2002 (9) TMI 248 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of specific items as business income.
2. Consideration of the nature of specific incomes for exclusion under section 32AB.
3. Reduction of donations to arrive at deduction under section 32AB.
4. Classification of donations and contributions to Scientific Research Association as expenses or application of income.
5. Allowability of deduction under section 32AB after reducing contributions to Scientific Research Association and donations.

Issue-wise Analysis:

1. Treatment of Specific Items as Business Income:
The revenue contested the CIT(A)'s decision to treat profits from the sale of units, interest on inter-corporate deposits, Income-tax refunds, and other specific items as business income. The CIT(A) held that except for the dividend of Rs. 2,64,903, the balance income of Rs. 50,95,840 should not be deducted from the total income for computing deduction under section 32AB. The Tribunal upheld this view, stating that for the purpose of section 32AB, profit must be computed in accordance with Parts II & III of Schedule VI of the Companies Act. The Tribunal referenced the Supreme Court decision in Apollo Tyres Ltd. v. CIT and the Special Bench decision in Highway Cycle Industries Ltd. v. Asstt. CIT, affirming that these incomes, although taxable under different heads, form part of the net profit for section 32AB purposes.

2. Consideration of the Nature of Specific Incomes for Exclusion Under Section 32AB:
The revenue argued that the nature of these incomes indicated they should be classified as income from other sources and excluded when calculating the deduction under section 32AB. The Tribunal dismissed this argument, reiterating that the computation should follow the Companies Act's Schedule VI, not the Income-tax Act's classification. The Tribunal noted that the income was part of the eligible business, supporting the CIT(A)'s decision to treat it as business income for section 32AB.

3. Reduction of Donations to Arrive at Deduction Under Section 32AB:
The CIT(A) ruled that donations should not be reduced to compute the deduction under section 32AB. The Tribunal disagreed, emphasizing that the profit for section 32AB must be computed per Schedule VI of the Companies Act, which includes reducing donations. The Tribunal noted that the assessee's net profit was calculated after deducting donations, and there was no provision in section 32AB or the Companies Act suggesting otherwise. The Tribunal reversed the CIT(A)'s decision on this issue, supporting the Assessing Officer's rectification.

4. Classification of Donations and Contributions to Scientific Research Association as Expenses or Application of Income:
The revenue contended that donations and contributions to the Scientific Research Association should be considered expenses, not an application of income. The Tribunal agreed, stating that donations are expenses debited to the profit and loss account and must be reduced to compute the net profit of the eligible business for section 32AB. The Tribunal rejected the CIT(A)'s view that donations should not reduce the business income, emphasizing that the net profit must be calculated after deducting such expenses.

5. Allowability of Deduction Under Section 32AB After Reducing Contributions to Scientific Research Association and Donations:
The Tribunal concluded that the net profit for computing the section 32AB deduction must be determined after reducing donations. This approach aligns with the Companies Act's Schedule VI requirements and ensures the accurate calculation of eligible business profits. The Tribunal upheld the Assessing Officer's rectification, allowing the revenue's appeal on this issue.

Conclusion:
The appeal was partly allowed, with the Tribunal affirming the CIT(A)'s treatment of specific items as business income but reversing the decision regarding the reduction of donations for computing the section 32AB deduction. The Tribunal emphasized the need to follow the Companies Act's Schedule VI for calculating net profit, ensuring donations are deducted to determine the eligible business profit.