1999 (4) TMI 110 - AT - Income Tax

Summary

Issues involved:
1. Interpretation of deduction under section 32AB of the Income-tax Act for the assessment year 1990-91.
2. Whether the deduction should be computed on the entire income or only on the profits of the business.
3. Relevance of dividend income and capital gains in computing the deduction under section 32AB.

Analysis:

Issue 1: Interpretation of deduction under section 32AB
The appeal before the Appellate Tribunal ITAT Cochin involved the interpretation of the deduction under section 32AB of the Income-tax Act for the assessment year 1990-91. The main contention was regarding the correct method of computing the deduction under this section.

Issue 2: Computation of deduction on entire income or only on business profits
The Assessing Officer held that the deduction under section 32AB should be computed on the profits and gains of the business only, excluding capital gains and dividend income. However, the CIT(Appeals) disagreed and allowed the deduction on the entire income, including capital gains and dividend income. The Tribunal had to determine whether the deduction should be based on the profits of the business or the total income of the assessee.

Issue 3: Relevance of dividend income and capital gains
The key question was whether dividend income and capital gains should be included in the computation of the deduction under section 32AB. The revenue argued that the deduction should be based on the profits of the business alone, excluding income from other sources. On the other hand, the assessee contended that dividend income and capital gains were part of the profits of the business as per the profit and loss account prepared in accordance with the Companies Act.

The Tribunal analyzed the provisions of section 32AB and emphasized that the deduction is to be calculated at 20% of the profits of the eligible business as per the audited accounts of the assessee. Referring to a previous judgment, the Tribunal held that interest and dividend income should not be included in the computation for the deduction under section 32AB. Therefore, the Tribunal ruled that the CIT(Appeals) erred in including dividend income and capital gains in the computation of the deduction. Consequently, the order of the CIT(Appeals) was reversed, and the deduction under section 32AB was held to be worked out on the profits and gains of the business, excluding dividend income and capital gains.

In conclusion, the appeal by the revenue was allowed, and the Tribunal clarified the correct method of computing the deduction under section 32AB, emphasizing the exclusion of dividend income and capital gains from the calculation.