1995 (12) TMI 91 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction u/s 32AB.
2. Computation of profits for eligible business.
3. Inclusion of non-assessable profits in eligible business profits.

Summary:

1. Eligibility for Deduction u/s 32AB:
The primary issue was whether the assessee could claim a deduction of Rs. 46,423 u/s 32AB when the chargeable profit was only Rs. 72,667, and the cost of the new machinery was Rs. 1,95,376. The CIT(A) allowed the deduction, interpreting that the deduction is permissible if the machinery is purchased out of the income chargeable to tax, and the amount utilized or deposited is compared with 20% of the profits of the eligible business, whichever is lower.

2. Computation of Profits for Eligible Business:
The CIT(A) and the learned Accountant Member upheld that the profit of the eligible business, as certified by the auditor, was Rs. 2,32,117. The computation was based on the profit as per the Profit & Loss Account prepared under Parts II and III of the Sixth Schedule to the Companies Act, 1956, and adjusted for depreciation and other specified items. The Assessing Officer's objection to excluding the profit on sale of capital assets was rejected, as the adjustments allowed under the section did not include such exclusion.

3. Inclusion of Non-Assessable Profits in Eligible Business Profits:
The learned Judicial Member disagreed, emphasizing that non-assessable profits on the sale of fixed assets and agricultural land, which were not charged to tax, should not be included in the profits of the eligible business. He argued that the profits of eligible business should be computed exclusively on business income, excluding non-eligible business receipts. The matter was referred to the Third Member due to the disagreement.

Third Member Decision:
The Third Member held that the profits derived from the sale of capital assets and immovable property should not be included in the P&L Account prepared under Parts II and III of the Sixth Schedule to the Companies Act, 1956. The audit report is not conclusive and the Assessing Officer has the authority to verify and adjust the profit figures. The correct business profit eligible for deduction u/s 32AB should be Rs. 72,667, and the allowable deduction should be 20% of this amount, i.e., Rs. 14,533.

Conclusion:
The Third Member concluded that the assessee is entitled to a deduction of Rs. 14,533 u/s 32AB, based on the correctly computed business profits of Rs. 72,667, excluding non-assessable profits. The matter was directed to be resolved by the Division Bench in accordance with this view.