1993 (5) TMI 60 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is entitled to a deduction under Section 32AB when the cost of new machinery exceeds the profit chargeable to tax.
2. The proper calculation of the profit of the eligible business for the purpose of Section 32AB.

Detailed Analysis:

1. Entitlement to Deduction under Section 32AB:

The Revenue objected to the CIT(A)'s order allowing a deduction of Rs. 46,423 under Section 32AB for machinery costing Rs. 1,95,376, which exceeded the chargeable profit of Rs. 72,667. The Revenue's contention was that the term "utilisation from the profit chargeable to tax" implies that the cost of the machinery must not exceed the computed taxable profit. The Assessing Officer (AO) held that since the machinery cost exceeded the chargeable profit, the utilisation could not be said to be from the profit chargeable to tax, thus disqualifying the assessee from any deduction.

The appellant argued that the deduction should be allowed based on the profit from the business certified by the auditor, which was Rs. 2,32,117. The appellant contended that the amounts to be compared for the deduction are Rs. 72,670 (computed profit) and 20% of Rs. 2,32,117 (certified profit), with the lower amount being deductible. The CIT(A) agreed with the appellant, stating that the deduction is limited to 20% of the profits of the eligible business or the amount utilised, whichever is less.

2. Calculation of Profit of Eligible Business:

The CIT(A) rejected the AO's contention that the profit on the sale of assets should be excluded from the calculation of the eligible business profit. The CIT(A) observed that the profit of the eligible business should be computed as per the accounts audited under Section 32AB(5), which includes the profit on the sale of assets. The CIT(A) noted that the legislature did not intend to exclude such profit from the calculation.

The relevant portion of Section 32AB was reproduced, emphasizing that the deduction is permissible if the total income includes income chargeable to tax under the head "profits and gains of business or profession." The section also requires that the amount deposited or utilised must be from the income chargeable to tax and compared with 20% of the profits of the eligible business. The CIT(A) found that the appellant satisfied these conditions, as the total income of Rs. 72,667 was entirely from business and chargeable to tax. The cost of the new machinery being Rs. 1,95,376 was justified as being met from the available profit of Rs. 72,667, thus satisfying the second condition.

The CIT(A) also addressed the AO's objection regarding the calculation of the eligible business profit, which included the profit on the sale of assets. The CIT(A) concluded that the profit of the eligible business was correctly computed at Rs. 2,32,117, as the exclusion of the profit on the sale of assets was not warranted by the statute.

Conclusion:

The Tribunal upheld the CIT(A)'s order, allowing the deduction of Rs. 46,423 under Section 32AB. The Tribunal found that the conditions of Section 32AB were satisfied, and the calculation of the eligible business profit was correctly done. The appeal by the Revenue was dismissed as without merit.