2006 (7) TMI 137 - HC - Income Tax

Deduction under section 32AB - 1. Whether, Tribunal is correct in law in directing the Assessing Officer not to deduct income-tax refunds of earlier years from the book profits in computing the deduction under section 32AB? 2. Whether, the Tribunal is correct in law in holding that the income-tax refunds for earlier years are required to be added back for the purpose of allowing deductions under section 32AB(3) is specified and exhaustive not to give scope for addition of refund of income tax of earlier years as such? - we deem it proper to answer the questions of law raised by the Revenue against the Revenue and in favour of the asses-see.

Summary

Issues:
1. Whether income-tax refunds of earlier years should be deducted from book profits for computing deduction under section 32AB?
2. Whether income-tax refunds for earlier years are required to be added back for allowing deductions under section 32AB(3)?

Analysis:
Issue 1: The court was asked to determine whether income-tax refunds of earlier years should be deducted from book profits for computing the deduction under section 32AB. The assessee had claimed a deduction under section 32AB of the Income-tax Act and the Assessing Officer determined the profits eligible for deduction under section 32AB at a different amount. The Tribunal directed the Assessing Officer not to deduct a specific amount from the book profits. The court analyzed the provisions of section 32AB and concluded that income-tax refunds cannot be considered as an amount withdrawn from reserves or provisions. Therefore, the court held that income tax refund amounts credited to the profit and loss account are not required to be deducted from the book profits. The court accepted the contention of the assessee that the income tax refunds should not be deducted.

Issue 2: The court was also asked to determine whether income-tax refunds for earlier years are required to be added back for allowing deductions under section 32AB(3). The court examined the general scheme of interpreting the expressions in section 32AB and concluded that the income-tax refunds should not be added back for allowing deductions under section 32AB(3). The court emphasized that the question of refund would arise only in the event of factual payment, and there was no requirement for any payment as argued by the Revenue. Therefore, the court answered both questions of law raised by the Revenue against the Revenue and in favor of the assessee.

In conclusion, the court ruled in favor of the assessee, holding that income-tax refunds of earlier years should not be deducted from book profits for computing the deduction under section 32AB. Additionally, the court determined that income-tax refunds for earlier years are not required to be added back for allowing deductions under section 32AB(3). The judgment provided a detailed analysis of the provisions of section 32AB and the interpretation of relevant expressions, ultimately deciding in favor of the assessee and against the Revenue.