9911796707
TMI Blog1995 (12) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed as deduction. The amount of profit of the eligible business, that has been defined in sub-section (3) of section 32AB, has to be certified by an auditor, which has been so provided in sub-section (5) of section 32AB. He pleaded that, the appellant company, has purchased a new machinery at a cost of Rs. 1,95,376. The profit of the eligible business, as certified by the auditor, is Rs. 2,32,117. The figure of profit as computed as per the provisions of the Act, before allowing of any deduction under section 32AB, is computed at Rs. 72,670. The deduction is therefore to be allowed with reference to this profit of Rs. 72,670. The amounts that need to be compared, for allowing of deduction under this section are Rs. 72,670 and 20% of Rs. 2,32,117 and the amount that is lesser of the two, has to be deducted from the computed profit of Rs. 72,670. The amount of 20% of Rs. 2,32,117, being Rs. 46,423 is positively lower, and hence deduction was allowed to that extent. He thus supported the order of the CIT (Appeals). 3. The rival contentions on the above issue, have been very carefully considered. The ground as raised by the revenue is reproduced for the sake of facility : "On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed such profit. He also observed that the deduction permissible under the Act, is either the amount utilised or 20% of the profits of the eligible business, whichever amount is less. He also observed that even where the cost of the machinery that has been purchased, is greater than the 20% of the profits of the eligible business, the entitlement to deduction is limited to 20% of the profits of the eligible business. On the calculation of the profits of the eligible business, he rejected the contention of ACIT, by observing that no defect had been pointed out. We shall reproduce the relevant portion of the section 32AB for the sake of facility and for appreciating the controversy in the instant case : "32AB. (1) Subject to the other provisions of this section, where an assessee whose total income includes income chargeable to tax under the profits and gains of business or profession has out of such income,--- (a)................................................................................... (b) utilised any amount during the previous year for the purchase of any new ship, new aircraft new machinery or plant, without depositing any amount in the deposit account under clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the total sales, turnover or gross receipts of the business or profession carried on by the assessee. (5) The deduction under sub-section (1) shall not be admissible unless the accounts of the business or profession of the assessee for the previous year relevant to the assessment year for which the deduction is claimed to have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit on the prescribed form duly signed and varified by such accountant :" The reading of the section indicates that the deduction is permissible only if the total income as computed under the provisions of the IT Act from the business or profession and that the income from business or profession should be a positive figure. The second condition is that the amount deposited or utilised must be from the income from business or profession, which is chargeable to tax. The third condition is that the amount utilised or deposited would be compared with twenty per cent of the profits of the eligible business, as computed in the accounts. The fourth condition is the derived one, i.e. t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment to be made for arriving at the profit of the eligible business. It provides two alternatives, one for those who maintain separate books of account of the eligible business and two, for those who do not maintain separate books of accounts of eligible business. We are presently concerned with the case of the assessee, who is maintaining separate books of account, as indicated in the report of the auditor issued under sub-section (5) of section 32AB, in col. No. 3 which has been reproduced earlier, since, it is not the case of the ACIT that, separate books of accounts are not maintained of the eligible business. The sub-section (3) clearly provides that, profit of the elgible business to mean that profit as is computed in the accounts of the assessee, audited according to sub-section (5) of the Act. It further provides for the items to be added and reduced from this profit and the final derived profit figure, would be the profit of the eligible business, which would be relevant for this sub-section (1) of section 32AB of the Act. The starting point is the profit as shown in the Profit & Loss account, prepared as per parts II & III of Schedule VI of the Companies Act, 1956. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount utilised is Rs. 72,667 and 20% of the profits of the eligible business is Rs. 46,423 and lesser of the two figures, is obviously Rs. 46,423, which would rank for deduction. The CIT (Appeals), had allowed deduction of Rs. 46,423. We, accordingly, uphold the order of the CIT (Appeals), for allowing the deduction of Rs. 46,423 under section 32AB, which deduction is in accordance with the provisions of the law. In the result, the appeal of the revenue is without any merit and hence dismissed. Per Vimal Gandhi, J.M.---Having gone through the order of my learned brother, I find it difficult to subscribe to the view taken by him. The assessee-company claimed deduction of Rs. 46,423 under section 32AB for having utilised its income for purchase of electric transformer costing Rs. 1,95,376. The basis of above deduction as given in the audit report on Form 3AA is as follows :--- The amount of profit computed in accordance with the requirements of Parts II and III of the Sixth Schedule Rs. to the Companies Act, 1956 1,78,712 Plus: Amount of depreciation debited in the audited profit and loss account or income and expenditure statement 1,26,101 -------- Gross Amount 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (3) which is supported with a certificate from the C.A. Keeping in view the above discussion I am of the opinion that the appellant is entitled for reduction under section 32AB and the Assessing Officer is directed to allow the claim of Rs. 46,423." 5. The Revenue has brought the issue in appeal before the Appellate Tribunal and main contention is that deduction of Rs. 46,423 cannot be allowed when income chargeable to tax is only Rs. 72,677. In other words, the assessee at best is entitled to deduction of Rs. 14,535 i.e. 20 per cent of Rs. 72,677. 6. It is clear from the facts recorded above that controversy between the parties is whether profit on disposal of fixed assets (Rs. 1,55,109) and profit on sale of agricultural land (Rs. 3,476) which admittedly has not been charged to tax and is not "business income", is liable to be included for computing 20% of profit of eligible business on which deduction is to be computed as per clause (ii) of sub-section (1) of section 32AB. In my view, the above two amounts cannot be included in profits of eligible business for computing permissible deduction under section 32AB. 7. From perusal of section 32AB it is clear that for app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng depreciation in accordance with the provisions of sub-section (1) of section 32, the same proportion as the total sales, turnover or gross receipts of the eligible business or profession bear to the total sales, turnover or gross receipt of the business or profession carried on by the assessee." 8. It is clear from above that clause (a) is applicable where separate accounts in respect of "such eligible business or profession are maintained". Then, the profits are required to be computed in accordance with Parts II and III of the Sixth Schedule to the Companies Act, 1956 and increased as provided. The other clause (b) is applicable where profits and receipts of eligible business are mixed with other receipts and profits. The context of two clauses and homogeneous reading of the section as a whole, make it abundantly clear that under both the clauses Legislature intended to allow deduction exclusively on profits of eligible business. Non-eligible business is entirely excluded. In this connection, use of words, "or are not available" in clause (b) is significant as above words would also cover a case where separate accounts are maintained but separate profit of eligible business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is being referred for the opinion of the Hon'ble Third Member :--- "1. Whether on the facts and in the circumstances of the case, for computing the profits of the eligible business as per sub-section (3) of section 32AB, the profit of sale of capital assets of Rs. 1,55,901 should be excluded ? 2. Whether on the facts and in the circumstances of the case, the assessee-company is entitled for deduction under section 32AB of Rs. 46,423?" ORDER UNDER SECTION 255(4) OF THE I.T. ACT, 1961 Per Shri Vimal Ghandhi, Judicial Member---The Members could not agree on one of the issues. Accordingly, the point of difference raised in the shape of question is being referred for the opinion of the Hon'ble Third Member :--- "Whether non-assessable profit on sale of fixed assets and agricultural land admittedly included in profits shown as Rs. 1,78,712 can be treated as part of profits of eligible business and entitled to deduction under section 32AB of IT Act?" THIRD MEMBER ORDER 1. This is a case in which the learned Members constituting the Division Bench had passed differing orders. There was no unanimity among the learned Members even for identifying the questions of difference betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certificate cannot be questioned anywhere including the Tribunal. 5. The facts of the case are few and are stated as under : The assessee is a private limited company engaged in the business of exhibiting cinematographic films in certain theatres atDelhi. In the year of account, relevant to assessment year 1988-89 from the note given under the Profit & Loss account prepared for the assessee-company as on 31-10-1987, a copy of which is filed along with the auditor's report filed under Form No. 3AA, it can be seen that an electrical transformer belonging to the assessee was insured for Rs. 1,69,945 against fire, etc. In fact, the said electrical transformer was damaged by accidental fire and the assessee-company had received Rs. 1,55,109 towards damages for sustaining the said loss of the assets in fire. Similarly, the assessee derived profit of Rs. 3,427 on sale of agricultural land belonging to it. The above two amounts were admittedly credited to the Profit & Loss A/c and they were shown to be part of profits derived from the business. The Profit & Loss A/c revealed a profit of Rs. 72,667 before deduction under section 32AB. The assessee based his version of business profits on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gether as per his assessment order dated26-10-1990. 10. On appeal filed by the assessee against the order of the Assessing Officer dated 26-10-1990, referred to above, the assessment order is reversed by the learned CIT (Appeals) by the impugned order dated 26-6-1991 wherein he has directed the Assessing Officer to grant the whole of deduction claimed under section 32AB namely Rs. 46,423. The whole of the reasoning of the learned CIT (Appeals) is found noted in the penultimate para of his order which is as follows : "The Assessing Officer has denied the claim of the appellant because the profits chargeable to tax was available to the extent of Rs. 72,667 whereas the machinery was purchased by Rs. 1,95,376. Section 32AB relates to the claim, if the total income chargeable to tax under the head 'Profits and gains of business or profession' is utilised during the previous year for purchase of any machinery or plant. The section does not lay any such condition that in which amount towards cost of machinery is to come from income chargeable to tax. In the case of the appellant, the machinery worth Rs. 1,95,376 has been purchased and accordingly, the claim of the appellant for Rs. 72,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he subject of entitlement, to the grant of deduction under section 32AB. (2) The case of the assessee on a proper understanding should be held covered under section 32AB(1)(a) and not 32AB(1)(b) since the assessee had been certified to have maintained regular books of account for eligible business. (3) The profit of Rs. 1,78,712 includes no doubt the amount of profit derived on disposal of the assets. Further the adjustments that are to be allowed out of the above figure are the following: (i) Depreciation is allowable under section 32(1) of the I.T. Act. (ii) Amount withdrawn from provision of reserves, if credited to P & L A/c." 15. The amounts which are allowed to be added to the above figure are the following : (a) Depreciation as per books. (b) Income-tax paid or payable and provision for income-tax. (c) Surtax paid or payable. (d) Amount of any reserves. (e) Amount of provision for meeting ascertained liabilities. (f) Amount of provision of loss of subsidiary companies. (g) Amount of dividends paid or proposed. 16. The learned Accountant Member held that the above list of adjustments do not provide for the exclusion of profit on sale of assets and for that reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts in respect of eligible business are maintained but this certificate cannot be treated as conclusive or binding and the deduction is to be allowed in accordance with law. The learned Judicial Member went on stating that it is an admitted position that net profit shown as per P & L A/c amounting to Rs. 1,78,712 includes non-assessable profits on sale of fixed assets and agricultural land. The assessee has itself admitted and given these receipts a treatment separate from 'profits of eligible business' for the purpose of computation. These receipts, therefore, cannot be taken as exclusive or separate profit of eligible business. Therefore, on facts the learned Judicial Member stated that he has to conclude that profits of eligible business are not separately available in this case and clause (b) is applicable. He further recorded that non-eligible receipts are mixed in turnover or gross receipts of eligible business and profits for purpose of sub-section (1) are to be computed on proportionate basis under clause (b). He held that the learned C.I.T. (Appeals) was not justified in including profit on sale of fixed assets and agricultural land in profits of eligible business. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A/c prepared under Parts-II and III of Sixth Schedule of Companies Act, 1956 which is an essential condition set out under section 32AB(3) to find out the business profits of the assessee for purpose of sub-section (1). Sub-section (3) lays down how to compute the business profits which are eligible for deduction under sub-section (1). Sub-section (3) further says inter alia that the business profits should be computed in accordance with Parts-II and III of Sixth Schedule of Companies Act, 1956. From the figures of such business profits, certain deductions and additions are to be made. From the gross profits, the amount of depreciation computed in accordance with the provisions of sub-section (1) of section 32 should be deducted and the balance should be increased by an aggregate amount mentioned in clauses 1 to 7 of section 32A(3). P & L A/c is to be prepared under section 210(2) of the Companies Act, 1956. The requirement as to P & L A/c are all set out in Part-II and III of Sixth Schedule of Companies Act, 1956. Clause (3) of Part-II in Schedule Sixth of the Companies Act clearly states that what are the items of income and expenditure of a company arranged under the most conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns under section 45 of the I.T. Act, 1961. In fact income under the head 'capital gains' and income from 'business or profession' falls under two different categories of income enumerated under section 14 of the I.T. Act, 1961. Even though the electrical transformer had been used by the assessee in its business of exhibiting of films, it remains only a capital asset. If items of credit which do not relate to the business carried on by the assessee-company are found included in its P & L A/c, such a P & L A/c cannot in my opinion be called as P & L A/c prepared in accordance with the requirements of Part-II and III of Sixth Schedule of Companies Act, 1956. It is further to be held that the profits derived on the sale of electrical transformer or the immovable property yield only 'capital gains' and they do not partake the character of business profits. The ratio of the Hon'ble Calcutta High Court in CIT v. Sugauli Sugar Works (P.) Ltd. [1983] 140 ITR 286 is apposite in this connection. It is pertinent to note that in that case there was an amount of Rs. 3,45,000 lying in the suspense A/c of the assessee-company. In 1965-66, the whole of the suspense A/c was transferred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assets should form part of P & L A/c correctly made under Part-II & III of Schedule VI of Companies Act, 1956 was earlier considered by the Full Bench of the Tribunal in Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 45 ITD 22 (Cal.). The Full Bench was considering section 115J(1A) which is similar to section 32AB(3). In that case the assessee-company held certain equity shares as investor. Revaluation of shares took place. The difference in revaluation which worked out to about Rs. 39 crores was taken to capital reserve account. One of the questions considered in that case was 'is capital profit part of book profits for purposes of P & L A/c' At page 47 of the reported decision the Full Bench held the following : "A reference to the requirements of the Companies Act shows that it is concerned with the result of the working of the company. Consequently, it cannot be directly concerned with changes in the capital structure. In particular the profit and loss account is concerned with items of income and expenditure and therefore any profit by realisation of capital asset would not be an item of income." At page 49 after elaborate discussion, the Full Bench held the following : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le opinion, it is not correct. In this connection, I wish to consider the ratio of the Hon'ble Supreme Court decision in State Bank of India v. CIT [1986] 157 ITR 67. In the headnote of the decision, the following ratio is found to have been extracted correctly : "It is well-settled that the way in which entries are made by the assessee in its books of account is not determinable of the question whether the assessee has earned any profit or suffered any loss. The assessee might by making entries which were not in conformity with proper principle of accountancy, have concealed profit or showed loss and the entries made by him cannot therefore be regarded as conclusive one way or the other." So simply because capital gains earned by the assessee were shown as part of trading receipts in P & L A/c prepared not in conformity with Part-II & III of Sixth Schedule of Companies Act, 1956, and simply because the accounts were audited in sub-section (5) of section 32AB, the nature of capital gains cannot change and they do not convert themselves into business profits or part of trading receipts. Another question which is to be considered is whether the audit report prepared in Form No. 3AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articulars required are material for proper scrutiny of the account and to ensure that the books of account and other records are properly maintained and faithfully reflected the true income of the assessee." The ratio of the Madhya Pradesh High Court which is laid down in connection with section 44AB equally applies while considering the purpose of the audit certificate required under sub-section (5) of section 32AB. Had the intention of the Legislature been otherwise nothing prevented it to lay down that the disclosed profits in the audit certificate would be final and the deduction under sub-section (1) of section 32AB would be determined accordingly. However, in sub-section (5) of section 32AB, it is only stated that deduction under sub-section (1) shall not be admissible unless the return is accompanied by an audit report. The purpose of the audit report in my opinion would be to help the Assessing Officer to determine the correct income and also to get assurance that the assessee had maintained the required books of account and they faithfully reflect the true income of the assessee and nothing more. So according to me, the finding of the Ld. AM that because the exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Companies Act is entitled to adjust the profit. To this extent we are of the opinion that the power to adjust book profits will have to be acceeded to the Assessing Officer." In view of above clarification of the position in law, I hold that the finding of the learned Accountant Member that the profits disclosed as per books should be accepted as they are, that no adjustment of profit figure is possible for the Assessing Officer and be has also no authority to verify the correctness of the profits disclosed, cannot be accepted as correct under law. 20. However, I am not in agreement with the learned Judicial Member when he states that when the profits of eligible business are not separately available as in this case, clause (b) comes into play and for the purpose of determining the business profits under clause (b), the matter should go back to the Assessing Officer. In fact, the P & L A/c of the assessee-company for the year ending31st October, 1987was already on record before the Assessing Officer and as part of the auditor's report. Except the two sums Rs. 1,55,109 which is profits on sale of fixed assets and Rs. 3,476 which is a profit on sale of agricultural land fr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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