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TMI Blog2001 (9) TMI 817X X X X Extracts X X X X X X X X Extracts X X X X ..... Parts II and III of Sch. VI of the Companies Act for computing deduction under section 32AB irrespective of the heads under which such income is assessable under the Income-tax Act?" 2. Before adverting to the facts in the cases under consideration, it is desirable to note the circumstances which led to the constitution of this Special Bench. The Chandigarh Benches of the Tribunal were allowing deduction under section 32AB of interest income, rent and miscellaneous income by following consistently the decision of the Cochin Bench in case of Apollo Tyres Ltd. v. Dy. CIT [1992] 44 TTJ 534/[1992] 43 ITD 464 (Coch.). This was done in the case of Highway Cycle Industries Ltd. v. Asstt. CIT in ITA No. 1039/Chd/1991 for assessment year 1987-88 vide order dated 14th January, 1997, and in other cases, some of which are mentioned below : (i) M/s. Munjal Castings v. Asstt. CIT ITA No. 1145 of 1992 for assessment year 1989-90, order dated 31st May, 1999; (ii) Majestic Auto Ltd. v. Dy. CIT ITA Nos. 1055 & 1356 of 1992 for assessment years 1987-88 & 1988-89, order dated 14th June, 2000; and (iii) Highway Cycle Inds. v. Asstt. CIT ITA No. 1777 of 1992 for assessment year 1989-90 order, dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Highway Cycle Industries Ltd. are that the assessee claimed deduction under section 32AB at Rs. 26,69,541 supported by an audit report in the prescribed form as required by the rules. The Assessing Officer allowed deduction at Rs. 25,29,466. The difference between the deduction claimed and allowed was on account of the following items : Rs. (i) Rent 1,05,204 (ii) Profit on sale of investment 5,000 (iii) Interest 2,40,991 (iv) Misc. income 2,07,066 (v) Lease rent 1,20,000 6,79,261 Deduction at 20 per cent thereof 1,35,852 The Assessing Officer was of the view that rent, profit on sale of investment, interest received, miscellaneous income and lease rent were not business income but income assessable under the head 'other sources'. Therefore, the deduction under section 32AB was not permissible on these items. 4. The assessee impugned above assessment in appeal before the CIT(A) and contended that deduction was to be made on P&L a/c drawn as per Parts II and III of Sch. VI of the Companies Act and, therefore, there was no justification to exclude above items. In support of the claim, the decision of Cochin Bench of the Tribunal in the case of Apol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as in the decision dated 14-1-1997, the Chandigarh Bench merely followed the decision of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra). Several other Benches followed suit and throughout the country, Apollo Tyres' case (supra) had been followed. That way, the other Member (Shri Vimal Gandhi, Vice President) was also a party in the case of Phoenix Overseas Ltd. in ITA No. 5177/ Del/1990 which has been included in the paper book and was later cited by the learned Departmental Representative in support of his arguments. The third Member might have also considered the issue in some other context. The case are decided on the basis of facts pleaded and legal propositions advanced by the parties and the Bench is required to take an objective view of the issue. No bias was alleged. We, therefore, reject this objection raised on behalf of the Revenue. 8. Shri Subhash Aggarwal, the learned counsel for the assessee, opened the arguments for and on behalf of the assessee. He referred to conflicting views taken by the Benches of the Tribunal at Chandigarh. He pointed out that M/s H.D. Bansal & Co. had audited the accounts of the assessee and report in the prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (5)." Shri Subhash Aggarwal further contended that provisions of section 32AB are in pari materia with provision of section 115J of the IT Act and interpretation placed on the latter provision is applicable to the former. In this connection, he invited our attention to the decision of the Hon'ble Bombay High Court in the case of CIT v. Veekaylal Investment Co. (P.) Ltd. [2001] 166 CTR (Bom.) 96/[2001] 249 ITR 597 (Bom.) therein their Lordships observed that for computing book profit, income from capital gains on sale of capital investment was liable to be included. Their Lordships did not agree with the view taken by the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT [1993] 46 TTJ (Cal.)(SB) 310/[1993] 199 ITR (AT) 164. In other words the income assessable under the head "capital gains", under the IT Act, can be treated as profit of business for purposes of section 115J of the Income-tax Act. He submitted that in section 32AB also the legislature has employed a similar language. Shri Aggarwal further drew our attention to the decision of the Delhi Bench of the Tribunal in the case of Phoenix Overseas Ltd. v. Asstt. CIT [1996] 55 TTJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the above section talks of profits and gains included in the total income. If there is no profit in computed total income, no deduction is to be allowable. There is no dispute on this proposition, but if profit is even Re. 1, the assessee must get full deduction disproportionate to the business income included in the total income. Such an interpretation cannot be accepted as it is repugnant and would create a anomalous situation. He, therefore, submitted that profits and gains of business for purposes of all sub-sections of section 32AB can only mean profit and gains as understood under the Income-tax Act. Income not assessable under the above-referred to head was not entitled to any deduction. He then drew our attention to sub-section (3) of section 32AB relating to computation of eligible business. He drew our attention to clause (b) in the said sub-section to show that in the said clause no reference is made to computation of profit under the Companies Act where the expression used is 'only profits and gains of business' which mean profit as per the IT Act. The purpose of clauses (a) and (b) cannot be different. If under clause (b), the deduction is to be allowed on proportio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of the assessee. He relied on the Madras High Court decision in the case of Smt. B. Seshamma v. CIT [1979] 10 CTR (Mad.) 163/[1979] 119 ITR 314 (Mad.) where their Lordships hold that interest was income liable to be taxed under the head 'other sources' as the assessee had failed to show that interest was earned on loans advanced in the course of business. Here also the same position prevailed as the assessees have failed to show that various items of income were earned in the course of business. With reference to the decision of the Hon'ble Kerala High Court in the case of CIT v. Apollo Tyres Ltd. [1998] 149 CTR (Ker.) 538/[1999] 237 ITR 706 (Ker.), Shri Srivastava submitted that in the said decision, their Lordships did not give any clear finding on application of sub-section (3) of section 32AB of the Income-tax Act. He also relied on the decisions of the Tribunal in favour of the Revenue as noted earlier. 12. We have given careful thought to the rival submissions of the parties. We deem it appropriate to reproduce a portion of section 32AB introduced through the Finance Act, 1986, w.e.f. 1st April, 1987. The relevant portion of sub-sections (1), (2) and (3) of section 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducting an amount equal to the depreciation computed in accordance with the provisions of sub-section (1) of section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by the aggregate of: (i)the amount of depreciation; (ii)the amount of income-tax paid or payable, and provision therefore; (iii)the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964); (iv)the amounts carried to any reserves by whatever name called; (v)the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; (vi)the amounts by way of provision for losses of subsidiary companies; and (vii)the amount or amounts of dividends paid or proposed, if any, debited to the P&L a/c, and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the P&L a/c; and (b)in a case where such separate accounts are not maintained or are not available be such amount which bears to the total profits of the business or profession of the assessee after allowing depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. These qualifications may be summarised as follows: (i)that total income of the assessee chargeable to tax should include income under the head 'Profits and gains of business or profession'. (ii)out of such income, the assessee should deposit any amount in an account maintained with the development bank within the time as provided in clause (a) or utilise any amount out of such income for purchase of new ship, new machinery as provided in clause (b); and (iii)the deposit on utilisation of amount should be as per scheme framed by the Central Government. The assessee so qualified would be entitled to deduction as below : (i)A sum equal to amount or aggregate of amounts deposited or utilised; or (ii)20 per cent of the profit of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), whichever is less. The proviso to sub-section is not material here. 15. Sub-section (2) of the section defines "eligible business" and the said definition is exclutory definition. Every business other than one excluded under clauses (a) and ( b) is eligible business to be considered for quantification of the deduction. Certain sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment. The expression "Profits and gains of business or profession" means profits and gains of business or profession as understood in the Income-tax Act. If no profit of business or profession is included in the total income as computed under the Income-tax Act, no deduction would be allowed. The deposit with the development bank and utilisation of amount for purchase of any new ship or machinery is also to be made out of above income. The qualifying condition flows from use of words "such income" in sub-section (1). Clause (i) relating to deduction under this section also confines itself to the aggregate of amount deposited or utilised out of "profits and gains of business or profession chargeable to income-tax" and included in the total income. 18. Clause (ii ) of sub-section (1) allows alternative deduction at 20 per cent of profits of eligible business or profession. Here the conditions prescribed are different from those provided in other portion of the sub-section. The eligible business is separately defined and it does not mean business as is understood under the Income-tax Act. There is clear departure from the scheme of computation under the Income-tax Act. In sections 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinction is not seen made. The deduction available under the said sub-section is an amount equal to twenty per cent of the profits of the eligible business. So, what is required for fixing the quantum of deduction is to find out the profits of eligible business from out of the total income. As already stated, by virtue of the definition contained in clause (i) of sub-section (2) of section 32AB, 'eligible business' means business other than those provided in sub-clauses (a) and (b) thereof. Admittedly the activity of purchase and sale of units of the Unit Trust of India does not fall under the said two sub-clauses. Therefore, it has to be held that the business of buying and selling of units of the Unit Trust of India is an eligible business and the profits thereof qualifying for inclusion for determining the quantum of deduction available under the said sub-section. In this context, it is relevant to note that the Department has no case that the activity of the assessee-company by way of purchase and sale of units of the Unit Trust of India is not a business activity or that the income by way of dividend or profits on the sale of units is not business income. In fact, the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dend income received ceases to have the character of business income. On the other hand, the same will also form part of the business income. The only thing is that because of the specific provisions contained in sub-section (2) of section 56 of the Act the said income, namely, dividend income, cannot be included in the income chargeable to tax under the head 'income from business', nor can it be assessed as such. As already stated, the relevance of income chargeable to tax under the head 'income from business' comes in only in the context of the utilisation of the income out of the total income of the previous year for the purchase of new machinery/plant. It has no relevance when it comes to the deduction part. There, the only relevance is to 'profits of eligible business'. The expression 'eligible business' is also defined. If the legislative intention as contended by the Department, is to allow deduction of a sum equal to twenty per cent of the income chargeable to tax under the head 'income from business', the legislature could have specifically said so, in which case it was not at all necessary to use the expression 'profit of eligible business' or to give a definition of elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act and legal assistance can be derived from the decisions given under the said provisions as in the said provision "book profit" of the assessee is also to be computed as per Parts II and III of Schedule VI to the Companies Act, 1956. The relevant portion of section 115J introduced in assessment year 1988-89 to impose income-tax on prosperous zero-tax companies, is as under : "115J. Special provisions relating to certain companies.--(1) Notwithstanding anything contained in any other provision of this Act, where, in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 (but before the Ist day of April, 1991) (hereinafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in "Principles of Statutory Interpretation" (7th Edn., 1999) : "Incorporation of an earlier Act into a later Act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier Act into the later. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the provisions so incorporated become part and parcel of the later Act as if they had been 'bodily transposed into it'. The effect of incorporation is admirably stated by Lord Esher, M.R.: 'If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write these sections into the new Act as if they had been actually written in it with the pen, or printed in it". "Even though only particular sections of an earlier Act are incorporated into the later, in construing the incorporated sections it may be at times necessary and permissible to refer to other parts of the earlier statute which are not incorporated. As was stated by Lord Blackburn: 'When a single section of an Act of Parliament is introduced into another Act, I think it must be read i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r : ".....Further, under clause 2 of Part II of Schedule VI to the Companies Act where a company receives the amount on account of surrender of leasehold rights, the company is bound to disclose in the P&L a/c the said amount as non-recurring transaction or a transaction of an exceptional nature irrespective of its nature i.e., whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve [see Companies Act by A Ramaiya, p. 1669, fourteenth Edn.]. Such receipts are also covered by clause 2(b) of Part II of Schedule VI of the Companies Act which, inter alia, states that the P&L a/c shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. Lastly, even under clause 3(xii)( b) profits or losses in respect of transactions not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature shows clearly that capital gains should be included for the purposes of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, submits that in order to come to a proper calculation the provisions of sub-section (3) of section 32AB of the Act is relevant. We are of the view that we cannot answer that question because there is no such question whether the income is calculated rightly or wrongly. We are required to answer whether under the facts and circumstances of the case the interest and dividend received by the assessee-company is from the investment made out of business income. The Tribunal went wrong in holding that this should be included by giving the benefits of section 32AB of the Act." It is clear from the report that their Lordships did not examine the provision of sub-section (3) of section 32AB, nor their Lordships' attention was drawn to the provisions of Parts II and III of Schedule VI of the Companies Act. But importance of above statutory provision have been highlighted by their Lordships of Kerala High Court in the case of Apollo Tyres (P.) Ltd. (supra), to which we have already made a detailed reference. It is not the case of the Revenue that the issues before us can be decided without examining sub-section (3) of section 32AB or other relevant provisions of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X
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