High Court Upholds Section 32AB Deduction Method: No Inter-Business Loss Setoff Allowed

The High Court upheld the Tribunal's decision that the deduction under section 32AB should be based on the profits of the paper division alone without setting off the loss from the agro division. The Court emphasized that the provision does not allow for setting off losses from one eligible business against the profits of another. The Court highlighted that the method prescribed involves determining profits of each eligible business separately. The appeal was dismissed in favor of the assessee, ruling against the Revenue's argument for setting off losses from another eligible unit.

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Issues Involved:
1. Whether the Tribunal was right in law in confirming the findings of the Commissioner (Appeals) in directing the Assessing Officer to allow deduction under section 32AB based on profits from the paper division alone, without considering the loss of the agro unit.

Detailed Analysis:

Issue 1: Deduction under Section 32AB Based on Profits from Paper Division Alone

The core issue in this case pertains to the interpretation of section 32AB of the Income-tax Act, 1961, specifically whether the deduction under this section should be calculated based solely on the profits of the paper division without setting off the loss from the agro division.

The assessee, a public limited company, operates two separate units: a paper division and an agro division. Both units are "eligible businesses" under section 32AB. The assessee maintained separate accounts for each unit, preparing individual profit and loss accounts and balance sheets as per the Companies Act, 1956. For the assessment year 1990-91, the paper division reported a net profit of Rs. 4,42,22,227, while the agro division reported a loss of Rs. 97,80,642. The assessee claimed a deduction under section 32AB for the paper division, amounting to Rs. 88,44,445, which is 20% of the profits from the paper division.

The Assessing Officer (AO) argued that the 20% limit for the deduction should be calculated after setting off the loss from the agro division, thus restricting the deduction to Rs. 68,88,353. However, the Commissioner of Income-tax (Appeals) and subsequently the Income-tax Appellate Tribunal (ITAT) upheld the assessee's claim, stating that the deduction should be based on the profits of the paper division alone, without considering the loss from the agro division.

The Revenue's contention was that under section 32AB(3)(a), the profits should be determined in accordance with Parts II and III of the VI Schedule to the Companies Act, 1956, encompassing all activities of the assessee. Therefore, the deduction should consider the net profits after setting off the losses from any other eligible business.

Section 32AB(3)(a) specifies that when separate accounts are maintained, the profits of the eligible business should be computed after deducting depreciation and making certain adjustments as per the Companies Act. The Revenue argued that this should include setting off losses from other eligible units. However, the Tribunal and the Commissioner (Appeals) relied on the Supreme Court's decision in CIT v. Canara Workshops P. Ltd., which supported the assessee's stance of not setting off losses from another eligible unit.

The High Court upheld the Tribunal's decision, emphasizing that section 32AB(3)(a) does not provide for setting off losses from one eligible business against the profits of another. The Court noted that the method prescribed under section 32AB(3)(a) involves several steps to determine the profits of each eligible business separately, without any provision for setting off inter-unit losses. The Court also highlighted that the amendment by the Finance Act, 1989, effective from April 1, 1991, removed the concept of eligible business and the relevance of maintaining separate accounts for the purpose of deduction under section 32AB. However, for the assessment year 1990-91, the deduction had to be determined based on the profits of each eligible business separately.

The Court concluded that the profits of the paper division should be considered independently for the deduction under section 32AB, without setting off the loss from the agro division. Consequently, the appeal was dismissed, and the question was answered in favor of the assessee and against the Revenue.

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