2006 (7) TMI 128 - HC - Income Tax

Income from rent, interest not eligible for business profits deduction

The court held that income from sources such as rent, interest, and sundry receipts cannot be included as profits of eligible business for computing ... Deduction allowable under sub-clause (ii) of clause (b) of section 32AB(1) - 'Whether, Tribunal was right in holding that the profits of eligible business computed in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956, should be reduced by income from coffee sales, areca nut sales, rent receipts, interest and subsidy from Tea Board for the purpose of computing the deduction allowable under sub-clause (ii) of clause (b) of section 32AB(1)?' – we hold that the assessee is not entitled to deduction of the rent income, interest income and sundry receipts income as profits of eligible business or profession for computing the deduction under section 32AB. Issues Involved:1. Eligibility of income sources for deduction under Section 32AB of the Income-tax Act, 1961.2. Interpretation of 'profits of eligible business or profession' under Section 32AB.3. Applicability of the decision in CIT v. Kil Kothagiri Tea and Coffee Estate Co. Ltd. [2005] 273 ITR 278 (Ker).4. Relevance of the Supreme Court decision in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273.Detailed Analysis:1. Eligibility of income sources for deduction under Section 32AB of the Income-tax Act, 1961:The primary issue in this case was whether the profits of eligible business computed in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956, should be reduced by income from coffee sales, areca nut sales, rent receipts, interest, and subsidy from Tea Board for the purpose of computing the deduction allowable under sub-clause (ii) of clause (b) of section 32AB(1). The assessee claimed a deduction based on the entire income, including rent, interest, and sundry receipts. However, the Assessing Officer, Commissioner (Appeals), and the Tribunal excluded these incomes from the deduction computation.2. Interpretation of 'profits of eligible business or profession' under Section 32AB:The court analyzed whether the expression 'profits of eligible business or profession' includes income from all sources or is restricted to 'profits and gains of business or profession' alone. The judgment clarified that for computing the quantum of deduction under section 32AB, only that income which forms the profits and gains of business or profession of the assessee-company is liable to be taken into account, not the income from other sources like rent income, interest income, and sundry receipts.3. Applicability of the decision in CIT v. Kil Kothagiri Tea and Coffee Estate Co. Ltd. [2005] 273 ITR 278 (Ker):The court found it difficult to accept the reasoning of the earlier Division Bench decision in Kil Kothagiri's case, which held that income from all sources should be considered for computing the 20% deduction under section 32AB. The Full Bench overruled this decision, stating that the deduction should be restricted to the profits of eligible business or profession computed in accordance with Parts II and III of the Sixth Schedule to the Companies Act, 1956.4. Relevance of the Supreme Court decision in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273:The court examined the applicability of the Supreme Court's decision in Apollo Tyres' case, which was relied upon by the assessee. The judgment clarified that the Supreme Court's decision supports the view that for computing the benefit under section 32AB, the eligible business income should be the income from the business of the assessee itself and not from any other source. The Supreme Court emphasized that the eligible business income shown under a different head of income does not deprive the company of its benefits under section 32AB, but this does not mean that income from all sources can be included.Conclusion:The court concluded that the assessee is not entitled to include rent income, interest income, and sundry receipts as profits of eligible business or profession for computing the deduction under section 32AB. The question was answered in the affirmative, in favor of the Revenue and against the assessee, thereby disposing of the reference accordingly.