TaxTMI 
TaxTMI 
1995 (12) TMI 91
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.... or 20% of the profit, that would be allowed 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 reprodu....
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.... chargeable to tax and in no case it can exceed 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 depositin....
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....es, turnover or gross receipts of the eligible business or profession bear 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....
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....,55,109 should be excluded. Sub-section (3) of section 32AB provides for the adjustment 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 accoun....
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....income from profits and gains from business or profession. In this case, the amount 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 Schedu....
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....p; Net Amount : 2,32,117 20 per cent of above amount i.e. Rs. 46,423 was claimed as deduction. 2. The assessee in its return declared income of Rs. 72,667 (without deduction under section 32AB) as per the following calculations : Rs. Net profit as per Profit & Loss Account 1,7....
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....bsp; Rs. Less: Depreciation as per chart : 72,696 Profit on disposal of fixed assets 1,55,109 Profit on sale of agricultural land 3,476 &nb....
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.... the assessee as claimed, with the following remarks :--- "Shri N.C. Sharma, ACIT pleased that section 32AB does not provide part payment towards the cost of acquisition of the asset out of income chargeable to tax. It was further argued that in such eventuality the assessee will get 20% of the deduction out of profit and the same may be more than the investment made in purchase of new plant and machinery. Section 32AB clearly takes care of such eventuality because the deduction under any circumstances cannot be more than 20 per cent of the profits or the cost of the machinery, whichever, is less. The second objection taken by the CIT is regarding the profit on account of sale of old assets. The profit is not to be taken note of so far as income-tax assessment is concerned to the extent that a different treatment is to be given to the profit earned on sale of assets. So far as section 32AB is concerned, the profits have been defined in sub-section (3). The learned Assessing Officer has not pointed out any defect in working out the profit in accordance with sub-section (3) which is supported with a certificate from the C.A. Keeping in view the above discussion I am of the opinion....
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....nts 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 therefor; (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 amount 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 profit and loss account; and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account; and (b) in a case where such separate amounts 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 depreciation in accordance with the provisions of sub-section (1) of section 32, the same ....
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....mputation. These receipts, therefore, cannot be taken as exclusive or separate profit of eligible business. Therefore, on facts, I am to conclude that profits of eligible business are not separately available in this case and clause (b) is applicable. Non-eligible business receipts are mixed in turnover or gross receipts of eligible business and profits for purposes of sub-section (1) are to be computed on proportionate basis under clause (b). The CIT (Appeals) was not justified in including profit on sale of fixed assets and agricultural land in profits of eligible business. As profit and loss account has not been placed on record and relevant figures are not available, the matter, in view, should go back to the Assessing Officer to recompute the deduction under clause (b) mentioned above. I direct accordingly, set aside order of CIT (Appeals) and allow this appeal of the revenue. ORDER UNDER SECTION 255(4) OF THE I.T. ACT, 1961 Per Shri A. Kalyanasundharam, Accountant 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 :--- "1. Whether ....
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....tax Act ?" So broadly stated the question of difference between the Members is about correctly computing the business profits under section 32AB(3) and while computing such profits to correctly decide whether the profits derived from the sale of capital assets held by the assessee form part of business profits. 3. The further question which arises for consideration will be whether for purposes of determining business profits derived, whether Profit & Loss A/c maintained by the assessee would be final or whatever the profit and loss account should be maintained strictly in accordance with Parts I and II of 6th Schedule of the Companies Act, 1956. Whether profits derived on sale of capital assets would form part of business profits in a correctly framed or prepared Profit & Loss A/c strictly according to Parts I and II of VI Schedule of the Companies Act, 1956. 4. Another question which falls for consideration is whether the figure of business profits found in the certificate of the auditor should be taken as final under section 32AB(5) and its correctness cannot be questioned and whether the correctness of such certificate cannot be questioned anywhere including the Tribuna....
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....bsp; Gross Amount : 3,04,313 Less: Amount of depreciation computed in accordance with the provisions of section 32(1) 72,696 -------- Net Amount : 2,32,117 &....
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.... 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. 72,667 being the profit of the year has been utilised for purchase of the said machinery. The claim of Rs. 46,423 has been made in accordance with the certificate issued by theC.A.in Form No. 3AA.ShriN.C.Sharma, Asstt. C.I.T. pleaded that section 32AB does not provide part payment tow....
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.... 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 reasons it cannot be excluded from calculation of profit of eligible business. He held that the objection of the Assessing Officer is that the profit on disposal of assets had to be excluded is clearly not tenable. Therefore, the learned Accountant Me....
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....d 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 learned Judicial Member further held that as Profit and Loss A/c has not been placed on record and relevant figures are not available, the matter should go back to the Assessing Officer to recompute the deduction under clause (b) mentioned ab....
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.... 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 convenient heads. For the purposes of preparing P & L A/cs companies are divided into several categories like manufacturing companies, trading companies and companies which fall more than in one category mentioned above and other companies. Here,....
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....he 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 assessee to its Capital Reserve A/c. The Income-tax Officer found that out of the said amount a sum of Rs. 2,56,529 which represented for expenses had been allowed as a deduction in the earlier year. The ITO invoking provisions of section 41(1) in....
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....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 : "We are therefore of the opinion that the profit realised by the sale of the shares by the assessee could not form part of the book profit as required to be shown in the profits and loss account under the provisions of the Companies....
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....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 of the I.T.A.T. Rules, in fulfilment of requirements of section 32AB(5), whether business profits noted in Col. No. 4 set apart for that purpose in that form is the last word on this subject and that figure of profit a....
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....he 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 profit on sale of assets from the calculation of the profit of the eligible business was not mentioned specifically under section 32AB(3), the objection of the Assessing Officer that the profit on disposal of t....
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....fication 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 from out of the amounts of credit in P & L A/c all other credits and debits of the P & L A/c clearly represent the credits and debits relating to the trading activity of the assessee-company. Therefore, by e....