TaxTMI 
TaxTMI 
2025 (8) TMI 456
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....n Assessee to seek benefit of 20% deduction under Section 32AB of the Act on profits as reflected in the Profit & Loss Account finalized under Part II and III of the VI Schedule of the Companies Act, 1956 (Companies Act) or whether they must be determined with reference to the actual profits for the purposes of the Income Tax Act. The issue arises in the peculiar circumstances where the additional sugarcane price is required to be paid by the Assessee (as determined by the Director of Sugar) after finalization of the accounts under Parts II and III of the VI Schedule of the Companies Act, but the Assessee can still claim the said amount as expenses while filing the return on income. The Assessing Officer has proceeded to deduct the said additional amount of sugarcane from the amount of profits for the relevant AY while computing the 20% deduction admissible under Section 32AB of the Act. 3) The Assessee is a manufacturing company carrying on the business of manufacturing toffees, confectionery and sugar candy. The Assessee is required to purchase sugarcane from farmers for the purpose of manufacturing toffees, confectionery and sugar candy. For various Co-operative Sugar Factori....
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....d for the sugarcane purchased for the year 1986-87. Thus, deduction under Section 32AB for Assessment Year 1989-90 was computed by the Assessee as under:- Net profit as per P&L A/c Rs. 41,11,514/- Add: Depreciation as per accounts Rs. 45,82,900/- Add: Provision for taxation Rs. 86,94,414/- Rs. 35,00,000/- Less: Depreciation as per I.T. Act Rs. 1,21,94,414/- Rs. 78,98,251/- Profit for section 32AB Rs. 42,96,163/- =========== Proportion of eligible business profit @ 51.15% Rs. 21,97,487/- --------------------- Investment Deposit account u/s. 32AB @ 20% of profit Rs. 4,39,297/- =============== 6) This is how the Assessee added Rs. 30,56,352/- being the additional sugarcane price paid for season 1986-87 in the year ended 31 March 1989 to the net profit of Rs. 41,11,514/- and paid tax thereon. However, while computing deduction under Section 32AB of the Act the said additional sugarcane price paid for the season 1986-87 was not added to the net profit of Rs. 41,11,514/- as the said net profit was determined as per the Profit and Loss account prepared as per Parts II and III of Schedule VI of the Companies Act. For following thi....
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....dated 27 July 1990, the said additional sugarcane price of Rs. 78,86,857/- was not considered as the same was not debited to Profit and Loss account prepared as per Part II of Schedule VI of the Companies Act. This is how Appellant Company computed deduction under Section 32AB of the Act as under :- 1. Gross Turnover for the year ended 31st March 1990 As per the Audited Accounts submitted herewith 28,34,76,673 =============== 2. Turnover of confectionary being non eligible for Section 32AB of I. Tax Act 13,82,19,856 =============== 3. Turnover of Eligible Business 14,52,56,817 ============== 4. Proportion of eligible business turnover to Total Turnover 51.24% ============== 5. Total profit of business as per the profit and loss accounting 56,96,748 Add: Depreciation as per accounts 51,83,534 -------------------------- Add. Tax Provision as per accounts 1,08,80,282 45,00,000 1,53,80,282 Less: Depreciation allowable as per I. T. Act 58,64,343 -------------------------- Profit for Section 32 AB 95,15,939 ============= 6. Prop....
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....Act the profits of the business shall be an amount arrived at after depreciation under Section 32(1) from the amounts of profits computed in accordance with the requirements in Parts II and III of Schedule VI of the Companies Act. The CIT(A), however, passed order on 9 December 1993 and rejected the Assessee's contention and approved the decision of Assessing Officer. The Assessee preferred appeal before ITAT being Appeal No. I.T.A. No. 871/Bom/94 and the Revenue filed cross-appeal I.T.A. No.1407/Bom/94. The Assessee's Appeal is however dismissed by the ITAT by order dated 24 January 2003, which is the subject matter of challenge in the present Appeal. 11) The Appeal was admitted on 26 October 2004 on following substantial question of law:- "Whether on the facts and in circumstances of the case as well as in law, the Tribunal, while computing the deduction under Section 32AB of the Act, was right in altering the profit of the eligible business computed as per the requirements of Parts II and III of Schedule VI to the Companies Act, 1956 for the purpose of providing the liability of the additional sugarcane price which was determined in the month of October, 1990?" 12....
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....which had enhanced the income under the normal provisions substantially. That the Revenue has not adjusted the eligible profits to enhance the profits by such sum. That the Assessee has followed the system as provided under Section 32AB consistently over the years. The methodology adopted by the Assessee in the subsequent years has not been questioned. On the above broad submissions, Mr. Sriram would pray for answering the question of law formulated in favour of the Assessee. 14) The Appeal is opposed by Ms. Kanani, the learned counsel appearing for the Revenue. She would submit that the Assessee follows the mercantile accounting system and therefore the actual trading expenses including additional sugarcane price must be considered while computing the profits. That excluding additional sugarcane price of Rs. 78,86,857/- while computing 20% deduction under Section 32AB would inflate the eligible profits contrary to law. She would rely upon judgment of the Apex Court in Commissioner of Income-tax, Bombay Versus. Tasgaon Taluka S.S.K. Ltd. [2019] 262 Taxman 176 (SC) in support of the contention that the additional price paid to sugarcane growers is not distribution of profits but ....
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....he Act. It is Assessee's contention that this practice is consistently followed by it. It is not in dispute that in the succeeding years, though same practice was followed, the same was not objected to by the Revenue. However, for Assessment Year 1990-91, the Assessing Officer selectively did not agree to the action of the Assessee in not adjusting the additional cane price of Rs. 78,86,857/- against the profits in Assessment Year 1990-91. 17) For resolution of the question of law formulated while admitting the Appeal, it would be necessary to make reference to the provisions of Section 32AB of the Act as it stood at the relevant time. Section 32AB is a beneficial provision inserted by Finance Act, 1986 w.e.f 1 April 1987. The provision provides an incentive to an Assesee who is carrying on business or profession by allowing deduction of 20% of the profits and gains of business. The condition is that the amount needs to be deposited with the development bank or utilized for purchase of new Plant & Machinery. There is no dispute about eligibility of the Assessee to take benefit of provisions of Section 32AB of the Act. The only dispute is about the exact quantum of profit in resp....
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....tion 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 [Schedule VI] 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. (4) ..... (5) The deduction under sub-section (1) shall not be admissible unless the accounts of the business or profession of th....
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.... or profession, a deduction out of the total income 20 per cent of the profits and gains of business or profession. If the said amount is deposited with the Development Bank or utilised for the purchase of any new machinery or plant without depositing any amount in an account under clause (a), how the profits of business or profession to be calculated for the purpose of section 32AB of the Act is found under sub-section (3), which is extracted above. 9. From a reading of the aforesaid provision it is clear that the profits of business or profession of an assessee for the purposes of sub-section (1) is to be arrived at on the basis of the profits computed in accordance with the requirements of Part II of the Sixth Schedule to the Companies Act. Therefore, it is clear, the said profits of business or profession is not computed in accordance with the provisions of the Income-tax Act. Further, it provides, for deduction of 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 Part II of the Sixth Schedule to the Companies Act. To that income, th....
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....equirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, they found it difficult to accept the argument of the Revenue that it is still open to the Assessing Officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. Sub-section (1A) of section 115J do not empower the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes, one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company's income, then it would have stated in section 115J that "income of the company as accepted by the Assessing Officer". In the absence of the same and on the language of section 115J, it ....
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....testing the liability. 17. In the instant case, even if in the profit and loss account a sum of Rs. 32,22,067 paid as customs duty had been deducted by virtue of sub-section (3) of section 32AB as it is a contingent liability and not a ascertained liability, it has to be added. In the instant case, as the said amount was not deducted, the question of adding would not arise. The assessing authority was justified in upholding the claim of the assessee who had not excluded the same from the profit of business or profession. Hence, the orders passed by the revisional authority as well as the appellate authority are not in accordance with law and they are required to be set aside, accordingly set aside. All the three substantial questions of law framed are answered in favour of the assessee and against the Revenue. (emphasis added) 21) Thus, in Jindal Aluminium Ltd. (supra), the Division Bench of Karnataka High Court has held that for the purpose of deciding the benefit under the provisions of Section 32AB of the Act, the Assessing Officer needs to take into consideration only the profits of business as stipulated under sub-section (3) of Section 32AB, which means t....
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....previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account with a development bank. The benefit is given by way of deduction, such deduction being allowed before the loss, if any, brought forward from earlier years, is set off under Section 72 of- (i) a sum equal to the amount or the aggregate of the amounts, so deposited and any amount so utilised ; or (ii) a sum equal to twenty per cent, of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with Sub-section (5), whichever is less. The manner in which the profits of the business should be computed is dealt with in Sub-section (3), which, as noticed earlier, requires computation to be in accordance with the requirement of Parts II and III of Schedule VI to the Companies Act. The computation so made is to be increased by the aggregate of the amounts set out in Sub-clauses (i) to (vii) therein. It is thereafter to be reduced by any amount or amounts withdrawn from reserves or provisions if such amounts are credited to the profit and loss account. It is thus amply clear that it....
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....1, are to commence with the figure representing the profits of the eligible business as computed in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956. From that figure the amount equal to the depreciation computed in accordance with Section 32(1) of the Income Tax Act, 1961, is to be deducted. After such deduction, that amount is to be increased by the aggregate of the amounts set out in Clauses (i) to (vii) of Section 32(3). A sum equal to 20 per cent of that amount is to be allowed as a deduction under Section 32AB(1)(ii). The determination of the profit required to be made in accordance with Parts II and III of Schedule VI to the Companies Act is required to be made after taking into account all the activities of the assessee governed by the Companies Act, as the profit and loss account required to be drawn up by a company must necessarily reflect all the income and all the expenditure incurred by the company in that year. Section 32AB does not require the profit for the purpose of Section 32AB(1) to be calculated in accordance with the provisions of the Income Tax Act. All that it provides is that the calculations should first be mad....
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....ct. There was, therefore, no scope at all for importing the concept of different heads of income found in the Income Tax Act, into the calculation of profit required to be made. 26) In Commissioner of Income-tax Versus. Tirupattur Co-operative Sugar Mills Ltd. (supra), the Madras High Court has followed the judgment in Commissioner of Income-tax Versus. Tamil Nadu Mercantile Bank Ltd. 27) In Deputy Commissioner of Income-tax Versus. United Nilgiris Tea Estate Co. Ltd. (supra) it has been held as under :- Section 32AB does not require the profit for the purpose of section 32AB(1) to be calculated in accordance with the provisions of the Income-tax Act. All that it provides is that the calculations should first be made in accordance with the Companies Act and the requirements more specifically required of Parts II and Iii of the Sixth Schedule to the Companies Act. Therefore there is no scope at all for importing the concept of different heads of income found in the Income-tax Act, into the calculation of profit required to be made in terms of section 32(3) of the Act which makes the calculation made in accordance with the Companies Act, the starting point for....
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....thod is consistently followed by the Assessee where the amount of additional sugarcane price paid after the end of the Financial Year is considered while determining profits of the following year. Therefore, though the amount of additional sugarcane price of Rs. 78,86,857/- is not deducted from the amounts of profits for the Financial Year 1989-90 (Assessment Year 1990-91), the same has been deducted from the amount of profits for the following year. As can be seen from the narration of facts above, similar practice was followed during Assessment Years 1989-90 when Assessee paid additional sugarcane price of Rs. 30,56,352/- which, though was claimed as an expenditure in the Assessment Year 1989-90, was deducted from the amount of profits in the subsequent year. There can thus be no revenue loss for the department. Though it may appear to an Assessing Officer while assessing accounts of a particular year that the Assessee is taking benefit by showing expenses of additional sugarcane price paid to farmers but hiding the same while computing profits for the purpose of 20% benefit of deduction under Section 32AB, however the Assessee deducts the very same amount from profits of the sub....