Income Tax Appellate Tribunal - Cochin
Indian Transformers Ltd. vs Deputy Commissioner Of Income Tax. on 6 March, 1995
Equivalent citations: (1995)52TTJ(COCH)654
ORDER
G. SANTHANAM, A. M. :
The appeal for the asst. yr. 1989-90 is by the assessee. The appeal for the asst. yr. 1990-91 is by the Revenue. As common issues are involved, a consolidated order is passed for the sake of convenience.
2. The assessee is a public limited company engaged in designing and production of advanced types of transformers. For the asst. yr. 1989-90, it claimed a deduction of Rs. 10,29,000 under S. 32AB and for the asst. yr. 1990-91 deduction was claimed under S. 32AB on an amount of Rs. 23,25,000. According to the Assessing Officer the assessee had a number of receipts which are not business receipts. Therefore, he excluded the following receipts from the purview of computation of deduction under S. 32AB of the Act :
Rs.
Rs.
(a) Interest from debentures, unit trust, fixed deposits and excess income-tax 5,88,002
(b) Income from investments 1,47,470
(c) Sale of account 3,062
(d) Sale of old trees 4,400
(e) Commission on unit trust 13,575
(h) Share transfer fee 8 21,045 7,56,517 Accordingly he computed the deduction only in a sum of Rs. 8,77,946 as against the claim of Rs. 10,29,000 for the asst. yr. 1989-90
3. For the asst. yr. 1990-91, the Assessing Officer excluded the following amounts and computed the deduction under S. 32AB as follows :
Rs.
Rs.
Amount of profit as per assessees computation 1,18,28,632 Add : Depreciation debited 63,042 1,18,91,674 Less : Income not related to eligible business -
Interest income from investment 8,27,804 Other interest 7,01,246 Sale transfer fee 10 Under miscellaneous income - sale of account 6,291 Sale of old materials 6,609 Sale of windows 2,459 Sale of old tyres 2,000 Commission on purchase of railway lands 2,400 15,70,419 Depreciation admissible 2,50,375 18,20,794 Balance 1,00,70,880 Deduction admissible @ 20% 20,14,176
4. The assessee appealed. The learned CIT(A) upheld the computation as made by the Assessing Officer as in his view the eligible business profit can only be considered as income derived from a business activity and, therefore, the items referred to by the Assessing Officer cannot be considered as part of eligible business profits. Thus, he dismissed the appeal of the assessee for the asst. yr. 1989-90.
5. For the asst. yr. 1990-91, another CIT(A) took a different view. It was contended before him, by the assessee, as follows :
"An assessee is eligible for deduction of the sum deposited as per the scheme or 20% of the profits of the eligible business or profession. As per S. 32AB(2)(i), eligible business or profession means business or profession other than the business of construction, manufacture or production of any article or thing specified in the Eleventh Schedule. Under S. 32AB(3), profits of eligible business or profession shall be the amount arrived at after deducting depreciation computed under S. 32(1) 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, as increased by the amounts mentioned in sub-cls. (i) to (vii). The learned representative stated that in computing the amounts of profits in accordance with the requirements of Part II and III of the Sixth Schedule to the Companies Act, all the above mentioned receipts are includible and, therefore, it is not correct to exclude these receipts in computing the profits as per S. 32AB(3). He submitted that the exclusion of these receipts is erroneous as all these are income from eligible business since they do not fall under any of the business listed in the Eleventh Schedule. The learned representative further submitted that the fact that the appellant is eligible for the deduction on the entire income would be evident from a comparison of the provisions of S. 32AB which relates to Tea Development Account. As per S. 32AB(1), what is to be allowed is the sum deposited or 20% of the profits of such business computed under the head profits and gains of business or profession, whichever is less. Shri Iyer pointed out that as per this section, the deduction is on the business income as computed under the IT Act whereas under S. 32AB, what is to be allowed is 20% of the profits of eligible business. He contended that if the intention was to allow the deductions only in respect of the business income as computed under the IT Act, then, the section would have stated so, as in the case of S. 32AB."
The CIT(A) was in agreement with the above contentions and allowed the claim of the assessee.
6. The assessee is in appeal against the order of the first appellate authority for the asst. yr. 1989-90 restricting the claim of deduction under S. 32AB of the Act as computed by it. The Revenue is in appeal against the order of the first appellate authority for the asst. yr. 1990-91 in upholding the claim of deduction under S. 32AB as computed by the assessee.
7. We have heard rival submissions and perused the records. We are in agreement with the decision of CAT(A) rendered for the asst. yr. 1990-91. In Apollo Tyres Ltd. vs. Dy. CIT (1992) 44 TTJ (Coch) 534 : (1992) 43 ITD 464 (Coch), it was held by the Tribunal as follows :
"From the language of S. 32AB(1) and the Boards Circular No. 461, dt. 8th July, 1986 issued thereunder, it is clear that investment deposit or the purchase of a new asset or plant must have come out of the income chargeable to profits and gains of business or profession. Since the income from units of UTI was chargeable under the head income from other sources, the same could not be construed as forming part of the income chargeable to tax under the head profits and gains of business or profession. But the definition of eligible business or profession it is a wide sense. Except those business specified in cls. (a) and (b) of S. 32AB(2), all other business or professions have to be construed as eligible business. In other words, an eligible business need not necessarily be an industrial undertaking engaged in the manufacture or production of an article.
One of the components to be considered for deduction under S. 32AB(1)(ii) is the profit of eligible business, to the extent of 20% of the same, computed in the manner laid down in S. 32AB(3). Therefore, whatever income, earned by the assessee either from its activity of manufacture or production for sale or from other activities such as dealing in shares and earning profit thereon and receiving income on such shares in the interim period, as long as they constituted the same business - all would fall under the category of eligible business. The reason was that by definition, eligible business was not confined to manufacture or production. Moreover, inter-head and intra-head adjustments are the cardinal features of computation of income. Further, in the case of the assessee the accounts had been prepared in accordance with Part II and Part III of Sixth Schedule to the Companies Act as was the mandate in S. 32AB(3). From the accounts so prepared the income from units of UTI and profit or loss on the sale of units were considered before ascertainment of net profit of the undertaking. From such profit the adjustment envisaged in S. 32AB(3) was to be given effect to. Moreover, these two activities of the assessee had to be construed as forming part of the same business as there was one account for all the funds which were intertwined and interlaced with each other, and the business was conducted under a common management. In S. 32AB(3) or in S. 32AB(1)(ii) the expression chargeable to profits and gains of business is conspicuous by its absence. Hence, the dichotomy as between the income from manufacture and income from units of UTI was not warranted in terms of S. 32AB(3). As both the activities constituted same business which was an eligible business, provisions of S. 32AB(3)(b) were not applicable.
Therefore, for the purpose of working out the deduction, rather more specifically in computing 20% of the eligible profit, the income from the units of UTI should also be considered along with other income subject to adjustments prescribed therein."
In the light of the above decision, it has to be seen first whether the amount representing the investment deposit or the purchase of a new asset or a plant has come out of the income chargeable to profits and gains of business or profession. At this stage the incomes which are assessed under any other head should not be taken into account but are to be only excluded. The exclusion is only to quantity the amount of investment deposit or the amount utilised for the purchase of new machinery or plant from out of the income chargeable under the head "profits and gains of business". There is no dispute on this. Once this amount is quantified, the assessee becomes eligible to claim the deduction. The deduction to be allowed is in -
(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 20% of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-s. (5).
whichever is less.
There cannot be any dispute about the quantification of the aggregate of the amounts deposited and the amount utilised for purchase of plant and machinery. Thus, as far as sub-cl. (i) is concerned, there is no ambiguity. As far as sub-cl. (ii) is concerned, a question arises whether the profits of eligible business means, profits chargeable under the head profits and gains of eligible business or the profits and gains of eligible business as found in the accounts. The Revenue opts for the former view while assessee opts for the latter view. We are in agreement with the assessees point of view, in view of the clear-cut language employed in sub-cl. (ii) of sub-s. (1) of S. 32AB. The expression used is profits of eligible businesss. Eligible business has been defined in sub-s. (2) and it is not disputed that the assessees business is an eligible business. Sub-s. (3) defines or explains the computation of profits of eligible business or profession. It is based on the amount of profits computed in accordance with the requirements of Part II and Part III of the Sixth Schedule to the Companies Act, 1956, subject to certain specified adjustments. Thus, the profits of the eligible business are not to be computed in accordance with the provisions of IT Act but are to be computed in accordance with the requirements of the Sixth Schedule to the Companies Act, 1956. In other words, if in the published accounts of the company certain income which are assessable under the head other sources are also found forming part of profits of the company, irrespective of the head of income under which a particular receipt is to be assessed, such receipts are to form part of the profits of eligible business as per the accounts in accordance with Part II and Part III of the Schedule VI of the Companies Act, 1956. Therefore, the learned CIT(A) was justified in upholding the computation as made by the assessee in the appeal for the asst. yr. 1990-91. For the same reason we are unable to agree with the order of the CIT(A) for the asst. yr. 1989-90.
8. The learned Departmental Representative relied on the following decisions :
(a) Eastern Investment Ltd. vs. CIT (1951) 20 ITR 1 (SC);
(b) Bengal & Assam Investors Ltd. vs. CIT (1966) 59 ITR 547 (SC);
(c) Michel A. Kallivayalil vs. CIT (1976) 102 ITR 202 (Ker); and
(d) Brooke Bond & Co. Ltd. vs. CIT (1986) 162 ITR 373 (SC).
These decisions are on a totally different context and they have nothing to do with the definition of profits of eligible business as given in sub-s. (3) of S. 32AB of the Act. For these reasons we allow the ground of appeal of the assessee in relation to S. 32AB and reject the Departments ground of appeal on the same issue.
9. The next two grounds of appeal are confined to the asst. yr. 1989-90 and they are as follows :
"The learned CIT(A) also erred in confirming the computation of capital loss made by the assessing authority. The determination of loss at Rs. 27,188 is apparently wrong.
The addition of Rs. 50,700 made by the assessing authority and confirmed by the first appellate authority while determining income from other sources is also not in order; since the interest accrued has been already considered for the purpose of working out the cost."
10. The assessee purchased some debentures with interest accrued thereon but not due for payment at the time of purchase. Some of the debentures purchased were sold during the accounting year. The details of purchases as extracted by the CIT(A) are as follows :
Name of the company No. of debentures Amt. paid Less interest Purchase price Rs.
Rs.
Rs.
Rs.
Dr. Reddys Lab. Ltd.
2,000 1,88,000 2,500 1,85,500 JBF Industries Ltd.
2,000 1,70,000 4,667 1,65,333 Best & Crompton Ltd.765
69,655 2,961 67,494 Jindal Strips Ltd.900
83,970 1,600 82,370 5,11,525 10,828 5,00,697 Subsequent to the acquisition of debentures the assessee accounted for the interest accrued due on the debentures from the date when interest was last paid to the date of interest fell due for payment. As against this accrual it sought to deduct the interest included in the purchase price of the debentures which accrued but not due for payment as on the date of purchase of such debentures. The Assessing Officer took the entire interest on the debentures held by the assessee as on the date when the interest accrued became due for payment and disallowed the deduction claimed by the assessee as against such interest in respect of the period upto the date of purchase. The CIT(A) upheld the computation.
11. Another fallout of this treatment of debenture interest was the quantification of the profit or loss on the sale of debentures. While the assessee sought to set off a sum of Rs. 5,00,697 against the sale proceeds of 4,84,397, the Assessing Officer sought to set off the interest inclusive purchase cost of 5,11,525 as against the sale proceeds of 4,84,397. The CIT(A) in keeping with his decision on the treatment of broken period interest upheld the determination of the loss as computed by the Assessing Officer. The assessee is in second appeal.
12. We have heard rival submissions. In the case of Vijaya Bank Ltd. vs. Addl. CIT (1991) 187 ITR 541 (SC) the apex Court held that -
"Whether the assessee purchases securities at a price determined with reference to their actual value as well as the interest accrued thereon till the date of purchase, the entire price paid for them would be in the nature of capital outlay and no part of it can be set off as an expenditure against the income by way of interest received on the securities."
Accordingly we uphold the order of the CIT(A) in disallowing the deduction claimed by the assessee and also in the quantification of the capital loss as determined by the Assessing Officer.
13. In the result, the appeal for the asst. yr. 1989-90 is partly allowed and the appeal for the asst. yr. 1990-91 is dismissed.