Income Tax Appellate Tribunal - Bangalore
India Packing Products (P) Ltd. vs Dy. Cit on 20 November, 2000
Equivalent citations: (2002)74TTJ(BANG)561
ORDER
T.J. Joice, A.M. These are appeals filed by the assessee and are directed against the orders of the Commissioner (Appeals), dated 15-7-1992, and 13-7-1992, for the assessment year 1989-90 and 1990-91, respectively. As some of the grounds are common, we are disposing of both the appeals by a consolidated order for the sake of convenience.
2. The assessee claimed deduction under section 32AB amounting to Rs. 4,64,602 with reference to the profit of Rs. 23,23,008. The assessing officer has observed in the assessment order that this income includes the following :
Rs.
Dividend income 13,528 Interest on debentures 2,850 Income from house property 2,34,540 The dividend and interest income has been offered under the head 'other sources' and the rental income has been offered under the head 'house property'. However, for the purpose of claiming deduction under section 32AB, the assessee wanted the entire amount of Rs. 23,23,008 to be treated as business income on the ground that it has been computed in accordance with Parts II and III of the VI Schedule of the Companies Act, 1956. However, the assessing officer considered this contention of the assessee as not acceptable. According to the assessing officer, the deduction under section 32AB should be made out of the profits and gains of "eligible business" and the business income should be computed with reference to the income computed specifically under the head "profits and gains from business or profession". According to the assessing officer, income from house property and capital gains are assessable under the respective heads and income from dividend and interest is assessable under the head 'other sources'. Therefore, these items are to be excluded from the purview of business income. The assessee's contention before the assessing officer and the Commissioner (Appeals) was that the profits of 'eligible business' in this context should be taken to mean profits of the assessee-company computed in accordance with the requirements of Parts II and III of the Schedule VI of the Companies Act, 1956 as mentioned in sub-section (3) of section 32AB. This being a special provision and the assessee-company being bound by the provisions of Companies Act was entitled to a deduction under section 32AB with respect to the higher amount of income as per the profit & loss account. However, this contention of the assessee has been negatived both by the assessing officer and the Commissioner (Appeals) very emphatically by referring to the legislative intent of the provisions of section 32AB in the light of judicial pronouncements on the subject.
3. Aggrieved by the order of the Commissioner (Appeals) who has confirmed the order passed by the assessing officer, the assessee is in further appeal before us. Shri S. Parthasarathi, the learned counsel for the assessee, has vehemently assailed the order of the assessing officer and of the Commissioner (Appeals) by referring to the provisions of sub-section (3) of section 32AB according to which the profits of the business of the assessee for the purpose of section 32AB has to be calculated in accordance with the requirements of the Companies Act and, therefore, the assessee's claim is well founded. It is pointed out by the learned counsel that what is relevant for the purpose of section 32AB is the net profit of the company as computed in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. Therefore, the question of allocating the net profit of the company into business profits and other heads of income does not arise. Such concept of different heads of income ought to be confined only to income-tax and cannot be imported and brought into the net profit of the company arrived at as per the provisions of Schedule VI of the Companies Act. The Commissioner (Appeals) has erred in not accepting this clear distinction. In section 32AB reference is only to total income and not to the head of 'profit and gains of business or profession'. In other words, the deduction of 20 per cent is to be calculated only with reference to the total income which includes income from all other heads and not confined only to profits and gains of business or profession. On the basis of these arguments, the learned counsel submits that the assessee is entitled to the full claim of deduction as claimed amounting to Rs. 4,64,602.
4. On the other hand, the learned Departmental Representative Shri K. Ramesh, has supported the orders of the assessing officer and the Commissioner (Appeals), where the issue has been examined at length explaining the provisions of section 32AB on the basis of judicial pronouncements. He has also drawn our attention to the decision of the Gauhati High Court in CIT v. Dinjoye Tea Estates (P) Ltd. (1997) 224 ITR 263 (Gau), which is directly applicable to the facts of the present case.
5. We have carefully considered the rival submissions, the evidence on record and the ratio of the decisions cited before us and the decisions referred to in the orders of the lower authorities. In order to consider the merits of the assessee's contention in this case, we deem it necessary to reproduce the relevant provisions of section 32AB as applicable for the assessment year 1989-90, in so far as they are pertinent to the issue before us :
"32AB. Investment deposit account.(1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the "head 'profits and gains of business or profession", has, out of such income,
(a) deposited any amount in an account (hereinafter referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or
(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a), in accordance with, and for the purposes specified in, a scheme (hereinafter referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a 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 Provided that where such assessee is a firm, or any Association of Persons or any Body of Individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or as the case may be, any member, of such firm, Association of Persons or Body of Individuals.
(2) For the purposes of this section,
(i) "eligible business or profession" shall mean business or profession, other than
(a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking, which is not a small-scale industrial undertaking as defined in section 80HHA;
(b) the business of leasing or hiring of machinery or plant to an industrial undertaking, other than a small-scale industrial undertaking as defined in section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.
(ii) "new ship" or "new aircraft' includes a ship or aircraft which before the date of acquisition by the assessee was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India;
(iii) "new machinery or plant" includes machinery or plant which before its installation by the assessee was used outside India by any other person, if the following conditions are fulfilled, namely :
(a) such machinery or plant was not, at any time previous to the date of such installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee;
(iv) "Tea Board" means the Tea Board established under section 4 of the Tea Act, 1953 (29 of 1953);
(3) The profits of eligible business of profession of an assessee for the purposes of sub-section (1) shall,
(a) in a case where separate accounts in respect of such eligible business or profession are maintained, be an amount arrived at after deducting 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 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 & loss account; and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit & loss account; and
(b) in a case where such separate accounts 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 proportion as the total sales, 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.
(4) ..............
(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 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 in the prescribed form duly signed and verified by such accountant :
Provided that in a case where the assessee is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this sub-section if such assessee gets the accounts of such business or profession audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed under this sub-section.
(5X to (10) ........"
(emphasis, italicised in print) If the assessee's argument is to be accepted, it would mean that profits of "eligible business" would include the entire income of the assessee as per the profit & loss account, since such profit has been computed in accordance with the provisions of the Companies Act as mentioned in sub-section (3) and audited as mentioned in sub-section (5). However, on careful consideration of the legal provisions, we are unable to agree with the proposition that the profits of eligible business with reference to which 20 per cent deduction is to be computed under section 32AB should include income computed under the heads income from house property, capital gains and other sources. This is because of the fact that section 32AB appears under Chapter IV of the Income Tax Act entitled "computation of total income" and more specifically under Part D of the same chapter entitled "Profits and gains of business or profession". The sub-headings given to the various parts of Chapter IV indicate the different heads of income like A-Salaries, B-Interest on securities (now omitted with effect from 1-4-1989), C-Income from house property, D-Profits and gains of business or profession, E-Capital gains. These sub-headings clearly indicate that the respective sections occurring in the parts of Chapter IV apply to the respective heads of income under which the income is to be computed. Therefore, it is clear that the computation of business income has to be done strictly in accordance with the provisions of section 28 to 44D. Since the income from house property, capital gains and other sources are governed by sections occurring in other parts as mentioned above, the deduction under section 32AB cannot be extended to the other parts, unless it is specifically provided for in the Act. The mere mention of the Companies Act and the audited statement of accounts in sub-sections (3) and (5) of section 32AB does not take away or dilute the basic principle embedded in the computation of income and scheme of deductions under the various heads of income as provided for in Chapter IV of the Income Tax Act, 1961. Therefore, it is clear that the words "profits of eligible business" have to be interpreted to mean only the profits of the assessee's income from business as defined in clause (i) of section 32AB(2).
6. In this context, we may refer to the decision of the Hon'ble Supreme Court in the case of United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688 (SC) and in the case of CIT v. Chugandas & Co. (1965) 55 ITR 17 (SC). In both these cases, the Supreme Court was concerned with the computation of income under the head 'interest on securities. In the first case, it was a bank where the securities were held by the bank as business assets and, therefore, interest on securities was held to be the business income of the bank though assessable under the different head "interest on securities". Similarly, in the second case, the assessee was a dealer in securities and, therefore, the income derived from interest on securities was held to be the assessee's business income for the purpose of exemption from tax under section 25(3) of the Indian Income Tax Act, 1922. When we come to the present case, we find that the eligible business of the assessee in respect of deduction under section 32AB is to be given relates to manufacture of cardboard boxes and plastic items. Therefore, by no stretch of imagination can it be held that income from house property, dividend and interest on debentures are attributable to the business of such manufacture. Moreover we find that the decision of the Gauhati High Court in the case of Dinjoye Tea Estate (supra) is squarely applicable to the instant case, because, in that case also, the High Court was concerned with the claim of deduction under section 32AB in the case of an assessee engaged in the manufacture and sale of tea. The Hon'ble High Court held that income by way of interest and dividend was not includible in the business profit for the purpose of calculating deduction under section 32AB. In this case also, one of the arguments advanced by the assessee was with reference to the provisions of Companies Act as referred to in sub-section (3) of section 32AB. However, as stated earlier, the Hon'ble High Court clearly held that the interest and dividend received by the assessee-company was not eligible to be included in the business income for the purpose of giving benefits of section 32AB. While doing so, the court reversed the order of the Tribunal in favour of the assessee. In the circumstances, respectfully following the decision of the Hon'ble High Court in the above-mentioned case, we have to hold that the assessee is not entitled to the deduction under section 32AB with respect to the income to be assessed under the heads 'income from house property', 'capital gains' and 'income from other sources'.
7. Before parting with this order, we have to record our appreciation at the way in which the issue has been dealt with the Deputy Commissioner, Special Range-2, Bangalore who made the assessment in this case (hereinafter referred to as the assessing officer) and also by the Commissioner (Appeals)-1, Bangalore. It is found that the assessing officer in paras 2 to 7 of the assessment order has explained the relevant provisions of the Act in the light of the Explanatory Notes to Finance Act, 1986, bringing out the clear intention of the legislature and has also dealt with each of the arguments advanced by the assessee. The Commissioner (Appeals) after referring to the arguments of the assessing officer and of the assessee has given an in-depth analysis regarding the provisions of section 32AB vide paras 10 to 20 of the appellate order in which reliance has been placed on the following case laws:
(1) K.P. Verghese v. ITO (1981) 131 ITR 597, 612 (SC);
(2) Deshbandhu Gupta & Co. v. Delhi Stock Exchange Association Ltd. AIR 1979 (SC) 1049;
(3) Baleshwar Bagarti v. Ghagirathi Dass (1908) ILR 35 (Cal) at pp. 701, 713.
(4) Cambay Electric Supply Indl. Co. Ltd. v. CIT (1978) 113 ITR 84 (SC);
(5) CIT v. Cochin Refineries Ltd. (1982) 135 ITR 278 (Ker);
(6) CIT v. Standard Motor Products of India Ltd. (1962) 46 ITR 814 (Mad);
(7) Industrial Gases Ltd. v. CIT (1965) 58 ITR 317 (Cal);
(8) Reserve Bank of India v. Peerless Genl. Finance & Investment Co. Ltd. & Ors. JT 1987 (1) SC 246;
(9) Keshavji Ravji & Co. v. CIT (1990) 49 Taxman 87 at pp 95 & 96 (SC); and (10) Doypack Systems (P) Ltd. v. Union of India (1988) 69 CTR (SC)(Allied Laws) 6 : (1988) 2 SCC 299.
We strongly endorse the reasoning adopted by both the authorities below. We have also for the reasons indicated in paras 5 and 6 above, upheld the orders of the lower authorities.
8. There is one more ground of appeal for the assessment year 1989-90 relating to disallowance of telephone expenses amounting to Rs. 39,159 relating to the residential phones of the directors of the company. According to the assessing officer, these are personal expenses of the directors and cannot be allowed as a deduction in the hands of the company under section 37. The Commissioner (Appeals) upheld the disallowance by stating that the telephones installed at the residence of the directors were mainly used for non-business purposes and were only casually used in connection with the assessee's business. The learned counsel for the assessee took exception to these observations made by the Commissioner (Appeals) by pointing out that in an agreement with the Managing Director, the company had agreed to pay the telephone expenses at the directors' premises. These telephones were mainly used for the business purposes of the company, for contacting the out-station customers in north, with whom the company has a high volume of business. Moreover, it is pointed out that it is always advantageous to call the customers in the night when they will be easily available and when the benefit of concessional rate of tariff is also available from the telephone department. Hence, it is pleaded that there is no justification for the disallowance. On the other hand, the learned Departmental Representative supported the orders of the lower authorities by stating that the expenses not having been incurred for business purposes of the company, it has been rightly disallowed under section 37.
9. After considering the rival submissions and the evidence on record, we are of the view that the disallowance of telephone expenses in the case of the directors of the company, is not justified in the assessment of the company. As far as the company is concerned, there cannot be any expenses of a personal nature. Hence, the disallowance on the ground that the expenses have been incurred for personal purposes is not justified. At best the facilities given to the directors by way of residential phone can only be treated as a perquisite in their hands, insofar as, personal use of the telephone by the directors are concerned. However, that should not be a factor for disallowance under section 37 in the assessment of the company. In this view of the matter, we reverse the orders of the lower authorities and direct the assessing officer to delete the disallowance relating to telephone expenses.
ITA 1731/Bang/1992; Asst. yr. 1990-91
10. The only issue that arises for consideration is disallowance of Rs. 46,163 by way of personal use of telephones installed in the directors' residence. In the preceding paragraph, we have discussed an identical issue for the assessment year 1989-90 and held that the disallowance is not proper. Accordingly, we direct the assessing officer to delete this disallowance for this assessment year as well.
11. In the result, ITA 1730/Bang/1992 is partly allowed and ITA 1731/Bang/1992 is allowed.