Having regard to divergence of opinion between the Benches of the Appellate Tribunal, on the question of deductions to be allowed under section 32AB. The Honble President of the Tribunal has constituted this Special Bench to consider the following questions : "(i) Whether, on the facts and circumstances of the case, the assessee is entitled to deduction under section 32AB in respect of income by way of rent, interest, lease rent, profits arising from transactions in investment, miscellaneous income and generator hire charges (ii) Whether, on the facts and circumstances of the case, profit from eligible business is to be computed in accordance with the provisions of the Income Tax Act or in accordance with Parts II and III of Schedule VI of the Companies Act for computing deduction under section 32AB irrespective of the heads under which such income is assessable under the Income Tax Act ?" Before adverting to the facts in the cases under consideration, it is desirable to note the circumstances which led to the constitution of this Special Bench. The Chandigarh Benches of the Tribunal were allowing deduction under section 32AB of interest income, rent and miscellaneous income by following consistently the decision of the Cochin Bench in case of Dy. CIT v. Apollo Tyres Ltd. (1992) 43 ITD 464 (Coch). This was done in the case of Highway Cycle Industries Ltd. v.Asstt. CIT in ITA No. 1039/Chd/1991 for assessment year 1987-88 vide order dated 14-1-1997, and in other cases, some of which are mentioned below : (i) M/s. Munjal Castings v. Asstt. CIT ITA No. 1145 of 1992 for assessment year 1989-90, order dated 31-5-1999; (ii) Majestic Auto Ltd. v. Dy. CIT ITA Nos. 1055 & 1356 of 1992 for assessment years 1987-88 & 1988-89, order dated 14-6-2000; and (iii) Highway Cycle Inds : Ltd. v. Asstt. CIT ITA No. 1777 of 1992 for assessment year 1989-90 order dated 30-6-2000.
The Cochin Bench had taken the view that for purposes of deduction under section 32AB(3), profit & loss account has to be prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956, and then certain additions as mentioned in various clauses of sub-section (3)(a) of section 32AB are to be made. The Bench had noted that expression "chargeable to profits and gains of business" was conspiouous by its absence while computing deduction under section 32AB(3) of the Income Tax Act. In other words, it was held that for computing deduction under section 32AB, it was not necessary that only income, assessable under the head "business" as the term is understood under the Income Tax Act, be taken into account. Several receipts, strictly speaking not assessable under the above head, can be included in the profits and gains of business in the accounts prepared as per Parts II and III of Schedule VI to the Companies Act. As noted earlier, above view was applied by the Tribunal in the decision in the case of Highway Cycle Industries Ltd. (supra) one of the assessees before us.
However., in the assessment year 1989-90 of the assessee, the hon'ble members rejected the claim for deduction under section 32AB in respect of interest income although similar claim was allowed in the earlier years. This departure was made by the Bench, following the decision of the Honble Gauhati High Court in the case of CIT v. Dinjoye Tea Estate (P) Ltd. (1997) 224 ITR 263 (Gau). The above view was subsequently followed by the Chandigarh Benches of the Tribunal in the other cases also. The other Benches at different places continue to follow the decision in the case of Apollo Tyres Ltd. (supra) or similar view as taken by the Cochin Bench. Some of the cases are listed below : (ii) Kelvinator of India Ltd. v. Dy. CIT 195 Taxman 246 (Del) Mag (sic); (iv) Asstt. CIT v. Northern India Theaters (P) Ltd. (1995) 56 ITD 42 (Del) (TM); and On account of above conflict, the need to constitute a Special Bench arose and accordingly, in the two cases, two questions noted earlier have been referred to be considered by the Special Bench.
The relevant facts, in the case of Highway Cycle Industries Ltd. are that the assessee claimed deduction under section 32AB at Rs. 26,69,541 supported by an audit report in the prescribed form as required by the rules. The assessing officer allowed deduction at Rs. 25,29,466. The difference between the deduction claimed and allowed was on account of the following items : The assessing officer was of the view that rent, profit on sale of investment, interest received, miscellaneous income and lease rent were not business income but income assessable under the head other sources.
Therefore, the deduction under section 32AB was not permissible on these items.
The assessee impugned above assessment in appeal before the Commissioner (Appeals) and contended that deduction was to be made on profit & loss account drawn as per Parts II and III of Schedule VI of the Companies Act and, therefore, there was no justification to exclude above items. In support of the claim, the decision of Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra) was relied on.
The learned Commissioner (Appeals) however, respectfully differed with the view taken in the case of Apollo Tyres Ltd. (supra) and held that there was no question of allowing deduction under section 32AB on income like rent, etc., as they had nothing to do with the nature and source of income and claim of deduction. He held that part of interest, i.e., Rs. 58,837, could only be allowed under the head "business".
Likewise lease rent amounting to Rs. 1,20,000, received for giving machinery on hire to sister concern was treated as part of business income. He directed the assessing officer to take the above items as business receipts and recompute permissible deduction under section 32AB.In-the case of Rockman Cycle Industries Ltd., the assessee had claimed deduction under section 32AB at Rs. 51,74,125. The assessing officer allowed the claim of Rs. 50,88,818 and excluded the following items from the purview of section 32AB as these were not part of business : On appeal, arguments similar to those advanced in the other case of Highway Cycle Inds. Ltd. (supra) were advanced before the learned Commissioner (Appeals). Reliance was again placed on the decision of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra), but the learned Commissioner (Appeals) respectfully differed with the view taken in the above case. He was of the view, that rental income could not be taken as business income as it had no interlacing or interweaving with business activity. He accordingly upheld the exclusion of rental income for computing deduction under section 32AB.The miscellaneous income of Rs. 36,566 received in the shape of customs duty refunds or CST refund was held to be the business income. The learned Commissioner (Appeals) also accepted that interest on deposit in IDBI was business income. The rejection of claim in respect of other items was upheld.At the very outset, it may be pointed out that the learned Departmental Representative raised an objection, relating to the constitution of the Special Bench, pointing out that one of the Members (Shri R.K. Bali) has already expressed an opinion on the points at issue in the case of Highway Cycle Industries in ITA No. 1039/Chd/1991, dated 14-1-1997, and, therefore, he should not be part of the Special Bench. This objection is without any merit as in the decision dated 14-1-1997, the Chandigarh Bench merely followed the decision of the Cochin Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra). Several other Benches followed suit and throughout the country, Apollo Tyres case (supra) had been followed. That way, the other Member (Shri Vimal Gandhi, Vice President) was also a party in the case of Phoenix Overseas Ltd. in ITA No. 5177/Del/1990, which has been included in the paper book and was later cited by the learned Departmental Representative in support of his arguments. The third Member might have also considered the issue in some other context. The cases are decided on the basis of facts pleaded and legal propositions advanced by the parties and the Bench is required to take an objective view of the issue. No bias was alleged. We, therefore, reject this objection raised on behalf of the revenue.
Shri Subhash Aggarwal, the learned counsel for the assessee, opened the arguments for and on behalf of the assessee. He referred to conflicting views taken by the Benches of the Tribunal at Chandigarh. He pointed out that M/s. H.D. Bansal & Co. had audited the accounts of the assessee and report in the prescribed Form 3AA under clauses (a) and (b) of rule 5 of the Income Tax Rules, was duly filed. Chandigarh Benches had all along been following the decision of Cochin Bench of the Tribunal in the case of Apollo Tyres (supra) but then after the judgment of the Guahati High Court in the case of CIT v. Dinjoye Tea Estate (P) Ltd. (supra), the view was changed by Chandigarh Benches. He drew our attention to the case of Dinjoye Tea Estate (P) Ltd. (supra) and pointed out that question of eligible profit was not considered by the Hon'ble High Court nor provisions of sub-section (3) of section 32AB were placed before the High Court. This is more than clear from the observations made by the Honble High Court at para 264 of the report which were read out to us. In order to emphasise that consideration of the definition "eligible profit" was relevant, Shri Aggarwal drew our attention to decision of the Hon'ble Delhi High Court in the case of CIT v. Tirath Ram Ahuja Ltd. (2000) 242 ITR 646 (Del).
He also referred to the decision of the Bombay High Court in the case of CIT v. Diners Club India Ltd. (2000) 163 CTR (Bom) 330 wherein their Lordships of the Bombay High Court upheld the order of the Tribunal, directing the assessing officer to allow deduction under section 32AB, on profits computed in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. The assessee was allowed deduction even on dividend income, treating it as a part of business income. Their Lordships held that no question of law arose from the order of the Tribunal. Shri Aggarwal further drew our attention to the following observations of learned author Kanga and Palkhiwala on section 32AB of the Income Tax Act at para 535 of their Commentary (4th Edn.) : The profits of the eligible business, a percentage of which is deductible under sub-section (1)(ii), should include any income (e.g.
interest or dividend) which forms part of business profits as computed according to well-settled commercial or accounting principles, even though such income is assessable under a head other than Business (Contrast section 80HHC(3)).
In exercise of the powers conferred by sub-section (1), the Central Government has framed the Investment Deposit Account Scheme 1986. Rule 5AB prescribes the form in which the report of audit of the accounts is to be furnished under sub-section (5)." Shri Subhash Aggarwal further contended that provisions of section 32AB are in pari materia with provision of section 115J of the Income Tax Act and interpretation placed on the latter provision is applicable to the former. In this connection, he invited our attention to the decision of the Honble Bombay High Court in the case of CIT v.Veekaylal Investment Co. (P) Ltd. (2001) 249 ITR 597 (Bom) therein their Lordships observed that for computing book profit, income from capital gains on sale of capital investment was liable to be included.
Their Lordships did not agree with the view taken by the Special Bench of the Tribunal in the case of Satluj Cotton Mills Ltd. v. Asstt. CIT (1993) 199 ITR (AT) 164. In other words, the income assessable under the head "capital gains", under the Income Tax Act, can be treated as profit of business for purposes of section 115J of the Income Tax Act.
He submitted that in section 32AB, also the legislature has employed a similar language. Shri Aggarwal further drew our attention to the decision of the Delhi Bench of the Tribunal in the case of Phoenix Overseas Ltd. v. Asstt. CIT (1996) 56 ITD 274 (Del) where the Bench held that deduction was admissible under section 32AB on eligible business which means any business not falling in exclutory clauses (a) and (b) of sub-section (2) of section 32AB. All business other then the one excluded under the above clauses was "eligible business. He then referred to other decisions of other Benches of the Tribunal complaced in the paper book starting with the case of M/s. Highway Cycle Industries, (supra), wherein view in favour of the assessee was taken.
Some of these we have already referred to above. The other cases are as under : (i) Mahendra R. Patel (HUF) v. Asstt. CIT (ITA No. 1322/Ahd/1994, assessment year 1990-91, dated 1-8-2000) and (ii) Asstt. CIT v. Suma Eng. (P) Ltd. (ITA Nos. 673 & 674/Pn/1990, assessment years 1987-88 & 1988-89, dated 28-7-1995).
In particular, Shri Subhash Aggarwal referred to the decision of Pune Bench in the case of Asstt. CIT v. Suma Engg. (P) Ltd., wherein rental income and dividend income was also taken for purposes of computing deduction under sub-section (3) of section 32AB. The Pune Bench had relied on the decision in the case of Apollo Tyres Ltd. (supra) decided by the Cochin Bench. He further submitted that R.A. filed against the above decision was rejected by the Pune Bench vide the order dated 11-8-1996. A copy of above order has been made part of the record.
After citing above decisions, Shri Aggarwal submitted that deduction under section 32AB is to be allowed on profit & loss account, prepared under Parts II and III of Schedule VI of the Companies Act and not on business income as understood under the Income Tax Act. Therefore, items of income, not taken as business under the Income Tax Act are to be taken for purposes of computing above deduction when profit & loss account is prepared under the Companies Act. He further submitted that in case, the Bench holds that the reasonable views of the matter are possible, the view, in favour of the assessee be adopted as per the settled law.
Shri P.K. Srivastava, the learned Departmental Representative, opposed the arguments of Shri Aggarwal. Referring to the questions, set up before the Special Bench, and submitted that basis question was the second question. If the same is answered in the affirmative, the other question becomes irrelevant. He read out the provisions of section 32AB and pointed out that sub-section (1) of the above section talks of profits and gains included in the total income. If there is no profit in computed total income, no deduction is to be allowable. There is no dispute on this proposition, but if profit is even Re. 1, the assessee must get full deduction, disproportionate to the business income included in the total income. Such an interpretation cannot be accepted as it is repugnant and would create a anomalous situation. He, therefore, submitted that profits and gains of business for purposes of all sub-sections of section 32AB can only mean profit and gains as understood under the Income Tax Act. Income, not assessable under the above referred to head was not entitled to any deduction. He then drew our attention to sub-section (3) of section 32AB relating to computation of eligible business. He drew our attention to clause (b) in the said sub-section to show that in the said clause, no reference is made to computation of profit under the Companies Act where the expression used is only profits and gains of business which mean profit as per the Income Tax Act. The purpose of clauses (a) and (b) cannot be different. If under clause (b), the deduction is to be allowed on proportionate basis on the business income, there is no reason for allowing deduction on income assessable under heads other than "business", Therefore, a harmonious construction is to be placed on both the clauses (a) and (b) to avoid anomalies. That can be done by computing deduction with reference to income assessed under the head "business" only. He then referred to sub-sections (5A) and (5AA) of section 32AB under which deduction allowed is to be withdrawn before the expiry of five years from the date of deposit and whole of amount so withdrawn "shall be deemed to be the profit and gain of business or profession of that previous year and shall accordingly be charged to income-tax". Thus, the deduction withdrawn is deemed to be profit and gain of business when it is withdrawn. It cannot have a different colour when it is computed and allowed. Therefore, the deduction has to be allowed only from the profits of business or profession as computed under the Income Tax Act. He further argued that section 32AB is applicable not only to a limited company but to all assessees and in order to give uniform approach, income which is to be taken into consideration is only income from business or profession.
Shri Srivastava referred to the arguments of Shri Aggarwal and contended that section 115J is riot in pari materia to section 32AB as section 115J is applicable only to companies, whereas section 32AB is applicable to all assessees. The purposes of two sections are also different. He referred to decisions relied on by Shri Aggarwal and submitted that those were not applicable as in those cases decision of Honble Gauhati High Court was not taken into consideration. This is evident from the discussion in those cases. He submitted that observations of Third Member in the case of Northern India Theatres (P) Ltd. (supra) were in favour of the revenue as it was observed that deduction is to be confined to business profit. In the case of Diners Club India Ltd. (supra), the Honble Bombay High Court had, held that items, on which deductions were claimed were part of business income as held by the Tribunal. This being a finding of fact, their Lordships had held that no question of law arose from the order of the Tribunal.
Likewise, in the other decisions of the High Court, the finding of fact arrived at by the Tribunal was upheld. These decisions, therefore, do not advance the case of the assessee. He relied on the Madras High Court decision in the case of Smt. B. Seshamma v. CIT (1979) 119 ITR 314 (Mad) where their Lordships hold that interest was income liable to be taxed under the head other sources as the assessee had failed to show that interest was earned on loans advanced in the course of business. Here also the same position prevailed, as the assessees have failed to show that various items of income were earned in the course of business. With reference to the decision of the Honble Kerala High Court in the case of Apollo Tyres Ltd. (1999) 237 ITR 706 (Ker), Shri Srivastava submitted that in the said decision, their Lordships did not give any clear finding on application of sub-section (3) of section 32AB of the Income Tax Act. He also relied on the decisions of the Tribunal in favour of the revenue as noted earlier.
We have given careful thought to the rival submissions of the parties.
We deem it appropriate to reproduce a portion of section 32AB, introduced through the Finance Act, 1986, with effect from 1-4-1987.
The relevant portion of sub-sections (1), (2) and (3) of section 32AB reads as under : "32AB(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 the 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 (hereafter 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 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), (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; (3) The profits of eligible business or profession of an assessee for the purpose 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 : (iii) the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964); (v) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; (vi) the amounts by way of provision for losses of subsidiary companies; and 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 provision 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." The Central Board of Direct Taxes issued Circular No. 461, dated 9-7-1986 (1986) 161 ITR (St) 171, explaining the provisions of above section. The relevant para 17.4 of the said circular deals with the salient features of the scheme and is as under : "(a) Under section 32AB(1), it has been provided that deposits with the development bank or the purchase of a new ship, new aircraft, new machinery or plant should be out of income chargeable to tax under the head profits and gains of business or profession. However, for arriving at the book profit, a uniform system of accounting is yet to be enforced even in the organised sector. Hence, the term profit of eligible business or profession has been defined as per section 32AB(3) in order to ensure uniformity in determining the profits qualifying for deduction, as also to reduce uncertainty about the interpretation of this term. In terms of section 32AB(3)(a), it has been provided that the profits of eligible business or profession for the purposes of deduction under these provisions will mean, in a case, where separate accounts in respect of such business or profession are maintained, an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provision of section 32(1) of the Income Tax Act, from the amount 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 an amount equal to the depreciation, if any, debited in the audited profit & loss account.
That implies that the profit has to be computed, taking into account only the depreciation for the current year, as admissible under the Income Tax Act. Further, Part II of the Sixth Schedule to the Companies Act lays down the requirements as to profit & loss account. These requirements, as per the provisions of section 32AB(3) of the Income Tax Act, will be applicable in the cases of corporate as well as non-corporate assessees." On a plain reading of section and the scheme of investment deposit account, it is clear that sub-section (1) provides the qualifications for making claims for deduction. These qualifications may be summarised as follows : (i) that total income of the assessee, chargeable to tax, should include income under the head profits and gains of business or profession.
(ii) out of such income, the assessee should deposit any amount in an account maintained with the development bank, within the time, as provided in clause (a) or utilise any amount out of such income for purchase of new ship, new machinery as provided in clause (b); and (iii) the deposit on utilisation of amount should be as per scheme framed by the Central Government.
(i) A sum equal to amount or aggregate of amounts deposited or utilised; (ii) 20 per cent of the profit of eligible business or profession as computed in the accounts of the assessee, audited in accordance with sub-section (5), Sub-section (2) of the section defines "eligible business" and the said definition is exclutory definition. Every business other than one excluded under clauses (a) and (b) is eligible business to be considered for quantification of the deduction. Certain specific businesses like construction, manufacture or production of any article or things specified in the list in Eleventh Schedule not carried by a small-scale industrial undertaking, are excluded. Likewise, business of leasing or hiring of machinery or plant to an undertaking other than a small-scale industrial undertaking and some other businesses, specified in the above clauses are excluded. All other businesses are eligible businesses. We are not concerned here with provisions defining "new ship", "new machinery", etc., in the present controversy.
Sub-section (3) of the section, which is most relevant for the present controversy, provides how profits of eligible business or profession of the assessee are to be computed for purposes of the quantification of the deduction. This sub-section is again split into two clauses, i.e., clauses (a) and (b) applicable in two different situations as below : (i) In a case where separate accounts in respect of eligible business or profession are maintained. In that case, the deduction is to be allowed of an amount of profit computed in accordance with the requirements of Parts II and III of Sixth Schedule to the Companies Act. From the above amount, depreciation, computed in accordance with the provisions of sub-section (1) of section 32 is to be deducted. The resultant figure is to be increased by items specified in clause (a).
(ii) The second situation governs a case, where no accounts are maintained or made available by the assessee. In such a case, deduction is to be allowed of amount which bears to the total profits of business or profession of the assessee the same proportion as the total sales, turnover or gross receipts of eligible business or profession bear to total sales, turnover or gross receipts of the business or profession carried on by the assessee.
From an analytic reading of the combined provisions noted above, it is clear that conditions for eligibility for deduction provided in sub-section (1) are different as explained hereinbelow. To qualify and be eligible for deduction, the assessee must have income chargeable under the head "profits and gains of business or profession" forming part of the total income, and out of such income should make deposit with the development bank or utilise amount in the previous year for purchase of new ship, machinery or plant as per scheme framed by the Central Government. The expression "Profits and gains of business or profession" means profits and gains of business or profession as understood in the Income Tax Act. If no profit of business or profession is included in the total income as computed under the Income Tax Act, no deduction would be allowed. The deposit with the development bank and utilisation of amount for purchase of any new ship or machinery is also to be made out of above income. The qualifying condition flows from use of words "such income" in sub-section (1).
Clause (i) relating to deduction under this section also confines itself to the aggregate of amount deposited or utilised out of "profits and gains of business or profession chargeable to income-tax" and included in the total income.
Clause (ii) of sub-section (1) allows alternative deduction at 20 per cent of profits of eligible business or profession. Here the conditions prescribed are different from those provided in other portion of the sub-section. The eligible business is separately defined and it does not mean business as is understood under the Income Tax Act. There is clear departure from the scheme of computation under the Income Tax Act. In sections 32AB(2), 32AB(3) or 32AB(1)(ii), the expression "total income" or "profits and gains chargeable to tax" are conspicuous by their absence". By defining eligible business and by providing for computing of income of eligible business under the Companies Act, the legislature wished to provide a different formula for quantification of the deduction. If deduction was to be allowed on "business income" as computed under the Income Tax Act, there was no need to define or make separate provisions of computation of income of "eligible business". As pointed out in para 17.4 of Circular No. 461 of the Central Board of Direct Taxes, this was done "in order to ensure uniformity in determining the profits qualifying for deduction, as also to reduce uncertainty about the interpretation of this term". Therefore, profits of eligible business are to be computed not under the Income Tax Act, but as per accounts prepared under Parts II and III of Schedule VI to the Companies Act where clause (a) of sub-section (3) is applicable and separate accounts of eligible business or profession are maintained.
Our aforesaid view is fully supported by elaborate decision of the Kerala Bench of the Tribunal in the case of Apollo Tyres Ltd. (supra) which has been approved by the Honble Kerala High Court. Their Lordships of the High Court observed, as under at para 757 of the report.
"....... From reading of the provisions of section 32AB and the circular mentioned above, it would be clear that the benefit of the said section will be available to all business income from whatever sources other than those mentioned in sub-clauses (a) and (b) of clause (i) of sub-section (2) of the said section. It is relevant to note that sub-section (1) of section 32AB consists of two parts. One is regarding utilisation of the income from the business. The other is regarding the deduction, available on the utilisation of such income. Regarding the utilisation of the income, in order to qualify for deduction under the said sub-section, the utilisation must be from out of the income chargeable to tax under the head profits and gains of business or profession. It also provides that the utilisation of such income must be for the purchase of new machinery/plant during the previous year.
The said sub-section itself contemplates that the total income of an assessee may consist of other income also. When it comes to the deduction part, such a distinction is not seen made. The deduction available under the said subsection is an amount equal to twenty per cent of the profits of the eligible business. So, what is required for fixing the quantum of deduction is to find out the profits of eligible business from out of the total income. As already stated, by virtue of the definition contained in clause (i) of sub-section (2) of section 32AB, eligible business means business other then those provided in sub-clauses (a) and (b) thereof. Admittedly the, activity of purchase and sale of units of the Unit Trust of India does not fall under the said two sub- clauses. Therefore, it has to be held that the business of buying and selling of units of the Unit Trust of India is an eligible business and the profits thereof, qualifying for inclusion for determining the quantum of deduction available under the said sub-section. In this context, it is relevant to note that the department has no case that the activity of the assessee-company by way of purchase and sale of units of the Unit Trust of India is not a business activity or that the income by way of dividend or profits on the sale of units is not business income. In fact, the Tribunal has noted in paragraph 39 of the appellate order that there is no dispute that the business of the assessee falls within the meaning of eligible business. The dispute is only about the computation of profit of such business. In other words, the case of the department is that since dividend income has been returned by the assessee as income from other sources, and since the said income was assessed under other sources, the said income cannot be treated as business income qualifying for inclusion in the profit of eligible business. The contention is raised by the department on the assumption, that once the dividend income is excluded from the income, chargeable to tax under the head income from business' the same can never be treated as business income. This assumption is unfounded. Section 28 of the Act specifies different kinds of income chargeable to tax under the head profits and gains of business or profession. Clause (i) of the said section provides that the profits and gains of any business or profession which is carried on by the assessee at any time during the previous year are chargeable to tax under the above head. But section 56 of the Act falling under the head income from other sources, clause (i) of sub-section (2), thereof specifically provides that dividends shall be chargeable to income-tax under the head income from other sources. It has to be noted that, income chargeable to tax under the head income from other sources is only that income, which is not chargeable to income-tax under any of the heads specified in section 14, items A to E. In other words, if a particular item of income can be included under any of the other heads mentioned in section 14 of the Act, the same is not liable to be assessed under the head "income from other sources. It is so stated in sub-section (1) of section 56 of the Act. Incomes falling under the various clauses in sub-section (2) of section 56 are the exception to the above. It is by virtue of the specific provisions contained in sub-section (2) of section 56, that the assessee had excluded dividend income from the income chargeable to tax under the head "income from business" and the dividend income was assessed under the head "income from other sources". This does not mean that in the case of an assessee who is engaged in the business of buying and selling of units of the Unit Trust of India, the dividend income received ceases to have the character of business income. On the other hand, the same will also form part of the business income. The only thing is that because of the specific provisions contained in sub-section (2) of section 56 of the Act, the said income, namely, dividend income, cannot be included in the income chargeable to tax under the head income from business, nor can it be assessed as such. As already stated, the relevance of income chargeable to tax under the head income from business comes in only in the context of the utilisation of the income out of the total income of the previous year for the purchase of new machinery/plant. It has no relevance when it comes to the deduction part. There, the only relevance is to profits of eligible business. The expression eligible business is also defined. If the legislative intention as contended by the department, is to allow deduction of a sum, equal to twenty per cent of the income chargeable to tax under the head income from business, the legislature could have specifically said so, in which case it was not at all necessary to use the expression profit of eligible business or to give a definition of eligible business. As already stated by the Tribunal, the expression chargeable to profits and gains of business is conspicuous by its absence in section 32AB(1)(ii) or in section 32AB(3). The department has taken a contention based on the provisions of sub-section (3) of section 32AB that dividend income cannot form part of the profits of eligible business. The Commissioner (Appeals) has also taken the stand that dividend income will not fall in the items of clause (a) of section 32AB(3). Section 32AB(3) deals with the profits of eligible business.
In other words, it provides the mode for arriving at the profits of eligible business. It is only for the said purpose clauses (a) and (b) of the said sub-section provide different modes for arriving at the profits of eligible business. Clause (a) provides the mode for calculation of the profits of eligible business in a case, where separate accounts, in respect of such eligible business are maintained and clause (b) provides the mode for calculation of the profits of eligible business in a case where such separate accounts are not maintained or are not available. It has to be noted that while clause (i) of sub-section (2) of section 32AB defines eligible business, sub-section (3) of section 32AB provides the mode for computation of profits of eligible business for the purposes of clause (iii) of sub-section (1) of section 32AB. Sub-section (3) of section 32AB is attracted only in a case, where the assessees total income consists of income from eligible business, as well as non-.eligible business. It is only in such a case, separation of profits of eligible business from the total profits of the business as contemplated under clause (b) of sub-section (3) arises. In the instant case, we have already held that the activity of buying and selling of the units of the Unit Trust of India will form part of the eligible business of the assessee and its income by way of dividend and profits arising from the sale of units, all will form part of the profits of eligible business ........." We, therefore, do not find any force in the submission of the revenue that eligible profits mean profits as computed under the Income Tax Act and any receipt assessed under the head "other sources" would not qualify for deduction under section 32AB. We further hold that the provisions of section 32AB are in pari materia with the provisions of section 115J of the Income Tax Act and legal assistance can be derived from the decisions given under the said provisions as in the said provision "book profit" of the assessee is also to be computed as per Parts II and III of Schedule VI to the Companies Act, 1956. The relevant portion of section 115J introduced in assessment year 1988-89 to impose income-tax on prosperous zero-tax companies, is as under : "115J. Special provisions relating to certain companies .(1) Notwithstanding anything contained in any other provision of this Act, where, in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year, relevant to the assessment year, commencing on or after the 1-4-1988 (but before the 1-4-1991) (hereinafter referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee, chargeable to tax, for the relevant previous year shall be deemed to be an amount, equal to thirty per cent of such book profit.
(1A) Every assessee, being a company, shall for the purpose of this section, prepare its profit & loss account for the relevant previous year accordance with the provisions of Parts II and III of the Schedule VI to the Companies Act, 1956 (1 of 1956).
As is well known, this provision was introduced to take care of phenomenon of prosperous zero-tax companies which had continued in spite of enactment of section 80VVA. These companies were paying no tax though they had profits and were declaring dividends, the legislature, therefore, thought it fit to impose a minimum corporate tax on these prosperous companies. It is clear from the language of the section that "book profit" is to be computed as per accounts into prepared in accordance with Parts II and III of Schedule VI of the Companies Act.
The profit so computed is expected to be more than the profit computed in accordance with provisions of the Income Tax Act. Only then the provisions can work and object of subjecting prosperous companies to tax at the rate of 30 per cent of book profit achieved. It can hardly be disputed that this mode of computation is different from one provided for computing business income under the Income Tax Act. Having regard to the identity of the language, it is reasonable to infer that the legislature by providing same method of quantification wanted to give more relief to the assessee under section 32AB than the assessee would have got, if the relief was computed in accordance with the Income Tax Act.
The Supreme Court in. the case of Surana Steels & Ors. (P) Ltd. v. Dy.
CIT (1999) 237 ITR 777 (SC) considered rationale behind the introduction of section 115J by referring to 1987 Budget Speech of the Finance Minister where the Minister, justified levy of minimum 30 per cent of corporate tax on profit declared by prosperous companies in their accounts though no tax was paid by them as per provisions of the Income Tax Act. Their Lordships further noted that the Minister did not wish to affect new projects that have just begun to make profits after some years of losses or sick companies. Therefore, the enactment proposed to allow past losses or unabsorbed depreciation, whichever was less, under section 205 of the Companies Act. Their Lordships after considering the purpose of the legislature adopted the following interpretations suggested by Justice G.P. Singh in Principles of Statutory Interpretation" (7th Edn., 1999) : "Incorporation of an earlier Act into a later Act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier Act into the later. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the provisions so incorporated become part and parcel of the later Act, as if they had been bodily transposed into it. The effect of incorporation is admirably stated by Lord Esher, M.R.: If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write these sections into the new Act, as if they had been actually written in it with the pen, or printed in it".
"Even though only particular sections of an earlier Act are incorporated into the later, in construing the incorporated sections, it may be at times necessary and permissible to refer to other parts of the earlier statute which are not incorporated. As was stated by Lord Blackburn : When a single section of an Act of Parliament is introduced into another Act, I think it must be read in the sense it bore in the original Act from which it was taken, and that consequently it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section meant, though those other sections are not incorporated in the new Act." Their Lordships, accordingly, held that the provisions of section 205 of the Companies Act were to be applied for answering the question that the, depreciation for the current year was to be taken into account for determining business loss of that year. The legal principles applied by their Lordships in the above referred to case are equally applicable to the cases before us. There is no reason why the relevant provisions of the Companies Act should not be treated as bodily transported into the Income Tax Act and given legal effect to rather than ignored as suggested by the revenue. In other words, profits from the eligible business is to be computed not under the Income Tax Act but as would be computed in the case of a company by an accountant as per Parts II and III of Schedule VI of the Companies Act. It is the commercial profits of an undertaking as understood by the people conversant with the Companies Act. It is computed by applying well settled principles of accounting. Therefore, all receipts which can be included in the profit & loss account prepared as per Schedule VI of the Companies Act (Parts II and III) are eligible for deduction and its computation. We may add that there is an in built safeguard in the provision (sub-section (3)(a)) as it insists on maintenance of separate accounts in respect of such eligible business or profession and that this requirement is satisfied is to be certified in report given under sub-section (5) of the section. If receipts, totally unconnected with profits of the business are included in the accounts purportedly prepared as per Parts II and III, the case would be governed by clause (b) and not clause (a) of sub-section (3) of the section. In that case, the formula to be applied, is totally different. The relief is to be computed on a proportionate basis.
In the case of CIT v. Veekaylal Investment Co. (P) Ltd. (2001) 249 ITR 597 (Bom), their Lordships of Bombay High Court were concerned with the question whether "capital gains" should be included for purposes of computing book profits under section 115J of the Income Tax Act. It was held as under : "................... Further, under clause 2 of Part II of Schedule VI to the Companies Act, where a company receives the amount on-account of surrender of leasehold rights, the company is bound to disclose in the profit & loss account, the said amount as non-recurring transaction or a transaction of an exceptional nature irrespective of its nature i.e., whether capital or revenue. That, it would be inappropriate to directly transfer such amount to capital reserve (see Companies Act by A.Ramaiya, para 1669, fourteenth Edn.). Such receipts are also covered by clause 2(b) of Part II of Schedule VI of the Companies Act which, inter alia, states that the profit & loss account shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. Lastly, even under clause 3(xii)(b) profits or losses in respect of transactions not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature shows clearly that capital gains should be included for the purposes of computing book profits. That, capital gains would certainly be one of the various items whose information is required to be given to the shareholders under the said clause 3(xii)(b). So also, the disclosure is required to be made in respect of investment in the capital of a partnership firm if the company is a partner on the date of the balance sheet (see para 1651 of the Companies Act by A. Ramaiya (Fourteenth Edn.). Similarly, profits or losses on such investments are also required to be disclosed. (See clause 3 (xii) (a) of Part II of Schedule VI to the Companies Act)." It is clear from the aforesaid decision that capital gains earned by a company is an item which is required to be taken to the profit & loss account while computing the "book profit." Although under the Income Tax Act capital gains is required to be assessed under a head, different from that of business. The circular of Central Board of Direct Taxes, referred to above, clearly state that eligible business has been used in section 32AB with a view to ensure uniformity in determining the qualifying profits or allowing deduction. A further reference to Parts II and III of Schedule VI would show that several items like income from investment, income, by way of interest, miscellaneous income and dividend from subsidiary company etc., are required to be taken into account, while computing profits of an undertaking. All these miscellaneous items are not required to be excluded even as per provision of section 32AB of the Income Tax Act.
We, therefore, hold that to qualify for deduction it is not necessary that, receipts should be assessed under the head "business" in the Income Tax Act. Only condition being that it should not be an item excluded as per definition of "eligible business".
The various cases cited by the learned counsel for the assessee including the decision of the Honble Kerala High Court in the case of Apollo Tyres (P) Ltd. (supra) support such a view, which in our considered opinion, is the correct view. The decisions taking the contrary view are not correct.
Our discussion of the topic would be incomplete unless a reference is made to the decision of the Honble Guahati High Court in the case of CIT v. Dinjoye Tea Estate (P) Ltd. (supra) on which the learned Departmental Representative had also relied upon. In that case, their Lordships were concerned with the question, whether deduction under section 32AB was to be allowed an interest and dividend. At para 266 of the report their Lordships have noted as under : "Mr. Joshi, on the other hand, submits that in order to come to a proper calculation the provisions of sub-section (3) of section 32AB of the Act, is relevant. We are of the view that we cannot answer that question because there is no such question whether the income is calculated rightly or wrongly. We are required to answer whether under the facts and circumstances of the case, the interest and dividend received by the assessee-company is from the investment made out of business income. The Tribunal went wrong in holding that this should be included by giving the benefits of section 32AB of the Act." It is clear from the report that their Lordships did not examine the provision of sub-section (3) of section 32AB, nor their Lordships attention was drawn to the provisions of Parts II and III of Schedule VI of the Companies Act. But importance of above statutory provision have been highlighted by their Lordships of Kerala High Court in the case of Apollo Tyres (P) Ltd. (supra), to which we have already made a detailed reference. It is not the case of the revenue that the issues before us can be decided without examining sub-section (3) of section 32AB or other relevant provisions of the Companies Act referred to above. We have, therefore, preferred to follow the decision of Kerala High Court in the case of Apollo Tyres (supra).
Having analysed the provisions of section 32AB of the Income Tax Act, we proceed to consider and answer the two questions referred to the Special Bench. As regards question No. 1, we hold that all items of receipts of eligible business are entitled to deduction under section 32AB of the Income Tax Act. However, receipts like construction, manufacture or production of articles, specified in the list of the Eleventh Schedule as also receipts from business of leasing or hiring of machinery or plant to an industrial undertaking other than a small scale industrial undertaking are to be excluded. It is not the case of the assessee that it is a small scale undertaking or it has given its machinery on hire to an undertaking which is a small scale undertaking.
Therefore, rent on hiring of machinery is not eligible for deduction under section 32AB. Likewise, here charges from the generator (machine) fall in the same category and are not entitled to deduction as such receipts are specifically excluded under the definition of "eligible profit". It is not clear as to how and from where the "rent" was received by the assessee. If the "rent" is rent for hiring of machinery or plant, it is to be excluded for computing profits of the eligible business. We may add that the Tribunal as per settled law has no power of enhancement of assessment and our above observations should not be construed to suggest enhancement on any ground. In other words, if the lower authorities have allowed any relief to the assessee which is final and contrary to what we have observed above, the said relief cannot be withdrawn on account of what we have stated above in this decision. The authority can only act if otherwise authorised by law.
As regards the second question, our answer is that profit from the eligible business is to be computed in accordance with Parts II and III of Schedule VI of the Companies Act and not in accordance with provisions of the Income Tax Act. We answer both the questions accordingly. Let this case be put up before the regular Bench for disposal of the appeals.