Bombay High Court
Ravalgaon Sugar Farm Ltd. vs Commissioner Of Income Tax on 5 August, 2025
2025:BHC-OS:12739-DB
Neeta Sawant INCOME TAX APPEAL-592-2003-FC
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 592 OF 2003
The Ravalgaon Sugar Farm Ltd. ....Appellant
: Versus :
Commissioner of Income Tax,
City-II, Aayakar Bhavan, Mumbai ....Respondent
Mr. S. Sriram with Mr. B. V. Jhaveri & Mr. Dinesh Kukreja, for Assessee-
Appellant.
Ms. Samiksha R. Kanani, for Revenue-Respondent.
CORAM : ALOK ARADHE, CJ. &
SANDEEP V. MARNE, J.
Judgment Reserved on : 31 July 2025
Judgment Pronounced on : 5 August 2025
JUDGMENT :
(Per Sandeep V. Marne, J.)
1) The Assessee has preferred this Appeal under Section
260A of the Income Tax Act, 1961 (the Act) assailing the order dated
24 January 2003 passed by Income Tax Appellate Tribunal, Mumbai
Bench (ITAT) in I.T.A. No. 871/Bom/94, by which the Appeal
preferred by the Assessee has been dismissed. The Assessee had
challenged the order of Commissioner of Income Tax (Appeals)
upholding the order of the Assessing Officer deducting the additional
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
cane price of Rs.78,86,857/- from the profits of the Assessee for AY
1990-91 while allowing the benefit under Section 32AB of the Act.
2) The issue involved in the appeal is whether it is
permissible for an 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 Factories, the Director of Sugar, State of
Maharashtra, determines the final price of sugarcane to be paid to
farmers, which is decided after the end of sugarcane season by taking
into account various factors like production cost of sugarcane, cost of
sugarcane to farmers, etc. In order to incentivize the farmers to sell
sugarcane, the Assessee had formed a policy of paying them certain
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
amount in addition to the final price of sugarcane determined by the
Director of Sugar for the neighboring Co-operative sugar factories
(M/s. Vasantdada Patil Sahkari Sakhar Karkhana Ltd. and M/s. Girna
Co-operative Sakhar Karkhana Ltd.). For sugarcane seasons of 1988-
89, 1989-90 and 1990-91, the Assessee announced the policy of
paying Rs. 15/- per metric ton which was in addition to the final price
of sugarcane determined by the Director of Sugar.
4) The Director of Sugar determined the final price of
sugarcane for the season of 1989-90 at Rs.376.50 per metric ton vide
letter dated 4 October 1990. The Assessee had paid price of sugarcane
as per tentative price determined by the Government at the time of
purchase of sugarcane during every season. On determination of final
price by the Director of Sugar, the Assessee used to pay additional
sugarcane price to the farmers as per its policy of paying more than
the final price determined by the Director of Sugar.
5) During the year commencing from 1 October 1987 and
ending on 31 March 1989 (18 months) relevant to the Assessment
Year 1989-90, the Assessee had paid additional sugarcane price of
Rs.30,56,352/- on the sugarcane purchased for the season 1986-87.
Therefore, while computing the total income for Assessment Year
1989-90, the said amount of additional sugarcane price of Rs.
30,56,352/- was added back to the net profit of Rs.41,11,514/-
computed as per Profit and Loss account. The said additional
sugarcane price of Rs. 30,56,352/- was claimed as an expenditure of
the Assessee in the Assessment Year 1988-89. However, while
computing deduction under Section 32AB of the Act for Assessment
Year 1989-90, the Assessee started with the net profit of Rs.
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
41,11,514/- as per the Profit and Loss account prepared as per Parts
II and III of Schedule VI of the Companies Act. The said net profit
of Rs. 41,11,514/- was arrived at after debiting the additional
sugarcane price of Rs. 30,56,352/- to the Profit and Loss account
which was paid 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/-
-------------------------
Rs. 86,94,414/-
Add: Provision for taxation Rs. 35,00,000/-
-------------------------
Rs. 1,21,94,414/-
Less: Depreciation as per I.T. Act 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
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
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 this practice, the Assessee relies on the instructions issued
by Central Board of Direct Taxes bearing No. 1347 dated 27 August
1980.
7) For the purpose of Companies Act, the Assessee was
following the Accounting Year ending on 30 September and therefore,
its accounts were closed on 30 September 1988. Thereafter, the
Assessee decided to close its accounts on 31 March every year so as to
match the accounting year for the purposes of the Companies Act
and Income Tax Act. Accordingly, it closed its accounts for the
Companies Act on 31 March 1990, which was a period of 18 months
commencing from the 1 October 1988 and ending on 31 March 1990.
Assessee’s account of this 18 months period was added and approved
in the A.G.M. For the purposes of Income-tax, the accounts for the
year 1 April 1989 to 31 March 1990 were audited under Section 44AB
of the Act on 26 December 1990. Similarly, audit report under
Section 32AB(5) of the Act was also signed by the Auditor on 26
December 1990. As per the said audited accounts for the period of 12
months ending on 31 March 1990, the Assessee filed its return of
income for Assessment Year 1990-91 on 31 December 1990
computing the total income at Rs. 32,72,754/- wherein it claimed
deduction under Section 32AB of the Act at Rs. 9,75,192/-. This was
done on the basis that the Assessee had claimed deduction of
additional sugarcane price of Rs. 78,86,857/- paid after October, 1990
as per final determination of sugarcane price by the Director of Sugar
in respect of sugarcane purchased prior to 31 March 1990. This
amount of additional sugarcane price of Rs. 78,86,857/- was not
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
debited to the Profit and Loss account for the year ended 31 March
1990 prepared as per Part II of Schedule VI of the Companies Act
since the final determination of the sugarcane price was made by the
Director of Sugar only in the month of October 1990 whereas the
amounts for the year ended 31 March 1990 were audited for the
purposes of the Companies Act on 27 July 1990. As per the policy
previously followed by the Assessee, the additional sugarcane price of
Rs. 78,86,857/- which was pertaining to the sugarcane purchased
prior to 31 March 1990 was claimed as an expenditure for the year
ended 31 March 1990 by claiming deduction in the computation of
total income. However, while computing deduction under Section
32AB of the Act which was made as per audited accounts 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 56,96,748
accounting
Add: Depreciation as per accounts 51,83,534
————————–
1,08,80,282
Add. Tax Provision as per accounts 45,00,000
—————————
1,53,80,282
Less: Depreciation allowable as per I. T. Act 58,64,343
————————–
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Profit for Section 32 AB 95,15,939
=============
6. Proportion of eligible business profit
@ 51.24% as per point 4 above 48,75,967
==============
7. Investment deposit amount u/s. 32 AB
@ 20% of profit of Rs. 48,75,967/- 9,75,193
==============
8) However, the Assistant Commissioner of Income-tax
Central Circle 22, Mumbai (Assessing Officer) computed the total
income of Rs. 46,10,441/- wherein the Assessing Officer allowed
deduction under Section 32 AB at Rs. 1,66,948/- as against the claim
of the Assessee of Rs. 9,75,193/-. The Assessing Officer computed
the deduction under Section 32 AB as under :-
Net Profit as per P&L A/c. as shown by the assessee Rs. 56,96,748/-
Less: Additional cane price paid in the previous year Rs. 78,86,857/-
————————-
(-) Rs. 21,90,109/-
==============
However, computation of eligible profit for the purpose of deduction u/s. 32AB
as per the Assessing Officer is as under:
Net loss as per P & L account (-) Rs. 21,90,109/-
Less: i) Depreciation Rs. 51,83,534/-
ii) Provision for taxation Rs. 45,00,000/-
------------------------------
Rs. 96,83,534/-
-------------------------------------
(+) Rs. 74,93,425/-
Less: Depreciation as per I. T. Act Rs. 58,64,343/-
------------------------------------
Balance profit Rs. 16,29,082/-
==============
Profit attributable to the eligible business as per
Certificate in Form No. 3AA was 51.24%______________________________________________________________________________
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Neeta Sawant INCOME TAX APPEAL-592-2003-FCof Rs.16,29,082/- Rs. 8,34,741/-
Admissible deduction u/s. 32AB being
20% of Rs. 8,34,741/- Rs. 1,66,948/-
9) This is how the Assessing Officer reduced the additional
sugarcane price of Rs. 78,86,857/- paid by the Assessee after the end
of the previous year from the net profit computed as per Profit and
Loss account which was prepared as per Part II of Schedule VI of the
Companies Act.
7
10) The Assessee preferred an appeal before Commissioner
of Income-Tax (Appeals) contending that for the purposes of
computing deduction under Section 32AB of the Act, additional
sugarcane price of Rs. 78,86,857/- paid by the Assessee after 31
March 1990 which was not debited to Profit and Loss account
(prepared as per Part II of Schedule VI of the Companies Act) cannot be
reduced from the net profit computed as per the aforesaid Profit and
Loss account. It was further contended that for the purposes of
deduction under Section 32AB of the 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.
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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) Mr. Sriram, the learned counsel appearing for the
Assessee would submit that the scheme of Section 32AB is a separate
Code by itself. That plain reading of the section particularly sub-
section (3) and subsection (5), clearly indicates that the allowance
under Section is not dependent upon profits or losses otherwise
computed under the Act but solely on the profits disclosed in the
audited annual accounts. That objects and reasons behind
introduction of Section 32AB needs to be borne in mind as explained
in Circular No.461 dated 9 July 1986, which makes it clear that profit
needs to be determined in accordance with the Books of Accounts
prepared under Part-I and II of Schedule-VI of the Companies Act
for the purpose of Section 32AB. That the issue involved in the
present Appeal is squarely covered by judgment of Karnataka High
Court in Jindal Aluminium Ltd. Versus. Deputy Commissioner of
Income-tax (Asst.) Special Range II, Banglore1. That the judgment of
the Madras High Court in Commissioner of Income-tax Versus. Tamil
Nadu Mercantile Bank Ltd.2 also takes a view that profits of business
compared to income under the provisions of the Act is of no
assistance for the purpose of determining the extent of benefit under
Section 32AB. That these judgments are followed in numerous other
1
[2016] 68 Taxman 111 (Karnataka)
2
[2003] 126 Taxman 45 (Madras)
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judgments and he would rely upon the judgment in Carborandum
Universal Ltd. Versus. Commissioner of Income-tax 3, Commissioner of
Income-tax Versus. Macmillan India Ltd.4, South India Sugars Limited
Versus. Deputy Commissioner of Income-tax5, Commissioner of Income-
tax Versus. Tirupattur Co-operative Sugar Mills Ltd. 6 and Deputy
Commissioner of Income-tax Versus. United Nilgiris Tea Estate Co. Ltd.7
13) Mr. Sriram would further submit that similar provision
under Section 115-J of the Act has been interpreted by the Hon’ble
Apex Court in Apollo Tyres Ltd. Versus. Commissioner of Income Tax8.
That following of peculiar method of accounting by the Assessee and
claiming deduction consistently follows the word and spirit of law
and does not violate it. That in computing its income under the
normal provisions of the Act, the Assessee had made other numerous
adjustments 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
3
[2004] 265 ITR 372 (Madras)
4
[2007] 295 ITR 67 (Madras)
5
[2008] 214 CTR 205 (Madras)
6
[2009] 310 ITR 360 (Madras)
7
[2005] 273 ITR 470 (Madras)
8
[2002] 255 ITR 273 (SC)
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
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.9 in support of
the contention that the additional price paid to sugarcane growers is
not distribution of profits but a purchase price determined under the
Statute. She would therefore submit that it is a revenue expenditure
deductible in computing taxable income and must therefore be
considered while computing the real business profits under Section
32AB. She would distinguish the judgment of Karnataka High Court
in Jindal Aluminium Ltd. (supra). She would also rely upon judgment
of Kerala High Court Parry Agro Industries Ltd. Versus. Commissioner
of Income-tax, Cochin10. She would submit that Section 32AB is
intended to permit investment based on actual profits. That inclusion
of unrealised and artificial inflated profits by ignoring real trading
expenditure would defeat the object of the provision. She would
further submit that Revenue’s action of deducting Rs.78,86,857/-
additional sugarcane price from the trading account is justified. She
would pray for dismissal of the Appeal.
15) Rival contentions of the parties now fall for our
consideration.
16) In the present case, a unique conundrum got created on
account of fixation of statutory minimum price by the Controller of
Sugarcane after closure of accounts of the Assessee pertaining to the
9
[2019] 262 Taxman 176 (SC)
10
[2006] 156 Taxman 184 (Kerala)
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
Assessment Year 1990-91 (Financial Year 1989-90). It appears that
similar problem had arisen in the previous year as well, as discussed
while narrating the facts. The Assessee appears to have added the
additional sugarcane price of Rs.30,56,352/- relating to Assessment
Year 1989-90 in the profits for the subsequent Assessment Year. When
it came to Assessment Year 1990-91, the Assessee attempted to follow
the same practice of adjusting the additional sugarcane price of
Rs.78,86,857/- paid in October 1990 (after closure of the Accounts as
on 31 March 1990) in the subsequent year. The Assessee thus followed
the practice of claiming deduction of additional sugarcane price for
income tax purposes in one year but taking into consideration the
figure of profit without such deduction for calculating the 20% benefit
under Section 32AB and thereafter subtracting the said amount of
additional sugarcane price in the subsequent year’s profit. This is
done by the Assessee ob account of enabling provision in Section
32AB which permits consideration of profits reflected in the accounts
finalized under Parts II and III of VI Schedule of Companies Act for
the purpose of computing the benefit under Section 32AB of the 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.
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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 respect of which 20% deduction is admissible to the Assessee
under Section 32AB of the Act.
18) Section 32AB of the Act, as it stood at the relevant time,
provided thus :-
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 (hereafter in this section
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
(hereafter in this section 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
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Neeta Sawant INCOME TAX APPEAL-592-2003-FCdeduction 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:]
[Provided further that no such deduction shall be allowed in
relation to the assessment year commencing on the 1st day
of April, 1991, or any subsequent assessment year.]
(2) ….
(3) The profits of business or profession of an assessee for the purposes of
sub-section (1) shall] 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 [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 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.
(5A) …
(5AA) ….
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
(5B) …
(6) ….
(7) …
(8) …
(9) ….
(10) …
19) Thus, a sum equal to 20% profits of eligible business as
computed in the accounts of the Assessee audited in accordance with
sub-section (5) is admissible if the Assessee has either deposited any
amount in the Development Bank or utilized any amount during
previous year for purchase of new plant or machinery. Under sub-
section (3) of Section 32AB, the methodology of determining the
profits for the purpose of allowance of deduction under sub-section
(1) is dealt with. Under clause (a) of sub-section (3) of Section 32AB,
the profits of eligible business would be the amount arrived at after
deducting an amount equal to the depreciation computed in
accordance with the provisions of Section 32(1) from the amounts of
profits computed in accordance with the requirements of Parts-II and
III of VI Schedule to the Companies Act.
20) An issue arose before the Division Bench of Karnataka
High Court as to whether which of the profits (determined in
accordance with the provisions of the Income Tax Act or determined in
accordance with the provisions of Parts-II and III of Schedule-VI of
Companies Act), need to be taken into consideration for allowing
deduction under Section 32AB of the Act. The Karnataka High
Court in Jindal Aluminium (supra) relied upon judgment of the Apex
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Neeta Sawant INCOME TAX APPEAL-592-2003-FC
Court in Apollo Tyres Ltd. (supra) and held in paras-8, 9, 10, 14, 15, 16
and 17 as under :-
8. The said provision provides an incentive to an assessee who is carrying
on business 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, the amounts mentioned in clauses (i) to (vii) has to be added.
One such amount to be added is the amount or amounts set aside as the
provisions made for meeting liabilities, other than ascertained liabilities.
Therefore, the contingent liability or unascertained liability has to be
added to the profits for the purpose of section 32AB.
10. Part II of Sixth Schedule to the Companies Act deals with the
requirements as to the profit and loss account. Clause (3) of Part II
provides that the profit and loss account shall set out the various items
relating to the income and expenditure of the company arranged under
the most convenient heads; and in particular, shall disclose the
information mentioned therein in respect of the period covered by the
account. One such information to be disclosed is the expenditure incurred
on the items mentioned therein, separately for each item which includes
rates and taxes, excluding taxes on income. Therefore, the requirement of
law is, profit and loss account should disclose the information regarding
expenditure incurred in respect of rates and taxes. It does not provide that
the rates and taxes incurred as expenditure is to be deducted from the
income.
14. The apex court in the case of Apollo Tyres Ltd. v. CIT reported in
MANU/SC/0422/2002 : [2002] 255 ITR 273 (SC) dealing with the object
of introducing section 115J in the Income-tax Act held that section 115J
makes the income reflected in the company’s books of account the
deemed income for the purpose of assessing the tax. The words “in
accordance with the provisions of Part II of Schedule VI to the
Companies Act” was made for the limited purpose of empowering the
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assessing authority to rely upon the authentic statement of accounts of the
company. While so looking into the accounts of the company, an
Assessing Officer under the Income-tax Act has to accept the authenticity
of the accounts with reference to the provisions of the Companies Act
which obligates the company to maintain its account in a manner
provided by the Companies Act and the same to be scrutinised and
certified by the statutory auditors and will have to be approved by the
company in its general meeting and thereafter to be filed before the
Registrar of Companies who has a statutory obligation also to examine
and satisfy that the account of the company are maintained in accordance
with the requirements 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 will have to be held that the view taken by the Tribunal is correct and the
High Court has erred in reversing the said view of the Tribunal. The
Assessing Officer, while computing the income under section 115J, has
only the power of examining whether the books of account are certified by
the authorities under the Companies Act as having been properly
maintained in accordance with the Companies Act. The Assessing Officer,
thereafter, has the limited power of making increases and reductions as
provided for in the Explanation to the said section. To put it differently,
the Assessing Officer does not have the jurisdiction to go behind the net
profit shown in the profit and loss account except to the extent provided in
the Explanation to section 115J.
15. Therefore, while deciding the benefit to which the assessee is entitled
to under section 32AB of the Act, the Assessing Officer has only power to
examine whether the books of account are certified by the authorities
under the Companies Act as having been properly maintained in
accordance with the Companies Act. Therefore, he cannot apply the
principles under the Income-tax Act for the purpose of determining the
profit of the assessee from business or profession for the purpose of
section 32AB. In other words, there cannot be two incomes one for the
purpose of the Companies Act and another for the purpose of the Income-
tax Act maintained under the same Act for the purpose of section 32AB.
After arriving at profits of business or profession of the assessee, as
stipulated in sub-section (3) of section 32AB, the said provision also
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provides for addition to such income as stipulated therein. After such
additions, the authority has to determine the profits of business or
profession for the purpose of extending the benefit under section 32AB.
16. Dealing with the provision for tax liability when the same is disputed,
it is observed that where a company disputes its liability on valid and bona
fide reasons in regard to the tax demand raised, it is not probable that a
liability has been incurred on the balance-sheet date; and it is not
necessary to provide for the liability. A disclosure thereof by way of a note
to the accounts would be sufficient. A note regarding the disputed tax
liability can be explanatory in nature if the auditor is satisfied about the
validity of the reasons of the company for contesting 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 the profits as reflected in the Accounts finalized as per
Parts-II and III of VI Schedule to the Companies Act.
22) A similar provision exists in Section 115-J of the Act
which has been interpreted by the Apex Court in Apollo Tyres Ltd.
(supra) wherein it is held that the Assessing Officer does not have
jurisdiction to go beyond the profits shown in the Profit and Loss
Account, except to the extent provided in the Explanation to Section
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115-J. The Division Bench of Karnataka High Court has applied
same analogy to the provisions of Section 32AB of the Act and has
held that the benefit under Section 32AB of the Act needs to be
determined only on the basis of profits reflected in the Books of
Accounts of the Company maintained as per the provisions of Part-II
and III of VI Schedule of the Companies Act. In Commissioner of
Income-tax Versus. Tamil Nadu Mercantile Bank Ltd. (supra) the same
issue has been dealt with and it is held in paras-4 to 7 as under :-
4. The claim so made was not accepted by the Assessing Officer, who took
the view that the limit of 20 per cent, of the profits of the business or
profession as computed in the accounts of the assessee audited in
accordance with Sub-section (5) of Section 32AB, as prescribed in Section
32AB(1)(ii) was to be ascertained with reference to the business income as
per the provisions of the Income Tax Act and not with reference to the
computation of the profit and computed in accordance with Schedule VI
to the Companies Act. His view was upheld in appeal but reversed by the
Tribunal on further appeal and, in our view, rightly so.
5. What has been done by the assessee is not strictly in accordance with
the requirement of the statutory provision. Section 32AB(3) nowhere
refers to the computation of the income under the provisions of the
Income Tax Act. No such requirement can be imported into it. The view
adopted by the Assessing Officer and the appellate authority would find
no support whatever from any part of Section 32AB.
6. Section 32AB provides a benefit to the assessee. The benefit so provided
is an incentive to an assessee, who deposits any amount in a 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. That
incentive is also available if the assessee utilises 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
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
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Neeta Sawant INCOME TAX APPEAL-592-2003-FCdealt 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 is the computation made in accordance with Sub-
section (3) of Section 32AB, which is to be the basis for
determining the twenty per cent, of the profits of the business for
the purpose of Section 32AB(1)(ii).
7. The computation of income under the provisions of the Income Tax
Act is of no relevance for the purpose of determining the extent of benefit
under Section 32AB(1) or (2). The computation under the Income Tax Act
is relevant after the ascertainment of the amount of the deposit and the
twenty per cent, of the profits of the business calculated in accordance
with Section 32AB(3), and the amount to be allowed in the computation
under the Income Tax Act is the lower of the two figures and the
deduction is to be allowed in the manner provided in Section 32AB(1) of
the Act.
(emphasis added)
23) In Carborandum Universal Ltd. (supra), it is held in paras-
6 and 10 as under :-
6. 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.
There is, 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 in terms of Section 32(3)
of the Act which makes the calculations made in accordance with
the Companies Act, the starting point for making the deductions
and additions provided for in Section 32(3) after which the sum of
20 per cent, referred to in Section 32AB(1) is to be ascertained.
10. Having regard to the content of Section 32AB(3) and the
scheme of the whole section, it is clear that it is the computation
made in terms of Schedule VI of the Companies Act that has to be
the starting point, and all the things included in that computation
are required to be taken note of and not to be disregarded except to
the extent specifically provided for in Section 32AB(3).
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24) In Commissioner of Income-tax Versus. Macmillan India
Ltd. (supra), it is held as under :-
With regard to the second question of law, it is settled that the
calculations required to be made for the purpose of Section 32AB
of the Income Tax Act, 1961, 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 made in accordance
with the Companies Act and the requirements more specifically
required of Parts II and III of Schedule VI of the Companies Act.
There is, 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, vide Carborandum
Universal Ltd. v. CIT MANU/TN/1764/2003 :
[2004]265ITR372(Mad) .
25) In South India Sugars Limited (supra), it is held in para-13
as under :-
13. In respect of the second question of law, learned Counsel on
either side submitted and agreed that the issue is covered in favour
of the assessee by the decision of this Court in the case of
Commissioner of Income Tax v. Tamil Nadu Mercantile Bank
Limited reported in MANU/TN/0640/2001 :
[2002]255ITR205(Mad) and Carborandum Universal Limited v.
Commissioner of Income Tax reported in MANU/TN/1764/2003
: [2004]265ITR372(Mad) , wherein this Court has held that the
calculations required to be made for the purpose of Section 32AB
of the Income Tax Act, 1961, are to commence with the figure
representing the profits of the eligible business as computed in
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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 was 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 was 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 was 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 Schedule VI to the
Companies Act. 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
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starting point for making the deductions and additions provided for in
section 32AB after which the sum of 20 per cent referred to in section
32AB(1) is to be ascertained.
28) Thus, there appears to be a consistent view taken by
different High Courts by relying on judgment of the Apex Court in
Apollo Tyres Ltd. that the profits for the purpose of grant of benefit
under Section 32AB of the Act can only be the one determined in
accordance with Parts-II and III of Schedule-VI of the Companies
Act. It has repeatedly held that Section 32AB does not require the
profit to be calculated in accordance with the provisions of the
Income Tax Act. There can be no two incomes, one for the purpose
of Companies Act and another for the purpose of Income Tax Act
for the purpose of applicability of provisions of Section 32AB. In
our view, therefore the issue involved in the present Appeals is
squarely covered by the judgments referred to above.
29) Reliance by Ms. Kanani on judgment of the Apex Court
in Commissioner of Income-tax, Bombay Versus. Tasgaon Taluka S.S.K.
Ltd. (supra) does not assist the case of the Revenue. The issue
involved before the Apex Court was entirely different. The Apex
Court has dealt with the issue of difference of amount between the
minimum statutory price and additional purchase price as an element
of profit or one of the components of profit. The judgment therefore
has no relevance to the issue of interpretation of provisions of
Section 32AB of the Act.
30) Reliance by Revenue on judgment of Kerala High Court
in Parry Agro Industries Ltd. (supra) again does not assist the case of
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the Revenue as the issue before the Kerala High Court was entirely
different. The issue was whether the income from other sources such
as rent, interest, sundry receipts etc. would also be taken into
consideration for determining the amount of profit for determination
of benefit under Section 32AB of the Act.
31) In our view, therefore the Assessing Officer has grossly
erred in deducting an amount of Rs.78,86,857/- while computing the
amount of profits of the Assessee for Assessment Year 1990-91. The
Assessee was justified in claiming the benefit of deduction under
Section 32AB of the Act on the basis of the amount of profit as
reflected in the Profit & Loss Account prepared in accordance with
Parts-II and III of the VI Schedule to the Companies Act. It is also
seen that this method 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
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profits for the purpose of 20% benefit of deduction under Section
32AB, however the Assessee deducts the very same amount from
profits of the subsequent year. Thus the 20% additional benefit
received under Section 32AB in one year gets neutralized in the
subsequent year. This pattern is followed on account of peculiar
provisions of Section 32AB(3) of the Act which permits profits
indicated in the Profit & Loss accounts finalized as per Parts II and
III of the VI Schedule of the Companies Act for the purpose of
computing the benefit under Section 32AB of the Act.
32) The question of law formulated while admitting the
Appeal is accordingly answered in favour of the Assessee and against
the Revenue. It is held that while computing the benefit under Section
32AB of the Act, the profit of the eligible business computed as per
the requirement of Parts-II and III of Schedule-VI to the Companies
Act can alone be taken into consideration and that therefore the
additional sugarcane price paid in the month of October, 1990 could
not have been deducted as expenditure while considering the profits
for the purpose of grant of benefit under Section 32AB of the Act.
33) Consequently, the orders passed by the Assessing Officer,
CIT(A) and ITAT to the above extent are set aside. The Appeal is
accordingly allowed.
[SANDEEP V. MARNE, J.] [CHIEF JUSTICE]
Digitally
signed by
NEETA
NEETA SHAILESH
SHAILESH SAWANT
SAWANT Date:
2025.08.05
17:58:31
+0530 ______________________________________________________________________________
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