ORDER
Deepak R. Shah, A.M.
This appeal by revenue is arising out of the order of Commissioner of Income Tax-I, Bangalore dated 30-11-1993 against an order passed under section 154 to an intimation under section 143(1)(a) of the Income Tax (the Act).
2. The revenue has raised the following grounds before us :
(i) The Commissioner (Appeals) erred in treating specific items like profit on sale of units-short term gain Rs. 2,36,000; interest on inter-corporate deposits/Grindlays bank Rs. 39,83,931; Income Tax refund Rs. 1,52,587; Interest on IDBI/IT Surcharge Rs. 7,20,971 and others of Rs. 2,351 as business income.
(ii) The Commissioner (Appeals) ought to have considered that the nature of these income shows that they are income from other sources only and has to be excluded while arriving at the deduction under section 32AB.
(iii) The Commissioner (Appeals) erred in holding that donations of Rs. 2,06,77,000 should not be reduced to arrive at deduction under section 32AB.
(iv) The Commissioner (Appeals) erred in agreeing that donation and contribution to Scientific Research Association are not expenses of the business but only application of income.
(v) The Commissioner (Appeals) ought to have considered that contribution to Scientific Research Association and donations are items of expenditure as per Income Tax Act, and these items have to be reduced and on the balance only deduction under section 32AB is allowable.
3. The assessing officer passed an order under section 154 dated 14-9-1993 as under :
“In the intimation dated 14-2-1990, deduction under section 32AB has been worked out after reducing Rs. 2,06,77,000 amount debited to Scientific Research Association, contribution to National Rural Development Fund and donation and also income from other sources have been taken into account while arriving at profit from business. Additional tax was omitted to charge on these items. These mistakes have been brought to the notice of the assessee and the assessee has objected to include these items quoting the case law held in TS. Balaram, ITO v. Volkart Bros. (1971) 82 ITR 50 (SC) with other points and the assessee has given list of items included in other sources :
Rs.
(i)
Duty Drawback
48,416
(ii)
Sale of Misc. Tools
5,18,500
(iii)
Contributions to scientific research paid earlier year called back.
2,00,000
(iv)
Profit on sale of units-short term gain
2,36,400
(v)
Dividend-UTI
60,980
Jindal Irrigation Limited
2,00,000
(vi)
Interest Inter-corporate deposits/Grindlays Bank
39,83,931
Collected from customers
11,49,302
Income tax refund
1,52,587
Interest IDBI/IT Surcharge scheme
7,20,971
Others
2,351
(vii)
Rebate on discount
44,129
(viii)
Profit on sale of fixed assets
6,18,591
Total
79,39,681
After careful consideration, the assessees objection is rejected. However, items included under other sources allowed as follows :
Rs.
(i)
Duty Drawback
48,416
(ii)
Sale of Misc. Tools
5,18,500
(iii)
Contribution to scientific research paid earlier year.
2,00,000
(iv)
Interest collected from customers
11,49,302
(v)
Rebate on discount
44,129
(vi)
Profit on sale of fixed assets
6,18,591
25,78,938
Out of Rs. 79,39,681, the above referred items amounting to Rs. 25,78,938 is allowed and the balance of Rs. 53,60,743 is disallowed under other sources.
The intimation is revised as under :
Total income as per order dated 16-7-1992
Rs. 2,00,48,790
Add Income as per Annexure
Rs. 52,07,549
Rs. 2,52,56,339
Or Rs. 2,52,56,340
Annexure
Net Profit
Rs. 5,55,73,887
Less : Other sources
Rs. 53,60,743
Rs. 5,02,13,144
Less : Donations
Rs. 2,06,77,000
Rs. 2,95,36,144
20% of Rs. 2,95,36,144
Rs. 59,07,228
Less : Already allowed
Rs. 1,11,14,777
Rs. 52,07,549″
3.1 The Commissioner (Appeals) held that except the dividend of Rs. 2,64,903, the balance income of Rs. 50,95,840 should not be deducted from the total income for the purpose of computing deduction under section 32AB of the Act. The Commissioner (Appeals) also held that the total donations of Rs. 2,06,77,000 is not required to be reduced from the computation of profit computed in accordance with the requirement of Parts II & III of Schedule VI of the Companies Act, 1956. The Commissioner (Appeals) held that as per the accounting principles laid down by the Institute of Chartered Accountants of India, business income for the purpose of section 32AB of the Act could not be reduced by the amount of donation. The revenue is in appeal before us for both the aforesaid adjustments.
3.2 The W. Departmental Representative Mr. Mahalingam submitted that for purpose of section 32AB the profit is to be arrived at in accordance with Parts II & III of Schedule VI of the Companies Act, 1956. He placed before us the relevant abstract from the Schedule VI. It was also argued that for the purpose of computation of remuneration to the managerial personnel under section 348 of the Companies Act, the contribution made by way of donation is also required to be reduced for the purpose of arriving at net profit. It was also argued that the assessee himself-have computed the net profit for the year only after deducting various contribution and donation amounting to Rs. 2,06,77,000. The net profit though as per profit and loss account was calculated after deducting various donations given as above, yet only for the purpose of claiming deduction under section 32AB, these donations are not reduced from the profit of the eligible business for the relevant period. Since this amounts to pure mistake in computation of net profit, the assessing officer was justified in passing an order under section 154 of the Act.
3.3 The learned Authorised Representative placed before us the audited annual accounts for. the relevant financial year. He also filed the copy of’ auditor’s report as required under section 32AB(5) of the Act. He submitted that the deduction was claimed purely on the basis of audit report submitted which has been accepted by the assessing officer in the original intimation. The subsequent rectification amounts to change of opinion. The issue is therefore debatable in nature and hence in view of decision of TS. Balaram, ITO v. Volkart Bros. (1971) 82 IT R 50 (SC) submitted that such rectification is not envisaged under section 154. As regards query from the bench whether the accounts are prepared in accordance with Parts II & III of Schedule VI of the Companies Act, 1956 and whether the same represents a true and fair view, the learned A.W submitted that the accounts are prepared strictly in compliance of Schedule VI of the Companies Act. In reply, the learned Departmental Representative submitted that the issue is stated to be debatable only for the sake of arguments but no material is placed to show that profit is not computed in accordance with Parts II & III of Schedule VI of the Companies Act, 1956. This is a pure arithmetical exercise carried on by the assessing officer which is well within the purview of section 154 of the Act.
4. We have considered the rival submission, the relevant facts of the case, the arguments advanced and decisions relied upon. Section 32AB(1)(ii) of the Income Tax Act allow the deduction of a sum equal to 20% of the profits of eligible business as computed in the accounts of assessee audited in accordance with the sub-section (5) of section 32AB. Section 32AB prescribes the procedure for arriving at the eligible profit.
For the sake of brevity sub-section is reproduced below :
(5) “The profits of eligible business or profession of an assessee for the purpose of sub-section (i) 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 (i) of section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956), as increased by the aggregate of
(i) the amount of depreciation;
(ii) the amount of income tax paid or payable, and provision therefor,
(iii) the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964),
(iv) the amounts carried to any reserves, by whatever name called,
(v) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities,
(vi) the amount by way of provision for losses of subsidiary companies, and
(vii) the amount or amounts of dividends paid or proposed, if any, debited to the profit 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.”
Thus the starting point for calculation of deduction under section 32AB is the amount of profit computed in accordance with the requirement of Parts II & III of Schedule VI of the Companies Act, 1956. The learned Authorised Representative has produced before us a copy of audited profit and loss account for the relevant financial year. It may be noted that the assessment year involved is 1989-90. In respect of assessee, this is a transitional previous year comprising of 21 months comprising the period 1-7-1987 to 30-6-1989. The profit and loss account depicts the following position for the relevant financial year.
Profit and Loss Account for the year ended. (Rs. 000)
31-3-1989
30-6-1988
Total
A. Income
Sales
274849
289327
562176
Other Income
4781
3159
7940
Total (A)
279630
230486
570116
B. Expenses
Expenses
250059
258245
508304
Depreciation
2931
2490
5421
Total (B)
252990
260735
513725
Profit from operation
(A-B)
26640
29751
56391
Less : Donations
19121
1556
20671
Profit before taxation
7519
28195
35714
Less : Provision for taxation
2900
10800
13700
Net Profit
4619
17395
22014
The dispute therefore centers around the two items (i) inclusion of various income of Rs. 50,93,489 as detailed in ground No. 1 above to be treated as income of eligible business, and (ii) Donation of Rs. 2,06,77,000 to be reduced to arrive at the net profit of eligible business, for the purpose of deduction under section 32AB.
5. As regards the first issue of inclusion of various income for purpose of computing net profit, the learned Departmental Representative fairly conceded that though this income in ay be taxed under different heads for the purpose of Income Tax Act, yet for the purpose of computation of net profit under Schedule VI to the Companies Act, they are definitely forming part of net profit. Since the language of section 32AB(3) requires net profit to be computed not as per Income Tax Act but under the Companies Act, various income amounting to Rs. 50,93,489 has been correctly treated by the learned Commissioner (Appeals)as business income for the purpose of computing deduction under section 32AB. The fact that the income was shown under a different head of income or it is taxable under the head “income from other sources”, did not deprive the assessee-company of the benefit under section 32AB so long as the relevant income was in the course of its “eligible business”. This view finds support from the decision of special bench of the Tribunal in the case of Highway Cycle Industries Ltd. v. Asstt. CIT (2002) 74 TTJ (Chd) (SB) 171 and the decision of Honble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273. This issue raised by the revenue tinder ground Nos. (i) and (ii) above is therefore dismissed.
6. The next issue that is required to be examined is whether for the purpose of computing net profit for the year, various donations should be deducted or not. Once again for claiming deduction under section 32AB, the profit is to be computed as per the normal principle of accounting as contained in Parts II and III of Schedule VI of the Companies Act. The assessee himself have arrived at the figure of net profit only after reducing various donations given. The profit before taxation as computed in the audited profit and loss account amounts to Rs. 3,57,13,797. The learned AR. fairly conceded that this is the net profit as computed in accordance with Schedule VI of the Companies Act. It is also stated that the said accounts represent a true and fair view of the statement of affairs. There is no provision either in section 32AB or under the Companies Act, which indicates that the net profit of the business is to be arrived at before reducing the various donations made. The donations given are expenses by the company. Whether the same is eligible for deduction either under section 35 or under section 80G is not material for the purpose of computing profit of eligible business and consequently deduction under section 32AB. Since the donation of Rs. 2,06,77,000 is an item of expenditure which has been debited to the profit and loss account and is reduced to arrive at the profit of eligible business, the net profit to be adopted for the purpose of computing deduction under section 32AB is to be arrived at only after the same is reduced from the net profit. Any other treatment or taking a figure of net profit before reducing such amount will definitely amount to a mistake apparent on record. Since the figure of net profit was taken before reducing the donations given, the assessing officer was correct in substituting the figure of net profit after reducing the donations given. This is purely arithmetical mistake correctly rectified by the assessing officer. The decision of Honble Supreme Court in Volkart Bros. case (supra) is not applicable to the present set of facts. Honble Supreme Court in the said case has held as under :
“A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two options. A decision on a debatable point of law is not a mistake apparent from the record.”
As can be seen in the present set of facts, the mistake is obvious and patent mistake, which does not require a long drawn process of reasoning. The issue is also not a debatable point of law. The issue in present set of facts is the computation of eligible profit as mentioned in section 32AB(3) of the Act. There is no provision either in Schedule VI of Companies Act, or in section 32AB of the Act, which suggest that the net profit is to be arrived at before reducing the donation from the income of the eligible business.
Sub-section (3) of section 32AB which defines the profit of eligible business provides for increasing the net profit in respect of certain item. None of the items referred in SI. Nos. (i) to (vii) of said sub-section provides for increasing the net profit by the amount of donations given. Once again, referring to the decision of ITAT Special Bench in case of Highway Cycle Industries Ltd. (supra) and of Honble Supreme Court in case of Apollo Tyres Ltd. (supra) the profit of the eligible business is to be computed as per parts II and III of Schedule VI which requires the assessee to reduce various donations given and treated as an expenditure from the profit to be arrived at. We therefore reverse the order of learned Commissioner (Appeals) on this issue and upheld the order of learned assessing officer. Accordingly ground Nos. 3, 4 and 5 as above are allowed.
In the result the appeal is partly allowed.