ORDER
K.C. Singhal, J.M.
1. The only issue arising out of this appeal relates to the claim of the assessee under s. 32AB.
2. The brief facts of the case are that the assessee had purchased new plant and machinery of Rs. 6,21,260 during the year under consideration. For this purpose, a loan of Rs. 4,40,590 was taken from Sholapur Janata Sahakari Bank Ltd. and rest of the amount of Rs. 1,80,670 was utilised out of its own day-to-day money available with the assessee. On the first day of the accounting year, the assessee had investment allowance reserve to the extent of Rs. 4,90,349. This amount was written off by the assessee by debiting the said reserve account and crediting the account of investment allowance utilised account. The assessee claimed deduction under s. 32AB to the extent of Rs. 1,80,670 which has been disallowed by the AO on the ground that amounts borrowed by the assessee from the bank could not be considered out of the investment allowance reserve and consequently, it was only the remaining amount of Rs. 1,80,670 which should be considered out of such reserve. Accordingly, it was held by him that the amount utilised for the purpose of machinery was not out of the income of the assessee. Hence, the assessee was not entitled to such deduction. Action of the AO has been confirmed by the CIT(A).
3. The learned counsel for the assessee Mr. Sathe has submitted and agreed before us that assessee was not entitled to deduction to the extent the amount was borrowed from the bank or utilised out of the reserve. However, it was submitted by him that entry made by the assessee with reference to the reserve account was merely the paper entry and did not represent the correct state of affairs and was made only to meet the legal requirements of s. 32A in respect of machineries purchased in the earlier years. According to him, even the deduction is not to be allowed with reference to the amount of reserve, the assessee is still entitled to the deduction of Rs. 1,80,670 i.e. the amount over and above the reserve written off. On the other hand, the learned Senior Departmental Representative has relied upon the order of the CIT(A) and the reasonings given by the AO.
4. After hearing both the parties, we are of the view that the submissions of the learned counsel for the assessee are not without force. There is no dispute about the legal position that assessee is entitled to deduction only if the amount for purchase of machinery is utilised out of the income of the year under consideration. Therefore, the assessee would not be entitled in respect of the amount utilised out of the borrowed money or out of the reserves created by the assessee in the preceding years. The reserves credited by the assessee are nothing but the part of capital of the assessee which is normally blocked in the assets which may be capital assets or trading assets. Therefore, if any amount is borrowed, for the purpose of purchasing the machinery, then it cannot be said that such machinery was purchased out of the reserves despite the entries made by the assessee in this regard. Even under the law, assessee was not obliged to pass such entries. The amount of reserve written off was Rs. 4,90,349 while the amounts borrowed from bank was to the sum of Rs. 4,40,590. Therefore, in our opinion, the entry passed by the assessee for writing off the reserve does not represent the correct state of affairs and is only a paper entry. Therefore, the same has to be ignored for all purposes. Admittedly, the assessee is not entitled to the extent of amount borrowed by the assessee from the bank. The remaining amount of Rs. 1,80,670 was utilised out of the normal fund of the business. The income of the assessee as per the P&L a/c was Rs. 7,49,907 while the income computed by the assessee before the claim under s. 32AB was Rs. 9,01,909. Even the assessed income was Rs. 9,38,870. From the details furnished by the assessee, it appears that the plant and machinery were purchased in the last quarter of the assessee. Therefore, it can be safely presumed that the amount of Rs. 1,80,000 was available to the assessee out of the profits of the year. It is not the case of the Revenue that such profits were not available on the date of purchase of the machinery. The contention of the Senior Departmental Representative that such amount could not be said to have been utilised out of the profits of the current year since profits of the year accrue on the last date of the assessment (sic-accounting) year cannot be accepted. Meaning of the income has to be determined in the context in which it has been used. If the contention of the Senior Departmental Representative is accepted, then the words “out of such income” appearing in s. 32AB would become redundant and meaningless. In view of the above discussion, the order of CIT(A) is set aside and AO is directed to allow the claim under s. 32AB with reference to the sum of Rs. 1,80,670 in accordance with law.
5. In the result, appeal of the assessee is allowed.