M/S. Carborandum Universal Ltd. Chennai v. The Commissioner Of Income-Tax, Chennai

In the High Court of Judicature at Madras Dated: 17/11/2003 Coram The Hon'ble Mr. Justice R. Jayasimha BabuandThe Hon'ble Mr. Justice S.R. Singharavelu Tax Case No. 72 of 2000 M/s. Carborandum Universal Ltd.Chennai. ... Applicant -Vs- The Commissioner ofIncome-tax,Chennai. ... RespondentTax case under Section 256 (1) of the Income Tax Act, 1961 against theorder made in I.T.A. No: 3119/Mds/90 dated 29.05.1988 for the assessmentyear 1987-88. !For applicant : Mr.P.P.S.Janardhanaraja forM/s. Subbaraya Aiyer ^For respondent : Mr. K. Subramaniam,Senior Standing counsel forIncome tax :O R D E R (Order of the Court wasmade by R. Jayasimha Babu, J.) The reference is at the instance of the assessee. The assessment yearis 1987-88. 2. The first question is concerned with the interpretation of Section32 AB and as to whether it has been construed too narrowly by the Tribunal. 3. The Tribunal has held that the exclusion of the amount of intereston securities, dividends and rents while making the computation under Section32 AB of the Act was in accordance with Section 32 AB even though all thoseamounts form part of the computation that was required to be made in terms ofParts II and III of the VIth Schedule to the Companies Act for arriving at the profits from the assessee's business. 4. Sectin 32 AB which deals with investment deposit account in sub-section 1 provides that," Subject to the other provisions of this Section, where an assessee, whosetotal income includes income chargeable to tax under the head "Profits andgains of business or profession", has, out of such income,-........... ............... shall be allowed a deduction [such deduction being allowed before theloss, if any, brought forward from earlier years is set off under section 72]of --(i) a sum equal to the amount, or the aggregate ofthe amounts, so deposited and any amount soutilised; or(ii) a sum equal to twenty per cent of the profitsof business or profession as computed in theaccounts of the assessee audited in accordancewith sub-section (5),whichever is less : " 5. Sub-section (3) of Section 32 AB sets out the manner in which theprofits of eligible business or profession of an assessee for the purposes ofsub-section (1) is to be calculated. It provides, " (3) The profits of eligible business or profession of an assessee for thepurposes of sub-section (1) shall, -- (a) in a case where separate accounts in respect of such eligiblebusiness or profession are maintained, be an amount arrived at after deductingan amount equal to the depreciation computed in accordance with the provisionsof sub-section (1) of section 32 from the amounts of profits computed inaccordance with the requirements of Parts II and III of the Sixth Schedule tothe 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 underthe Companies (Profits) Surtax Act,1964( 7 of 1964) ;(iv) the amounts carried to any reserves, bywhatever name called ;(v) the amount or amounts set aside to provisionfor losses of subsidiary companies; and (v) the amount or amounts set aside to provision (vi) the amount by way of provision for losses ofsubsidiary companies ; and (vii) the amount or amounts of dividends paidor proposed, if any debited to the profit and loss account ; and as reduced by anyamount or amounts withdrawn from reserves and provisions, if such amounts arecredited to the profit and loss account. " (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 underthe Companies (Profits) Surtax Act,1964( 7 of 1964) ;(iv) the amounts carried to any reserves, bywhatever name called ;(v) the amount or amounts set aside to provisionfor losses of subsidiary companies; and (v) the amount or amounts set aside to provision (vi) the amount by way of provision for losses ofsubsidiary companies ; and (vii) the amount or amounts of dividends paidor proposed, if any debited to the profit and loss account ; and as reduced by anyamount or amounts withdrawn from reserves and provisions, if such amounts arecredited to the profit and loss account. " 6. Thus, the calculations required to be made for the purpose of thesection is to commence with the figure representing the profits of theeligible business as computed in accordance with the requirements of Parts IIand III of the VIth Schedule to the Companies Act. From that figure theamount equal to the depreciation computed in accordance with Section 32 (1) ofthe Income Tax Act is to be deducted. After such deduction, that amount is tobe increased by the aggregate of the amounts set out in (i) to (vii) ofSection 32 (3). A sum equal to 20% of that amount is to be allowed as adeduction under Section 3 2 AB (1) (ii). 7. The determination of the profit required to be made in accordancewith Parts II and III of the VIth Schedule to the Companies Act is required tobe made after taking into account all the activities of the assessee governedby the Companies Act, as the Profit and Loss account required to be drawn upby a company must necessarily reflect all the income and all the expenditureincurred by the Company in that year. 8. Part II of Schedule VI to the Companies Act is titled " Requirement as to Profit and Loss Account". Paragraph 2 thereunder mandatesthat the profit and loss account "shall be so made out as clearly to disclosethe result of the working of the Company during the period covered by theaccount". Paragraph 3 requires that "The profit and loss account shall set out the various items relating to theincome and expenditure of the company arranged under the most convenientheads; and in particular, shall disclose the following information in respectof the period covered by the account: ......." inter alia, as set out in clause 3 (xi) " 3 (xi)(a) The amount of income from investments, distinguishing betweentrade investments and otherinvestments.(b) Other income by way of interest, specifying thenature of the income.(c) The amount of income-tax deducted if the grossincome is stated under sub-paragraphs (a) and (b)above. " The income by way of interest as also income from investment, which wouldinclude dividend, are clearly amounts which are required to be taken note ofwhile making the calculations required to be made for the purpose of Parts IIand III of the VIth Schedule to the Companies Act. Income from rent, thoughnot specifically referred to, being part of the total income of the company,must necessarily be accounted for in the profit and loss account required to be drawn up in accordance with Parts II and III of the VIth Schedule to theCompanies Act. 9. Section 32 AB does not require the profit for the purpose ofSection 32 AB (1) be calculated in accordance with the provisions of theIncome Tax Act. All that it provides is that the calculations should first bemade in accordance with the Companies Act and the requirements morespecifically required of Parts II and III of the VIth Schedule to theCompanies Act. 10. There is, therefore, no scope at all for importing the concept ofdifferent heads of income found in the Income Tax Act, into the calculation ofprofit required to be made in terms of Section 32 (3) of the Act which makesthe calculations made in accordance with the Companies Act, the starting pointfor making the deductions and additions provided for in Section 32 (3) afterwhich the sum of 20% referred to in Section 32 AB (1) is to be ascertained. 9. Section 32 AB does not require the profit for the purpose ofSection 32 AB (1) be calculated in accordance with the provisions of theIncome Tax Act. All that it provides is that the calculations should first bemade in accordance with the Companies Act and the requirements morespecifically required of Parts II and III of the VIth Schedule to theCompanies Act. 10. There is, therefore, no scope at all for importing the concept ofdifferent heads of income found in the Income Tax Act, into the calculation ofprofit required to be made in terms of Section 32 (3) of the Act which makesthe calculations made in accordance with the Companies Act, the starting pointfor making the deductions and additions provided for in Section 32 (3) afterwhich the sum of 20% referred to in Section 32 AB (1) is to be ascertained. 11. The assessing officer has excluded the amount of dividendreceived as also the income by way of interest and rents by relying on thefact that those incomes are to be taxed under the Act as income from othersources. By doing so, he has failed to give effect to the plain language andthe mandate of Section 32 AB (3). 12. Learned counsel for the revenue however sought to sustain theorder of the Tribunal which has upheld the assessment made by the assessingofficer by relying on the decision of the High Court at Gauhati in the case ofCommissioner of Income-tax vs. Dinjoye Tea Estate (P) Ltd. 224 (1997) I.T.R.263 which decision was followed by the Calcutta High Court in the case ofCommissioner of Income-tax vs. Warren Tea Ltd. reported in 251 (2001) I.T.R.382. 13. Having perused both the judgments, with great respect, we areunable to subscribe to the views expressed therein. In the Gauhati case atpage 266, the argument that the assessee's counsel had advanced with regard toSection 32 AB, though set out, was not considered on the ground that thequestion referred to the Court didn't permit such consideration. In theCalcutta case, the Court noticed the fact that the Tribunal had held in favourof the assessee by holding that Section 32 AB (3) requires the calculations tobe made in accordance with the VIth Schedule to the Companies Act and,therefore, the dividend received by the assessee is to be taken into accountwhile determining the profit, but did not consider the correctness orotherwise of that view as it proceeded to hold that the decision of theGauhati High Court covered the case before them. 14. Having regard to the content of Section 32 AB (3) and the schemeof the whole section, it is clear that it is the computation made in terms ofSchedule VI of the Companies Act that has to be the starting point, and allthe things included in that computation are required to be taken note of andnot to be disregarded except to the extent specifically provided for in 15. The first question referred to us is, therefore, answered infavour of the assessee and against the revenue. 16. The second question is as to whether the Tribunal was right insustaining the action of the assessing officer in charging interest underSection 216 of the Income Tax Act. 17. The assessee made payments of advance tax on the 15th June 1986 ,30th September 1985 and 15th December 1986 in the sums of Rs.32,40,000/-,Rs.32,40,000/- and Rs.65,62,000/- respectively. The income that it hadestimated while paying the first two installments of advance tax wasRs.1,98,00,000/-. The estimation of income when it paid the third installmentwas Rs.2,65,60,000/-. 15. The first question referred to us is, therefore, answered infavour of the assessee and against the revenue. 16. The second question is as to whether the Tribunal was right insustaining the action of the assessing officer in charging interest underSection 216 of the Income Tax Act. 17. The assessee made payments of advance tax on the 15th June 1986 ,30th September 1985 and 15th December 1986 in the sums of Rs.32,40,000/-,Rs.32,40,000/- and Rs.65,62,000/- respectively. The income that it hadestimated while paying the first two installments of advance tax wasRs.1,98,00,000/-. The estimation of income when it paid the third installmentwas Rs.2,65,60,000/-. 18. The assessee had explained the reasons for this varying estimatesby stating that in the accounts for the year ended 31st August 198 6 it hadbeen decided to write off interest capitalised and that while filing theadvance tax estimates in June as also in September of 19 86, the amount ofinterest to be capitalised and written off was estimated at a figure ofRs.70,00,000/-. However, after the accounts for the year ending 31st August1986 was finalised, it was found that the interest charged, to be capitalisedand written off was only Rs.26 ,00,000/- and the income therefore, had to berevised upwards by Rs.4 4,00,000/-. The other reason given was that duringthe finalisation of accounts provisions made for various expenditures werereviewed and excess provision to the extent of Rs.25,43,000/- in the books wasadded back to the profit and loss account which resulted in an increase ofincome by that amount. The assessee's submission was that these figures couldnot be estimated accurately while filing the estimations for the first andsecond instalments and while paying the advance tax. 19. The Tribunal has upheld the levy of interest under Section 216 ofthe Income Tax Act by observing that as the previous year of the assessee hadended on 31st August, 1985 the assessee had sufficient time to review theexcess provision and make a proper estimation. Neither the Tribunal nor theauthorities had found the explanation offered by the assessee to be a falseone. Advance tax was to be paid on the basis of estimates. An estimate is,what the word itself conveys, only a prediction in the view of the personmaking it, as his likely income. It is an attempt to predict the future onthe basis of information presently available. It is at best an intelligentguess. It is not a prediction which can be made with accuracy. 20. The estimate in this case was made by the assessee on the basisof the data which it had at the time it made the estimation while paying thefirst and second installments of the advance tax. The subsequent revision ofthe figures after other relevant data had become available to the assessee ata later point of time would not by itself render the assessee liable forpayment of interest. That is the reason why the section vests discretion inthe assessing officer who is empowered either to levy interest or not to levyinterest. On the facts of this case the reasons given by the assessee nothaving been found to be false and the assessee having revised its estimation before it paid the third instalment and the assessee having paid the fullamount on the basis of such re-estimation, the assessing officer was requiredto apply his mind as to whether at all the levy of interest was warranted. 21. As the assessing officer has not taken note of all the factorsthat he was required to, we direct the assessing officer to examine thequestion of levy of interest under Section 216 of the Income Tax Act afreshand for this purpose we set aside the orders of the Tribunal and the otherauthorities on this aspect. Index : YesWebsite : Yes gp To, 1. The Assistant Registrar,Income Tax Appellate Tribunal,"Rajaji Bhavan" III Floor,Besant Nagar,Madras - 90. 2. The Secretary,Central Board of Revenue,New Delhi. 3. The Commissioner ofIncome-tax,Central II,Madras 4. The Commissionerof Income-tax (Appeals) II,Madras. 5. The Deputy Commissionerof Income-tax,Central Circle II (7),Madras. �