2.3 Query: Issues relating to section 32AB of the Income-tax Act, 1961.
1. A public limited company is a large manufacturer and marketer of chemical fertilisers namely urea, di-ammonium phosphate and complex fertilizers. All its manufacturing facilities are situated in the State of Goa. Its annual turnover is around Rs. 200 crores.
2.The querist has referred the following issues arising out of section 32AB of the Income-tax Act, 1961 for the opinion of the Expert Advisory Committee:
(a) The company has a general cash credit account in which sales and other cash collections are deposited, and from which all payments, etc. are made. As of the date when the deposit under section 32AB is made, by reason of withdrawals made temporarily, exceeding sales and other collections deposited, if a debit balance is reflected, could it imply that the deposit was not made “out of income” chargeable to tax under the head “profit and gains of the business” even though there was a positive income under the head?
(b) Further, as per section 32AB (1)(a), a deposit with IDBI is required to be made before the expiry of six months from the end of the previous year or before furnishing the return of income, whichever is earlier and not during or on the last day of the previous year. Therefore, the deposit made, could at best be out of the next year’s profit. The querist has sought clarification on this issue?
(c) In para 5.8 of the Guidance Note on section 32AB of the Income-tax Act, it has been clarified that income from investments, property rent, interest on deposits etc. which is not considered as forming part of income from eligible business should be excluded while computing the net profit from such business.
If the company has the following incomes-
(i) Income from investments-trade and non-trade;
(ii) Profit on sale of investments (UTI units¾ short-term investments other than units invested in as required under the Companies Acceptance of Deposit Rules);
(iii) Rental income¾ from part of building let out to bank, contractors, post office etc., whose services are required for the business of the company; and from a leased office, sub-let temporarily to reduced cost of keeping the office vacant;
(iv) Other miscellaneous income including railway/insurance claims etc.
Could the same be considered as forming part of income from “eligible business”?
The querist has stated that making such short term investment to maximise return on surplus funds/letting out of property etc. are within the objects of the company and, therefore, are part of the business.
(d) If any of the items at (c) above are not to be considered as income of “eligible business”, how should the same be excluded in form 3AA?
According to the querist, section 32AB (3) and para 4 of Form 3AA start with profit as computed in accordance with the requirements of part II and III of the sixth schedule and the amounts to be deducted/added therefrom do not include such income.
Opinion May 21,1991
1. The Committee notes section 32AB of the Income-tax Act which states inter alia:
“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 is 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;………….
(2) ……….
(3) The profits of eligible business or profession of an assessee for the purposes 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 provisioned 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 –
(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; 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 provisions 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 receipt of the business or profession carried on by the assessee………”
2. The Committee also notes paragraphs 3.1 and 4.1 of the ‘Guidance Note on Audit Under Section 32AB of the Income-tax Act’, issued by the Institute of Chartered Accountants of India, which are reproduced below:
“3.1 ‘Eligible business or profession’ has been defined in Section 32AB (2)(i) to mean any business or profession other than-
(i) The business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule to the Act.
(ii) The business of leasing or hiring of machinery or plant to an industrial undertaking engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule to the Act.
The restrictions stated in (i) and (ii) above do not apply to a small scale industrial undertaking as defined in section 80 HHA of the Act, which is engaged in construction, manufacture or production of Eleventh Schedule items. Similarly an assessee who is not manufacturing/producing the items listed in the Eleventh Schedule but is engaged in only trading of such items will be considered to be carrying on eligible business. List of Articles and things covered under the Eleventh Schedule is given in Annexure II. The Central Government have reserved power under Section 32AB(8) to delete any of the items from the above list.”
“4.1 The deduction under Section 32AB is restricted to 20% of the profits from eligible business or profession. This profit is to be determined as per audited accounts as provided in Section 32AB(3). The profit is to be determined on commercial principles and not as per provisions of the Income-tax Act. However, the opening words of Section 32AB (1) read as under:
“Subject to the other provisions of this section, where the assessee, whose total income includes income chargeable to tax under the head “Profits and gains of business or profession”, has, out of such income, -”.
The expression ‘out of such income’ refers to the income chargeable to tax under the head “Profits and gains of business or profession”. Therefore, it appears that the requirement to utilise income for making deposit with the Development Bank and/or for purchase of new plant, machinery etc. as provided in Section 32AB has to be complied with reference to the above income. In view of this it appears that the benefit of Section 32AB can be claimed only if there is a positive income as computed under the provisions of the Act, under the head ‘Profits and gains of business or profession’. Such positive income may be from an eligible or a non-eligible business or profession. The Finance Bill, 1987 proposes to amend Section 32AB(1) to provide that while granting deduction under the said Section the brought forward business loss of earlier years will be ignored. Further, the CBDT have clarified that in computing the above income, unabsorbed depreciation, unabsorbed investment allowance, brought forward incentives u/s 80VVA etc. of earlier years will not be deducted. It will, however, be necessary to give effect to all the provisions of the Act including chapter VIA and VIB for computation of total income. If the net result of the computation of income for the relevant year under the head business or profession is loss no deduction under Section 32AB can be claimed. If the amount of income so computed is less than 20 % of profit from eligible business or profession as per the audited accounts, the deduction will be restricted to the amount of income so computed.”
3.The Committee is of the following opinion in respect of issues raised in paragraph 2 of the query:
(a) Since no specific liability has been incurred for the purpose of making deposit under section 32AB, the deposit made in circumstances referred to in para 2 (a) of the query will be considered to be made out of the income chargeable to tax under the head “profits and gains of business or profession” to the extent of such income.
(b) The deposit has to be made out of the income under the head “Profits and gains of business or profession” of the previous year in respect of which deduction is claimed. The deposit cannot be made out of the income under the head “profits and gains of business or profession” of the next previous year as stated by the querist.
(c) Whether the income referred to in para 2(c) of the query from part of the income from eligible business or not will depend upon facts of the case. It can not be said that just because making the short term investments referred to in para 2(c) of the query and letting out of the property are within the objects of the company, they form part of the eligible business.
(d) In case, the income referred to in para 2(c) of the query do not form part of the income from eligible business, the profits of the eligible business shall be calculated in the following manner:
(i) Where separate accounts are maintained for eligible business, the profits of the eligible business shall be calculated in accordance with clause (a) of sub-section 32AB and in Form 3AA, clause 4 of Part III shall be filled up.
(ii) Where separate accounts are not maintained for eligible business, the profits of the eligible business shall calculated in accordance with clause (b) of sub-section (3) of section 32AB and in Form 3AA, clause 5 of Part III shall be filled up. __________________________ |