HC Rules Section 32AB Deduction Must Be Computed on Companies Act, Profits Excludes Later Sugarcane Price Adjustment

HC Rules Section 32AB Deduction Must Be Computed on Companies Act, Profits Excludes Later Sugarcane Price Adjustment

The assessee, a sugar manufacturer, had shifted its accounting year under the Companies Act to end on 31 March 1990, covering a period of 18 months from 1 October 1988. In its return for AY 1990-91, it claimed a deduction of Rs. 9.75 lakh under Section 32AB on the basis of profits as per its audited Profit & Loss Account prepared in accordance with Parts II and III of Schedule VI to the Companies Act. Meanwhile, the State authorities fixed an additional sugarcane price of Rs. 78.86 lakh for the 1989-90 season through an order issued in October 1990, i.e. after finalisation of the accounts on 27 July 1990. Since this liability arose after the close of the books, the assessee did not debit the same to the 1989-90 accounts.

The Assessing Officer held that this liability had to be deducted while computing “profits of business” under Section 32AB and reduced the eligible deduction to Rs.1.66 lakh.

Appeal Before CIT(A) and ITAT: Both the CIT(A) and the Tribunal upheld the AO’s view, reasoning that the later-determined cane price formed part of the relevant year’s expenditure and profits for Section 32AB must reflect that. Aggrieved, the assessee approached the High Court.

Issue Raised: Whether the profits of the business for Section 32AB deduction should be strictly those disclosed in the audited P&L prepared under the Companies Act, or whether they can be recomputed by reducing the subsequently fixed additional sugarcane price.

Court’s Decision: The Court answered the issue in favour of the assessee. It held that Section 32AB specifically requires profits to be taken from the P&L account prepared by Parts II and III of Schedule VI to the Companies Act, and does not mandate a recomputation under the Income-tax Act. Since the accounts had been closed before fixation of the October 1990 cane price, the subsequent liability could not change the eligible profits for AY 1990-91.
The Court recognized that consistent judicial practice, encompassing the rule in Apollo Tyres, is that profits under Section 32AB are accounts-based under the Companies Act. The use of cases involving other contexts, e.g., disputes relating to cane price fixation, was distinguished by Revenue. Accordingly, the orders of the AO, CIT(A), and Tribunal were set aside. The appeal was granted, with clear direction that deduction under Section 32AB should be worked out on the unchanged Companies Act profits.

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