Income Tax Act | Assessing Officer Cannot Recast Profits for Section 32AB Deduction: Only Audited Accounts Under Companies Act Hold—Bombay High Court

“Section 32AB is a Self-Contained Code; Income Tax Authorities Have No Power to Adjust Profits Shown in Audited Accounts”— Bombay High Court delivered a clear and authoritative answer to a long-disputed issue in taxation of manufacturing companies. The division bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne categorically held that, for purposes of Section 32AB of the Income Tax Act, the profits must be those "computed in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act," and cannot be reduced by post-closing adjustments, such as additional cane price paid after the close of the year.

The ruling sets aside the approach of the Assessing Officer, Commissioner of Income Tax (Appeals), and Income Tax Appellate Tribunal (ITAT), who had altered the profits by deducting such post-year-end payments, thus shrinking the quantum of the 20% Section 32AB deduction available to the assessee. The High Court’s emphatic answer is that the statutory language and settled judicial authority leave no scope for such alterations: "There can be no two incomes, one for the purpose of Companies Act and another for the purpose of Income Tax Act for the purpose of applicability of provisions of Section 32AB."

Additional Cane Price Sparks Tax Litigation

The legal controversy originated with The Ravalgaon Sugar Farm Ltd., a company engaged in manufacturing sugar and confectionery. In accordance with the State policy, the final price for sugarcane purchased from farmers was only determined by the Director of Sugar after the end of each crushing season, and therefore after the close of the company’s accounting year. For the Assessment Year 1990-91, the company paid an additional sugarcane price of ₹78,86,857—after March 31, 1990, and after its books were closed and audited under the Companies Act.

The company, following its consistent practice, debited this expenditure in the following year’s Profit & Loss Account for the Companies Act and only claimed it as a deduction under the Income Tax Act for the relevant year. In computing the quantum of profits for the Section 32AB deduction (which allows 20% of eligible profits for investment in plant and machinery), the company relied solely on the audited accounts and did not deduct the belatedly paid sugarcane price from the profit figure in those accounts.

However, the Assessing Officer took a different route, deducting the additional price from the profits as per audited accounts, thus severely reducing the Section 32AB benefit. This approach was subsequently affirmed by the CIT(A) and ITAT, leading to the current appeal.

The Court distilled the controversy into a pointed legal question:

“Whether the Tribunal, while computing the deduction under Section 32AB, was right in altering the profit of the eligible business computed as per the requirements of Parts II and III of Schedule VI to the Companies Act, for the purpose of providing the liability of the additional sugarcane price which was determined after the close of accounts?”

Arguments: A Clash Between Statutory Text and Revenue’s Pragmatism

Mr. S. Sriram, appearing for the assessee, pressed that the statutory text of Section 32AB, especially sub-section (3), is a “separate code,” requiring the profits to be taken exactly as they appear in audited accounts under the Companies Act, without further tinkering by Income Tax authorities. He cited an unbroken line of judgments, including Jindal Aluminium Ltd. v. Deputy Commissioner of Income-tax (Karnataka HC) and Apollo Tyres Ltd. v. CIT (Supreme Court). As the High Court later quotes, the Supreme Court’s rationale was:

“There cannot be two incomes, one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act… the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.” (Apollo Tyres Ltd., as cited by the Bombay High Court at Para 14-15)

Ms. Samiksha R. Kanani, for the Revenue, maintained that excluding the post-closing additional cane price artificially inflated profits for deduction purposes, and that such a practice, if unchecked, would “defeat the object of Section 32AB.” She leaned on Tasgaon Taluka SSK Ltd. (SC) and Parry Agro Industries Ltd. (Kerala HC), but the Court found these cases distinguishable.

 “No Scope for Importing Income Tax Computation into Section 32AB”

The Court engaged deeply with Section 32AB and its judicial interpretation. Justice Marne, delivering the judgment, noted:

“Section 32AB does not require the profit for the purpose of Section 32AB(1) to be calculated in accordance with the provisions of the Income Tax Act. All that it provides is that the calculations should first be made in accordance with the Companies Act and the requirements more specifically required of Parts II and III of the Sixth Schedule to the Companies Act.” (Para 23, quoting Carborandum Universal Ltd. v. CIT)

Drawing from the Supreme Court in Apollo Tyres Ltd. and High Courts in Jindal Aluminium Ltd. and Tamil Nadu Mercantile Bank Ltd., the bench affirmed:

“The Assessing Officer, while computing the income under section 115J, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained… He does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided.” (Para 14, quoting Apollo Tyres)

And further, adopting the Madras High Court’s formulation:

“Section 32AB provides a benefit to the assessee… the computation of income under the provisions of the Income Tax Act is of no relevance for the purpose of determining the extent of benefit under Section 32AB(1) or (2).” (Para 7, Tamil Nadu Mercantile Bank Ltd.)

Consistency in Practice: Revenue Loss Argument Rejected

The bench found that the assessee’s method was consistently applied, with the additional cane price always deducted in the subsequent year. The Court observed:

“Thus the 20% additional benefit received under Section 32AB in one year gets neutralized in the subsequent year. This pattern is followed on account of peculiar provisions of Section 32AB(3)... There can thus be no revenue loss for the department.” (Para 31)

The Court also noted that the Revenue did not challenge this accounting practice in other years, and selective objection was unjustified.

Precedent Cited by Revenue Held Inapplicable

The Court distinguished the Supreme Court’s decision in Tasgaon Taluka SSK Ltd., clarifying:

“The issue involved before the Apex Court was entirely different… The judgment therefore has no relevance to the issue of interpretation of provisions of Section 32AB of the Act.” (Para 29)

Similarly, Parry Agro Industries Ltd. was held not germane to the dispute at hand.

 “Only Audited Profits Can Be Used—Appeal Allowed”

The Court concluded with a clear restatement of the governing law:

“While computing the benefit under Section 32AB… the profit of the eligible business computed as per the requirement of Parts-II and III of Schedule-VI to the Companies Act can alone be taken into consideration and… the additional sugarcane price paid… could not have been deducted as expenditure while considering the profits for the purpose of grant of benefit under Section 32AB.” (Para 32)

The orders of the Assessing Officer, CIT(A), and ITAT were accordingly set aside, and the appeal allowed.

Date of Decision: 5 August 2025