In a significant ruling, the High Court addressed the issue of whether rental income, assessed under the head "Income from house property", qualifies for a deduction under Section 32AB of the Income Tax Act, 1961. The Court's decision clarifies the scope of "eligible business or profession" and its relevance to claiming deductions for investment and acquisition of new machinery, plant, or other specified assets.

The appellant, a company engaged in a variety of business activities, earned substantial rental income from leasing out space in a property known as Express Towers, located in Mumbai. This rental income was assessed under the head "Income from house property" by the Assessing Officer for the assessment year 1987-88. However, the appellant sought a larger deduction under Section 32AB of the Income Tax Act, claiming Rs. 76,97,918/- as opposed to the Rs. 2,85,024/- granted by the Assessing Officer.

Section 32AB of the Act provides for deductions to taxpayers who deposit a portion of their profits in a specific deposit account or use the profits to purchase new machinery or assets. The deduction is calculated as 20% of the profits of an "eligible business or profession" of the taxpayer. The Assessing Officer, however, argued that since the rental income was assessed under the head "Income from house property" rather than as business income, it could not be included in the calculation of the "profits of eligible business" for the purpose of Section 32AB.

The appellant appealed to the Commissioner of Income Tax (Appeals) (CIT(A)), who upheld the Assessing Officer’s decision. The matter was subsequently taken to the Income Tax Appellate Tribunal (ITAT), which also ruled in favor of the Revenue, concluding that rental income assessed as "Income from house property" could not be treated as part of the "eligible business" income for Section 32AB purposes.

The central legal issue was whether rental income, despite being assessed under the head "Income from house property", could still be included in the "profits of eligible business or profession" for the purposes of availing the deduction under Section 32AB of the Income Tax Act. Specifically, the question framed for determination was:

Whether the rental income earned by the appellant, assessed under the head 'Income from house property,' qualifies for deduction under Section 32AB of the Income Tax Act, 1961.

The appellant, represented by Mr. Syal, argued that:

Eligible Business Interpretation: Section 32AB(2)(i) of the Act defines "eligible business or profession" in broad terms, covering various business activities that generate profits. According to the appellant, any income resulting from business activity should qualify for the deduction under Section 32AB, regardless of the head under which it is assessed.

Profit Calculation Methodology: The appellant emphasized that Section 32AB(3) outlines the computation of profits of an "eligible business or profession" in accordance with the provisions of the Sixth Schedule to the Companies Act, 1956. In the appellant’s case, rental income was shown as business income in the profit and loss account prepared according to these standards.

Past Case Law: The appellant referred to the ruling in Commissioner of Income Tax v. Diners Club India Ltd. (2001) 248 ITR 679, where the Supreme Court held that dividend income, though assessed under a different head, was nonetheless part of the business profits and eligible for deduction under Section 32AB. The appellant argued that rental income, similarly treated as part of business income in the financial statements, should also qualify.

Support from Jurisprudence: The appellant also cited the Kerala High Court decision in Commissioner of Income Tax v. Apollo Tyres Ltd. (1999) 237 ITR 706, affirmed by the Supreme Court in 2002, which held that the rental income from leasing property should be considered part of the eligible business if it is regularly part of the business activities and income.

The respondent, represented by Mr. Chhotaray, opposed the appellant's claims, arguing that:

Scope of Section 32AB: The text of Section 32AB limits the scope of eligible business or profession to those activities that fall under the specific definitions within the Act. The income from house property, assessed under Section 22 of the Act, was clearly distinct from "profits and gains of business or profession" under Section 28 and could not be included in the computation of eligible business profits for Section 32AB.

Categorization of Income: Mr. Chhotaray pointed out that the Act explicitly provides separate heads of income for "Income from house property," "Income from business," and others. Since rental income is assessed under a separate head, it cannot be included in business profits under Section 32AB, which applies strictly to income derived from business activities.

The Court analyzed the provisions of Section 32AB in depth and emphasized the following key points:

Eligibility of Business Profits for Deduction: Section 32AB allows a deduction based on profits from "eligible business or profession." The definition of "eligible business" is quite broad and includes any business that is not specifically excluded under the provisions of the Act. The rental income from the appellant’s property, although assessed under the head "Income from house property," was still considered part of the overall business income.

Accounting Treatment: The Court noted that the appellant’s accounts, prepared according to the Sixth Schedule of the Companies Act, treated the rental income as part of the business income. This treatment was consistent with the appellant’s overall business activities, including property leasing, and was recognized as such in the profit and loss account.

Non-Exclusion of Rental Income from "Eligible Business": The Court rejected the Revenue’s view that rental income could not be part of "eligible business" merely because it was classified under a separate income head for taxation purposes. The Court observed that the key factor is whether the rental income is considered as part of the business for accounting purposes, which it was in this case.

Support from Jurisprudence: The Court drew upon the principles established in Apollo Tyres Ltd. and Diners Club India Ltd. to conclude that rental income, when it forms part of the business, should be included in the "profits of eligible business" for Section 32AB purposes, even if assessed under a different head of income.

The High Court ruled in favor of the appellant, holding that rental income earned by the appellant and assessed under the head "Income from house property" qualifies for deduction under Section 32AB of the Income Tax Act. The Court affirmed that as long as rental income is part of the business, it should be considered eligible for deductions under Section 32AB, as long as it is not specifically excluded by the provisions of the Act.

This ruling highlights the importance of the accounting treatment of income and the broad interpretation of "eligible business or profession" under Section 32AB, underscoring that a business may engage in multiple activities, including property leasing, without being denied tax benefits merely because of how income is categorized for taxation purposes.