Commissioner Of Income Taxcoimbatore v. M/S Elgi Equipmets Ltd.elgi Industrial Complextrichy Roadsinganallurcoimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 29 - 4 - 2011 Coram : THE HONOURABLE MR. JUSTICE ELIPE DHARMA RAOAND THE HONOURABLE MR. JUSTICE M. VENUGOPAL Tax Case (Appeal) Nos. 183 and 184 of 2008 Commissioner of Income TaxCoimbatore ... Appellant in both Appeals vs. M/s Elgi Equipmets Ltd.Elgi Industrial ComplexTrichy RoadSinganallurCoimbatore... Respondent in both Appeals TAX CASE (APPEALS) filed under Section 260-A of the Income Tax Act,1961 against the order of the Income Tax Appellate Tribunal Madras'D' Bench dated 10.11.2006 made in I.T.A. Nos. 1252/Mds/05 and1253/Mds/05 for the assessment years 1999 - 2000 and 2000-2001respectively. (Appeal No.353 & 354/04-05 dated 28.2.2005 on thefile of the Commissioner of Income Tax (Appeals) 1 Coimbatoreagainst the Assessment order dated 19.11.2004 and 3.12.2004respectively on the file of the Asst Commissioner of Income Tax,Company Circle, 1(3), Coimbatore) For Appellant : Mr. J. NareshkumarFor Respondent : Mr. P. Senthilkumar COMMON JUDGMENT (Delivered by ELIPE DHARMA RAO, J.) Since the issue involved in both these Tax Appeals are one andthe same and they are inter-connected, they were heard together anddisposed of by this common judgment. 2.At the time of admission, though four substantialquestions of law were framed, the Bench had admitted these appealson the second question of law alone, which is as follows:-"whether on the facts and in the circumstances ofthe case, the Income Tax Tribunal is right inholding that technical service charges and tyreretreading receipts do form part of the exporthttps://hcservices.ecourts.gov.in/hcservices/business and are eligible for deduction underSection 80HHC?" 3.The facts culled out from the pleadings are asfollows :-The assessee filed return under Section 139(1) of the IncomeTax Act, 1961 (in short "the Act") and the same was processed underSection 143(1) of the Act. Thereafter, under Section 154 of theAct, an order was passed after finding that while computingdeduction under Section 80 HHC of the Act, the assessee hadincluded contract / rent income, lease operations, which were notrelated to the business anda sum of Rs.1,75,41,697/- was nettedagainst interest payments and treated expenditure towards VRS ascapital expenditure and disallowed the expenses. The AssessingOfficer also disallowed various claims under different headsincluding 90% of technical service charges and tyre retreadingcharges. Aggrieved by the aforesaid order, the assessee preferredappeals before the Commissioner of Income Tax (Appeals), who, by acommon order dated 28.02.2005 allowed some of the claims of theassessee and rejected some, thereby allowed the appeals in part.Aggrieved by the order of the appellate authority, the assessee aswell as the Revenue preferred appeals before the Income TaxAppellate Tribunal (in short "the Tribunal"). The Tribunal, onconsideration of the submissions made by both sides, dismissed theappeals preferred by the Revenue and allowed the appeals filed bythe assessee. Aggrieved by the order of the Tribunal, the Revenuehas come forward with the present appeal. 4.In these appeals, though four substantial questions oflaw had been raised by the Revenue, this Court, at the time ofadmission, following the earlier decisions of the Supreme Courtanswered Question Nos. 1, 3 and 4 against the Revenue andformulated the aforesaid Substantial Question No.2, which relatesto claiming of technical service charges, for consideration. 4.In these appeals, though four substantial questions oflaw had been raised by the Revenue, this Court, at the time ofadmission, following the earlier decisions of the Supreme Courtanswered Question Nos. 1, 3 and 4 against the Revenue andformulated the aforesaid Substantial Question No.2, which relatesto claiming of technical service charges, for consideration. 5.With respect to this issue, the Assessing Officer inparagraph 3.2 of the order dated 19.11.2004, under the heading inrespect of deduction under Section 80HHC, has held that theexplanation offered by the assessee is not convincing as this is acompany doing mainly the business of manufacturing of compressorsand garage machineries, a part of which was exported; that incomefrom lease operation is treated as not falling in the main businessactivities of the assessee and hence, the deduction under Section80HHC was recomputed by excluding this and other income and arrivedat the taxable amount of Rs.4,26,16,843/-. The appellate authorityas well as the Tribunal, following the decision of the Commissionerof Income-Tax vs. Bangalore Clothing Co. [260 ITR 371], allowedthe claim of the assessee and held that service charges andreceipts should not have been reduced while working out theadjusted profits. 6.Learned Standing Counsel appearing for the Revenuesubmitted that aforesaid decision relied on by the Appellatehttps://hcservices.ecourts.gov.in/hcservices/Authority as well as the Tribunal is not applicable to the facts ofthe case. He further submitted that the principle laid down by the Hon'ble Supreme Court in Commissioner of Income-tax v.K.Ravindranathan Nair [295 ITR 228], is directly applicable to thefacts of the present case. 7.Before delving into the contentions raised, it would beprofitable to note down the relevant provisions of the Act,particularly Section 80HHC of the Act, which is as follows :-"80HHC. Deduction in respect of profits retained forexport business: -........................................................................ (4C) The provisions of this section shall apply toan assessee, - (a) for an assessment year beginning after the31[st] day of March, 2004 and ending beforethe 1[st] day of April, 2005; (b) who owns any undertaking which manufacturesor produces goods or merchandise anywherein India (outside any special economiczone) and sells the same to any undertakingsituated in a special economic zone whichis eligible for deduction under section 10Aand such sale shall be deemed to be exportout of India for the purposes of thissection. (ba)‘total turnover’ shall not include freightor insurance attributable to the transportof the goods or merchandise beyond thecustoms station as defined in the CustomsAct, 1962 (52 of 1962):Provided that in relation to any assessmentyear commencing on or after the 1st day ofApril, 1991, the expression ‘totalturnover’ shall have effect as if it alsoexcluded any sum referred to in clauses(iii-a), (iii-b) and (iii-c) of Section 28; (baa)‘profits of the business’ means theprofits of the business as computed underthe head ‘Profits and gains of business orprofession’ as reduced by— https://hcservices.ecourts.gov.in/hcservices/ (1) ninety per cent of any sum referred to in clauses (iii-a), (iii-b) and (iii-c)of Section 28 or of any receipts by wayof brokerage, commission, interest,rent, charges or any other receipt of asimilar nature included in suchprofits; and (2) the profits of any branch, office,warehouse or any other establishment ofthe assessee situate outside India;" (baa)‘profits of the business’ means theprofits of the business as computed underthe head ‘Profits and gains of business orprofession’ as reduced by— https://hcservices.ecourts.gov.in/hcservices/ (1) ninety per cent of any sum referred to in clauses (iii-a), (iii-b) and (iii-c)of Section 28 or of any receipts by wayof brokerage, commission, interest,rent, charges or any other receipt of asimilar nature included in suchprofits; and (2) the profits of any branch, office,warehouse or any other establishment ofthe assessee situate outside India;" 8.From a reading of the aforesaid Section, it is seen thatunder Clause (baa)(1), 90% of any amount referred to in clauses(iii-a), (iii-b) and (iii-c) of Section 28 of the Act or anyreceipts by way of brokerage, commission, interest, rent, chargesor any other receipt of a similar nature included in such profits.The said expression “included in such profits” indicated that thesaid processing charges formed part of the gross total income beingbusiness profits. This has been clarified by Clause (baa) of thesaid Explanation which inserted the definition of “profits frombusiness” in the said Section 80-HHC(3) of the Act. 9.From the above, it is apparent that any receipts by wayof brokerage, commission, interest, rent, charges or any otherreceipt of a similar nature included in such profits. In thepresent case, we are concerned with the question whether thetechnical service charges and tyre retreading receipts would formpart of the export business and are eligible for deduction underSection 80HHC. The Section makes it clear that any other receiptof a similar nature should be included in such profits. The assessee deals with the business of manufactur of Aircompressors & Service Station Equipments and part of themanufactured products was also exported. The assessee has statedthat income from lease operations is also one of the businessactivities and it should be considered as income derived out of thebusiness and, therefore, eligible for deduction under Section80HHC. The Assessing Officer, who was not convinced with theaforesaid statement made by the assessee, proceeded to treat thetechnical service charges and tyre retreading receipts as part ofthe export business on the footing that the assessee has beenmainly doing the business of manufacturing of compressors andgarage machineries and a part of which was exported. This findingof the Assessing Officer gets ample support from the decision ofthe Supreme Court in Ravindranathan Nair case. 10.In the said case, the learned Addl. Solicitor Generalappeared on behalf of the Department, contended that in view ofExplanation (ba) read with Explanation (baa) to Section 80HHC ofthe Income-tax Act when the said processing charges were includiblein the business profits, the same were also simultaneouslyincludible in the total turnover. According to him, Section 80 HHChttps://hcservices.ecourts.gov.in/hcservices/provided for export profits and that in order to compute the 10.In the said case, the learned Addl. Solicitor Generalappeared on behalf of the Department, contended that in view ofExplanation (ba) read with Explanation (baa) to Section 80HHC ofthe Income-tax Act when the said processing charges were includiblein the business profits, the same were also simultaneouslyincludible in the total turnover. According to him, Section 80 HHChttps://hcservices.ecourts.gov.in/hcservices/provided for export profits and that in order to compute the quantum of eligible deduction under Section 80HHC of the Income-taxAct, the Department was right in including the processing chargesin the business profits and if such charges constituted part ofbusiness profits then such charges cannot be excluded from thetotal turnover. That, business profits, under the above formula,were required to be calculated in accordance with clause (baa) ofthe said Explanation. According to the learned counsel, keeping inmind the provisions of Explanation (ba) and Explanation (baa) it isclear that what was includible in the business profits in the aboveformula had to be included also in the total turnover.Therefore, according to learned counsel, the Tribunal as well asthe High Court had erred in holding that the processing chargeswere not includible in the total turnover. He also relied on thejudgment of the Rajasthan High Court in CIT vs. Sharda Gum andChemicals [(2007) 288 ITR 116]. 11.The Hon'ble Supreme Court, on consideration of thesubmissions and the provisions of law laid that, held that theprocessing charges, which was part of gross total income, was anindependent income like rent, commission, brokerage, etc. and,therefore, 90 per cent of the said sum had to be reduced from thegross total income to arrive at the business profits and since thesaid processing charge was an important component of businessprofits, it also had to be included in the total turnover in thesaid formula to arrive at the business profits in terms of clause(baa) to the said Explanation. In the case before the SupremeCourt, it was held that the processing charges were included in thegross total income from cashew business and that even according tothe assessee the said charges constituted an important component ofgross total income from cashew business. 12.Ultimately, the Supreme Court has observed as follows :-"23. In our view, for the above reasons, thesaid processing charges, which was part of grosstotal income, was an independent income like rent,commission, brokerage, etc. and, therefore, 90% ofthe said sum had to be reduced from the gross totalincome to arrive at the business profits and sincethe said processing charge was an importantcomponent of business profits, it also had to beincluded in the total turnover in the said formulato arrive at business profits in terms of Clause(baa) of the said Explanation." 13.Following the above judgment of the Supreme Court, thefinding of the Assessing Officer that the assessee was mainly doingthe business of manufacture of compressors and garage machinaries,part of which was exported and the income from lease operation istreated as not falling in the main business activities and hence,the deduction under Section 80HHC was recomputed excluding thebusiness and other income, is well founded. https://hcservices.ecourts.gov.in/hcservices/ 14.With regard to the judgment relied on by the learnedcounsel for the assessee in Southern Sea Foods Ltd. vs. JointCommissioner of Income Tax [288 ITR 151], the Supreme Court withoutanswering the issue on merits, had dismissed the SLP on the groundthat the High Court has followed its previous judgment, which hasbecome final and no appeal has been filed. Therefore, in view ofthe judgment in 295 ITR 228 (cited supra), with respect, we areunable to follow the judgment of the Supreme Court. In view of the above, the substantial question of law isanswered in favour of the Revenue and the Appeals are allowed. Nocosts. gri https://hcservices.ecourts.gov.in/hcservices/ 14.With regard to the judgment relied on by the learnedcounsel for the assessee in Southern Sea Foods Ltd. vs. JointCommissioner of Income Tax [288 ITR 151], the Supreme Court withoutanswering the issue on merits, had dismissed the SLP on the groundthat the High Court has followed its previous judgment, which hasbecome final and no appeal has been filed. Therefore, in view ofthe judgment in 295 ITR 228 (cited supra), with respect, we areunable to follow the judgment of the Supreme Court. In view of the above, the substantial question of law isanswered in favour of the Revenue and the Appeals are allowed. Nocosts. gri Sd/-Asst. Registrar//True Copy//To1.The Assistant Registrar Sub Asst. Registrar Income Tax Appellate TribunalBench D, Chennai 90. 2.The Commissioner of Income-Tax(Appeals) I, Coimbatore.3.The Assistant Commissioner of Income-TaxCompany Circle I (3) Coimbatore + 1 cc to M/s. S. Naresh Kumar, Advocate SR No.30499 + 1 cc to Mr. Philip George, Advocate SR No.31096RSI(CO)SR/7.6.2011 T.C.(A) Nos. 183 and 184 of 2008