Dy. Commissioner Of Income Tax.circle v. Pushpa

IN THE HIGH COURT OF JUDICATURE AT MADRASRESERVED ON : 18.02.2021 DELIVERED ON : 23.02.2021CORAM:THE HON'BLE MR. JUSTICE M.DURAISWAMYAND THE HON'BLE MRS.JUSTICE T.V.THAMILSELVI VTM Limited (Formerly Virudhunagar Textile Mills Ltd.)Sulakarai,Virudhunagar - 626 003 ..Appellant/Respondent in both TCAsv. Dy. Commissioner of Income Tax.Circle-1,Virudhunagar .. Respondent in both TCAsT.C.A.No.817 /2010Appeal preferred under Section 260A of theIncome Tax Act, 1961, against the order of the Income TaxAppellate Tribunal, Chennai, ''B'' Bench, dated 19.06.2009 inITA.No.2418/Mds/2006, preferred against order of theCommissioner of Income Tax(Appeals)-II, Madurai made inITA.No.42/2006-07, dated 13.09.2006 against the Assessment orderof the Assistant Commissioner of Income Tax, Circle -I,Virudhunagar, dated 23.03.2006,made in PAN./GIR.No.AAACV3775Efor the assessment year 2002-03. T.C.A.No.818 /2010Appeal preferred under Section 260A of theIncome Tax Act, 1961, against the order of the Income TaxAppellate Tribunal, Chennai, ''B'' Bench, dated 19.06.2009 inITA.No.2419/Mds/2006, preferred against order of theCommissioner of Income Tax(Appeals)-II, Madurai made inITA.No.41/2006-07, dated 13.09.2006 against the Assessment orderof the Assistant Commissioner of Income Tax, Circle -I,Virudhunagar, dated 23.03.2006,made in PAN./GIR.No.AAACV3775Efor the assessment year 2003-04. For Appellant : Mr. R. Srinivasan(in both TCA) For Respondent : Mr. M. Swaminathan(in both TCA) Senior Standing Counsel Asst. by Ms. V. Pushpa COMMON JUDGMENT M. DURAISWAMY, J. T.C.A.No.817 of 2010arises against the order passed inI.T.A.No.2418/Mds/2006 on the file of the Income Tax AppellateTribunal, Chennai, ''B'' Bench, for the Assessment Year 2002-03. T.C.A.No.818 of 2010 arises against the order passed inI.T.A.No.2419/Mds/2006 on the file of the Income Tax AppellateTribunal, Chennai, ''B'' Bench, for the Assessment Year 2003-04. Challenging the orders passed by the Tribunal, theassesee has filed the above appeals. 2. Since the issue involved in both the appeals areidentical, both the appeals are disposed of by this commonJudgment. 3.The appeals were admitted on the following substantialquestion of law: “ Whether the Appellate Tribunal wasjustified in reversing the order of the firstappellate authority and restoring that of theAssessing Officer for excluding receipts arisingin the core business and not specified inExplanation (baa) to Section 80 HCC ?” 4. The appellant company is engaged in the business ofmanufacture of cloth. For the assessment year 2002-03, theappellant filed its return of income on 28.10.2002 admittingtotal income of Rs.4,57,83,603/- after claiming deduction undersection 80HHC to the extent of Rs.2,98,17,261/-. The returnwas processed under section 143(1). Subsequently, theappellant filed a revised return on 24.03.2004 admitting totalincome of Rs.3,44,96,795/- after claiming deduction undersection 80HHC at Rs.4,11,04,069/-. The revised return wasfiled for the purpose of claiming higher deduction undersection 80HHC on the ground that the export sales and domesticsales were to be considered separately as if there were separatebooks of account maintained by the appellant. In the meantime, the Assessing Officer reopened the assessment undersection 148 on 17.1.2005, in response to which, the appellantfiled its return of income admitting total income ofRs.4,57,83,063/- as per the original return filed. TheAssessing Officer completed the reassessment proceedings byorder dated 23.3.2006. 5. In respect of the assessment year 2003-04, theappellant filed its return of income on 29.11.2003 admittingtotal income of Rs.6,25,35,393/- after claiming deduction undersection 80HHC to the extent of Rs.4,62,77,950/-. The return wasprocessed under section 143(1) and subsequently, the case was selected for scrutiny. The Assessing Officer completed thescrutiny assessment on 23.3.2006 determining the total incomeat Rs.8,90,29,588/- apart from long term capital loss atRs.14,56,893/- to be carried forward. 6. The appellant is engaged in the business ofmanufacture of cloth at its factory at Sulakarai nearVirudhunagar. In the said factory, the appellant manufacturedclot both for domestic sales and export sales. The majorportion of the cloth manufactured was exported. The appellantclaimed deduction under section 80HHC by computing profits forthe export division separately and accordingly the entire profitrelating to export sales was claimed as deduction under section80HHC. The Assessing Officer found that the appellant had notmaintained separate books of account for domestic sales andexport sales but based on the combined books of accountapportioned the purchase and sales and other expenditure fordomestic and export sales. The Assessing Officer was of theview that in a case where no separate books of accountmaintained, deduction under section 80HHC is to be worked outbased on the proportion of export turnover to total turnover aslaid down in section 80HHC. In these circumstances, theAssessing Officer rejected the claim of the appellant-assessee.The assessee admitted before the Commissioner of Income Tax thatno separate books of accounts were maintained for domesticsales and export sales. For computing the profits for exportactivities, the appellant allocated various expenditures on thebasis of sales and production. 7. The appellant claimed deduction under section 80HHCbased on separate accounts prepared from the same books ofaccount after allocating the expenditure on the basis ofproduction or on actual basis as submitted them. TheCommissioner of Income Tax, in the appeal preferred by theassessee observed that only when separate books of accounts aremaintained, the appellant would be entitled to claim deductionunder section 80-HHC. In the absence of separate books ofaccounts, the Commissioner of Income Tax did not accept thecontention of the appellant-assessee. The Assessing Officerincluded sales tax, sale of yarn (raw materials) and sale ofcondemned materials to the total turnover. 8. Relying upon the appellant's own case reported in 97 ITR309, the Income Tax Appellate Tribunal, Madras Bench, heldthat if an assessee had generated profits on sale of rawmaterials and sale of condemned materials and if the saidprofits are included in the business income, then, theseelements have to be included in the total turnover. TheCommissioner of Income Tax directed the Assessing Officer toexclude sales tax from the total turnover following the decision of this court reported in 272 ITR 652 (Commissioner of IncomeTax v. Sundaram Fasteners ). So far as the sale of yarn andsale of condemned materials are concerned, since there waselement of profit, the inclusion of the same in the totalturnover were confirmed by the Commissioner of Income Tax.So far as the insurance claim and the miscellaneous income areconcerned, the Assessing Officer, reduced the amounts under thesaid heads from the profits of business to the extent of 90%.The Assessing Officer reduced these items on the ground thatthey were not derived from the business. of this court reported in 272 ITR 652 (Commissioner of IncomeTax v. Sundaram Fasteners ). So far as the sale of yarn andsale of condemned materials are concerned, since there waselement of profit, the inclusion of the same in the totalturnover were confirmed by the Commissioner of Income Tax.So far as the insurance claim and the miscellaneous income areconcerned, the Assessing Officer, reduced the amounts under thesaid heads from the profits of business to the extent of 90%.The Assessing Officer reduced these items on the ground thatthey were not derived from the business. 9. The appellant contended that the insurance claimreceived is not in the nature of rent, commission, brokerage,interest etc., and therefore, the Assessing Officer was notjustified in reducing 90% of the same from the profits ofbusiness. Further, it is the contention of the appellant thatthe insurance claim was received during the course of businessand therefore, the stand of the Assessing Officer that it is notattributable to business is not correct. Regarding themiscellaneous income, the assessee contended that it representsfine amount collected from employees towards fabric damage.Further it is contended that the appellant incurredexpenditure by way of fabric damage on account of which theappellant received less sale consideration when the cloth wassold, which was partly compensated by the recoveries from theemployees. Admittedly, the assessee's loss/damages wascompensated by the insurance company. This compensationreceived from the insurance company cannot be termed as rent,commission, brokerage, interest, etc. Similarly, the fineamount collected from the employees towards fabric damage alsocannot be reduced as it is only to compensate for less salevalue. The appellant, while filing the return, offered theentire amount as business income and with reference tocomputation of deduction under section 80 HHC, the appellanttreated the amount as receipts warranting 90% deduction underClause (baa) to section 80HHC and increased the export profitswith 90% of the said amounts in proportion to export turnoverto total turnover as per the first proviso to(3). 10. For the purpose of computation of deduction underClause (baa) to section 80HHC, it would be appropriate toextract Clause (baa) to section 80HHC, which reads asfollows:- [(baa) “profits of the business” means the profitsof the business as computed under the head “Profits andgains of business or profession” as reduced by - (1) ninety per cent of any sum referred to inClauses (iiia), (iiib) [,(iiic), (iiid) and (iiie) ofsection 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receiptof a similar nature included in such profits; and (2) the profits of any branch, office, warehouse orany other establishment of the assessee situate outsideIndia;] 11. Mr. R. Srinivasan, learned counsel appearing for theappellant, in support of his contention, has relied upon thefollowing judgments:- (i) (2019) 103 Taxman.com 250 (SC) [Principal Commissionerof Income Tax v. Atul Ltd.], wherein the Hon'ble Supreme Courtheld as follows:- (1) ninety per cent of any sum referred to inClauses (iiia), (iiib) [,(iiic), (iiid) and (iiie) ofsection 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receiptof a similar nature included in such profits; and (2) the profits of any branch, office, warehouse orany other establishment of the assessee situate outsideIndia;] 11. Mr. R. Srinivasan, learned counsel appearing for theappellant, in support of his contention, has relied upon thefollowing judgments:- (i) (2019) 103 Taxman.com 250 (SC) [Principal Commissionerof Income Tax v. Atul Ltd.], wherein the Hon'ble Supreme Courtheld as follows:- " ... 4.1 Now so far the reliance placed upon thedecision of the Hon'ble Supreme Court in the case ofRavindranathan Nair [(2007) 295 ITR 228/165 Taxman285] is concerned on considering the facts of thecase before the Hon'ble Supreme Court, we are of theopinion that the said decision would not be applicableto the facts of the case on hand. In the case beforethe Hon'ble Supreme Court the assessee claimed thededuction with respect to the charges paid forpurchasing material of the purchasers. To that it washeld that the same cannot be permitted to be deductedand the same cannot be said to be as income earned bybusiness. As observed hereinabove, the issue isdirectly covered by the decision of the Division Benchof this Court in the case of Nirma Industries [(2006)283 ITR 402 (Guj)]. We are in complete agreement withthe view that the interest earned/charged by theassessee on the delayed payment of sale consideration(for 90 days) is not required to be excluded for thepurpose of computation of deduction under Section80HHC of the Act. No substantial question of lawarises in the present Tax Appeal. Hence, the presentAppeal deserves to be dismissed." (ii) (2003) 127 Taxman 637 (Bombay) [ Commissioner ofIncome Tax v. Bangalore Clothing Co], wherein the Division Benchof Bombay High Court held as follows: "... 8. We do not find any merit in the argumentadvanced on behalf of the Department. In this case, weare concerned with profits from the business ofexports of goods manufactured by the assessee.Therefore, the export profits were required to becomputed in the ratio of export turnover to totalturnover as contemplated by the above formula.Explanation (baa) was introduced into the Act by the https://hcservices.ecourts.gov.in/hcservices/ (ii) (2003) 127 Taxman 637 (Bombay) [ Commissioner ofIncome Tax v. Bangalore Clothing Co], wherein the Division Benchof Bombay High Court held as follows: "... 8. We do not find any merit in the argumentadvanced on behalf of the Department. In this case, weare concerned with profits from the business ofexports of goods manufactured by the assessee.Therefore, the export profits were required to becomputed in the ratio of export turnover to totalturnover as contemplated by the above formula.Explanation (baa) was introduced into the Act by the https://hcservices.ecourts.gov.in/hcservices/ Finance (No. 2) Act, 1991, with effect from April 1,1992. Under the Circular of the Central Board ofDirect Taxes bearing No. 621, dated December 19, 1991(see [1992] 195 ITR 154), it has been stated that theabove formula gave a distorted figure of exportprofits when receipts like interest, commission, etc.,which do not have an element of turnover are includedby the assessee in the profit and loss account.Therefore, Explanation (baa) came to be introduced.Under that Explanation profits of the business, forthe purposes of Section 80HHC, does not includereceipts which do not have an element of turnover likerent, commission, interest, etc. However, as someexpenditure might be incurred in earning such incomesan ad hoc 10 per cent. deduction from such incomes isprovided to account for those expenses. However,learned counsel for the Department cannot invokeExplanation (ban) in every matter involving receiptsby way of brokerage, commission, interest, rent,labour charges, etc. These items of income have got tobe seen in the context of the business activity of theassessee. To give an example, in the case of amanufacturing company which undertakes exports,receipt of interest or commission may not beoperational income because they do not have theelement of turnover and consequently Explanation (baa)will apply. However, that will not be the case if theassessee is carrying on the business of financingbecause in the case of financing, the interest incomewhich accrues to the assessee will have the element ofturnover and in such a case, receipts like interest,will not attract Explanation (baa). The point which wewould like to make, therefore, is that in every matterthe Assessing Officer will have to ascertain whetherreceipt of interest, commission, labour charges, etc.,were a part of operational income. We cannot lay downany standard test for deciding what would constituteoperational income. Broadly, the Department will haveto consider the memorandum and articles of associationof the company, the nature of the business, the natureof the activity and such other tests, The Departmentwill also have to ascertain as to what is the dominantbusiness of the company and whether receipts likeinterest, commission, etc., accrue as a part of themain business activity or whether they accrue out ofincidental business. In the case of CIT v. K. K. Doshiand Co. MANU/MH/0679/2000 : [2000]245ITR849(Bom) , theassessee had received Rs. 19.60 lakhs as servicecharges. It was held that the service charges of Rs.19.60 lakhs did not have the element of turnover because the charges were received for a seasonalactivity which was not an integral part of themanufacturing activity. Therefore, the test to beapplied in all such matters is, whether interest,service charges, commission accrue out of the mainbusiness activity of the company and whether they wereoperational income. The case of K. K. Doshi and Co.MANU/MH/0679/2000 : [2000]245ITR849(Bom) shows, thatservice charges of Rs. 19.60 lakhs did not representoperational income and, therefore, came withinExplanation (baa). However, we find that theDepartment just looks at the nomenclature of thereceipt and if it finds that the nomenclature is rent,interest, commission then without any further inquiryinto the nature of business, the Department invokesExplanation (baa) which is not the purpose and theobject of that Explanation. In the present case, thereceipt in question is labour charges. However, thisnomenclature may not be accurate. In the present case,the assessee is a manufacturer and exporter ofgarments. In the present case, the Tribunal hasrecorded a finding of fact which is not challenged,namely, that there was no difference between theactivities relating to export business carried on bythe assessee and the processes carried on formanufacturing garments for others under job workcontracts. The Tribunal has further found, on thefacts, that the activity of labour job involved use ofmachinery, labour and material which were also formingpart of the activity of manufacturing garments for itsown sales. The Tribunal further found that there wasno difference between manufacturing of garments forthe assessee's own sales and manufacturing of garmentsfor others on labour job basis. These are findings offact. They have not been challenged in the memo ofappeal. The memo of appeal proceeds only on the basisthat because the receipt is by way of labour charges,Explanation (baa) stood attracted. As stated above,each case will have to be examined by the AssessingOfficer. As stated above, in each case of receipt oflabour charges, rent, interest commission, etc., theAssessing Officer will have to ascertain whether theelement of turnover existed. In the present case, theTribunal has found, on the facts, that there was anelement of job work turnover and, therefore, theTribunal concluded on the facts of this case that thereceipt of labour charges was not in the nature ofbrokerage, commission, rent, interest or charges asmentioned in Explanation (baa) to Section 80HHC.Further, the assessee received Rs. 66,35,083 as processing charges. This can be seen from the profitand loss account. The company is engaged inmanufacture and sale of garments, both domesticallyand by way of exports. The processing charges earnedwas by using the entire undertaking of the companywhich also manufactured garments for domestic salesand export sales and which processing charges wereearned by incurring expenditure for the factory likewages, electricity charges, etc., debited in theprofit and loss account. That, the income of Rs.66,35,083 was only an income from business and theexpenditure for earning this income is included inseveral items of expenditure debited in the profit andloss account. In these circumstances, we do not wishto interfere with the finding of fact recorded by theTribunal. As stated above, if the receipt of labourcharges (job work charges), interest, commission,etc., accrues by way of operating income then it fallsoutside Explanation (baa). In the present case, thereceipt accrued from manufacturing activity, TheTribunal has found that job processing activity waslinked to the manufacturing activity of the assessee.In the circumstances, on the facts, the judgmentscited by the Department do not apply to this case.Lastly, we may point out that, in this case, there isno challenge to the findings of facts recorded by theTribunal in relation to the processing activityforming part of the manufacturing activity of theassessee. ..." (iii) (2019) 419 ITR 123 (Mad) [ JVS Exports v.Assistant Commissioner of Income Tax ], wherein the DivisionBench of this Court held as follows: " ... 16. In Bangalore Clothing Co. [(2003) 260ITR 371 (Bom.)], similar issue arose for considerationand the Court held that the Department cannot invokeExplanation (baa) in every matter involving receiptsby way of brokerage, commission, interest, rent,labour charges, etc., and these items of income haveto be seen in the context of the business activity ofthe assessee. It was pointed out that the AssessingOfficer will have to ascertain whether the receipt ofinterest, commission, labour charges, etc., were apart of operational income. It was further pointed outthat the Court cannot lay down any standard test fordeciding what would constitute operational income andthe Department will have to consider the memorandum ofarticles of association of company, the nature of thebusiness, the nature of the activity and such other tests. Further, the Department will also have toascertain as to what is the dominant business of thecompany and whether receipts like interest,commission, etc., accrue as a part of the mainbusiness activity or whether they accrue out ofincidental business. In the said case, the Tribunal,on facts, found that the job processing activity doneby the assessee was linked to the manufacturingactivity and affirmed the finding of the Tribunalholding that 90 per cent of labour charges ought nothave been excluded from such business profits whilecomputing deduction under Section 80HHC. ... 29. As mentioned earlier, the conversion of aportion of the sale proceeds as Fixed Deposits wasdone by the bank themselves and not on the volition ofthe assessee. Therefore, we are fully convinced thatthe transaction was connected and closely linked withthe assessee's business activity. ..." 12.. Mr. M. Swaminathan, learned Senior Standing Counselappearing for the respondent-Revenue submitted that the issueinvolved in the above appeals are covered by the decision of theHon'ble Supreme Court reported in (2007) 295 ITR 0228[Commissioner of Income TAx v. K. Ravindranathan Nair) whereinthe Hon'ble Supreme Court held as follows:- ... 29. As mentioned earlier, the conversion of aportion of the sale proceeds as Fixed Deposits wasdone by the bank themselves and not on the volition ofthe assessee. Therefore, we are fully convinced thatthe transaction was connected and closely linked withthe assessee's business activity. ..." 12.. Mr. M. Swaminathan, learned Senior Standing Counselappearing for the respondent-Revenue submitted that the issueinvolved in the above appeals are covered by the decision of theHon'ble Supreme Court reported in (2007) 295 ITR 0228[Commissioner of Income TAx v. K. Ravindranathan Nair) whereinthe Hon'ble Supreme Court held as follows:- " ... 21. At the outset, we may state that, inthe present case, we are dealing with the law as itstood during assessment year 1993-94. At that timeSection 80HHC(3) of the I.T. Act constituted a Code byitself.Subsequentamendmentshaveimposedrestrictions/qualifications by which the saidprovision has ceased to be a code by itself. In theabove formula there existed four variables, namely,business profits, export turnover, total turnover and90% of the sums referred to in Clause (baa) to thesaid Explanation. In the computation of deductionunder Section 80HHC all four variables had to be takeninto account. All four variables were required to begiven weightage. The substitution of Section 80HHC(3)secures profits derived from the exports of eligiblegoods. Therefore, if all the four variables are keptin mind, it becomes clear that every receipt is notincome and every income would not necessarily includeelement of export turnover. This aspect needs to bekept in mind while interpreting Clause (baa) to thesaid Explanation. The said Clause stated that 90% ofincentive profits or receipts by way of brokerage, commission, interest, rent, charges or any otherreceipt of like nature included in Business Profits,had to be deducted from Business Profits computed interms of Sections 28 to 44D of the I.T. Act. In otherwords, receipts constituting independent income havingno nexus with exports were required to be reduced fromBusiness Profits under Clause (baa). A bare reading ofClause (baa)(1) indicates that receipts by way ofbrokerage, commission, interest, rent, charges etc.formed part of gross total income being BusinessProfits. But for the purposes of working out theformula and in order to avoid distortion of arrivingexport profits Clause (baa) stood inserted to say thatalthough incentive profits and "independent incomes"constituted part of gross total income, they had to beexcluded from gross total income because such receiptshad no nexus with the export turnover. Therefore, inthe above formula, we have to read all the fourvariables. On reading all the variables it becomesclear that every receipt may not constitute saleproceeds from exports. That, every receipt is notincome under the I.T. Act and every income may not beattributable to exports. This was the reason for thisCourt to hold that indirect taxes like excise dutywhich are recovered by the taxpayers for and on behalfof the government, shall not be included in the totalturnover in the above formula (See: Commissioner ofIncome Tax, Coimbatore v. Lakshmi Machine WorksMANU/SC/7335/2007 : [2007]290ITR667(SC) ). ..." 13. In the judgment reported in (2007) 295 ITR 0228[cited supra ) relied upon by learned Senior Standing Counselappearing for the Revenue, the Apex Court clearly held thatevery receipt is not income and every income would notnecessarily include element of export turnover. Further it hasbeen held that this aspect needs to be kept in mind whileinterpreting Clause (baa) to the said Explanation. The saidClause stated that 90% of incentive profits or receipts by wayof brokerage, commission, interest, rent, charges or any otherreceipt of like nature included in Business Profits, had to bededucted from business profits computed in terms of Sections 28to 44D of the Income Tax Act. In other words, receiptsconstituting independent income had no nexus with exports wererequired to be reduced from business profits under Clause (baa).A bare reading of Clause (baa)(1) indicates that receipts by wayof brokerage, commission, interest, rent, charges etc. formedpart of gross total income being business profits. On a readingof all the variables, it becomes clear that every receipt maynot constitute sale proceeds from exports and every receipt is not income under the Income Tax Act and every income may not beattributable to exports. 14. In the case on hand, the insurance claim andmiscellaneous income have no nexus with the assessee's business.Since there is no nexus, the Tribunal rightly reversed theorder of the appellate authority restoring that of the AssessingOfficer for excluding receipts arising in the core business andnot specified in Explanation (baa) to Section 80 HCC. Theinsurance claim and miscellaneous income are not directlyattributable to the business, hence, they are liable for 90%deduction. 15. The ratio laid down by the Hon'ble Supreme Court inthe judgment reported in (2007) 295 ITR 0228 [supra)squarely applies to the facts and circumstances of the presentcase. 16. Though there is no dispute with regard to the ratiolaid down in the judgments relied upon by the learned counselfor the appellant, since the facts and circumstances of thepresent cases are different, the same are not applicable. 17. Following the ratio laid down by the Hon'ble SupremeCourt in the in the judgment reported in (2007) 295 ITR0228 (supra), we do not find any ground much less anysubstantial question of law to interfere with the common orderpassed by the Income Tax Appellate Tribunal, 'B' Bench,Chennai, Hence, the Tax Case Appeals preferred by theappellant are liable to be dismissed. Accordingly, the TaxCase Appeals are dismissed. No costs. Sd/-Assistant Registrar (CS.II) /True Copy/ Sub Assistant Registrar To 1. The Deputy Commissioner of Income Tax,Circle-1, Virudhunagar 2. The Income Tax Appellate Tribunal, Chennai, ''B'' Bench 3. The Commissioner of Income Tax(Appeals)-II, Madurai. 4. The Assistant Commissioner of Income Tax, Circle -I, Virudhunagar. +1cc to Mr.M.Swaminathan, Advocate SR.NO..10837AKM/17.03.21/ 11P-6C/