Ita/823/2008 Of M/S Mahavira Cycle Industries v. The Commisioner Of Income Tax & Anor

\ I-a:=:J-0U:I:-C):I:<Z~-->~<:I:CZ<ca<"'"")z:;:)a. IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Income Tax Appeal No. 823 of 2008Date Qf decision: 8.4.2011 Ms. Mahavir Cycle Industriesthrough its Partner Shri Jeevan Prabhat Jain--- AppellantVersusThe Commissionerof Income Tax, ludhianaand another.--- respondentCORAM:HON'BlEMR. JUSTICE ADARSH KUMAR GOElHON'BlEMR. JUSTICE AJAY KUMAR MITTAlPresent:Mr. Radhika Suri, Advocatefor the appellant.Mr. Rajesh Katoch, Standing counselfor the respondents-Revenue.AJAY KUMAR MITTAl,J.IThis appeal under Section 260A of th/e Inpome-Tax Act, 1961i(for &hort "the Act") has been filed by the assesse6 against the orderiiidateq29.9.2008,passe9bytheIncomeTaxAppell,ateTribunalCha~digarhBench'B', Chandigarh(in short"the Tribunat")in ITA No.1014/Chandi/2008,relating to the assessment year 1999-2000. 2.The appeal was admitted by this Court for determination of the-following substantialquestions of law:-following substantialquestions of law: "(i)Whetherin the facts and circumstancesof the case the ITATwas right in law in holding that th~ profit on sale of scrapwas right in law in holding that th~ profit on sale of scrap .,,__."h-- -",""~-'" '--'-- Income Tax Appeal No. 823 of 2008 , t-e:::::>0uJ:-C)J:'«Z~a::«J:0Z«en«'"""')z::Ja. 2.The appeal was admitted by this Court for determinationof thefollowing substantial questions of law: Whetherin the facts and circumstancesof the cas'e the ITAT"(i)wasright in law in holdingthat the profit on sale of scrapshouldbeexcludedfromtheprofitofbusinessforthepurposesofcomputingdeductionsunderSection8QHHCwhen the production of scrap was incidental to the business oftheassesseewhichwasa1000/0IExportOrientedUndertaking? Whetherin the facts and circumstancesof the case' the ITATwas right in law in upholding the order of the CIT (AJ who haddirected the exclusionof entire amountof turn over from theprofits of business without ascertainingthe profit embedded inthe turn over of sale of scrap?" (ii) 3. 3.The facts,in brief, necessaryfor adjudicationas narratedintheappeal,arethattheassessee-firmisdealingintradingandmanufacturingof cycle parts.It claims that the scrftP is bi-productof.imanufacturingwhichis not part of totalturnover.On 29.11:I 1999 the,asses~ee filed its orig'inal' return for the assessme~t year 1999-2000declar!ng total income as Nil.The assessee claimed deduction of Rs.,1,73,5b,957/-under Section 80HHC of the Act. The return was processedunder'Section143(1 )(a) on 21.3.2001.The case was re-openedunderSection 148 of the Act.During the assessmentproceedings,it was foundthat the assesseehad made sale of scrap amountingto Rs. 79,25,489/-.According to the viewpoint of the Revenue, the sale procee<;.fsof the scrapwas a part of the total turnover though the assessee had ignored to r-~ include the amountof saleof scrap,while computingdeduction. under. Section80HHCof theAct. At thesametime,theassessing'officerexcluded the profit on sale of scrap from the profit of the business onproportionate basis for the purposes of calculation of deduction underSection80HHC. The assessingofficer, thus, vide order dated '10:7.2006modified the deductionadmissible under Section 80HHC. 4.The assesseefiled appeal before the Commissioner of IncomeTax (Appeals) [for short "the CIT(A)"]. The CIT(A)held that the assessingofficer fell in legal error by including the sale of scrap in the total turnover,.for the purpose of computation of deduction under Section 80HH9. It wasalso clarified that thesaleof scrapshall not be' consideredwhilecomputing the profits of the business and accordingly by its order dated25.9.2006, t,he CIT(A)allowed the appeal.Tax (Appeals) [for short "the CIT(A)"]. The CIT(A)held that the assessingofficer fell in legal error by including the sale of scrap in the total turnover,.for the purpose of computation of deduction under Section 80HH9. It wasalso clarified that thesaleof scrapshall not be' consideredwhilecomputing the profits of the business and accordingly by its order dated25.9.2006, t,he CIT(A)allowed the appeal. 5.The order giving effect to the order of the CIT(A)was passedon 3.10.2006 by the assessing officer wherein total income was assessedat NIL. However, later on the' assessingofficer was of the opinion thatwhile giving effect to the order of the CIT(A), a mista~e apparent on theface of the record had oC9urred as the scrap salesl amou~t'ing to Rs.i79,25,489/- had to be excluded from the total turnover./as well' as from theprofits) of the business for computing deduction under Section 80HHC.!The ~ssessing officer, rectified its earlier order giving appeal effect byexercise of powers under Section 154 of the Act vide order. dated28.11.2006and re-computedthe deductionby excludingthe entire turn-over of sale of scrap from the, profits of the business.The assessee againfiled appeal before the CIT(A) challengingthe order dated 28.11.2006ofthe assessing officer., The CIT(A), however, dismissed the appeal videon 3.10.2006 by the assessing officer wherein total income was assessedat NIL. However, later on the' assessingofficer was of the opinion thatwhile giving effect to the order of the CIT(A), a mista~e apparent on theface of the record had oC9urred as the scrap salesl amou~t'ing to Rs.i79,25,489/- had to be excluded from the total turnover./as well' as from theprofits) of the business for computing deduction under Section 80HHC.!The ~ssessing officer, rectified its earlier order giving appeal effect byexercise of powers under Section 154 of the Act vide order. dated28.11.2006and re-computedthe deductionby excludingthe entire turn-over of sale of scrap from the, profits of the business.The assessee againfiled appeal before the CIT(A) challengingthe order dated 28.11.2006ofthe assessing officer., The CIT(A), however, dismissed the appeal vide ~il'!i1~~l f, ~<l~'~>' ) I-~::>0(.)J:-C)::I:«Z~~<C::I:CZ«en<C.,z::>c.. order dated28.12.2007in the light of its earlier order dated .25.9.2006,holding that under Section 154 the assessingofficer was competent toinitiate proceedings to exclude the turnover of sale of scrap from the profitof business for the purpose of computation of deduction under Section80HHC.Theassesseefurthertook thematterin appealbeforetheTribunal, impugningthe orderspassedby the CIT(A) dated28.12.2007and 25.9.2006.The main submission that was raised on behalf of theassesseewas that the CIT(A)had erred in holding that the entir~ turn,overof sale of scrapwas to be excluded from profits of businesswhilecomputing the deduction under Section 80HHC.6.The Tribunal, vide order dated 29.9.2008,under appeal beforeus, held that the deduction under Section 80HHC of the Act should becomputed after excluding the profit on sale of. scrap from the profit ofbusiness and the sale of scrap also would not form part of the total turn.Iover, for the purpose of calculation of deduction under Section 80HHCand dismissed both the appeals of the assessee. 7.This is how the. assesseeis in appeal befqre us.,ii...ii... ...8.We have heard learned counsel for th~ parties and haveperused the record. 9.Learned counsel for the assesseecandiidly admitted that in-sO-f4r as sale of scrap has been ordered to be excluded from the totalIturnover of the assesseefor computation of deduction under Section'80HHC of the Act is concerned, the same isI unsustainablein view ofdecisionof thisCourtinIncomeTaxAppealNo.31of 2002(Commissioner of Income Tax-III, Ludhiana vs. Bicyles wheels (India)decided on 11.10.2010.sO-f4r as sale of scrap has been ordered to be excluded from the totalIturnover of the assesseefor computation of deduction under Section'80HHC of the Act is concerned, the same isI unsustainablein view ofdecisionof thisCourtinIncomeTaxAppealNo.31of 2002(Commissioner of Income Tax-III, Ludhiana vs. Bicyles wheels (India)decided on 11.10.2010. II, I t I -I I-~::::>-.0uJ:-~J:<Cz~~«J:QZ<C- .cc<C..,Z::Ja.. Income Tax Appeal No. 823 of 2008 II, I t I -I I-~::::>-.0uJ:-~J:<Cz~~«J:QZ<C- .cc<C..,Z::Ja.. Income Tax Appeal No. 823 of 2008 10.However, learned counsel for the assessee submitted that theTribunal had erred in concluding that the profit on sale. of scrap will not beincludedin theprofitof thebusiness,thus,decreasingthe deductionunder Section 80HHCas the numerator shall be reducedin the formulagiven for calculatingdeduction under Section 80HHC which is as under:I "Business ProfitsxExport turn overTotal turn over" 11.Learned couns~1 on the strength of a decision of,t~e KeralaHigh Court in Income Tax Appeal No. 773 of 2009 (The Commissionerof Income Tax, Cochin vs. Kar Mobiles Limited), decided on 15.1.2010submitted that the profit on sale of scrap was to form part of the businessprofit.It was furthersubmittedthat the aforesaidobservationsof theKerala High Court have been approvedby this Court in Bicycle Wheels(India)'scase (supra). 12.The questionregardinginclusion of profit on sale of scrap incalculatingbusinessprofitunderSection80HHCcameupforconsiderationbefore the Kerala High Court in the Ka~ Mobile Limited'scase (supra) where after examining the provisions of Sbction 8o'HHC and!,the Explanation(baa)(1) attachedthereto,it wash~ld that the profits,Iarising ifrom the sale of scrap shall form part of busines$ profits referred toin the fq,rmula for determining,admissible deduction under Section 80 HHCiof the A,\ct.It was also recorded that the sale of scrap and shall also formIpart of the total turnover of the assessee. The relevant observations readthus: "The whole exercise of sub-section(3) of Section ~OHHC is todeterminetheproportionateprofitattributabletoexport I; It '. :ti i A,. ".t' J I-~::J0t)J:C>-J:<Cz~a:::<c.J:cz<CaJ<C.,z::)a. .' . business.Sectionprovidesfor a formulato determinetheexport profit by dividing business profits by total turnover andby multiplyingthe same with export turnover.Obviouslytheformulawill workout realisticallyonly if the businessprofitadoptedis attributable to the turnover wherefromit is derived.InfactexclusionsunderExplanation(baa)(i)ofSection80HHC are items of income referred to in Section 28(i.iia), (iiib)and(iiic)oftheActandreceiptsbywayofbrokerage,commission,interest,rent chargesor any other receipt of asimilarnature.It wouldbe usefulto refer to the natureofreceiptsspecificallycoveredbyExplanation(baa)(i)toexamine whether the items of income brought for the purposeof exclusionunder the residuary clause "any other receipt of.,. similarnature"arereallysimilar'tosuchitems.Thefundamentalcondition is that exclusionof 90% from businessprofit arises only if such item of profit is included'inbusinessprofit. Section28 of the Act provides for :inclusion. of certain,items as business income because such it~ms would not havefallenunder "businessprofits" but for su~h specificinclusion.;In the first place, the first three items cov.ered by Explanationclause are items which got included in the business profit byvirtue of operationof three clauses of Section28 referred totherein.The three items of incomeare not referableto anyturnover of the assessee and so much so if the said items ofincomeare included in thebusinessprofitby virtueofoperationofSection28,thenunlessitisexcluded, (PII.,.,,., ~1( f' )'\!I,.)..)'"..1"";..-f'".!"-,;(..'"'":)'?,..1:Q:(.,?"'"-J" .J... (PII.,.,,., ~1( f' )'\!I,.)..)'"..1"";..-f'".!"-,;(..'"'":)'?,..1:Q:(.,?"'"-J" .J... computationof export profit based on turnover formula will notbecorrectorrealistic.Thepositionissimilarsofarasbrokerage,commission',interestandrentareconcernedbecausetheseitemsofincomeareincomederivedfromseparate operations Qther than sale of goods, which constitutetotal turnover.Keeping this in mind, we are of the view that theincome from sale of scrap is not income of the nature similartobrokerage,commission,rent,interest,etc.,specificallycovered by clauses (iiia), (iiib) and (iiic) of Section 28. On theotherhand,thefindingoftheTribunalandthelowerauthoritiesisthatscrapisgeneratedfin thecourseofmanufactureof goods and scrap is systematicallysold by theassesseeformi~gpart of its business.So much so, 'inourview, the income from sale of scrapis part of the businessprofit and its sales turnover forms part of total turnover whichwillconstitutedenominatorfordeterminationofeligiblededuction of export profit. However, standin~ counsel h?~iexpressed the apprehension as to whether thJ assessee has!I'includedscrapsalesin its totalturnover.fdounselfor theassessee contended that there is no finding by any otheriI, authorities in this regard. We therefore hold that income fromscrap sale is part of the business income from which ~xelusionof 90% thereof is not called for by operation of Explanation(baa)(i) to Section 80HHC of the Act, but at the same time,scrap sales turnover, if not included in the total turnover,shouldbe added to the total turnoveras denominatorin the , + Income Tax Appeal No. 823 of 2008 computationof eligible relief under Section80HHC (3) of theAct."13.W.e are in. agreementwith the above quote_d observationsofthe Kerala High Court. ..~, . 14.Inviewoftheabove,theappealstandsdisposedof-accordingly.".--..:\i;J...._ [:']r;....(' l-0:: :J0UApril 8, 2011:J:~-(!)::r:«z~.tt::«:I:cz«cc«...,z:::)a..