M/S R.n. Gupta & Company Ltd v. Commissioner Of Income Tax (Appeals)-I, Ludhiana & Another

IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH I.T.A. No.119 of 2012 Date of Decision:22.01.2013 M/s R.N. Gupta & Company Ltd. .....Appellant Vs. Commissioner of Income Tax (Appeals)-I, Ludhiana & another .....Respondents CORAM:- HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MS. JUSTICE RITU BAHRI Present:-Mr. Akshay Bhan and Mr. Alok Mittal, Advocates, for the appellant. Mr. Rajesh Katoch, Advocate,for the respondents. HEMANT GUPTA, J.(Oral) The present appeal under Section 260-A of the Income Tax Act,1961 arises out of an order passed by the Income Tax Appellate Tribunal,Chandigarh Bench, Chandigarh (for short 'the Tribunal') dated 6.1.2012pertaining to the assessment year 2003-2004 raising following substantialquestions of law:- (i)Whether in facts and circumstances of the case, the action ofthe ld. authorities below in ignoring the fact that scrap isincidental to manufacturing of finished good and no expenseis incurred for the same and therefore the entire scrap saleforms part of business profit and thus includible for thecomputation purposes u/s 80 HHC is legally unsustainable inthe eyes of law? (ii)Whether in fact and circumstances of the case, the action of the authorities below in acting on its own presumptions andignoring the law laid down by this Hon'ble Court in CIT v/sBicycle Wheels (India) is legally unsustainable in the eyes oflaw? (iii)Whether in fact and circumstances of the case, the action ofthe authorities below, the impugned orders Annexure A-1 andA-3 are legally sustainable in the eyes of law?the authorities below, the impugned orders Annexure A-1 andA-3 are legally sustainable in the eyes of law? Though the assessee has framed the aforesaid three questions of law, yet it is question No.(i) which arises for consideration of this Court. The assessee is engaged in manufacturing of goods for export.In the process of manufacturing, the scrap is generated, which is a bi-product of manufacturing activity. The Assessing Officer has not acceptedthe explanation of the assessee that no expenses are incurred for generationof scrap, and therefore, expenditure should be taken as nil for not accepted.The Assessing Officer has disallowed the deductions claimed by theassessee under Section 80 HHC of the Income Tax Act, 1961. The learned Commissioner of Income Tax (Appeals) acceptedthe appeal of the assessee relying upon a judgment of this Court in CIT,Ludhiana Vs. Bicycle Wheels 335 ITR 388that scrap is generated in thecourse of manufacturing of goods. The scrap is systematically sold by theassessee forming part of its business. It was held that value of scrapgenerated goes on to increase the profits of organization and that there is noprofit element embedded in the value of scrap. Thus, the order of theAssessing Officer was set aside. But in further appeal before the Tribunal atthe instance of Revenue, the Tribunal recorded the following findings:- “9. As regards the inclusion of value of scrap sale in the profits ofthe business for computing the relief u/s 80HHC, the entire value ofscrap sales cannot be included in the profits of the business. What can be included in the profits of the business for working out therelief u/s 80HHC is the profit element in respect of sales of scrapand not the total sales of scrap. On the facts of the case, the profitelement on sale of scrap is estimated at 7.5%. The AO is directed toinclude 7.5% of sales of scrap in the profits of the business forworking out the relief u/s 80HHC. In this view of the matter, theorder of the ld. CIT(A) directing the AO to include the total sales ofscrap in the profits of business is vacated. The AO is directed toinclude only 7.5% being estimated element of profit in the sale ofscrap in the profits of the business for working out the relief u/s80HHC. can be included in the profits of the business for working out therelief u/s 80HHC is the profit element in respect of sales of scrapand not the total sales of scrap. On the facts of the case, the profitelement on sale of scrap is estimated at 7.5%. The AO is directed toinclude 7.5% of sales of scrap in the profits of the business forworking out the relief u/s 80HHC. In this view of the matter, theorder of the ld. CIT(A) directing the AO to include the total sales ofscrap in the profits of business is vacated. The AO is directed toinclude only 7.5% being estimated element of profit in the sale ofscrap in the profits of the business for working out the relief u/s80HHC. Learned counsel for the appellant has vehemently argued thatthe order of the Tribunal runs counter to the judgment of this Court inMahavir Cycle Industries Vs. The Commissioner of Income Tax, Ludhianaand another, - I.T.A. No.823 of 2008 decided on 08.04.2011, whereinreliance has been placed upon an earlier order of this Court in BicyclesWheels' case (supra)as well as the order of the Kerala High Court in The Commissioner of Income Tax, Cochin v. Kar Mobiles Limited– Income TaxAppeal No.773 of 2009 decided on 15.01.2010. Therefore, it is contendedthat the findings recorded by the Tribunal runs counter to the judgments ofthis Court. Mr. Katoch, learned counsel for the revenue has argued that thescrap value has to be included in the total turn-over but cannot be includedin business profit as only the profit after deducting the expenses ofgeneration of scrap can be added in the business profit. We find that the argument raised by Mr. Katoch is whollyuntenable. The expenditure is incurred by the assessee not for generation ofthe scrap but for generation of the finished product. There is and cannot be I.T.A. No.119 of 2012 any expenses which are incurred for generation of scrap. Scrap is bi-productof the manufacturing activity. Therefore, there are no expenses which couldbe excluded from the sale of scrap. Since the question of law standsanswered by this Court in favour of assessee in the above mentionedjudgments, therefore, the first substantial question of law is answered infavour of the assessee and against the Revenue. Dismissed. ( HEMANT GUPTA ) JUDGE January 22, 2013renu/Vimal ( RITU BAHRI ) JUDGE