\ I- a:= :J- 0 U :I: C)-:I: <Z~ -->~<:I: CZ< ca< "'"") z:;:) a. Income Tax Appeal No. 823 of 2008 1 M' - /' IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Income Tax Appeal No. 823 of 2008 Date Qf decision: 8.4.2011 Ms. Mahavir Cycle Industries through its Partner Shri Jeevan Prabhat Jain --- Appellant Versus The Commissioner of Income Tax, ludhiana and another. --- respondent CORAM: HON'BlE MR. JUSTICE ADARSH KUMAR GOEl HON'BlE MR. JUSTICE AJAY KUMAR MITTAl Present: Mr. Radhika Suri, Advocate for the appellant. Mr. Rajesh Katoch, Standing counsel for the respondents-Revenue. AJAY KUMAR MITTAl, J. I This appeal under Section 260A of th/e Inpome-Tax Act, 1961 i (for &hort "the Act") has been filed by the assesse6 against the order i i i dateq 29.9.2008, passe9 by the Income Tax Appell,ate Tribunal Cha~digarh Bench '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 substantial questions of law: "(i) Whether in the facts and circumstances of the case the ITAT was right in law in holding that th~ profit on sale of scrap ~,--- .,,__."h-- -",""~-'" ~ -",' '--'-- , t- e::: ::> 0u J: C)-J: '«Z ~ a::«J: 0Z« en« '"""')z::Ja. Income Tax Appeal No. 823 of 2008 2 2. The appeal was admitted by this Court for determination of the following substantial questions of law: "(i) Whether in the facts and circumstances of the cas'e the ITAT was right in law in holding that the profit on sale of scrap should be excluded from the profit of business for the purposes of computing deductions under Section 8QHHC when the production of scrap was incidental to the business of the which 1000/0 I Oriented was a Export assessee Undertaking? (ii) Whether in the facts and circumstances of the case' the ITAT was right in law in upholding the order of the CIT (AJ who had directed the exclusion of entire amount of turn over from the profits of business without ascertaining the profit embedded in the turn over of sale of scrap?" 3. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the assessee-firm is dealing in trading and manufacturing of cycle parts. It claims that the scrftP is bi-product of . i manufacturing which is not part of total turnover. On 29.11: 1999 the I , asses~ee filed its orig'inal' return for the assessme~t year 1999-2000 declar!ng total income as Nil. The assessee claimed deduction of Rs. , 1,73,5b,957/- under Section 80HHC of the Act. The return was processed under'Section 143(1 )(a) on 21.3.2001. The case was re-opened under Section 148 of the Act. During the assessment proceedings, it was found that the assessee had made sale of scrap amounting to Rs. 79,25,489/-. According to the viewpoint of the Revenue, the sale procee<;.fsof the scrap was a part of the total turnover though the assessee had ignored to r-~ ~ I I- ~ :J 0 U :J: ~-J: cd: Z ~ ~«J:cz« cc«.,z::) a. il I i I I ~I :1 .. I. Income Tax Appeal No. 823 of 2008 3 include the amount of sale of scrap, while computing deduction. under . Section 80HHC of the Act. At the same time, the assessing' officer excluded the profit on sale of scrap from the profit of the business on proportionate basis for the purposes of calculation of deduction under Section 80HHC. The assessing officer, thus, vide order dated '10:7.2006 modified the deduction admissible under Section 80HHC. 4. The assessee filed appeal before the Commissioner of Income Tax (Appeals) [for short "the CIT(A)"]. The CIT(A)held that the assessing officer 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 was also clarified that the sale of scrap shall not be' considered while computing the profits of the business and accordingly by its order dated 25.9.2006, t,he CIT(A)allowed the appeal. 5. The order giving effect to the order of the CIT(A)was passed on 3.10.2006 by the assessing officer wherein total income was assessed at NIL. However, later on the' assessing officer was of the opinion that while giving effect to the order of the CIT(A), a mista~e apparent on the face of the record had oC9urred as the scrap salesl amou~t'ing to Rs. i 79,25,489/- had to be excluded from the total turnover./as well' as from the profits) of the business for computing deduction under Section 80HHC. ! The ~ssessing officer, rectified its earlier order giving appeal effect by exercise of powers under Section 154 of the Act vide order. dated 28.11.2006 and re-computed the deduction by excluding the entire turn- over of sale of scrap from the, profits of the business. The assessee again filed appeal before the CIT(A) challenging the order dated 28.11.2006 of the assessing officer., The CIT(A), however, dismissed the appeal vide ~il '!i1~ ~l . f, ~ <l~'~>' ) I- ~ ::> 0 (.) J: C)-::I: « Z~ ~ <C ::I: C Z« en <C.,z::> c.. Income Tax AQQeal No. 823 of 2008 4 order dated 28.12.2007 in the light of its earlier order dated .25.9.2006, holding that under Section 154 the assessing officer was competent to initiate proceedings to exclude the turnover of sale of scrap from the profit of business for the purpose of computation of deduction under Section 80HHC. The assessee further took the matter in appeal before the Tribunal, impugning the orders passed by the CIT(A) dated 28.12.2007 and 25.9.2006. The main submission that was raised on behalf of the assessee was that the CIT(A)had erred in holding that the entir~ turn,over of sale of scrap was to be excluded from profits of business while computing the deduction under Section 80HHC. 6. The Tribunal, vide order dated 29.9.2008, under appeal before us, held that the deduction under Section 80HHC of the Act should be computed after excluding the profit on sale of. scrap from the profit of business and the sale of scrap also would not form part of the total turn . I over, for the purpose of calculation of deduction under Section 80HHC and dismissed both the appeals of the assessee. 7. This is how the. assessee is in appeal befqre us. , i . i . We have heard learned counsel for th~ parties and have 8. perused the record. 9. Learned counsel for the assessee candiidly admitted that in- sO-f4r as sale of scrap has been ordered to be excluded from the total I turnover of the assessee for computation of deduction under Section '80HHC of the Act is concerned, the same is I unsustainable in view of decision of this Court in Income Tax Appeal No. 31 of 2002 (Commissioner of Income Tax-III, Ludhiana vs. Bicyles wheels (India) decided on 11.10.2010. ~ I- ~ ::::> -.0u J: ~- J: <C z~ ~« J: Q Z <C - .cc <C .., Z::J a.. i I i I, I It I, It ~! t I I I - ~ 11 Income Tax Appeal No. 823 of 2008 5 .. 10. However, learned counsel for the assessee submitted that the Tribunal had erred in concluding that the profit on sale. of scrap will not be included in the profit of the business, thus, decreasing the deduction under Section 80HHC as the numerator shall be reduced in the formula given for calculating deduction under Section 80HHC which is as under: I "Business Profits x Export turn over Total turn over" 11. Learned couns~1 on the strength of a decision of,t~e Kerala High Court in Income Tax Appeal No. 773 of 2009 (The Commissioner of Income Tax, Cochin vs. Kar Mobiles Limited), decided on 15.1.2010 submitted that the profit on sale of scrap was to form part of the business profit. It was further submitted that the aforesaid observations of the Kerala High Court have been approved by this Court in Bicycle Wheels (India)'s case (supra). 12. The question regarding inclusion of profit on sale of scrap in calculating business profit under Section 80HHC came up for consideration before the Kerala High Court in the Ka~ Mobile Limited's case (supra) where after examining the provisions of Sbction 8o'HHC and ! , the Explanation (baa) (1) attached thereto, it was h~ld that the profits , I arising ifrom the sale of scrap shall form part of busines$ profits referred to in the fq,rmula for determining admissible deduction under Section 80 HHC , i of the A,\ct.It was also recorded that the sale of scrap and shall also form I part of the total turnover of the assessee. The relevant observations read thus: "The whole exercise of sub-section (3) of Section ~OHHC is to determine the proportionate profit attributable to export I; I t '. :ti i ." t' J A ,. I- ~ ::J 0 t) J: C>-J: <Cz~ a::: <c. J: cz <C aJ <C., z::) a. 6 - Income Tax Appeal No. 823 of 2008 .' . --- business. Section provides for a formula to determine the export profit by dividing business profits by total turnover and by multiplying the same with export turnover. Obviously the formula will work out realistically only if the business profit adopted is attributable to the turnover wherefrom it is derived. In fact exclusions under Explanation (baa)(i) of Section 80HHC are items of income referred to in Section 28(i.iia), (iiib) and (iiic) of the Act and receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature. It would be useful to refer to the nature of receipts specifically covered by Explanation (baa)(i) to examine whether the items of income brought for the purpose of exclusion under the residuary clause "any other receipt of . , . similar nature" are really similar' to such items. The fundamental condition is that exclusion of 90% from business profit arises only if such item of profit is included'in business profit. Section 28 of the Act provides for :inclusion. of certain , items as business income because such it~ms would not have fallen under "business profits" but for su~h specific inclusion. ; In the first place, the first three items cov.ered by Explanation clause are items which got included in the business profit by virtue of operation of three clauses of Section 28 referred to therein. The three items of income are not referable to any turnover of the assessee and so much so if the said items of income are included in the business profit by virtue of operation of Section 28, then unless it is excluded, (PI f' I I I I I I ~1( I. ,., ) '\ ! I,. ) .. )'".. 1" ;.."-f'" .!" ,;- (..' "'" :) '?,.. 1: Q :( ., ? "'" -J" .J... Income Tax AQQeal No. 823 of 2008 7 computation of export profit based on turnover formula will not be correct or realistic. The position is similar so far as brokerage, commission', interest and rent are concerned because these items of income are income derived from separate operations Qther than sale of goods, which constitute total turnover. Keeping this in mind, we are of the view that the income from sale of scrap is not income of the nature similar to brokerage, commission, rent, interest, etc., specifically covered by clauses (iiia), (iiib) and (iiic) of Section 28. On the other hand, the finding of the Tribunal and the lower authorities is that scrap is generated fin the course of manufacture of goods and scrap is systematically sold by the assessee formi~g part of its business. So much so, 'in our view, the income from sale of scrap is part of the business profit and its sales turnover forms part of total turnover which will constitute denominator for determination of eligible deduction of export profit. However, standin~ counsel h?~ i expressed the apprehension as to whether thJ assessee has ! I ' included scrap sales in its total turnover. dounsel for the f assessee contended that there is no finding by any other Ii , authorities in this regard. We therefore hold that income from scrap sale is part of the business income from which ~xelusion of 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, should be added to the total turnover as denominator in the , + l-0:: :J 0U :J: (!)- ::r:«z~ .tt::«:I: cz« cc« ...,z:::) a.. Income Tax Appeal No. 823 of 2008 8 computation of eligible relief under Section 80HHC (3) of the ..~, Act." 13. W.e are in. agreement with the above quote_d observations of the Kerala High Court. . 14. In view of the above, the appeal stands disposed of accordingly. - . - . - . . . " ._ :' ..:\i;J r;.... (' April 8, 2011 ~