(Jagdish Singh Khehar and R. Banumathi, JJ.)
Mahavira Cycle Industries ________________________ Appellant
v.
Commissioner of Income Tax and Another ____________ Respondent(s)
IA No. 3 of 2015 in CA No. 5773 of 2012†, IA No. 2 in CA No. 2737 of 2013, IA No. 2 in CA No. 2738 of 2013, IA No. 2 in CA No. 2740 of 2013 and IA No. 2 in CA No. 8753 of 2013, decided on November 16, 2015
The Judgement of the court was delivered by
JUDGMENT OF THE SUPREME COURT
1. The learned counsel for the respondents acknowledges that the controversy in hand has been adjudicated upon by this Court in CIT v. Punjab Stainless Steel Industries1 decided on 5-5-2014.
2. In view of the above, the instant applications are allowed and the civil appeals are disposed of in terms of the judgment rendered by this Court in CIT v. Punjab Stainless Steel Industries1 decided on 5-5-2014.
IMPUGNED JUDGMENT OF THE HIGH COURT2 dated 8-4-2011
(BEFORE ADARSH KUMAR GOEL AND AJAY KUMAR MITTAL, JJ.)
The Judgment of the High Court was delivered by
Ajay Kumar Mittal, J.:— This appeal under Section 260-A of the Income Tax Act, 1961 (for short “the Act”), has been filed by the assessee against the order dated 29-9-2008, passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (in short “the Tribunal”) in ITA No. 1014/Chandi/2008, relating to Assessment Year 1999-2000.
4. The appeal was admitted by this Court for determination of the following substantial questions of law:
“(i) Whether, in the facts and in the circumstances of the case, the Income Tax Appellate Tribunal 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 deduction under Section 80-HHC when the production of scrap was incidental to the business of the assessee which was a 100 per cent export-oriented undertaking?
(ii) Whether, in the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in upholding the order of the Commissioner of Income Tax (Appeals) who had directed the exclusion of the entire amount of turnover from the profits of business without ascertaining the profit embedded in the turnover of sale of scrap?”
5. 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 scrap is by-product of manufacturing which is not part of the total turnover. On 29-11-1999, the assessee filed its original return for Assessment Year 1999-2000 declaring a total income as nil. The assessee claimed deduction of Rs. 1,73,53,957 under Section 80-HHC of the Act. The return was processed under Section 143(1)(a) on 21-3-2001. The case was reopened 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 proceeds of the scrap was a part of the total turnover though the assessee had ignored to include the amount of sale of scrap, while computing the deduction under Section 80-HHC 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 80-HHC. The assessing officer, thus, vide order dated 10-7-2006, modified the deduction admissible under Section 80-HHC.
6. The assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for short “the CIT (A)”]. The Commissioner of Income Tax (Appeals) 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 80-HHC. 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, the Commissioner of Income Tax (Appeals) allowed the appeal.
7. The order giving effect to the order of the Commissioner of Income Tax (Appeals) was passed on 3-10-2006, by the assessing officer wherein the 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 Commissioner of Income Tax (Appeals), a mistake apparent on the face of the record had occurred as the scrap sales amounting to Rs. 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 80-HHC. The assessing officer rectified its earlier order giving appeal effect by exercise of the powers under Section 154 of the Act, vide order dated 28-11-2006, and recomputed the deduction by excluding the entire turnover of sale of scrap from the profits of the business. The assessee again filed an appeal before the Commissioner of Income Tax (Appeals) challenging the order dated 28-11-2006 of the assessing officer. The Commissioner of Income Tax (Appeals), however, dismissed the appeal, vide 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 80-HHC. The assessee further took the matter in appeal before the Tribunal, impugning the orders passed by the Commissioner of Income Tax (Appeals) dated 28-12-2007 and 25-9-2006. The main submission that was raised on behalf of the assessee was that the Commissioner of Income Tax (Appeals) had erred in holding that the entire turnover of sale of scrap was to be excluded from profits of business while computing the deduction under Section 80-HHC.
8. The Tribunal, vide order dated 29-9-2008, under appeal before us, held that the deduction under Section 80-HHC 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 turnover, for the purpose of calculation of deduction under Section 80-HHC and dismissed both the appeals of the assessee.
9. This is how the assessee is in appeal before us.
10. We have heard the learned counsel for the parties and have perused the record.
11. The learned counsel for the assessee candidly admitted that insofar as the sale of scrap has been ordered to be excluded from the total turnover of the assessee for computation of deduction under Section 80-HHC of the Act is concerned, the same is unsustainable in view of the decision of this Court in CIT v. Bicycle Wheels (India)3 decided on 11-10-2010.
12. However, the 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 80-HHC as the numerator shall be reduced in the formula given for calculating the deduction under Section 80-HHC which is as under:
| Export turnover | |
Business profits | x | —————— |
|
| Total turnover |
13. The learned counsel on the strength of a decision of the Kerala High Court in CIT v. Kar Mobiles Ltd.4 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) case3.
14. The question regarding the inclusion of profit on sale of scrap in calculating business profit under Section 80-HHC came up for consideration before the Kerala High Court in Kar Mobiles Ltd. case4 where after examining the provisions of Section 80-HHC and Explanation (baa)(1) attached thereto, it was held that the profits arising from the sale of scrap shall form part of business profits referred to in the formula for determining admissible deduction under Section 80-HHC of the Act. It was also recorded that the sale of scrap shall also form part of the total turnover of the assessee. The relevant observations read thus: (SCC OnLine Ker para 4 : ITR p. 481)
“4. The whole exercise of sub-section (3) of Section 80-HHC is to determine the proportionate profit attributable to export business. The 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)(1) of Section 80-HHC are items of income referred to in Sections 28(iii-a), (iii-b) and (iii-c) 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)(1) 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 items would not have fallen under “business profits” but for such specific inclusion. In the first place, the first three items covered 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, 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 other 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 (iii-a), (iii-b) and (iii-c) of Section 28. On the other hand, the finding of the Tribunal and the lower authorities is that scrap is generated in the course of manufacture of goods and scrap is systematically sold by the assessee forming 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, the Standing Counsel has expressed the apprehension as to whether the assessee has included scrap sales in its total turnover. The counsel for the assessee contended that there is no finding by any other authorities in this regard. We, therefore, hold that income from scrap sale is part of the business income from which exclusion of 90% thereof is not called for by operation of Explanation (baa)(1) to Section 80-HHC 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 computation of eligible relief under Section 80-HHC(3) of the Act.”
15. We are in agreement with the abovequoted observations of the Kerala High Court.
16. In view of the above, the appeal stands disposed of accordingly.
———
† From the Judgment and Order dated 8-4-2011 of the Punjab and Haryana High Court in ITA No. 823 of 2008
1 (2014) 15 SCC 129 : (2014) 364 ITR 144
2 Mahavir Cycle Industries v. CIT, 2011 SCC OnLine P&H 17612
3 2010 SCC OnLine P&H 10181 : (2011) 335 ITR 384
4 2010 SCC OnLine Ker 259 : (2011) 333 ITR 478
