High Court Of Kerala
CIT vs. Kar Mobiles Ltd.
Section : 80HHC
C.N. Ramachandran Nair And V.K. Mohanan, JJ.
IT Appeal No. 773 Of 2009
January 15, 2010
JUDGMENT
C.N. Ramachandran Nair, J. – Appeal is filed by the revenue challenging the order of the Tribunal holding that in the computation of deduction of export profit under section 80HHC (3) of the Income-tax Act, the Assessing Officer was not justified in excluding 90 per cent of the income on the sale of scrap and insurance claim received by applying Explanation (baa)(i) to section 80HHC of the Act. We have heard standing counsel appearing for the appellant and senior counsel Sri Joseph Markose appearing for the respondent-assessee.
2. The assessee was engaged in manufacture and sale of automotive parts both within India and out of India. Admittedly the assessee is entitled to deduction of export profit under section 80HHC of the Act. However, since the assessee has local sales as well as export sales, eligible deduction of export profit has to be determined with reference to section 80HHC (3) of the Act. While applying the formula provided therein, the assessee determined the proportionate export profit eligible for deduction and claimed deduction thereof. However, among other things, the Assessing Officer noticed that business profit arrived at by the assessee includes income from sale of scrap and insurance claim received which according to the Assessing Officer fall under “any other receipt of similar nature” requiring exclusion of 90 per cent thereof by virtue of Explanation (baa)(i) to section 80HHC. Even though disallowance in the original assessment relates to some other issues also, the dispute raised by the revenue in the appeal pertains to only two items, that is, income by way of receipt on sale of scrap and insurance claim.
3. Learned standing counsel appearing for the revenue relied on the decision of the Supreme Court in CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 and contended that scrap sales partakes the character of processing charges referred to in the decision of the Supreme Court, and so much so, 90 per cent of the income on scrap sales should be excluded under Explanation (baa)(i) of the Act and the position in respect of insurance claim is the same. Even though no question is raised as to whether scrap sale and insurance charges received should be treated as turnover forming part of denominator in the formula provided for computation of eligible deduction of export profit, standing counsel submitted that these two items should be excluded from the turnover also. Counsel for the assessee on the other hand contended that scrap sales and insurance claim received both form part of turnover and so much so, it should be reckoned as part of profit from business not liable to be excluded by reference to Explanation (baa)(i) to section 80HHC of the Act. Counsel for the assessee also relied on the Division Bench decision of this Court in William Goodcare & Sons India Ltd. v. CIT [2008] 173 Taxman 298 (Ker.).
4. The Supreme Court has explained in detail the procedure and formula for computation of eligible deduction of export profit in the above referred case. Of course, the question considered in that decision was whether the processing charges form part of turnover which is denominator in the formula for computation of deduction of eligible export profit. However, in this case, the issue is not on the denominator but as to whether the two items referred to above, namely, income from scrap sales, and insurance claim received, are in the nature of income referred to in Explanation (baa)(i) requiring exclusion of 90 per cent thereof for the purpose of computation of eligible relief. We notice that though the decisions of the Supreme Court and this Court are on the interpretation of section 80HHC, the issue raised is not exactly covered by both the decisions. Therefore keeping in mind the judgment of the Supreme Court, and in the light of what is held by this Court, we have to decide the issue. The whole exercise of sub-section (3) of section 80HHC is to determine the proportionate profit attributable to export 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(iiia), ( 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 per cent 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 clause (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 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, standing counsel has expressed the apprehension as to whether the assessee has included scrap sales in its total turnover. 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 per cent 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 computation of eligible relief under section 80HHC (3) of the Act. So far as the claim of insurance amount is concerned, there is no discussion as to the nature of insurance claim received by the assessee in the orders of any of the authorities below. Prima facie it falls under the Explanation clause. If the claim received is on account of loss of goods which form part of the total turnover then it has to be treated as business profit and the corresponding turnover will form part of the total turnover in the computation of export profit for deduction. We feel the Assessing Officer should re-examine the matter after verifying the facts.
Appeal is disposed of as above.
[Citation : 333 ITR 478]