2003 (9) TMI 43 - HC - Income Tax

Closing stock addition set aside; Rs.81,33,667 exclusion under section 32AB(3) invalid; interest, sales-tax, refunds are business income for section 80HHC

Alfa Laval India Ltd. Versus Deputy Commissioner of Income-Tax.

HC set aside the Tribunal's conclusions: the Tribunal was not justified in upholding the Assessing Officer's addition to closing stock, and erred in ... Addition made to closing stock - Assessing Officer took the realisable value of obsolete items at 50 per cent. of the cost and accordingly added back Rs. 15,15,656 - Held that:- Tribunal is not right in law in upholding the addition made to closing stock by the Assessing Officer - As per the circular issued by the Company Law Board, it was necessary for the assessee to rework the depreciation. As a result of which increased profits to the tune of Rs. 81,33,667 had to be written back by way of adjustment in the profit and loss account. - Tribunal was not justified in directing to exclude the amount of Rs. 81,33,667 from the book profits as defined in section 32AB(3) - Further, Tribunal was not right in law in holding that interest from customers, sales tax set-off and other refunds, claims, etc., do not form part of the business profit for calculating deduction under section 80HHC Issues Involved:1. Addition to closing stock by the Assessing Officer.2. Exclusion of depreciation written back from book profits under section 32AB.3. Inclusion of interest from customers and sales tax set-off in business profits for deduction under section 80HHC.Detailed Analysis:Issue 1: Addition to Closing Stock by the Assessing OfficerIn the assessment year 1989-1990, the assessee wrote off Rs. 28,00,000 for obsolete items, valuing them at 10% of the cost. The Assessing Officer (AO) added back Rs. 15,15,656, valuing the obsolete items at 50% of the cost, citing lack of evidence. The Commissioner of Income-tax (Appeals) deleted this addition, noting actual realizations were less than 10% in the subsequent year. The ITAT restored the AO's order due to insufficient evidence from the assessee. The High Court found that the auditor's report supported the assessee's valuation and that the AO's 50% valuation was arbitrary. The High Court ruled in favor of the assessee, stating the valuation at 10% was justified and proper.Issue 2: Exclusion of Depreciation Written Back from Book Profits under Section 32ABThe assessee reworked depreciation as per a Company Law Board circular, crediting Rs. 81,33,607 to the profit and loss account. The AO reduced this amount from book profits for section 32AB relief. The Commissioner of Income-tax (Appeals) disagreed, stating there was no provision to add back depreciation written back. The ITAT upheld the AO's decision. The High Court found the ITAT erred, noting the reworking of depreciation was mandated by the Company Law Board and did not involve withdrawal from reserves. The High Court ruled that the increased profits due to reworking should not be excluded from book profits for section 32AB relief, thus favoring the assessee.Issue 3: Inclusion of Interest from Customers and Sales Tax Set-Off in Business Profits for Deduction under Section 80HHCThe assessee claimed Rs. 1,20,51,817 under section 80HHC, including 'other income' of Rs. 4,33,56,007. The AO excluded Rs. 1,90,89,554 from business profits, considering it non-operational income. The Commissioner of Income-tax (Appeals) included interest from customers and sales tax set-off in business profits. The ITAT excluded these items, citing lack of nexus with business activities. The High Court noted these incomes were assessed under 'Profits and gains of business or profession' and should not be excluded for section 80HHC deduction. It ruled that since these incomes were treated as business profits, they should be included in the deduction calculation, thus ruling in favor of the assessee.Conclusion:The High Court ruled in favor of the assessee on all three issues, allowing the appeal with no order as to costs.