2003 (1) TMI 89 - HC - Income Tax

Labour and processing receipts constitute manufacturing turnover for computing export profits under Section 80HHC; Explanation (baa) limited

Commissioner of Income-Tax Versus Bangalore Clothing Co.

HC upheld the Tribunal's factual finding that receipts labelled as labour/processing charges arose from the assessee's manufacturing activity and ... Deduction under sections 80HHC - Exclusion of Labour Charges from 'Profits of Business' under Explanation (baa) to Section 80HHC - Tribunal's Decision on Exclusion of 90% of Labour Charges from Business Profits - HELD THAT:- In this case, we are concerned with profits from the business of exports of goods manufactured by the assessee. Therefore, the export profits were required to be computed in the ratio of export turnover to total turnover as contemplated by the above formula. Explanation (baa) was introduced into the Act by the Finance (No. 2) Act, 1991, with effect from April 1, 1992. Under the Circular of the Central Board of Direct Taxes bearing No. 621, dated December 19, 1991, it has been stated that the above formula gave a distorted figure of export profits when receipts like interest, commission, etc; which do not have an element of turnover are included by the assessee in the profit and loss account. Therefore, Explanation (baa) came to be introduced. Under that Explanation profits of the business, for the purposes of section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent. deduction from such incomes is provided to account for those expenses. However, learned counsel for the Department cannot invoke Explanation (baa) in every matter involving receipts by way of brokerage, commission, interest, rent, labour charges, etc. These items of income have got to be seen in the context of the business activity of the assessee. Tribunal findings has found of fact. They have not been challenged in the memo of appeal. The memo of appeal proceeds only on the basis that because the receipt is by way of labour charges, Explanation (baa) stood attracted. As stated, each case will have to be examined by the Assessing Officer. As stated above, in each case of receipt of labour charges, rent, interest commission, etc., the Assessing Officer will have to ascertain whether the element of turnover existed. In the present case, the Tribunal has found, on the facts, that there was an element of job work turnover and, therefore, the Tribunal concluded on the facts of this case that the receipt of labour charges was not in the nature of brokerage, commission, rent, interest or charges as mentioned in Explanation (baa) to section 80HHC. Further, the assessee received Rs. 66,35,083 as processing charges. This can be seen from the profit and loss account. The company is engaged in manufacture and sale of garments, both domestically and by way of exports. The processing charges earned was by using the entire undertaking of the company which also manufactured garments for domestic sales and export sales and which processing charges were earned by incurring expenditure for the factory like wages, electricity charges, etc., debited in the profit and loss account. That, the income of Rs. 66,35,083 was only an income from business and the expenditure for earning this income is included in several items of expenditure debited in the profit and loss account. In these circumstances, we do not wish to interfere with the finding of fact recorded by the Tribunal. As stated above, if the receipt of labour charges (job work charges), interest, commission, etc., accrues by way of operating income then it falls outside Explanation (baa). In the present case, the receipt accrued from manufacturing activity. The Tribunal has found that job processing activity was linked to the manufacturing activity of the assessee. Lastly, we may point out that, in this case, there is no challenge to the findings of facts recorded by the Tribunal in relation to the processing activity forming part of the manufacturing activity of the assessee. In the circumstances, we answer the above question in the affirmative, i.e., in favour of the assessee and against the Department. Issues Involved:1. Whether labour charges (job work receipts) received by the assessee stood excluded from the expression 'profits of business' under Explanation (baa) to section 80HHC.2. Whether the Tribunal was right in holding that 90 per cent. of the labour charges ought not to have been excluded from such business profits while computing deduction under section 80HHC.Detailed Analysis:Issue 1: Exclusion of Labour Charges from 'Profits of Business' under Explanation (baa) to Section 80HHCThe primary issue revolves around whether labour charges received by the assessee should be excluded from 'profits of business' as defined under Explanation (baa) to section 80HHC of the Income-tax Act. The Department argued that labour charges, similar to rent, commission, and interest, do not have an element of turnover and thus should be excluded from business profits. They relied on previous judgments, including CIT v. S.G. Jhaveri Consultancy Ltd., to support their position.However, the assessee contended that the labour charges were part of a composite business activity involving manufacturing, processing, and trading of garments. They argued that these charges should not be excluded as they were integral to the business operations. The Tribunal found that the job work involved the use of machinery, labour, and material, similar to the manufacturing process for the assessee's own sales. Therefore, these charges were part of the operational income and should not be excluded from business profits.Issue 2: Tribunal's Decision on Exclusion of 90% of Labour Charges from Business ProfitsThe Tribunal held that job work charges received by the assessee were not in the nature of brokerage, commission, rent, or interest and thus, 90 per cent. of such charges should not be excluded from business profits. The Tribunal cancelled the order under section 263 and restored the assessment order dated February 14, 1994. The Department challenged this decision, arguing that the Tribunal erred in including labour charges in business profits, which distorted the figure of export profits.The court analyzed the facts and found that the job work receipts were part of the operational income from the manufacturing activity. The Tribunal's findings of fact, which were not challenged, showed that the job work activity was linked to the manufacturing activity of the assessee. Therefore, the receipt of labour charges was not in the nature of brokerage, commission, rent, or interest as mentioned in Explanation (baa) to section 80HHC.Findings:The court concluded that the receipt of labour charges was part of the operational income and should not be excluded from business profits under Explanation (baa) to section 80HHC. The Tribunal's decision was upheld, and the appeal by the Department was dismissed. The court emphasized that each case must be examined based on its facts to determine whether receipts like interest, commission, or labour charges are part of the operational income. The court found that in this case, the job work receipts were integral to the assessee's manufacturing activity and thus should be included in the business profits for computing the deduction under section 80HHC.Conclusion:The court answered the question in the affirmative, in favor of the assessee, and against the Department. The appeal was dismissed with no order as to costs.