Appeal partially allowed: Verify borrowed funds use, confirm specified incomes inclusion in business profits.

The Tribunal partly allowed the revenue's appeal, directing the AO to verify the use of borrowed funds for interest income and confirm the inclusion of other specified incomes in business profits for deduction u/s 80HHC. The Tribunal upheld the deletion of liquidated damages disallowance, exclusion of excise duty and sales tax from total turnover for deduction, and inclusion of certain incomes in business profits. The decision was pronounced on May 21, 2010.

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Issues Involved:
1. Disallowance of liquidated damages.
2. Inclusion of excise duty and sales tax in total turnover for deduction u/s 80HHC.
3. Exclusion of certain incomes from business profits for deduction u/s 80HHC.

Summary:

1. Disallowance of Liquidated Damages:
The issue pertains to the deletion of disallowance of liquidated damages amounting to Rs. 42,06,346/-. The Assessing Officer (AO) disallowed the amount, considering it as a penalty not incurred wholly and exclusively for business purposes. The CIT(A) deleted the disallowance, referencing prior decisions in favor of the appellant for similar issues in earlier assessment years. The Tribunal upheld the CIT(A)'s decision, noting that the liquidated damages were a normal business expense due to delays in delivery, which were inherent in the appellant's business operations. The Tribunal referenced the case of Sardar Prit Inder Singh v/s. CIT, which supported the claim that such damages are allowable as business expenditure.

2. Inclusion of Excise Duty and Sales Tax in Total Turnover for Deduction u/s 80HHC:
The AO included excise duty of Rs. 2,99,66,653/- and sales tax of Rs. 1,20,95,809/- in the total turnover for calculating deduction u/s 80HHC. The CIT(A) directed the AO to exclude these amounts, following the Supreme Court decisions in Laxmi Machine Works and Catapharma India. The Tribunal upheld the CIT(A)'s decision, citing the Special Bench of the Tribunal in IFB Agro Industries Ltd. and the Supreme Court's ruling that excise duty and sales tax are not includible in the "total turnover" for the formula in Section 80HHC(3).

3. Exclusion of Certain Incomes from Business Profits for Deduction u/s 80HHC:
The AO excluded interest income of Rs. 3,94,774/-, GST set off of Rs. 12,98,202/-, write-off payment received of Rs. 1,15,767/-, and technical drawings income of Rs. 28,00,156/- from business profits for deduction u/s 80HHC. The CIT(A) included these incomes in business profits, referencing prior favorable decisions for the appellant. The Tribunal upheld the inclusion of GST set off and write-off payment received, referencing the case of Mazda Controls Ltd. For interest income, the Tribunal directed the AO to verify if borrowed funds were used for earning interest and to allow net interest income for deduction. Regarding technical drawings income, the Tribunal found it integral to the appellant's business and upheld its inclusion in business profits.

Conclusion:
The appeal of the revenue was partly allowed, with specific directions for the AO regarding interest income verification and confirmation of the inclusion of other incomes in business profits for deduction u/s 80HHC. The Tribunal's decision was signed, dated, and pronounced on May 21, 2010.

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