2013 (1) TMI 610 - HC - Income Tax

Inclusion of Scrap Profit in Business Profit for Tax Deductions Upheld by High Court

The High Court held that profit on the sale of scrap should be included in the business profit for calculating deductions under Section 80HHC of the ... Deductions u/s 80HHC - production of scrap - assessee was a 100% EOU - Held that:- As decided in CIT, Ludhiana Vs. Bicycle Wheels [2010 (10) TMI 496 - PUNJAB AND HARYANA HIGH COURT], Kar Mobiles' case [2010 (1) TMI 618 - KERALA HIGH COURT] 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 80HHC. It was also recorded that the sale of scrap and shall also form part of the total turnover of the assessee. 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)(i) to Section 80HHC, 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). Issues:1. Interpretation of Section 80HHC of the Income-Tax Act, 1961 regarding the treatment of profit on sale of scrap in computing deductions.2. Whether the profit on sale of scrap should be excluded from the profit of business for the purposes of calculating deductions under Section 80HHC.Analysis:1. The appeal raised substantial questions of law concerning the treatment of profit on the sale of scrap in computing deductions under Section 80HHC of the Income-Tax Act, 1961 for the assessment year 1999-2000. The primary contention was whether the profit on sale of scrap should be excluded from the profit of business for the purpose of calculating deductions under Section 80HHC. The Revenue argued that the sale proceeds of scrap were part of the total turnover and should be included in the profit calculation. The assessing officer had initially excluded the profit on the sale of scrap from the profit of the business for deduction under Section 80HHC.2. The Commissioner of Income Tax (Appeals) held that the assessing officer erred in including the sale of scrap in the total turnover for computing deductions under Section 80HHC. The CIT(A) clarified that the sale of scrap should not be considered in computing the profits of the business. However, the assessing officer later rectified the order, excluding the turnover of sale of scrap from the profits of the business for deduction under Section 80HHC. The CIT(A) dismissed the subsequent appeal challenging this exclusion, leading the assessee to appeal before the Tribunal.3. The Tribunal, in its order, upheld the exclusion of profit on the sale of scrap from the profit of the business for computing deductions under Section 80HHC. It ruled that the deduction should be calculated after excluding the profit on the sale of scrap and that the sale of scrap should not form part of the total turnover for deduction purposes. The Tribunal dismissed both appeals of the assessee based on these findings.4. The assessee then appealed before the High Court, arguing that the Tribunal erred in excluding the profit on the sale of scrap from the profit of the business for deduction under Section 80HHC. The counsel for the assessee referenced a decision of the Kerala High Court, which held that profit on the sale of scrap should be included in the business profit for calculating deductions under Section 80HHC. The High Court agreed with the Kerala High Court's interpretation and disposed of the appeal accordingly.