2008 (12) TMI 681 - HC - Income Tax

Whether the Tribunal was correct in holding that the provision made by the assessee for bad and doubtful debt is an allowable deduction ? Whether the Tribunal committed an error in holding that section 80-O deduction should be allowed on the gross income received by the assessee by ignoring the provisions of section 80AB of the Act ? Whether on the facts and in the circumstances of the case the Tribunal is right in allowing the notional /hypothetical cost for ascertainment of purchase price of raw materials for deduction under section 80HH and section 80-I of the Act by ignoring the computation contemplated in the said provisions read with section 80AB of the Act ? Held that - Questions Nos. 1 and 2 are answered against the assessee by following the judgment of this court dated June 25 2008 passed in 2008 (6) TMI 338 - KARNATAKA HIGH COURT. It is an undisputed fact that the FAGP after manufacturing the goods transfers it to its toilet soap unit and that neither octroi nor local taxes are being paid when such transfer/sale is made. However determination sought for in terms of the Explanation to section 80-I(8) of the Income-tax Act is not the cost of the goods but the market value of the goods. The goods to be sold in the open market would naturally include not only the cost of the goods but also such additional expenses. In addition to the expenses referred to above the notional profit to which the seller would be entitled to could be added to arrive at the market rate of the inputs. The availability of the goods at the nearest market is a question of fact. The said market could either be next door or miles apart either way the cost of the goods at the nearest avail- able market would have to be reckoned and to that the cost of transportation octroi local taxes etc. has to be added. The figures so arrived at would in terms of the Explanation to section 80-I(8) would constitute the market value. Question No. 3 is answered against the Revenue and in favour of the assessee.

Issues Involved:
1. Allowability of provision for bad and doubtful debt as a deduction.
2. Deduction under section 80-O on gross income versus income computed as per the Act.
3. Inclusion of hypothetical costs in the computation of deductions under sections 80HH and 80-I.

Issue-wise Detailed Analysis:

1. Allowability of Provision for Bad and Doubtful Debt as a Deduction:
The first issue was whether the provision made by the assessee for bad and doubtful debt is an allowable deduction. However, this issue has already been addressed by the court in a previous judgment dated June 25, 2008, in I.T.A. No. 499 of 2002 C/W I.T.A. Nos. 501 of 2002, 504 of 2002, and 510 of 2002 (reported in CIT v. Wipro Infotech Ltd. [2010] 323 ITR 151 (Karn)). Therefore, it was not reconsidered in this judgment.

2. Deduction under Section 80-O on Gross Income versus Income Computed as per the Act:
The second issue was whether the Tribunal erred in holding that section 80-O deduction should be allowed on the gross income received by the assessee, ignoring the provisions of section 80AB of the Act. This issue was also previously addressed in the same judgment as the first issue, and thus, it was not reconsidered in this judgment.

3. Inclusion of Hypothetical Costs in the Computation of Deductions under Sections 80HH and 80-I:
The primary focus of this judgment was on the third issue, which involved the computation of the market value of raw materials for the purpose of deductions under sections 80HH and 80-I of the Income-tax Act. The assessee had set up a unit for manufacturing toilet soap and another unit for manufacturing fatty acid and glycerin. For claiming deductions, the assessee included costs such as Mumbai octroi, Amalner octroi, and transportation charges in the cost of raw materials.

The Assessing Officer excluded these costs, leading to a reduction in the profit and consequently the deductions under sections 80HH and 80-I. The Appellate Commissioner upheld the Assessing Officer's decision, stating that these costs should not be included in the market value of the raw materials. However, the Income-tax Appellate Tribunal (ITAT) disagreed and held that these costs should be included as they would be part of the market value if the goods were sold in an open market.

The High Court analyzed the provisions of section 80-I(8) and the Explanation therein, which defines "market value" as the price that such goods would ordinarily fetch on sale in the open market. The court agreed with the ITAT's interpretation that in the absence of a market, a hypothetical assumption should be made, including costs like transportation and octroi, to determine the market value. The court emphasized that the market value is not just the cost of production but includes additional expenses that would be incurred to make the goods available in the market.

The court concluded that the Assessing Officer's determination of the market value by excluding these costs was incorrect. The correct approach would be to include such costs to arrive at the market value for the purpose of deductions under sections 80HH and 80-I.

Final Order:
(i) Questions Nos. 1 and 2 were answered against the assessee by following the judgment dated June 25, 2008, in I.T.A. No. 499 of 2002 C/W I.T.A. Nos. 501 of 2002, 504 of 2002, and 510 of 2002 (reported in CIT v. Wipro Infotech Ltd. [2010] 323 ITR 151 (Karn)).
(ii) Question No. 3 was answered against the Revenue and in favour of the assessee, allowing the inclusion of hypothetical costs in the computation of deductions under sections 80HH and 80-I.

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