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2005 (1) TMI 702 - AT - Income TaxUnaccounted sales - addition made on presumption and without any material or evidence to suggest that the sales of waste material - deduction under ss. 80HHC and 80-I - business income - HELD THAT - It is also notable that during the asst. yrs. 1992-93 and 1993-94 the sale proceeds shown in the books of account in respect of rags amounts to 68, 455 and 54, 260 respectively. Interestingly in the asst. yr. 1997-98 the sales of such material shot to 4, 56, 262. Thus we hold that it would be fair and reasonable to sustain the addition of 3, 60, 000 to the extent of 2 lakhs only. Accordingly the addition stands reduced to 2 lakhs. These sales for the purpose of ss. 80HHC and 80-I will have to be treated as local sales and not export sales. Obviously the waste generated during the manufacturing process will be sold only locally and cannot be exported. However it is in the nature of income derived from the industrial undertaking and therefore the assessee will be entitled to deduction under s. 80-I. For the purposes of s. 80HHC the addition will be treated as business profits and the same will also be included in the total turnover while computing deduction under s. 80HHC. The AO is accordingly directed to recompute the deduction under ss. 80HHC and 80-I. In the result while the assessees appeals are party allowed both the Departmental appeals are dismissed.
Issues Involved:
1. Estimated addition on account of alleged unaccounted sales of rags, fents, chindis, etc. 2. Treatment of interest receipts as income from other sources. 3. Computation of deduction u/s 80HHC including quota premium and service charges in the total turnover. 4. Exclusion of quota premium, REP licence premium, interest, service charges, sales-tax refund from profits eligible for deduction u/s 80-I. 5. Departmental cross-appeal regarding inclusion of profits/gains from duty drawback, insurance, commission, and export freight in calculating deduction u/s 80-I. Summary: 1. Estimated Addition on Account of Alleged Unaccounted Sales: The assessee's appeal arose from the order dated 21st May 1998, of CIT(A), Central-II, Mumbai. The AO made an estimated addition of Rs. 3,60,000 due to alleged unaccounted sales of rags, fents, chindis, etc., based on defects in the books of account and a comparable case of M/s Highland Garments (P) Ltd. The CIT(A) confirmed this addition. The Tribunal reduced the addition to Rs. 2 lakhs, considering the facts and circumstances. The sales were treated as local sales for the purposes of ss. 80HHC and 80-I, and the AO was directed to recompute the deductions accordingly. 2. Treatment of Interest Receipts: The learned CIT(A) confirmed the AO's action in treating the interest receipts of Rs. 12,31,068 as income from other sources and not allowing the set-off of financial expenses of Rs. 13,62,713 against the interest receipts. These grounds were not pressed by the assessee's counsel, and the CIT(A)'s order was confirmed. 3. Computation of Deduction u/s 80HHC: The CIT(A) confirmed the AO's inclusion of quota premium of Rs. 4,50,578 and service charges of Rs. 1,02,500 in the total turnover for the purpose of s. 80HHC. The Tribunal directed the AO to exclude the quota premium from the total turnover based on CBDT's Circular F.No. 133/131/97-TPL dated 23rd Feb 1998, but upheld the inclusion of service charges. 4. Exclusion from Profits Eligible for Deduction u/s 80-I: The CIT(A) confirmed the AO's action in excluding quota premium, REP licence premium, interest, service charges, and sales-tax refund from profits eligible for deduction u/s 80-I. The Tribunal agreed that these receipts were incidental to the industrial undertaking but had no direct nexus with the actual activity of the industrial undertaking, confirming the CIT(A)'s order. 5. Departmental Cross-Appeal: The Department's appeal contested the inclusion of profits/gains from duty drawback, insurance, commission, and export freight in calculating the deduction u/s 80-I. The Tribunal upheld the CIT(A)'s order, referencing Tribunal decisions in similar cases and distinguishing the Supreme Court decision in CIT vs. Sterling Foods. Conclusion: The assessee's appeals were partly allowed, with reductions and recomputations directed for certain additions and deductions. Both Departmental appeals were dismissed.
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