2011 (4) TMI 1159 - HC - Income Tax

Whether the Appellate Authorities were correct in holding that 90% of the income derived from scrap sales and other sub-contract services cannot be excluded when computing the profits of the business under Section 80HHC of the Act in accordance with the Explanation (baa) to Section 80HHC of the Act despite the same having not been earned in the course of export Held that - assessee is in the business of manufacture of commutators and they export the commutators after manufacturing and they have export income. They also manufacture certain products which are sold locally. The scrap which is sold is generated in the course of the manufacturing activity. Therefore, it is clear both the subject matter of the sub contract and scrap arises out of the very same business of manufacturing of commutators carried on by the assessee. Therefore, it does not fall within the Explanation (baa) to Section 80HHC as rightly held by the tribunal as well as the appellate authority, decision of law is answered in favour of the assessee and against the revenue. Appeals are dismissed

Summary

Issues:
- Interpretation of Explanation (baa) to Section 80HHC of the Income Tax Act, 1961 regarding receipts from sub contract services and sale of scrap material.

Analysis:
1. Background: The case involved two appeals by the revenue challenging a tribunal's decision that receipts from sub contract services and sale of scrap material did not fall within the definition of Explanation (baa) to Section 80HHC(1) of the Income Tax Act, 1961.

2. Assessee's Activities: The assessee, a manufacturer of commutators, also engaged in manufacturing goods on a sub contract basis and received service charges along with income from the sale of scrap material. The assessing authority initially disallowed these receipts under Section 80HHC. However, the appellate authority and tribunal held that there was a direct nexus between these receipts and the manufacturing business, allowing their inclusion in income.

3. Substantial Questions of Law: The appeals raised substantial questions of law regarding the exclusion of income from scrap sales and sub-contract services under Section 80HHC, specifically whether 90% of such income should be excluded despite not being earned through exports. The tribunal's decision favored the assessee, emphasizing the interconnectedness of these receipts with the core manufacturing business.

4. Business Nexus: The court noted that the sub contract services and scrap sales were integral to the manufacturing business of commutators, with the scrap being a byproduct of the manufacturing process. This inherent connection to the primary business activities supported the exclusion of these receipts from the purview of Explanation (baa) to Section 80HHC.

5. Judgment: The court upheld the tribunal's decision, ruling in favor of the assessee and dismissing the revenue's appeals. It affirmed that the inclusion of receipts from sub contract services and scrap sales in the income from business and profits was justified, as these activities were directly linked to the manufacturing operations. The decision aligned with the law, and no interference was deemed necessary.

6. Conclusion: The judgment clarified the application of Explanation (baa) to Section 80HHC concerning receipts from sub contract services and sale of scrap material in the context of manufacturing activities. By emphasizing the business nexus and rejecting the revenue's challenge, the court provided a comprehensive analysis supporting the inclusion of such receipts in the income computation under Section 80HHC.