2012 (5) TMI 39 - HC - Income Tax

Nature of surrendered income - Claim of deduction under Section 80HHC - the assessee had taken the surrendered value of stock of bullion lying with karigarsas as business profits Held that - Deduction under Section 80HHC could be claimed only on showing facts which make an assessee eligible for the deduction - there was no presumption that the surrender made was on account of unexplained stocks representing the export income - burden to prove to said facts was on the assessee and not on the Revenue - there cannot be any presumption that the surrender made represents income from exports against assessee.

Issues Involved:

1. Whether the surrendered income of Rs. 75 lakhs should be treated as business profits for the purpose of calculating deduction under Section 80HHC of the Income Tax Act, 1961.
2. Whether the Assessing Officer (AO) correctly excluded the surrendered income from business profits for computing the deduction under Section 80HHC.
3. Whether the Commissioner of Income Tax (CIT) was justified in invoking revisionary powers under Section 263 of the Act.
4. Whether the Tribunal erred in holding that the turnover should be increased by Rs. 75 lakhs and divided between local and export turnover in the same ratio as disclosed in the accounts of the assessee.

Issue-wise Detailed Analysis:

1. Treatment of Surrendered Income as Business Profits:

The assessee, a partnership firm engaged in the manufacture and sale of jewellery, had surrendered Rs. 75 lakhs as business income during a survey conducted under Section 133A of the Income Tax Act. The surrendered amount was included in the assessee's business profits for the purpose of claiming a deduction under Section 80HHC. The Tribunal held that the surrendered amount should be treated as business income, stating that the surrender was made to buy peace with the department and no penalty was imposed under Section 271(1)(c). However, the High Court found this reasoning flawed, emphasizing that the surrendered amount could not be treated as business income for the purpose of calculating the deduction under Section 80HHC, as it would distort the computation and lead to anomalies.

2. Exclusion of Surrendered Income by AO:

The AO excluded the surrendered amount from the business profits while computing the deduction under Section 80HHC, leading to a significantly lower deduction. The CIT (Appeals) confirmed this computation, treating the surrendered amount as income from other sources. The High Court upheld this exclusion, stating that the surrendered amount could not be included in the business income without a corresponding increase in turnover, as required by the formula under Section 80HHC(3).

3. Invocation of Revisionary Powers by CIT:

The CIT invoked revisionary powers under Section 263, arguing that the AO's order was erroneous and prejudicial to the interest of the Revenue. The Tribunal upheld the CIT's action, noting that the issue of whether the surrendered profit included any export profit was not considered by the Tribunal earlier. The High Court agreed with the Tribunal's decision, stating that the CIT correctly exercised revisionary powers, as the surrendered income did not have any element of export profit, and the turnover should be increased by Rs. 75 lakhs and divided between local and export turnover.

4. Tribunal's Decision on Turnover Adjustment:

The Tribunal directed that the turnover should be increased by Rs. 75 lakhs and divided between local and export turnover in the same ratio as disclosed in the accounts. The High Court found this direction inappropriate, as it would lead to absurdities in the computation of the deduction under Section 80HHC. The Court emphasized that the surrendered amount could not be treated as business income for the purpose of calculating the deduction, as it would distort the formula and result in an unintended relief to the assessee.

Conclusion:

The High Court concluded that the surrendered income of Rs. 75 lakhs could not be treated as business profits for the purpose of calculating the deduction under Section 80HHC. The AO's exclusion of the surrendered amount from business profits was justified, and the CIT correctly invoked revisionary powers under Section 263. The Tribunal's direction to increase the turnover by Rs. 75 lakhs and divide it between local and export turnover was found to be erroneous. The appeal by the Revenue was allowed, and the cross-appeals by the Revenue and the assessee were rendered infructuous.

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