2012 (9) TMI 152 - AT - Income Tax

Deduction u/s 80HHC - exclusion of profit on scrap sale - AO concluded that no expenditure was incurred on generation of scrap and the deduction u/s 80HHC was recomputed by reducing the total sale value of scrap as profit on sale of scrap - Held that - Aforesaid treatment would mean that the generation of scrap is an activity leading to 100% profits as against normal 10% to 15% profits on the production of finished output of the enterprise. Therefore, only the profit element in the sale of scrap is to be excluded from the profits of the business for determining the profits eligible for deduction u/s 80HHC - Decided in favor of assessee

Summary

Issues:
Calculation of profit on sale of scrap under section 80HHC of the Income Tax Act, 1961.

Analysis:
The appeal before the Appellate Tribunal ITAT, Chandigarh involved a dispute regarding the calculation of profit on the sale of scrap under section 80HHC of the Income Tax Act, 1961. The initial assessment by the Assessing Officer resulted in a taxable income of Rs. 30,72,982, which was later reassessed at Rs. 47,40,202. The Tribunal had previously set aside the case for computing the deduction under section 80HHC in relation to scrap sales. The Assessing Officer was directed to follow the precedent set in a previous case, M/s Flexfit Industries Vs. ACIT, where it was established that only the profit embedded in the scrap sales needed to be reduced from the overall business profits for the purpose of computing the deduction under section 80HHC.

Upon further proceedings, the Assessing Officer recomputed the deduction by reducing the total sale value of scrap as profit on sale of scrap at Rs. 67,39,197. The CIT (Appeals) considered the arguments presented by the assessee, emphasizing that the generation of scrap was indicative of the efficiency of the production process. The CIT (Appeals) concluded that the profit element in the sale of scrap should be excluded from the overall profits of the business to determine the eligible profits for deduction under section 80HHC. The Assessing Officer subsequently passed an order giving effect to the decision of the CIT (Appeals), where the profits on sale of scrap were determined at Rs. 2,98,598.

During the Tribunal hearing, the Revenue challenged the decision, arguing that without detailed submissions from the assessee, the initial working of the Assessing Officer should be upheld. Conversely, the assessee's representative supported the decision of the CIT (Appeals) and highlighted that the Assessing Officer had implemented the order without objection. The Tribunal, after considering the contentions of both parties and the previous rulings, upheld the decision of the CIT (Appeals) to exclude only the profit element from the sale of scrap for computing the deduction under section 80HHC. As a result, the Tribunal dismissed the appeal of the Revenue and the Cross Objections filed by the assessee were withdrawn and dismissed.