2013 (1) TMI 626 - HC - Income Tax

Computation u/s 80 HHC - scrap sale - Held that - The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is bi-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap. Since the question of law stands answered by this Court in favour of assessee as decided in CIT, Ludhiana Vs. Bicycle Wheels 2010 (10) TMI 496 - PUNJAB AND HARYANA HIGH COURT , Kar Mobiles case 2010 (1) TMI 618 - KERALA HIGH COURT & Mahavir Cycle Industries 2013 (1) TMI 610 - PUNJAB AND HARYANA HIGH COURT - substantial question of law answered in favour of assessee.

Summary

Issues:
1. Whether the entire scrap sale forms part of business profit for computation purposes under section 80 HHC?
2. Whether the action of the authorities in ignoring established law is legally sustainable?
3. Whether the impugned orders are legally sustainable?

Analysis:
1. The case involved a dispute regarding the treatment of scrap generated during manufacturing for export. The Assessing Officer disallowed deductions claimed under Section 80 HHC, arguing that the scrap sale should not be considered as part of business profit. The Commissioner of Income Tax (Appeals) accepted the appeal, citing a judgment that recognized scrap as a by-product of manufacturing, increasing profits without an embedded profit element in its value. However, the Tribunal directed to include only 7.5% of sales of scrap in the profits for computing relief under section 80 HHC, contrary to the appellant's argument and established legal precedents.

2. The appellant contended that the Tribunal's decision contradicted previous judgments favoring the inclusion of entire scrap sales in business profits. The Tribunal's rationale was that only the profit element from scrap sales should be considered, not the total sales value. The appellant argued that no expenses are incurred for generating scrap, as it is a by-product of manufacturing, and thus all scrap sales should be included in business profits. The Court agreed with the appellant, emphasizing that expenses are for the finished product, not scrap generation, and upheld the inclusion of the entire scrap sales in business profits based on established legal principles.

3. The Court found the revenue's argument that scrap value should only be included in total turnover, not business profit, untenable. It reiterated that no expenses are specifically incurred for scrap generation, making the entire scrap sales eligible for inclusion in business profits. Relying on previous judgments, the Court ruled in favor of the assessee, dismissing the revenue's contentions and upholding the inclusion of scrap sales in business profits for computation purposes under section 80 HHC. The appeal was dismissed in favor of the assessee.