2013 (11) TMI 428 - HC - Income Tax

Whether net conversion charges has to be included under clause (baa) of explanation to Section 80 HHC of the Act in the adjusted business profits for computation of deduction Held that - Reliance has been placed on the judgments in the cases of ACG Associated Capsules Pvt.Ltd. vs. Commissioner of Income Tax 2012 (2) TMI 101 - SUPREME COURT OF INDIA and CIT vs. K.Ravindranathan Nair (2007) 2007 (11) TMI 10 - Supreme Court of India , wherein it was held that the processing charges formed part of the gross total income as an independent income like Rent, Commission, brokerage, etc. Consequently, 90% of the said sum has to be reduced from the gross total income, to arrive at the business profits Thus, Net conversion charges included for computation of deduction u/s 80HHC Decided against the Revenue.

Summary

Issues:
1. Interpretation of Section 80HHC of the Income Tax Act regarding inclusion of 'net conversion charges' for deduction computation.

Analysis:
The High Court of MADRAS heard an appeal by the Revenue against the Income Tax Appellate Tribunal's order related to the assessment year 1997-98. The core issue revolved around whether 'net conversion charges' should be included under clause (baa) of Explanation to Section 80HHC of the Act for computing the deduction. The assessee, a yarn manufacturer, had conversion charges excluded by the Assessing Officer from the business profits for determining adjustable book profits under Section 80HHC.

The assessee's case was presented before the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, which directed the Assessing Officer to reevaluate whether conversion charges were part of the operational income based on a Bombay High Court decision. Despite the Assessing Officer's confirmation of the original assessment, the Commissioner of Income Tax (Appeals) ruled in favor of the assessee, citing previous tribunal decisions. The Revenue, dissatisfied, appealed to the Income Tax Appellate Tribunal, which upheld the Commissioner's findings.

The Revenue contended that the treatment of conversion charges for job work basis should be based on gross or net income, necessitating a reassessment by the Assessing Officer. The assessee relied on a Supreme Court ruling stating that processing charges constitute independent income and should be factored into the business profits calculation. The issue at hand was clarified to pertain to 'net conversion charges' under Section 80HHC, not gross charges.

Referring to a Supreme Court decision, the High Court established that processing charges, akin to rent or commission, are part of gross total income and must be considered in the turnover for computing business profits under Section 80HHC. Consequently, the net conversion charges were deemed integral to the gross total income, requiring a 90% reduction for determining business profits. Upholding the Supreme Court's precedent, the High Court dismissed the Revenue's appeal, affirming that net conversion charges contribute to the total turnover for deduction computation under Section 80HHC.