2015 (2) TMI 115 - HC - Income Tax

Computation of income under Section 80 HHC - exclusion of scrap sales from the total turnover - Held that - As regards the issue of scrap sales, it is covered by the decision of the Hon'ble Madras High Court in the case of Fenner (India) Ltd. - Vs - CIT (1998 (4) TMI 67 - MADRAS High Court) therefore the Appellate Tribunal was right in law in holding that the scrap sales is to be excluded from the total turn over for the purpose of computing the income under Section 80 HHC - Decided against revenue. Expenditure on earning exempt income - restricted to 2% by ITAT when the assessing officer has proved on a scientific basis that the interest paid on loans taken for investment in the exempt bonds was much larger - Held that - the assessee has claimed exemption from interest on tax free bonds. It is fact that the assessee has made systematic huge investments resulting in income and no expenditure in the form of expenditure and management have been made by the assessee. As the income is exempted, proportionate expenditure in this regard to be disallowed but as to how much. This issue has to be considered. It is to be noted that reasonable disallowance can be made i.e., to the extent of 2% of the exempted income. Accordingly, the Assessing Officer is directed to disallow proportionate expenditure to the extent of 2% of the exempted income as relying on Southern Petro Chemical Industries - Vs - DCIT 2004 (10) TMI 308 - ITAT MADRAS-C - Decided against revenue.

Summary

Issues:
1) Whether scrap sales should be excluded from total turnover for computing income under Section 80 HHC of the Income Tax Act, 1961?
2) Whether the Appellate Tribunal was correct in restricting expenditure on earning exempt income to 2%?

Issue 1:
The appellant, engaged in manufacturing and sales, contested the inclusion of sales tax, excise duty, and scrap sales in the turnover for income computation under Section 80 HHC. The CIT (Appeals) upheld the Assessing Officer's decision. However, the Income Tax Appellate Tribunal, relying on precedents like CIT - Vs - Sundaram Fasteners Ltd. and CIT - Vs - Wheels India Ltd., ruled in favor of the assessee. The Tribunal held that excise duty and sales tax should not be part of the total turnover for Section 80 HHC deductions. Similarly, scrap sales were also excluded based on the decision in Fenner (India) Ltd. - Vs - CIT. The High Court concurred with the Tribunal's decision, resolving the issue against the Revenue and in favor of the assessee.

Issue 2:
Regarding the second issue, the Tribunal addressed the disallowance of proportionate expenses on exempted income. The Tribunal directed the Assessing Officer to disallow expenses up to 2% of the exempted income, citing the decision in Southern Petro Chemical Industries - Vs - DCIT. This decision was partially allowed, considering the strategic nature of investment decisions and the need for proportionate management expenses deduction. The High Court noted a previous judgment in EID Parry - Vs - The Asst. Commissioner of Income Tax, Chennai, where a similar issue was decided against the Revenue. Consequently, the High Court upheld the Tribunal's decision on the second issue, leading to the dismissal of the appeal.

In conclusion, the High Court upheld the Tribunal's decisions on both issues, emphasizing the exclusion of scrap sales from turnover calculation and the allowance of proportionate expenses up to 2% of exempted income. The appeal was dismissed, affirming the decisions in favor of the assessee.