2015 (3) TMI 541 - HC - Income Tax

Admissibility of relief under Section 80 HHC - whether recovery of cost of material by way of sale of scrap generated in its manufacturing process, could be treated as local sale - assessee's unit was a 100% Export Oriented Unit (EOU) - Held that - From the record, it appears that the assessee's firm was 100% export unit, it had maintained the books of account subject to Audit under Section 44(A)(B) of the Income Tax Act. The cutting of the leather resulting into scrap which either will have to be thrown or sold in the local market. When such scrap is sold, the sale proceeds of the scrap cannot be included in the term of turnover , therefore, the proceeds of sale of such scrap would not be included in sales in the profit and loss account of the assessee.The assessee was not primarily dealing in scrap but was a manufacturer of 'shoe uppers'. So, only the sale proceeds from sale of 'shoe uppers' would be treated as its turnover, as per the normal accounting practice profits. The income derived from the sale of scrap would not be included in the total turnover and the same will have to be reduced from the cost of the raw material.See Commissioner of Income Tax Vs. Punjab Stainless Steel industries (2014 (5) TMI 238 - SUPREME COURT) Reopening of assessment - Held that - The proceedings under section 148/147 of the Act were not required as no fresh material was brought on record. This is a case of merely accounting principle. Therefore, we set aside the proceedings under Section 148/147 of the Act initiated by the A.O. for all the assessment years under consideration. All the impugned orders are hereby set aside. - Decided in favour of the assessee

Summary

Issues:
1. Appeal against consolidated order by Income Tax Appellate Tribunal for multiple assessment years.
2. Treatment of sale proceeds from scrap in a 100% Export Oriented Unit (EOU) under Section 80 HHC.
3. Validity of issuing notice under Section 147 after 4 years of regular assessment.

Analysis:
1. The appellant filed appeals against a consolidated order by the Income Tax Appellate Tribunal for various assessment years. The substantial questions of law admitted included the treatment of sale proceeds from scrap in a 100% EOU under Section 80 HHC and the validity of issuing a notice under Section 147 after a lapse of 4 years from regular assessment.

2. The appellant, engaged in manufacturing shoe uppers for export as a 100% EOU, sold scrap generated in the manufacturing process. The Assessing Officer (A.O.) disallowed the profit derived from selling scrap in the local market, leading to additions in the assessment. The CIT (A) and Tribunal upheld the A.O.'s decision. The appellant contended that the sale proceeds from scrap were accounted for in the books and should be reduced from the cost of raw material. The department argued that the entire sale proceeds should be added as no cost was attributed to producing scrap.

3. The High Court observed that the sale proceeds from scrap in a 100% EOU should not be included in turnover as per accounting practices. Referring to a Supreme Court case, the Court emphasized the legislative intent to encourage exports and provide benefits to those contributing to foreign exchange earnings. The Court held that the appellant, primarily a manufacturer of shoe uppers, should only consider the sale proceeds from shoe uppers as turnover. Consequently, the income from scrap sales should be reduced from raw material costs. The Court set aside the proceedings under Section 148/147 initiated by the A.O. for all assessment years.

4. The Court ruled in favor of the appellant on the substantial questions of law, allowing all appeals filed by the assessee. The judgment highlighted the importance of accounting principles in determining the treatment of sale proceeds from scrap in a 100% EOU under Section 80 HHC, ultimately providing relief to the appellant against the department's contentions.