2016 (5) TMI 142 - HC - Income Tax

Deduction u/s 80HHC - Tribunal held that the 90% of the job work charges should not be excluded from the profit of the business in terms of Explanation (baa) to Sec. 80HHC - Held that - Apex Court in K. Ravindranathan Nair (2007 (11) TMI 10 - Supreme Court of India ) had while considering Explanation (baa) to Section 80HHC of the Act held that independent income, which has no nexus with the export activity, then 90% of such independent income is required to be deducted from business profits. Thus, in the facts before it, it held that independent income like rent, commission etc. including processing charges were be reduced by 90% so as to arrive at the profit of the business in terms of Section 80HHC of the Act. In the present facts, we find that the respondent assessee is engaged not only in the business of manufacture and export of garments but also engaged in doing job work. There is nothing on record to indicate that the activity carried out on job work has nexus with the export earnings of the respondent assessee. In fact, the Assessing Officer has categorically given a finding of fact that job work charges received has no nexus to export. Substantial question of law raised for our consideration is answered in the negative i.e. in favour of the Revenue and against the respondent assessee. So far as the alternative submission of the assessee that while giving effect to this order, the Assessing Officer should exclude 90% of the net receipts on account of the job work charges while applying Explanation (baa) to Section 80HHC of the Act. We were not inclined to accept it as we find that both the Assessing Officer as well as the CIT(Appeals) have on facts found that the respondent assessee has not been able to establish that any expenses were incurred from the gross receipts so as to arrive at the net receipts. As it is a factual finding. In response to our above observation, it was pointed out that on the aforesaid finding of fact, the respondent assessee had filed an appeal to the Tribunal. However, the same being an alternative submission was not considered as the impugned order of the Tribunal decided the basic issue in its favour. In these circumstances, the petitioner s grievance on the above finding of fact was never considered by the Tribunal. Therefore, in the interest of justice, let the respondent assessee be given an opportunity to prove its case that net expenses are different from gross.

Summary

Issues:
Challenge to Tribunal's order on sundry creditors written back and job work charges exclusion from business profits under Section 80HHC of the Income Tax Act, 1961.

Analysis:
1. The appeal challenged the Tribunal's order for Assessment Years 2000-01 and 2002-03, specifically focusing on the Assessment Year 2000-01. The key issues raised by the Revenue related to the treatment of sundry creditors written back and the exclusion of 90% of job work charges from business profits under Section 80HHC.

2. Regarding the first issue, the Tribunal did not entertain the question concerning sundry creditors written back, as it was not relevant to the assessment year in question. Thus, the appeal was admitted solely on the substantial question of law related to job work charges exclusion under Explanation (baa) to Section 80HHC.

3. The respondent, engaged in garment manufacturing, export, job work, and local sales, claimed deduction under Section 80HHC. The Assessing Officer excluded 90% of job work charges from profits, stating they lacked nexus with export activity. The CIT(Appeals) upheld this exclusion, rejecting the claim for only 90% of net receipts to be excluded.

4. The Tribunal, relying on precedent, held that job work charges constituted operational income and should not be excluded under Explanation (baa) to Section 80HHC. The Revenue argued that subsequent judgments favored their position, but the respondent sought a reevaluation of the job work charges' nexus with exports.

5. The Court referenced the Apex Court's decision, stating that independent income unrelated to exports should be reduced by 90%. As the job work charges did not show a nexus with export earnings, the Assessing Officer's decision to exclude 90% was upheld. The respondent's request for reassessment was deemed unnecessary.

6. The Court acknowledged the respondent's alternative submission for excluding 90% of net receipts for job work charges. While not initially accepted due to lack of expense proof, the Court directed the Assessing Officer to reevaluate if the respondent could demonstrate expenses from gross receipts, allowing for exclusion based on net receipts under Explanation (baa) to Section 80HHC.

7. Consequently, the appeal was disposed of, granting the respondent an opportunity to substantiate net expenses for job work charges. The Court's decision favored the Revenue's position on the exclusion of job work charges from business profits under Section 80HHC, emphasizing the need for factual and legal substantiation in such cases.