2001 (10) TMI 259 - AT - Income Tax

Summary

Issues Involved:
1. Whether the drying/grinding/distillation charges received by the assessee should be excluded from the profits of the business for the purpose of computing the deduction u/s 80HHC.
2. Whether the CIT(A) was justified in directing the Assessing Officer to recompute the deduction u/s 80HHC without reducing 90% of the drying/grinding/distillation charges.

Summary:

1. Exclusion of Drying/Grinding/Distillation Charges:
The respondent-assessee, a company engaged in manufacturing and exporting spices products, claimed a deduction of Rs. 5,83,375 u/s 80HHC for the assessment year 1993-94. The Assessing Officer (AO) referenced clause (baa) of the Explanation to section 80HHC, specifically sub-clause (i), and observed that the drying/grinding/distillation charges of Rs. 19,90,260.40 received by the assessee should be excluded from the profits of the business. The AO held that 90% of such receipts should be deducted from the profits, resulting in a negative figure, thereby negating the assessee's claim for deduction u/s 80HHC.

2. CIT(A)'s Direction to Recompute Deduction:
The CIT(A) examined the arguments and found that the purpose of section 80HHC is satisfied by applying the formula of proportionate deduction provided in section 80HHC(3). The CIT(A) held that the drying/grinding/distillation charges were part of the domestic business and should not be further deducted as 90% from the export profit already arrived at by applying the turnover formula. The CIT(A) relied on Board Circular No. 621 dated 19-12-1991 and the Supreme Court decision in CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149, concluding that the receipts from such charges are business receipts and should not be excluded from the profits of the business for the purpose of section 80HHC.

3. Revenue's Appeal:
The Revenue appealed, arguing that the CIT(A) erred in holding that the assessee is entitled to claim deduction u/s 80HHC without deducting 90% of the drying/grinding/distillation charges. The Revenue contended that the term "charges" should be construed in its normal meaning, and such receipts should be excluded from the business profits as per the clear provisions of the Act.

4. Tribunal's Decision:
The Tribunal considered the detailed orders of the lower authorities and the arguments presented. It noted that section 80HHC provides for deduction in respect of profits retained for export business, computed using a specific formula. The Tribunal observed that the drying/grinding/distillation charges were integral to the assessee's manufacturing and processing activities, forming part of its core business. The Tribunal held that such charges are business receipts and should not be excluded from the profits of the business u/s 80HHC. The Tribunal agreed with the CIT(A) that the term "charges" in clause (baa) should be read in the context of brokerage, commission, interest, rent, etc., which do not have a nexus with manufacturing or processing activities.

Conclusion:
The Tribunal confirmed the order of the CIT(A), holding that the drying/grinding/distillation charges received by the assessee are part of its business turnover and should not be excluded from the profits of the business for the purpose of computing the deduction u/s 80HHC. The appeal by the Revenue was dismissed.