2009 (6) TMI 575 - HC - Income Tax

Export- Special Deduction- The assessee firm engaged in the business of manufacture and sale of processed ore, filed a return and claimed deduction under section 80HHC of the Income Tax Act, 1961. The Assessing Officer allowed the claim treating the truck lease income, machinery lease income and service charges as eligible for special deduction. The Commissioner acting under section 263 treated these income as non-business receipt. The Tribunal allowed the appeal upon the decision of Alfa Laval India Ltd. v. Deputy. Held that- the nature of expenditure in dispute and their co-relation with the export business had not been gone into, thus the order passed by the Tribunal is not valid. Matter remanded back.

Summary

Issues Involved:
1. Justification of the ITAT in setting aside the order passed by the Commissioner under Section 263 of the Income-tax Act.
2. Correctness of ITAT's reliance on the decision in Alfa Laval India Ltd. v. Deputy CIT.
3. Whether the order passed by the Assessing Officer allowing deductions under Section 80HHC without excluding certain receipts is prejudicial to the interest of the Revenue.

Issue-wise Detailed Analysis:

Issue 1: Justification of ITAT in Setting Aside the Order Passed by the Commissioner under Section 263
The assessee, a partnership firm engaged in the manufacture and sale of processed ore, filed a return for the assessment year 1993-94, claiming deductions under Section 80HHC. The Assessing Officer considered certain incomes as eligible for deduction. The Commissioner of Income-tax (CIT) revised this order under Section 263, treating these incomes as non-business receipts. The ITAT set aside the CIT's order, relying on the judgment in Alfa Laval India Ltd. v. Deputy CIT. The High Court found that the ITAT did not properly evaluate whether the incomes in question were operational receipts and mechanically relied on the Alfa Laval case, which was not applicable to the facts of the present case. The High Court held that the ingredients of Section 263 were satisfied, and the CIT was justified in revising the order.

Issue 2: Correctness of ITAT's Reliance on the Decision in Alfa Laval India Ltd. v. Deputy CIT
The ITAT relied on the Alfa Laval India Ltd. case, where the Assessing Officer had treated the disputed income as business profits but excluded them while calculating deductions under Section 80HHC. In the present case, the CIT had specifically found the incomes to be non-business receipts. The High Court noted that the ITAT did not examine the nature of the disputed incomes or their correlation with the business of the assessee. The High Court concluded that the ITAT's reliance on the Alfa Laval case was misplaced as the factual matrix was different.

Issue 3: Whether the Order Passed by the Assessing Officer Allowing Deductions under Section 80HHC without Excluding Certain Receipts is Prejudicial to the Interest of the Revenue
The High Court observed that the CIT had correctly identified that the incomes under truck lease, machinery lease, and service charges were non-operational and should be excluded while computing eligible business profits. The High Court found that the ITAT failed to address whether these incomes constituted operational receipts. The ITAT's order was quashed, and the matter was remanded back to the CIT to evaluate the nature of the receipts and their nexus with the business of the assessee, in line with the principles established in CIT v. Bangalore Clothing Co.

Conclusion:
The High Court allowed the appeal filed by the Department, quashed the ITAT's order, and remanded the matter back to the CIT for fresh evaluation. The court emphasized the need for a thorough examination of the nature of the disputed incomes and their correlation with the business activities of the assessee. The proceedings under Section 263 were restored for a fresh decision in accordance with the law.