2013 (6) TMI 100 - HC - Income Tax

Processing charges - whether be excluded from the computation of turnover as well as eligible profit so as to have the effect of reducing the assessee s claim under Section 80 HHC to NIL? - true and correct interpretation of the provision of Section 254 for the Tribunal to pass the impugned order which has the effect of reducing the relief under Section 80 HHC to NIL - Held that - The assessee is manufacturing and exporting plastic woven fabric bags and paper reinforced bags & processing charges received is on account of conversion of granules to woven fabric/liners or bags and also printing of bags which can not be treated as having any nexus with the export activity of the assessee. As assessee has separately shown a sum of Rs.46,31,715 as processing charges and not included it as part of sales in the P/L account filed alongwith the return. By not treating the processing charges as part of the total turnover, the assessee has itself treated it as receipts in the nature of income from other sources. There is no denying the fact that the deduction u/s 80 HHC is only meant for assessee who earned profits from exports. Any business profit other than export activity is not eligible for deduction u/s 80 HHC. AO has rightly treated the processing charges as separate head of income as it was not linked to export activity of the assessee reducing 90% of it from the business profits for calculating the deduction u/s 80 HHC. The order of the A.O. in excluding the processing charge from the business profits for the purpose of computation and deduction under Section 80 HHC appears reasonable. Enhancement of addition by Tribunal - rectification of order - Held that - In the instant case, the A.O. has allowed the claim of deduction by an order passed u/s 154 on 17.06.2004 for a sum of Rs.16,89,778/-. Thus, the benefit of this amount was allowed by the A.O. and the same was enhanced by the first appellate authority to Rs.28,15,3162 vide order dated 14.02.2005, but the Tribunal has not allowed either one. The relief which was given by the A.O. was also declined by the Tribunal and the same is not permissible in the eye of law. Hence, the deduction allowed which was already allowed by the A.O. vide order passed u/s 154 dated 17.06.2004 for a sum of Rs.16,89,778/-. The assessee is entitled to get this relief. For this purpose, the impugned order passed by the Tribunal is modified. Except the relief for Rs.16,89,778/-, the impugned order passed by the Tribunal upheld - in favour of the revenue partly.

Summary

Issues:
- Interpretation of Section 80 HHC regarding processing charges exclusion from turnover and eligible profit
- Legality of Tribunal's order reducing relief under Section 80 HHC to NIL
- Consideration of relevant material and information in computation of relief under Section 80 HHC

Interpretation of Section 80 HHC regarding processing charges exclusion from turnover and eligible profit:
The appellant, engaged in manufacturing and sale of plastic bags, exported goods and executed job work for clients, received processing charges. The AO initially allowed a deduction under Section 80 HHC for a lower amount, later rectified to a higher sum by the AO and further increased by the first appellate authority. The Tribunal, however, denied any relief to the appellant. The appellant contended that processing charges should not be equated with turnover and should be considered as part of business profits. Citing case laws, the appellant argued that job work charges should not be excluded from business profits under Section 80 HHC. The High Court agreed, holding that processing charges should be excluded from turnover and business profits, allowing the deduction for the appellant.

Legality of Tribunal's order reducing relief under Section 80 HHC to NIL:
The Tribunal's order reducing the relief under Section 80 HHC to NIL was challenged by the appellant. The appellant argued that the Tribunal erred in not considering the direct nexus between job work charges and manufacturing activity, as evidenced by case laws supporting inclusion of such charges in total profits. The High Court concurred with the appellant's argument, holding that 90% of the processing charges should be reduced from business profits for calculating the deduction under Section 80 HHC.

Consideration of relevant material and information in computation of relief under Section 80 HHC:
The High Court emphasized that the Tribunal cannot enhance the addition without an appeal or cross objection from the department, citing legal precedents. It was noted that the Tribunal's jurisdiction is limited compared to the first appellate authority, which has the power of enhancement. The High Court upheld the deduction allowed by the AO and the first appellate authority, modifying the Tribunal's order to allow the relief for the specified amount under Section 80 HHC. The Tribunal's rejection of the claim for processing charges was upheld, and the substantial questions of law were answered in favor of the revenue and against the assessee.

In conclusion, the High Court partly allowed the appeal filed by the assessee, modifying the impugned order to uphold the relief for the specified amount under Section 80 HHC.