2009 (3) TMI 213 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenses on the ground of inflation in the cost of production of carburetors.
2. Inclusion of sales-tax and excise duty in the total turnover for computing deduction under Section 80HHC.
3. Adjustment of sale of scrap, labor charges received, and other receipts for computing deduction under Section 80HHC.
4. Compensation received for violation of 'technical collaboration agreement' (TCA) and its taxability.
5. Interest awarded by the International Court of Arbitration (ICA) and its taxability.

Detailed Analysis:

1. Disallowance of Expenses on the Ground of Inflation in the Cost of Production of Carburetors:
The first issue pertains to the disallowance of expenses amounting to Rs. 5,02,19,635 due to alleged inflation in the cost of production of carburetors. The Assessing Officer (AO) compared the consumption of raw materials between the Pune and Madhawas units, concluding that the consumption was significantly higher at the Pune unit. The AO rejected the assessee's books of account, alleging inflation in the cost of raw materials, tools, components, spares, and packing materials, and made an addition of Rs. 5,02,19,635 as unaccounted income. The CIT(A) deleted the addition, following the orders of his predecessors. The Tribunal confirmed the order of the CIT(A), noting that identical issues had been decided in favor of the assessee in earlier assessment years (2000-01, 2001-02, and 2002-03).

2. Inclusion of Sales-Tax and Excise Duty in the Total Turnover for Computing Deduction under Section 80HHC:
The next issue involves the inclusion of sales-tax and excise duty in the total turnover for computing the deduction under Section 80HHC. The Tribunal upheld the order of the CIT(A), following the decision of the Hon'ble Supreme Court in CIT vs. Lakshmi Machine Works, which ruled in favor of the assessee.

3. Adjustment of Sale of Scrap, Labor Charges Received, and Other Receipts for Computing Deduction under Section 80HHC:
The third issue concerns the adjustment of sale of scrap, labor charges received, and other receipts for computing the deduction under Section 80HHC. The AO had included the sale of scrap and labor charges in the total turnover and reduced 90% of the same as per Explanation (baa) to Section 80HHC. The Tribunal concurred with the CIT(A) that the sale of scrap, being part of the total turnover generated from manufacturing activity, cannot be excluded by applying Explanation (baa). However, regarding labor charges, the Tribunal, following the decision in CIT vs. K. Ravindranathan Nair, held that the AO rightly invoked Explanation (baa) and decided in favor of the Revenue. For miscellaneous receipts, the Tribunal upheld the CIT(A)'s order as no details were provided to equate them with the items mentioned in Explanation (baa).

4. Compensation Received for Violation of 'Technical Collaboration Agreement' (TCA) and Its Taxability:
The fourth issue pertains to the compensation received by the assessee as per the final award given by the ICA against Keihin Corporation for violation of the TCA. The Tribunal upheld the CIT(A)'s order that the compensation awarded was in the nature of a capital receipt and not taxable. The Tribunal reasoned that the compensation was for the extinction of a source of income and profit-earning apparatus, as the assessee was deprived of the opportunity to manufacture the newly developed carburetor.

5. Interest Awarded by the International Court of Arbitration (ICA) and Its Taxability:
The final issue involves the interest awarded by the ICA in the same arbitration proceedings. The Tribunal upheld the CIT(A)'s order that the interest received was revenue in nature and taxable. The Tribunal noted that interest always bears the character of revenue unless awarded as profit, and in this case, the interest was for the delay in receipt of compensation, not as mesne profit.

In conclusion, the appeal of the assessee was dismissed, and the appeal of the Revenue was partly allowed.