Commissioner of Income Tax vs Greatways (P) Ltd.

Rakesh Kumar Garg, J.—This appeal has been preferred by the revenue against the order dated 25-5-2006 passed by the Income Tax Appellate Tribunal, Chandigarh Bench "B'', Chandigarh in ITA No. 596/CHD./2005 for the assessment year 2003-04 proposing following substantial questions of law:

Whether on the facts and in law, the Income Tax Appllate Tribunal was correct in upholding that the Central Sales Tax and Sales Tax be not formed the part of total turnover while computing of deduction u/s 80HHC ?

Whether on facts and in law, the Tribunal was right to uphold the order of the Commissioner (Appeals) that the premium on sale of export quota, as incentive, which is not covered under Sections 28(iiia), 28(iiib) and 28(iiic) of the Income Tax Act, be treated as ''Business income'' instead of ''income from other sources'' in computation of deduction u/s 80HHC?

Whether on the facts and in law, the Income Tax Appllate Tribunal was legally right in dismissing revenue appeal on exclusion of 90 per cent of interest-income assessable under the head ''Income from other sources'' from the business profit?

The brief facts of the case are that the assessee/respondent is a manufacturer and exporter of hosiery items. The return declaring total income at Rs. 49,49,827 has been filed on 30-11-2003. The return was processed u/s 143(1) on 26-3-2004. Notice u/s 143(2) was issued and served on 1-7-2004. In response to the notices, the assessment proceedings were attended by the representative of the assessee from time to time and requisite information was also furnished.

The assessing officer found the following discrepancies in the return.

(a) The assessee has not included Sales Tax and Central Sales Tax as part of total turnover.

(b) The assessee has treated the interest income of Rs. 59,03,694 as business income and treated it for reducing by 90 per cent while computing ''profit of the business'' under Explanation (baa) below Sub-section (4B) of Section 80HHC. It was found by the assessing officer that the interest was on deposits of surplus funds available with the assessee and the income of such interest according to assessing officer is income under the head ''Other sources''.

(c) While computing deduction u/s 80HHC, the assessee has taken the negative figure of "the profit from export of manufacturing business" as zero.

After receiving the explanation of the assessee on these points, the assessing officer vide his order dated 31-12-2004 finalized assessment u/s 143(4) of the Income Tax Act as under:

During the assessment proceedings u/s 143(3) of the Income Tax Act, 1961, the assessing officer has noticed that the assessee has not included Sales Tax and Central Sales Tax in the total turnover for the purposes of deduction u/s 80HHC. The assessing officer finalized the assessment by including the Sales Tax and Central Sales Tax at Rs. 34,331 in the total turn over for computation of deduction u/s 80HHC.

The assessing officer held that the premium on sale of export quota is not treated as export incentive as it is not covered in any of the Sections 28(iiia) - 28(iiic) of the Income Tax Act, 1961. The assessing officer treated the amount as ''any other receipt of similar nature'', while computing the profit of the business as per Explanation (baa) below Section 80HHC as these receipts cannot be treated as export incentives.

The assessing officer observed that, in the computation of deduction u/s 80HHC, while computing profit of the business, 90 per cent of premium on sale of quota was reduced and thereafter deduction was claimed on this amount as per proviso to Section 80HHC(3) of the Income Tax Act, 1961.The assessing officer rejected the claim of the assessee and held that 90 percent of the receipts from sale of export quota will be reduced while computing the profit of the business, but while computing deduction as per proviso to Section 80HHC(3) deduction on 90 per cent of these receipts will not be allowed.

Aggrieved by the order of the assessing officer, the respondent went in appeal before the Commissioner (Appeals), Ludhiana, who vide his order dated 30-3-2005 while relying upon his own decision in the instant case for the assessment year 2002-03 vide Appeal No. 107-IT/Commissioner (Appeals)-1 /2003-04 decided the issue in favour of the assessee.

On the next ground of appeal regarding not considering premium on sale of export quota as incentive for computing deduction u/s 80HHC, Commissioner (Appeals) relying upon his own order as quoted in the abovesaid order also decided the issue in favour of assessee.

The third ground of appeal regarding exclusion of 90 per cent of interest income of Rs. 47,05,138 from the business profit and assessing under the head ''Income from other sources'' Commissioner (Appeals), relying on the decision in the sister concern of the assessee Company M/s. Eveline International relevant to assessment year 2002-03 adjudicated the matter in favour of the assessee.

Being not satisfied with the findings of the Commissioner (Appeals), the revenue preferred appeal before the Income Tax Appellate Tribunal who vide their order passed on 25-5-2006 has dismissed the appeal partly by upholding the decision of Commissioner (Appeals)-I, Ludhiana on the following issues:

The Tribunal relied upon the decision of High Court of Bombay in the case of Commissioner of Income Tax Vs. Sudarshan Chemicals Industries Ltd., Rathi Engineering Works and Klockner Windsor (I) Ltd., , dismissed the ground of appeal of revenue and upheld the decision of Commissioner (Appeals).

The Tribunal also dismissed the ground of appeal of the revenue regarding treating the premium on sale of export quota as incentives, relying upon the decision taken in the sister concern of the assessee company, Eveline International (supra) relevant to assessment year 2002-03.

The Tribunal dismissed the ground of appeal pertaining to exclusion of 90 per cent of interest income assessable under the head ''Income from other sources'' from the business profit, relying upon its own decision in the instant case vide ITA No. 899 (Chd.) 2004 and in the case of Eve Line International for the assessment year 2002-03 in Income Tax Appeal No. 898 (Chd.) 2004.

Aggrieved against the order of the Tribunal, the revenue has filed the present appeal proposing the substantial questions of law as referred to in para No. 1 of the judgment on the following grounds:

(i) The Tribunal has erred in law and on facts in upholding the decision of Commissioner (Appeals), that the Central Sales Tax and Sales Tax should not be included in total turnover of the assessee while computing the deduction u/s 80HHC whereas the assessing officer was justified in including the Central Sales Tax and Sales Tax in total Turnover for the purpose of computation of deduction u/s 80HHC. Department is already in appeal before Punjab and Haryana High Court against the order in the case of assessee company for the assessment year 2002-03.

(ii) The Tribunal erred in law and on facts in upholding the decision of the Commissioner (Appeals), that the interest income is to be treated as "business income", instead of ''income from other sources'' for computation of deduction u/s 80HHC as held by the assessing officer. The interest income is not derived from exports so as to be eligible for deduction u/s 80HHC. department has already preferred an appeal u/s 260A against such order.

(iii) The Tribunal erred in law and on facts in dismissing the appeal on the ground regarding exclusion of 90 per cent of interest income assessable under the head ''Income from other sources'' from the business profit, following its own decision in the instant case.

Learned counsel for the parties have been heard and the record perused.

A perusal of the order dated 13-2-2007 would show that this court has already found that question No. 1 as raised by the counsel for the appellant is covered against the revenue by the order passed by this court in the case of CIT v. Vardhman Polytex Ltd. (2006) 154 Taxman 254 (P&H) and the notice of motion was issued to the respondent only with regard to question Nos. 2 and 3.

Learned counsel for the appellant has argued that for computation of deduction u/s 80HHC, interest income of the assessee is not to be treated as ''business income'' instead of ''income from other sources'' because the interest income is not derived from exports so as to be eligible for deduction u/s 80HHC. In support of his argument, learned counsel has placed reliance upon a judgment of this court passed in Income Tax Appeal No. 94 of 2006 titled as CIT v. Malwa Cotton Spinning Mills Ltd. decided on 22-12-2006 and has also placed reliance on Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore, .

On the other hand, Mr. Akshay Bhan, learned counsel for the respondent has stated that the interest income received on FDRs amounting to Rs. 11,98,556 given to Apparel Export Promotion Council is directly related to business and, therefore, is to be treated as business income and the assessee is entitled to claim deduction as such. However, we are unable to accept the contention of Shri Akshay Bhan, learned counsel for the assessee. From the facts and after going through the relevant provisions, we find that the second question of law as raised by the learned counsel for the revenue is fully covered in favour of the revenue by judgment of this court in Malwa Cotton Spinning Mills Ltd.''s case (supra) and thus, this substantial question of law referred is answered in favour of the revenue and against the assessee.

Mr. Vivek Sethi, Advocate appearing on behalf of Mr. Sanjeev Bansal, Advocate counsel for the revenue has very fairly conceded that question No. 3 as raised by him is also to be answered against the revenue in view of the judgment of the Hon''ble Supreme Court of India in Hero Exports v. CIT (2007) 165 Taxman 445 (SC). Thus this question is answered against the revenue and in favour of the assessee.

Accordingly, the present appeal is partly allowed.