Commissioner of Income Tax vs Nahar Spinning Mills Ltd.

Ajay Kumar Mittal, J.

C.M. No. 2335-CII of 2008

Application is allowed and the delay of 458 days in re-filing the appeal is condoned.

I.T.A. No. 98 of 2008

This appeal has been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (in short "the Act"), against the order dated August 12, 2005, passed by the Income-tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh (hereinafter referred to as "the Tribunal"), in I.T.A. No. 523/Chandi/2003 for the assessment year 2000-01. This court, while admitting the appeal, vide order dated November 12, 2009 had passed the following order:

"Learned counsel for the Revenue states that though three questions have been proposed in the appeal, question (i) may be covered by the judgment of the hon''ble Supreme Court in Hero Exports, G.T. Road, Ludhiana Vs. Commissioner of Income Tax (Central), Ludhiana, while question (ii) is covered against the Revenue by the judgment of the hon''ble Supreme Court in Commissioner of Income Tax, Coimbatore Vs. Lakshmi Machine Works, and the judgment of this court in Commissioner of Income Tax Vs. Vardhman Polytex Ltd., . Question (iii) in paragraph 6 of the appeal is substantial question of law, which is to be decided by this court.

Admitted to consider the question proposed in paragraph 6 of the appeal."

Accordingly, question (iii) in paragraph 6 of the appeal which arises for consideration reads thus:

"Whether, on the facts and in the circumstances of the case, the hon''ble Income-tax Appellate Tribunal was right in law in holding that service charges amounting to Rs. 10,46,44,301 be excluded from the total turnover of the assessee while computing deduction under section 80HHC?"

Briefly, the relevant facts necessary for disposal of the present appeal as relating to question No. (iii) only as narrated therein may be noticed. The assessee is a manufacturer and exporter of cotton yarn, woollen hosiery garments and also trades in cotton yarn. It filed the return of income on November 30, 2000, for the assessment year 2000-01 declaring the income at Rs. 9,92,49,470. The Assessing Officer, vide order dated July 30, 2002 (annexure A-1) framed the assessment at Rs. 11,95,87,260. The Assessing Officer treated service charges as part of total turnover. It was further observed that in case the plea of the assessee that it did not form part of the total turnover is accepted, then the income from service charges will be treated as income as per Explanation (baa) to section 80HHC and, therefore, 90 per cent, of income from service charges be reduced from the profits of the business while calculating the deduction under section 80HHC of the Act. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) (in short "the CIT(A)") who, vide order dated February 24, 2003 (annexure A-2) partly allowed the appeal directing the Assessing Officer not to include service charges as part of the total turnover and also not to exclude 90 per cent, of income from service charges from the profits of the business as per Explanation (baa) to section 80HHC of the Act relying upon his order passed in the case of the assessee for the assessment year 1999-2000. Against the order dated February 24, 2003 (annexure A-2), the Revenue approached the Tribunal by way of an appeal. The Tribunal, vide order dated August 12, 2005 (annexure A-3) held that service charges are to be excluded from the total turnover and are also to be excluded from the business profits for the purpose of computation of deduction under section 80HHC of the Act. Hence, the present appeal.

The matter herein relates to whether the service charges are to be excluded from the total turnover of the assessee and 90 per cent, of income from service charges is to be reduced from the profits of the business and deduction under section 80HHC of the Act to be calculated accordingly.

The matter is no longer res integra. The Madras High Court in Commissioner of Income Tax Vs. Kadri Mills Ltd., following the judgments of the hon''ble apex court in Commissioner, Income Tax, Thiruvananthapuram Vs. K. Ravindranathan Nair, and ACG Associated Capsules Pvt. Ltd. (Formerly Associated Capsules Pvt. Ltd.) Vs. The Commissioner of Income Tax, Central-IV, Mumbai, had held as under (page 597):

"Even from the reading of the order of the Income-tax Appellate Tribunal, it is clear that the issue raised herein is only as to whether ''net conversion charges'' has to be considered under clause (baa) of Explanation to section 80HHC of the Act in the adjusted business profits for computation of deduction and the question is not on the gross conversion charges.

In the decision reported in ACG Associated Capsules Pvt. Ltd. (Formerly Associated Capsules Pvt. Ltd.) Vs. The Commissioner of Income Tax, Central-IV, Mumbai, , the apex court after referring to the decision of the apex court in the case of Commissioner, Income Tax, Thiruvananthapuram Vs. K. Ravindranathan Nair, held that the processing charges formed part of the gross total income as an independent income like rent, commission, brokerage, etc. Consequently, the apex court held that the 90 per cent, of the said sum has to be reduced from the gross total income, to arrive at the business profits.

Since the processing charges was an important component of the business profits, it has to be included in the total turnover in the said formula to arrive at the business profits for computing deduction under clause (baa) of Explanation to section 80HHC of the Act.

Thus going by the apex court''s judgment reported in Commissioner, Income Tax, Thiruvananthapuram Vs. K. Ravindranathan Nair, and ACG Associated Capsules Pvt. Ltd. (Formerly Associated Capsules Pvt. Ltd.) Vs. The Commissioner of Income Tax, Central-IV, Mumbai, , we hold that the net conversion charges would also form part of the gross total income. Therefore, 90 per cent of the said sum has to be reduced in the total turnover of the assessee for arriving at the business profits."

In view of the above, the appeal is partly accepted and question No. (iii) reproduced in paragraph 2 above is answered accordingly. It is held that service charges would be included in the total turnover and 90 per cent of the service charges shall be excluded from the gross total income for arriving at the profits of the business for calculating the deduction under section 80HHC of the Act.