Commissioner of Income Tax I vs Premier Polytronics Ltd.

Chitra Venkataraman, J.—This Tax Case Appeal is filed by the Revenue, raising the following substantial question of law:

Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in setting aside the order of the

Commissioner of Income Tax u/s 263 of the Income Tax Act, holding that while computing the deduction u/s 80HHC in the case of the assessee

for the assessment year 1992-93, 90% of the service income, lease income and packing and forwarding collection should be excluded from the

profits of the business and the said receipts would not be disqualified under explanation to Section 80HHC(4A)?

The assessment year under consideration is 1992-93. Originally, while computing the relief u/s 80HHC, the Assessing Authority did not exclude

90% of the receipts pertaining to the service income, lease income and packing and forwarding collection. However, in exercise of power u/s 263

of the Income Tax Act, 1961, the Commissioner of Income Tax (Appeals) revised the order of assessment. In the process, the Commissioner held

that the three items of receipt were not part of receipts from the manufacturing activities to have the character of a business income. Consequently,

the Commissioner of Income Tax held that Section 80HHC being an incentive given for actual export business and not over profits from non-

export activities, they have to be excluded under the computation of the eligible income in terms of explanation (baa) to Sub-section (4A) of

Section 80HHC. The Commissioner of Income Tax directed the Assessing Officer to re-compute the assessment u/s 80HHC by excluding 90% of

the total receipt of service income, lease income and packing and forwarding collection.

Aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee preferred an appeal before the Income Tax Appellate

Tribunal, wherein it was contended that the receipts on service are related to its business activity. It was also contended that the assessee had been

selling plant and machinery to different buyers as part of its regular business. The assessee had also entered into Annual Maintenance Contracts

with the buyers and charging separate service charges for maintaining such contracts. As far as the leasing income is concerned, the assessee

contended that they were carrying separate leasing division as part of the diversified business and the lease rentals were arrived as business

income. As far as packing and forwarding collection is concerned, it was contended that it was in the nature of recoupment of such expenditure

already incurred by the assessee on behalf of the buyers while supplying the plant and machinery sold by the assessee. In support of its claim, the

assessee relied on the decision of the Bombay High Court reported in Commissioner of Income Tax Vs. Bangalore Clothing Co., to contend that

the Bombay High Court had held that the receipts forming part of the operational income of the assessee could not be excluded under Explanation

(baa) to Sub-section (4A) of Section 80HHC. Applying the law declared by the Bombay High Court, the Income Tax Appellate Tribunal set aside

the order of the Commissioner of Income Tax (Appeals). The Revenue is on appeal challenging the correctness of the order of the Tribunal.

Learned Counsel appearing for the Revenue submitted that the service charges and packing and forwarding charges did not form part of the

business of the assessee and were hit by Explanation (baa) to Sub-section (4A) of Section 80HHC. In the circumstances, learned Counsel seeks

the reversal of the order of the Tribunal.

A perusal of the order of the Tribunal shows that the assessee had received income on service charges as part of the collections of the business

of the assessee company. These claims were against the Annual Maintenance Contracts. The assessee was selling plant and machinery to various

buyers and consequently, the Tribunal held that for the smooth conduct of the assessee''s business, the assessee had taken their responsibility of

providing maintenance services to the buyers; in the process, the assessee had claimed service charges which are nothing but business receipts of

the assessee company and that the activity of providing repair maintenance services is incidental and very much part of the assessee''s principal

business. Ultimately, the Tribunal held that these are part of the business receipts and as such, they cannot be excluded in the computation of the

benefits u/s 80HHC. The Tribunal also pointed out that the assessee had expended on the salary, etc., on the Engineer and Technician to discharge

their contractual obligation of the Annual Maintenance Contract. As regards the expenses regarding the lease income, the Tribunal found that the

the assessee was doing leasing business under a separate division. The assessee claimed depreciation which was also allowed on the plant and

machinery deployed by the assessee in its leasing business, and therefore it was a business income. As regards packing and forwarding charges

collection, the Tribunal found that it was not an independent income in the hands of the assessee company. In the face of incurring expenditure for

packing and forwarding of machineries to various destinations on behalf of its purchasers, the reimbursement of the packing and forwarding

charges is very much part of the assessee''s business and hence, these are to be taken as business income. Ultimately, the Tribunal found that

applying the law laid down by the Bombay High Court reported in Commissioner of Income Tax Vs. Bangalore Clothing Co., and considering the

nature of business of the assessee, these income are very much part of the business income, which cannot be excluded for application of

Explanation (baa) to Sub-section (4A) of Section 80HHC.

In this connection, the decision of this Court as to the scope of Explanation (baa) to Sub-section (4A) of Section 80HHC reported in K.R.M.

Marine Exports Ltd. Vs. Assistant Commissioner of Income Tax, , to which one of us is a party (K. Raviraja Pandian, J.), needs to be referred to.

Referring to the decision of the Bombay High Court reported in Commissioner of Income Tax Vs. Bangalore Clothing Co., , this Court held that

when receipts like interest, commission, etc. are included in the business profits as the existing formula distorted the figure of export profits;

therefore, in order to clarify the meaning of the business profits for the purpose of Section 80HHC Clause (baa) to explain the same was inserted

to remove the doubt in calculating export profits. This Court also held that the numerator and denominator showed that they referred to sale

proceeds. The numerator and the denominator are required to have a common element which is the sale proceeds. In this background, the profit

referred to in Section 80HHC is not the general profit, but is the export profit, which had to be calculated and worked out with reference to the

other provisions and definitions contained in the Section itself, which sort of exercise had not been done in that case.

The Bombay High Court in the decision reported in Commissioner of Income Tax Vs. Bangalore Clothing Co., , held that unless and until the

officer concerned has necessary materials to show the nature of activity of the assessee to qualify for the non-application under Explanation (baa),

it is not possible for any authority for that matter to straight away apply the formula to restrict the allowable deduction u/s 80HHC. The Bombay

High Court also held that no standard test could be laid down to find out what would constitute operational income. Hence, the Department has to

consider the nature of the activity and the business of the assessee and such other test to find out what would be the dominant business of the

company and whether receipts like interest, commission, etc., accrue as a part of the main business activity or whether they accrue out of incidental

business, and apply such test. In this background, we look at the facts of this assessment.

The Tribunal, as a matter of fact, found that the income from the leasing of the company, amount received by way of service charges as well as

recoupment of packing and forwarding collection are nothing but forming part of the business income. In the nature of the facts found by the

Tribunal, unless and until there are facts otherwise to show the character of the transaction, it is not possible to accept the plea of the Revenue that

the transactions does not carry the character of business income. Hence, in the face of the facts recorded by the Tribunal, it is not possible to

accept the plea of the Revenue in an appeal filed u/s 260A. Consequently, applying the decision reported in K.R.M. Marine Exports Ltd. Vs.

Assistant Commissioner of Income Tax, , following the decision of the Bombay High Court reported in Commissioner of Income Tax Vs.

Bangalore Clothing Co., , we do not find any merit in this appeal. Consequently, this Tax Case Appeal is rejected and the order of the Tribunal

stands confirmed. No costs.