M/s Highway Industries Ltd., Ludhiana V. ACIT, Ludhiana

ITA 267/CHANDI/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0123 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 23-03-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 16-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Business income; Opportunity of being heard; Rule of consistency
• Section: 143(3); 80HHC; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.267/CHD/2015 (ASSESSMENT YEAR : 2004-05) M/S HIGHWAY INDUSTRIES LTD., VS. THE A.C.I.T., G.T., SAHNEWAL ROAD, CIRCLE-V, LUDHIANA. LUDHIANA. PAN: AABCH4072M AND ITA NO.300/CHD/2015 (ASSESSMENT YEAR : 2004-05) M/S ROCKMAN CYCLE INDUSTRIES LTD., VS. THE A.C.I.T., A-7, FOCAL POINT, CIRCLE-V, LUDHIANA. LUDHIANA. PAN: AAACR7866E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUBHASH AGGARWAL RESPONDENT BY : SHRI S.K. MITTAL, DR DATE OF HEARING : 05.04.2016 DATE OF PRONOUNCEMENT : 11.04.2016 O R D E R PER RANO JAIN, A.M . : THESE TWO APPEALS FILED BY THE DIFFERENT ASSES SEES ARE DIRECTED AGAINST THE SEPARATE ORDERS OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-2, LUDHIANA, B OTH DATED 3.2.2015, RELATING TO ASSESSMENT YEAR 2004-05 , 2 PASSED UNDER SECTION 250(6) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 2. SINCE THE FACTS AND CIRCUMSTANCES ARE IDENTICA L IN BOTH THE APPEALS, THE SAME WERE HEARD TOGETHER A ND ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR T HE SAKE OF CONVENIENCE. 3. WE WILL FIRST TAKE UP THE APPEAL OF THE ASSESSE E IN ITA NO.267/CHD/2015. ITA NO.267/CHD/2015(M/S HIGHWAY INDUSTRIES LTD.) : 4. BRIEFLY, THE FACTS ARE THAT THE ASSESSEE IS A MANUFACTURER OF FREE WHEELS, SPECIAL PURPOSE MACHIN ES AND AUTO PARTS ALONGWITH TRADING, ETC. THE ORIGINA L ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMP LETED VIDE ORDER DATED 29.12.2006, WHEREBY THE ASSESSING OFFICER REDUCED THE SALE PROCEEDS OF SCRAP AT RS.4,77,57,145/- FROM THE TOTAL TURNOVER AS WELL AS FROM PROFIT OF BUSINESS OF THE COMPANY FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT. ACCORDINGLY, DEDUCTION UNDER SECTION 80HHC OF THE A CT WAS REDUCED FROM RS.20,46,677/- TO RS.10,72,374. T HE CIT (APPEALS) VIDE HIS ORDER DATED 17.12.2008 UPHEL D THE ABOVE SAID DISALLOWANCE. ON APPEAL FILED BY THE AS SESSEE, THE I.T.A.T., CHANDIGARH BENCH IN ITA NO.82/CHD/200 9, HELD THE ISSUE OF EXCLUDING THE SALE PROCEEDS OF SC RAP FROM TOTAL TURNOVER IN FAVOUR OF ASSESSEE. WITH REGARD TO THE EXCLUSION OF SCRAP SALE FROM THE BUSINESS PROFITS F OR THE 3 PURPOSES OF COMPUTATION UNDER SECTION 80HHC OF THE ACT, THE DIRECTIONS WERE GIVEN TO THE ASSESSING OFFICER TO EXCLUDE NOT THE GROSS AMOUNT OF SCRAP SALE BUT ONLY THE PROFIT ELEMENT, IF ANY, EMBEDDED IN SUCH SCRAP SALE S. 5. BEFORE THE ASSESSING OFFICER IN REMAND PROCEEDINGS, IT WAS SUBMITTED THAT GENERATION OF SC RAP FROM RAW MATERIAL CAN NEVER BE SOLD AT THE PROFIT I .E. HIGHER THAN THE VALUE OF RAW MATERIAL UNDER ANY CIRCUMSTANCES AND HENCE, THERE CAN NEVER BE ANY PRO FIT ON SALE OF SCRAP. THE SCRAP GENERATION ALONGWITH O THER BY PRODUCTS IS A WASTE UNLESS THERE ARE SOME PURCHASERS FOR THE SAME. CONSIDERING THE SUBMISSION OF THE ASSESSEE, THE ASSESSING OFFICER HELD THAT THE C OST OF SALE OF SCRAP WAS NIL AND ENTIRE AMOUNT OF SCRAP SALE WAS TAKEN AS PROFIT ON SALE OF SCRAP AND RECOMPUTED DEDUCTION UNDER SECTION 80HHC OF THE ACT, ACCORDING LY. 6. BEFORE THE LEARNED CIT (APPEALS), APART FROM SUBMISSIONS, WHICH WERE MADE BEFORE THE ASSESSING OFFICER, THE ASSESSEE ALSO RELIED ON T HE JUDGMENT OF THE HON'BLE PUNJAB & HARYANA HIGH COU RT IN THE CASE OF R.N. GUPTA & CO. LTD. VS. CIT, 351 ITR 369 (P&H), WHEREBY IT HAS BEEN HELD THAT THE S CRAP SALES SHOULD BE ADDED TO THE BUSINESS PROFITS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE LEARNED CIT (APPEALS) DISMISSED TH E GROUND TAKEN BY THE ASSESSEE, MAINLY ON 4 THE BASIS OF THE JUDGMENT OF HON'BLE PUNJAB & HARY ANA HIGH COURT IN THE CASE OF R.N. GUPTA & CO. LTD. (S UPRA) ITSELF. THE CONTENTION OF THE LEARNED CIT (APPEALS ) WAS THAT IT HAS BEEN HELD IN THIS CASE THAT EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT FOR GENERATION OF SCRAP BUT FOR GENERATION OF THE FINISHED PRODUCTS. SINCE THERE IS NO ELEMENT OF COST EMBEDDED IN THE SALE OF SCRAP, T HE WHOLE AMOUNT REALIZED ON SALE OF SCRAP HAS TO BE EX CLUDED FROM THE BUSINESS PROFITS TAKEN AS NUMERATOR IN THE FORMULA ADOPTED FOR THE PURPOSES OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. 7. AGGRIEVED BY THIS, THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE LEARNED CIT (APPEALS), RAISING FO LLOWING GROUNDS OF APPEAL : I. THAT THE LEARNED CIT(A)-II HAS ERRED IN DISMISSING THE APPEAL OF THE APPELLANT IN RESPECT OF SCRAP SALE FOR COMPUTING DEDUCTION U/S 80HHC IGNORING THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT AND HON'BLE SUPREME COURT WHICH HAD CORRECTLY INTERPRETED THE LAW AFTER THE JUDGMENT OF THE TRIBUNAL. 2. THAT IN ANY CASE THE DISMISSAL OF THE APPEAL IS A GAINST THE LAW AND THE FACTS OF THE CASE. 3. THAT THE APPELLANT CRAVES LEAVE FOR PERMISSION TO ADD, AMEND OR ALTER ANY GROUND OF APPEAL AT THE TIME OF HEARING. 8. THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED BEFORE US THAT THERE ARE IN FACT TWO ISSUES INVOLVE D FOR ALLOWING DEDUCTION UNDER SECTION 80HHC OF THE ACT I N 5 ASSESSEES CASE. FIRST ISSUE IS WITH REGARD TO THE EXCLUSION OF SALE OF SCRAP FROM THE TOTAL TURNOVER FOR THE PURPOSES OF DEDUCTION UNDER SECTION 80HHC OF THE AC T, WHICH WAS ALLOWED IN FAVOUR OF THE ASSESSEE BY THE HON'BLE I.T.A.T. THE ONLY ISSUE IN THE PRESENT APP EAL IS WITH REGARD TO THE EXCLUSION OF SCRAP SALE FROM THE AMOUNT OF BUSINESS PROFITS. IT WAS ARGUED THAT THOUGH T HE I.T.A.T. IN THE FIRST ROUND HAS DIRECTED THE ASSESS ING OFFICER TO EXCLUDE THE SCRAP SALE NET OF EXPENDITUR E INCURRED ON SUCH SCRAP OUT OF THE BUSINESS PROFITS. HOWEVER, IT WAS SUBMITTED THAT THE I.T.A.T. WHILE C OMING TO THIS CONCLUSION HAS RELIED ON THE ORDER OF THE I .T.A.T., CHANDIGARH BENCH IN THE CASE OF MAHAVIR CYCLE INDUS TRIES VS. ITO IN ITA NO.1014/CHD/2007 AND ITA NO.58/CHD/2008. IT WAS STATED THAT THE SAID ORDER OF THE I.T.A.T. WAS TAKEN IN APPEAL BEFORE THE HON'BLE PUN JAB & HARYANA HIGH COURT BY THE ASSESSEE, WHEREBY THE ISS UE OF EXCLUSION OF SCRAP SALE FROM THE BUSINESS PROFITS W AS DECIDED IN FAVOUR OF THE ASSESSEE. A COPY OF THE J UDGMENT WAS PLACED OF RECORD. FURTHER, RELIANCE WAS ALSO PLACED ON THE JUDGMENT IN THE CASE OF R.N. GUPTA & CO. LTD . (SUPRA), WHEREBY THE SAME VIEW HAS BEEN TAKEN. 9. THE LEARNED D.R. RELIED ON THE ORDER OF THE LOW ER AUTHORITIES AND PLACED THE SPECIFIC RELIANCE ON THE JUDGMENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF R.N. GUPTA & CO. LTD. (SUPRA). HE STATED THAT IN T HE JUDGMENT OF R.N. GUPTA & CO. LTD. (SUPRA), IT HAS B EEN HELD BY THE HON'BLE HIGH COURT THAT THERE CANNOT BE AN 6 ELEMENT OF EXPENDITURE EMBEDDED IN THE SCRAP SALE. THEREFORE, THE WHOLE AMOUNT OF SCRAP SALE IS TO BE EXCLUDED FROM THE BUSINESS PROFITS WHILE COMPUTING THE DEDUCTION UNDER SECTION 80HHC OF THE ACT. 10. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. IN ORDER TO UNDERSTAND THE ISSUE IN QUESTION, WE FIRST HAVE TO UNDERSTAND THE CHRONOLOGY. THERE WERE TWO ISSUES O N THE BASIS OF WHICH THE ASSESSING OFFICER HAD DISALLOWED A PORTION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT CLAIMED BY THE ASSESSEE IN THE ORIGINAL ASSESSMENT. FIRSTLY, HE INCLUDED THE AMOUNT OF SCRAP SALE IN TH E AMOUNT OF TOTAL TURNOVER AND SECONDLY, HE EXCLUDED THIS AMOUNT OF SCRAP SALE OUT OF BUSINESS PROFITS WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT. BEFORE THE I.T.A.T., BOTH THESE ISSUES WERE RAISED BY THE ASSESSEE AND THESE ISSUES WERE ADJUDICATED UPON BY THE I.T.A.T. IN ITA NO.82/CHD/2009 FOR ASSESSMENT YEAR 2004- 05, ORDER DATED 18.6.2010 AT PAGE 3, PARAS 5 AND 6 HELD AS UNDER : 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CAREFULLY. IN THIS CASE, AS NOTED EARLIER, THE SHOR T POINT INVOLVED IS THE MANNER OF COMPUTATION OF. DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE ISSUE RELATING TO THE EXCLUSION OF 'SCRAP SALE' FROM, THE 'TOTAL TURNOVER' AND FROM THE 'PROFITS OF THE BUSINESS' FOR THE PURPOSES OF COMPUTING DEDUCTION 7 UNDER SECTION 80HHC OF THE ACT, HAS BEEN DEALT WITH EARLIER BY THE TRIBUNAL IN I.T.A.NO. 1014/CHANDI/2007 & 1.T.A.NO.58/ CHANDI/ 2008 IN THE CASE OF M/S MAHAVIRA CYCLE INDUSTRIES VS. IT O FOR THE ASSESSMENT YEAR 1999-2000 VIDE ORDER DATED 29.9.2008. THE FOLLOWING DISCUSSION IN THE SAID PRECEDENT IS WORTHY OF NOTICE:- '11. ON THIS ASPECT, WE HAVE CAREFULLY CONSID ERED THE RIVAL SUBMISSIONS. THE FACT POSITION GIVING R ISE TO THE IMPUGNED DISPUTE CAN BE BRIEFLY RE-CAPITULATED AS FOLLOWS. THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80HHC OF THE ACT AMOUNTING TO RS.1,73,53,957/- IN ITS RETURN OF INCOME. THE ASSESSING OFFICER DID NOT INCLUDE THE SALE OF SCRAP IN THE TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S 80HHC OF THE ACT. THIS WAS THE FIRST POINT OF DIFFERENCE BETWEEN THE ASSESSEE AND THE REVENUE. FURTHER THE ASSES SING OFFICER EXCLUDED THE PROPORTIONATE PROFIT ON THE SALE OF SCRAP FROM THE 'PROFITS OF THE BUSIN ESS' TO COMPUTE DEDUCTION U/S 80HHC OF THE ACT. THIS WAS THE SECOND POINT OF DIFFERENCE BETWEEN THE ASSE SSEE AND THE REVENUE. IN SO FAR AS THE FIRST ASPECT I S CONCERNED, THERE IS NO DISPUTE THAT THE SAME IS EXCLUDIBLE FROM THE FIGURE OF TOTAL TURNOVER FOR TH E PURPOSES OF COMPUTING DEDUCTION U/S 80HHC OF THE ACT. THE APPELLANT DOES NOT DISPUTE SO, ESPE CIALLY IN THE LIGHT OF THE ORDERS OF THE TRIBUNAL IN THE APPELLANT'S OWN CASE FOR ASSESSMENT YEARS 199 6- 97, 1997-98 AND 1998-99 (SUPRA). THIS IS ALSO EVIDENT FROM THE GROUND RAISED BY THE REVENUE IN THE APPEALS FOR THE ASSESSMENT YEARS 1996-9 7, 1997-98 AND 1998-99 PREFERRED BEFORE THE TRIBUNAL AGAINST THE ORDERS OF THE CIT(APPEALS) : (B) THE LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE ABOVE DISALLOWANCE BY HOLDING THAT THE SALE OF SCRAP DOESN'T CONSTITUTE APART OF TOTAL TURNOVER.' THE TRIBUNAL HAD FOUND IT EXPEDIENT TO DISMISS THE APPEAL OF THE REVENUE ON THIS GROUND. THE ASSESSES 8 ALSO DOES NOT PROJECT ANY GRIEVANCE AGAINST THE SAI D DECISION OF THE TRIBUNAL. IN FACT THE ENTIRE GRIEVA NCE OF. THE ASSESSES IS WITH REGARD TO THE SECOND POINT OF DIFFERENCE WHICH REVOLVES AROUND THE EXCLUSION FROM 'PROFITS OF THE BUSINESS'. THIS GRIEVANCE OF T HE ASSESSEE IS ALSO SOUGHT TO BE SUPPORTED BY THE DECISION OF THE TRIBUNAL FOR THE ASSESSMENT YEARS 1996-97, 1997-98 AND 1998-99 (SUPRA). THE CLAIM OF THE LEARNED COUNSEL FOR THE APPELLANT WAS THAT IN T HE PAST YEARS THE TRIBUNAL HAD ONLY UPHELD THE EXCLUSI ON OF SCRAP SALES FROM THE FIGURE OF TOTAL TURNOVER AN D THERE WAS NO ISSUE OF EXCLUDING THE PROFIT ON SCRAP SALES FROM THE 'PROFITS OF THE BUSINESS'. BASED ON THE PRINCIPLE OF CONSISTENCY IT IS ARGUED THAT SIMILAR DECISION BE TAKEN IN THIS YEAR TOO AND THEREBY THE DIRECTION OF THE CIT(APPEALS) THAT THE SCRAP SALE ' WILL ALSO NOT' BE CONSIDERED WHILE COMPUTING THE 'PROFIT S OF THE BUSINESS' BE VACATED. 12. WE HAVE CAREFULLY CONSIDERED TH E PLEA OF THE ASSESSEE AND FIND IT UN-TENABLE. ADMITTEDLY IN THE PAST YEARS, THERE WAS NO DIRECTION BY THE TRIBUNAL TO EXCLUDE PROPORTIONATE PROFIT ON SALE OF SCRAP FROM THE 'PROFITS OF THE BUSINESS' FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80HHC OF THE ACT. IT IS TO BE APPRECIATED THAT THE PAST DECISION OF THE TRIBUNAL WAS RENDERED IN THE CONTEXT OF THE SUBJECT MATTER OF DISPUTE- RAISED BEFORE IT. AS IS EVIDENT, IN THE ASSESSMENT YEARS 1996-97 TO 1 998- 99, THE ONLY DISPUTE RAISED BEFORE THE TRIBUNAL RELATED TO EXCLUSION OF SCRAP SALES FROM THE FI GURE OF 'TOTAL TURNOVER' FOR THE PURPOSE OF COMPUTIN G DEDUCTION U/S 80HHC OF THE ACT. OSTENSIBLY, AS ADMITTED BY THE LEARNED COUNSEL DURING THE COURSE O F THE HEARING, NEITHER THE ASSESSING OFFICER AND NOR THE CIT(APPEALS) IN THOSE ASSESSMENT YEAR S HAD CONSIDERED THE EXCLUSION OF PROFIT ON SCRAP SALES F ROM THE PROFITS OF THE BUSINESS. THEREFORE, THERE WAS NO OCCASION FOR THE TRIBUNAL TO CONSIDER THE EXCLUSION OF PROFIT ON SCRAP SALES FROM THE 'PROFITS OF THE BUSINESS'. HOWEVER, FACTUALLY SPEAKING, IN THIS YEA R THE ASSESSING OFFICER HAS RAISED ANOTHER ISSUE I N RELATION TO THE COMPUTATION OF DEDUCTION U/S 9 80HHC OF THE ACT. IN THE INSTANT YEAR, THE ASSESS ING OFFICER HAS EXCLUDED THE PROPORTIONATE PROFIT ON TH E SALE OF SCRAP FROM THE 'PROFITS OF THE BUSINESS' FO R THE PURPOSES OF COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT. THIS FEATURE WAS ABSENT IN THE EARLIER ASSESSMENTS AND THEREFORE THE DISPUTE BEFORE THE TRIBUNAL WAS LIMITED TO THE CASE MADE OUT BY THE ASSESSING OFFICER IN THOSE YEARS. THEREFORE, THE OR DER OF THE TRIBUNAL FOR ASSESSMENT YEARS 1996-97 TO 1998-99 DOES NOT ACT AS A BAR ON THE ASSESSING OFFICER IN THE INSTANT YEAR TO TAKE UP ISSUES IN TH E COMPUTATION OF DEDUCTION U/S 80HHC, WHICH WERE NOT THE SUBJECT MATTER OF DISPUTE BEFORE THE TRIBUNAL. FURTHER, IF ANY SUCH ISSUES ARE RAISED, THE SAME CA NNOT BE SHUT OUT AT THE THRESHOLD MERELY BECAUSE THE SAME WERE NOT RAISED IN THE PROCEEDINGS OF THE EARL IER YEAR. IT IS AN. ACCEPTED POSITION OF LAW THAT A JUDGEMENT IS AN AUTHORITY ON WHICH IT DECIDES AND NOT FOR SOMETHING WHICH MAY LOGICALLY FLOW FROM IT. THEREFORE THE PLEA OF THE ASSESSEE TO VACATE THE ACTION OF THE ASSESSING OFFICER TO EXCLUDE THE PROPORTIONATE PROFIT ON SALE OF SCRAP FROM THE 'PRO FITS OF THE BUSINESS' (WHICH HAS ALSO BEEN UPHELD BY THE CIT(APPEALS) ON THE BASIS OF THE DECISION OF THE TRIBUNAL FOR THE ASSESSMENT YEARS 1996-97, 1997-98 AND 1998-99 (SUPRA) IS MISPLACED AND UNTENABLE. 13. IN SO FAR AS THE MERITS OF THE DISPUTE IS CONCERNED, THE COUNSEL FOR THE ASSESSEE FAIRLY SUBMITTED THAT IT IS THE CONSISTENT VIEW OF THE CHANDIGARH BENCH OF THE TRIBUNAL THAT IF THE SALE O F SCRAP IS EXCLUDED FROM THE PURVIEW OF 'TOTAL TURNOV ER', THE PROPORTIONATE PROFIT THEREOF SHALL ALSO BE REDU CED FROM THE 'PROFITS OF THE BUSINESS' FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80HHC OF THE ACT. THEREFORE , IN THIS LIGHT, THE ORDER OF THE ASSESSING OFFICER D OES NOT SUFFER FROM ANY INFIRMITY. WE, THUS SUSTAIN THE ORD ER OF THE ASSESSING OFFICER ON THIS ASPECT. AS A RESUL T, IN ITA NO.L014/CHANDI/07, THE ASSESSEE HAS TO FAIL. WE HOLD SO.' 6. FOLLOWING THE AFORESAID PRECEDENT, WHICH IS IDENTICAL TO THE PRESENT DISPUTE, IT IS HELD THAT T HE 10 ASSESSING OFFICER RIGHTLY EXCLUDED THE AMOUNT OF SCRAP SALE FROM THE AMOUNT OF TOTAL TURNOVER. SO HOWEVER, WITH REFERENCE TO THE EXCLUSION FROM THE PROFITS OF THE BUSINESS, THE AMOUNT EXCLUDIBLE SHALL NOT BE THE GROSS AMOUNT OF SCRAP SALE BUT ONLY THE PROFIT ELEMENT, IF ANY, EMBEDDED IN SUCH SCRAP SALES. 'THEREFORE, WE SET ASIDE THE ORDE R OF THE COMMISSIONER OF INCOME-TAX (A) AND DIRECT TH E ASSESSING OFFICER TO RECOMPUTE THE DEDUCTION UNDER SECTION 80HHC OF THE ACT, WITH RESPECT TO SCRAP SALE BY EXCLUDING THE SAME FROM THE FIGURE OF 'TOTA L TURNOVER' AND ALSO EXCLUDING THE PROPORTIONATE PROF IT THEREOF, IF ANY, FROM 'THE PROFITS OF THE BUSINESS' . NEEDLESS TO SAY, THE ASSESSING OFFICER SHALL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD BEFORE RECOMPUTING THE DEDUCTION IN THE AFORESAID LIGHT IN ACCORDANCE WITH LAW. 11. FROM THE ABOVE, IT IS QUITE CLEAR THAT THE ISS UE OF INCLUSION OR EXCLUSION OF SCRAP SALE OUT OF THE TOTAL TURNOVER HAS BEEN DECIDED BY THE I.T.A.T. IN FAVOUR OF THE ASSESSEE STATING THAT THE SAID AMOUNT HAS TO BE EXC LUDED FROM THE TOTAL TURNOVER, WHILE THE ISSUE OF EXCLUSI ON OF SCRAP SALE OUT OF BUSINESS PROFITS WAS SENT BACK TO THE FILE OF THE ASSESSING OFFICER IN ORDER TO EXCLUDE THE PR OFIT ELEMENT OF THE SCRAP SALE FROM THE BUSINESS PROFITS FOR COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT. WE ALSO OBSERVE THAT THIS WAS DECIDED BY THE I.T.A.T. RELYING ON THE ORDER OF THE I.T.A.T. IN THE CASE OF MAHAVIR A CYCLE INDUSTRIES (SUPRA). WE HAVE GONE THROUGH THE JUDGM ENT OF THE HON'BLE HIGH COURT IN THE CASE OF MAHAVIRA CYCL E INDUSTRIES (SUPRA), WHICH WAS IN PURSUANCE OF AN AP PEAL FILED AGAINST THE ORDER OF THE I.T.A.T. IN MAHAVIRA CYCLE INDUSTRIES (SUPRA), WHICH WAS IN TURN RELIED ON BY THE 11 I.T.A.T. IN ASSESSEES CASE. IN THIS APPEAL, ONE O F THE SUBSTANTIAL QUESTIONS OF LAW FORMED. THE QUESTION READS AS UNDER : (I) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE ITAT WAS RIGHT IN LAW IN HOLDING THAT THE PROFIT ON SALE OF SCRAP SHOULD BE EXCLUDED FROM THE PROFIT OF BUSINESS FOR THE PURPOSES OF COMPUTING DEDUCTIONS UNDER SECTION 80HHC WHEN THE PRODUCTION OF SCRAP WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE WHICH WAS A 100% EXPORT ORIENTED UNDERTAKING? 12. DURING THE COURSE OF ARGUMENTS, THE LEARNED COUNSEL OF THE ASSESSEE RELIED ON A DECISION OF KER ALA HIGH COURT IN CASE OF CIT, COCHIN VS. KAR MOBILES LIMITE D IN ITA NO.773 OF 2009 DATED 15.1.2010, WHEREBY IT WAS HELD THAT THE PROFIT ON SALE OF SCRAP WAS TO FORM PART O F BUSINESS PROFIT. IT WAS FURTHER SUBMITTED THAT THE SAID OBSERVATION OF THE KERALA HIGH COURT HAS BEEN APPRO VED IN THE CASE OF CIT VS. BICYCLES WHEELS (INDIA) IN ITA NO.31 OF 2002 DATED 11.10.2010 BY THE PUNJAB & HARYANA HIGH COURT. AFTER CONSIDERING THE SUBMISSIONS OF LD. CO UNSEL OF THE ASSESSEE, THE HIGH COURT DECIDED THE MATTER IN FAVOUR OF THE ASSESSEE IN FOLLOWING TERMS : WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES AND HAV E PERUSED THE RECORD. 9. LEARNED COUNSEL FOR THE ASSESSEE CANDIDLY ADMITTED THAT IN- SO-FAR AS SALE OF SCRAP HAS BEEN ORDERED TO BE EXCLUD ED FROM THE TOTAL TURNOVER OF THE ASSESSEE FOR COMPUTATION O F DEDUCTION UNDER SECTION 80HHC OF THE ACT IS CONCERNED, THE SAM E IS UNSUSTAINABLE IN VIEW OF I DECISION OF THIS COURT IN INCOME TAX 12 APPEAL NO. 31 OF 2002 (COMMISSIONER OF INCOME TAX-III, LUDHIANA VS. BICYLES WHEELS (INDIA) DECIDED ON 11.10.2010. 10. HOWEVER, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TRIBUNAL HAD ERRED IN CONCLUDING THAT THE PROFIT ON SALE. OF SCRAP WILL NOT BE INCLUDED IN THE PROFIT OF THE BUSIN ESS, THUS, DECREASING THE DEDUCTION UNDER SECTION 80HHC AS THE NUMERATOR SHALL BE REDUCED IN THE FORMULA GIVEN FOR CALCULATING DEDUCTION UNDER SECTION 80HHC WHICH IS A S UNDER: 'BUSINESS PROFITS X EXPORT TURN OVER TOTAL TURN OVER' 11. LEARNED COUNS~1 ON THE STRENGTH OF A DECISION OF THE KERALA HIGH COURT IN INCOME TAX APPEAL NO. 773 OF 20 09 (THE COMMISSIONER OF INCOME TAX, COCHIN VS. KAR MOBILES LIMITED ), DECIDED ON 15.1.2010 SUBMITTED THAT THE PROFIT ON SALE OF SCRAP WAS TO FORM PART OF THE BUSINESS PROFIT. IT WA S FURTHER SUBMITTED THAT THE AFORESAID OBSERVATIONS OF THE KER ALA HIGH COURT HAVE BEEN APPROVED BY THIS COURT IN BICYCLE WH EELS (INDIA)'S CASE (SUPRA). 12. THE QUESTION REGARDING INCLUSION OF PROFIT ON SALE OF SCRAP IN CALCULATING BUSINESS PROFIT UNDER SECTION 80HHC CAME UP FOR CONSIDERATION BEFORE THE KERALA HIGH COURT IN T HE KAR MOBILE LIMITED'S CASE (SUPRA) WHERE AFTER EXAMINING THE PROVISIONS OF SECTION 80HHC AND THE EXPLANATION (BAA ) (1) ATTACHED THERETO, IT WAS HELD THAT THE PROFITS ARISI NG FROM THE SALE OF SCRAP SHALL FORM PART OF BUSINESS PROFITS REFE RRED TO IN THE FORMULA FOR DETERMINING ADMISSIBLE DEDUCTION UN DER SECTION 80 HHC OF THE ACT. IT WAS ALSO RECORDED THAT THE SALE OF SCRAP AND SHALL ALSO FORM PART OF THE TOTAL TURNOVER OF THE ASSESSEE. THE RELEVANT OBSERVATIONS READ THUS: THE WHOLE EXERCISE OF SUB-SECTION (3) OF SECTION 8 0HHC IS TO DETERMINE THE PROPORTIONATE PROFIT ATTRIBUTABLE TO EXPORT BUS INESS. SECTION PROVIDES FOR A FORMULA TO DETERMINE THE EXPORT PROFIT BY DIVIDING BUSINESS PROFITS BY TOTAL TURNOVER AND BY MULTIPLYING THE SAM E WITH 13 EXPORT TURNOVER. OBVIOUSLY THE FORMULA WILL WORK OU T REALISTICALLY ONLY IF THE BUSINESS PROFIT ADOPTED IS ATTRIBUTABLE TO THE TURNOVER WHEREFROM IT IS DERIVED. IN FACT EX CLUSIONS UNDER EXPLANATION (BAA)(I) OF SECTION 80HHC ARE ITEM S OF INCOME REFERRED TO IN SECTION 28(I.IIA), (IIIB) AND (IIIC) OF THE ACT AND RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTERES T, RENT CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE. IT W OULD BE USEFUL TO REFER TO THE NATURE OF RECEIPTS SPECIFICA LLY COVERED BY EXPLANATION (BAA)(I) TO EXAMINE WHETHER THE ITEMS OF INCOME BROUGHT FOR THE PURPOSE OF EXCLUSION UNDER THE RESID UARY CLAUSE, 'ANY OTHER RECEIPT OF SIMILAR NATURE' ARE REA LLY SIMILAR' TO SUCH ITEMS. THE FUNDAMENTAL CONDITION IS THAT EXCLUS ION OF 90% FROM BUSINESS PROFIT ARISES ONLY IF SUCH ITEM O F PROFIT IS INCLUDE IN BUSINESS PROFIT. SECTION 28 OF THE ACT PRO VIDES FOR INCLUSION OF CERTAIN ,ITEMS AS BUSINESS INCOME BECAUSE SUCH ITEMS WOULD NOT HAVE FALLEN UNDER 'BUSINESS PROFITS' BU T FOR SUCH SPECIFIC INCLUSION. IN THE FIRST PLACE, THE FIR ST THREE ITEMS COVERED BY EXPLANATION CLAUSE ARE ITEMS WHICH GOT INC LUDED IN THE BUSINESS PROFIT BY VIRTUE OF OPERATION OF THREE CLAUSES OF SECTION 28 REFERRED TO THEREIN. THE THREE ITEMS OF I NCOME ARE NOT REFERABLE TO ANY TURNOVER OF THE ASSESSEE AND SO MUCH SO IF THE SAID ITEMS OF INCOME ARE INCLUDED IN THE BUSIN ESS PROFIT BY VIRTUE OF OPERATION OF SECTION 28, THEN UNLESS IT IS EXCLUDED, COMPUTATION OF EXPORT PROFIT BASED ON TURNOVER FORM ULA WILL NOT BE CORRECT OR REALISTIC. THE POSITION IS SIMILAR SO F AR AS BROKERAGE, COMMISSION', INTEREST AND RENT ARE CONCERN ED BECAUSE THESE ITEMS OF INCOME ARE INCOME DERIVED FR OM SEPARATE OPERATIONS OTHER THAN SALE OF GOODS, WHICH C ONSTITUTE ' TOTAL TURNOVER. KEEPING THIS IN MIND, WE ARE OF THE VIEW THAT THE INCOME FROM SALE OF SCRAP IS NOT INCOME OF THE NATURE SIMILAR TO BROKERAGE, COMMISSION, RENT, INTEREST, ETC., SPECIFICALLY COVERED BY CLAUSES (IIIA), (IIIB) AND (IIIC) OF SECTION 28. ON THE OTHER HAND, THE FINDING OF THE TRIBUNAL AND THE LOWER AUTHORITIES IS THAT SCRAP IS GENERATED IN THE COURSE OF MANUFACTURE OF GOODS AND SCRAP IS SYSTEMATICALLY SOLD BY THE ASSESSEE FORMING PART OF ITS BUSINESS. SO MUCH SO, 'I N OUR VIEW, THE INCOME FROM SALE OF SCRAP IS PART OF THE B USINESS 14 PROFIT AND ITS SALES TURNOVER FORMS PART OF TOTAL TURN OVER WHICH WILL CONSTITUTE DENOMINATOR FOR DETERMINATION OF ELIGIB LE DEDUCTION OF EXPORT PROFIT. HOWEVER, STANDING COUNSE L HAS EXPRESSED THE APPREHENSION AS TO WHETHER THE ASSESS EE HAS INCLUDED SCRAP SALES IN ITS TOTAL TURNOVER. COUNSEL FOR THE ASSESSEE CONTENDED THAT THERE IS NO FINDING BY ANY OTHER AUTHORITIES IN THIS REGARD. WE THEREFORE HOLD THAT INC OME FROM SCRAP SALE IS PART OF THE BUSINESS INCOME FROM WHICH EXCLUSION OF 90% THEREOF IS NOT CALLED FOR BY OPERATION OF EXPLA NATION (BAA)(I) TO SECTION 80HHC OF THE ACT, BUT AT THE SAME TIME, SCRAP SALES TURNOVER, IF NOT INCLUDED IN THE TOTAL TUR NOVER, SHOULD BE ADDED TO THE TOTAL TURNOVER AS DENOMINATOR IN THE COMPUTATION OF ELIGIBLE RELIEF UNDER SECTION 80HHC (3) OF THE ACT.' 13. FROM THE READING OF THE ABOVE, IT IS QUITE CLE AR THAT THE HIGH COURT HAS IN VERY CLEAR TERMS HELD TH AT THE INCOME FROM SALE OF SCRAP IS PART OF BUSINESS PROFI T, FROM WHICH EVEN EXCLUSION OF 90% IS NOT CALLED FOR BY OP ERATION OF EXPLANATION (BAA)(I) TO SECTION 80HHC OF THE ACT . WE HAVE ALSO GONE THROUGH THE JUDGMENTS OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF BICYCLES WHEELS ( INDIA) (SUPRA) AND KERALA HIGH COURT IN THE CASE OF KAR MO BILES LIMITED (SUPRA), WHEREBY SAME PROPOSITION HAS BEEN UPHELD. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWI NG THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT, WE DO NO T HESITATE TO HOLD THAT FOR COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT, THE INCOME ON SCRAP SALE HAS TO BE INCLUDED IN BUSINESS PROFITS AS A NUMERATOR I N THE FORMULA PRESCRIBED. 15 14. BEFORE PARTING, WE WOULD LIKE TO DISCUSS THE C ASE LAW RELIED ON BY THE LEARNED CIT (APPEALS) AS WELL AS THE LEARNED D.R. AT THE TIME OF ARGUMENTS BEFORE US IN THE CASE OF R.N. GUPTA & CO. LTD. (SUPRA), THE FACTS OF THE CASE WERE THAT IN THE PROCESS OF MANUFACTURING OF G OODS BY THE ASSESSEE, SOME SCRAPS WERE GENERATED. THE ASSESSEE EXPLAINED THAT NO EXPENSES WERE INCURRED I N GENERATION OF SCRAP, THEREFORE, THE EXPENDITURE SHO ULD BE TAKEN AS NIL. THE ASSESSING OFFICER DISALLOWED DED UCTION CLAIMED UNDER SECTION 80HHC OF THE ACT WHILE THE TRIBUNAL DIRECTED THE ASSESSING OFFICER TO INCLUDE ONLY 7.5% BEING ESTIMATED ELEMENT OF PROFITS IN SALE OF SCRAP FOR COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE HON'BLE HIGH COURT FOUND THAT THE EXPENDITURE W AS INCURRED BY THE ASSESSEE NOT FOR GENERATING OF SCRA P BUT FOR GENERATING OF FINISHED PRODUCTS. THERE WAS AND CANNOT BE ANY EXPENSES WHICH ARE INCURRED FOR GENERATING O F SCRAP. THEREFORE, IT WAS HELD THAT THE SCRAP IS A BY- PRODUCT OF THE MANUFACTURING ACTIVITY. THEREFORE, THERE CAN BE NO EXPENDITURE WHICH COULD BE EXCLUDED FROM THE SALE OF SCRAP. WE OBSERVE THAT THE ISSUE WAS LIMIT ED TO NETTING UP OF SALE OF SCRAP BY REDUCING AMOUNT OF EXPENDITURE INCURRED FOR SALE OF SUCH SCRAP. SINCE IT HAS BEEN HELD THAT THERE IS NO ELEMENT OF EXPENDITURE I N THAT INCOME FROM SALE, THE GROSS AND NET SCRAP BEING SAM E AND IN VIEW OF THE FACT THAT IN ANOTHER JUDGMENT, THE HIGH COURT HAS HELD THAT THE AMOUNT OF SCRAP SALE IS TO BE ADD ED IN THE BUSINESS PROFIT. IT IS NOW CONFIRMED THAT THE AMOUNT TO 16 BE ADDED TO BUSINESS PROFITS FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT HAS TO BE THE GROSS AMOUNT OF SCRAP SALE. THEREFORE, T HIS ARGUMENT DOES NOT HELP THE CASE OF THE DEPARTMENT. IN VIEW OF THE ABOVE THE GROUNDS OF APPEAL RAISED BY A SSESSEE ARE ALLOWED. 15. THE APPEAL OF THE ASSESSEE IN ITA NO.267/CHD/2015 IS ALLOWED. ITA NO.300/CHD/2015(M/S ROCKMAN CYCLE INDUSTRIES LT D.) : 16. IT IS RELEVANT TO OBSERVE HERE THAT THE FACTS OF THIS CASE ARE SIMILAR TO THE FACTS IN ITA NO.267/CH D/2015 AND THE FINDINGS GIVEN IN ITA NO.267/CHD/2015 SHALL APPLY TO THIS CASE ALSO WITH EQUAL FORCE. 17. IN THE RESULT, THE APPEALS OF BOTH THE ASSESSE S ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DAY OF APRIL, 2016. SD/- SD/- (H.L.KARWA) (RANO JAIN) VICE PRESIDENT ACCOUNTANT MEMBER DATED : 11 TH APRIL, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE D R. ASSISTANT REGISTRAR, ITAT, CHANDIGARH