RACHANA UDYOG, MUMBAI V. ITO WD 18(1)(3), MUMBAI

ITA 3542/MUM/2010

• Counselvise Citation: 354219914 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 12-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 05-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR B SENTHIL KUMAR
• Keywords: Business income
• Section: 143(3); 80HHC; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 3542/MUM/2010 ITA NO. 2269/MUM/2009 (ASSESSMENT YEAR: 2003-04) M/S. RACHANA UDYOG INCOME TAX OFFICER - 18(1)(3) 101 AMIR INDUSTRIAL ESTATE MUMBAI SUN MILL COMPOUND, LOWER PAREL VS. MUMBAI 400013 PAN - AADFR 4104 H APPELLANT RESPONDENT APPELLANT BY: SHRI VIJAY MEHTA RESPONDENT BY: DR. B. SENTHIL KUMAR DATE OF HEARING: 18.08.2011 DATE OF PRONOUNCEMENT: 30.08.2011 O R D E R PER B. RAMAKOTAIAH, A.M. THESE APPEALS BY THE ASSESSEE ARE AGAINST THE ORDER S OF THE CIT(A)-XVII, MUMBAI DATED 15.03.2007 AND 03.12.2008 RESPECTIVELY . 2. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEA L IN ITA 3542/MUM /2010: - 1. ON FACTS AND IN LAW, THE LEARNED CIT HAD ERRED IN REVISING THE ORDER PASSED BY THE ASSESSING OFFICER U/S. 263 OF T HE ACT, WHICH IS WITHOUT JURISDICTION. 2. ON FACTS AND IN LAW, THE LEARNED CIT HAD ERRED I N HOLDING THAT JOB WORK CHARGES ARE TO BE REDUCED FROM PROFIT OF B USINESS UNDER CLAUSE (BASS) OF THE ACT, WHILE CALCULATING D EDUCTION U/S. 80HHC OF THE ACT. ISSUE OF CONDONATION 3. BEFORE ADVERTING TO THE MERITS OF THE ISSUES, IT I S NECESSARY TO CONSIDER THE PETITION FOR CONDONATION FILED IN ITA NO.3542/MUM/2010. ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 2 4. THE APPEAL WAS FILED BELATEDLY OF 1079 DAYS. THE O RDER OF THE CIT PASSED U/S 263 ON 15.03.2007 WAS RECEIVED ON 23.03. 2007 AND DUE DATE FOR FILING THE APPEAL WAS 21.05.2007, WHEREAS, THE APPE AL WAS FILED ON 05.05.2010. THUS, THERE WAS A DELAY OF 1079 DAYS. THE ASSESSEES CHARTERED ACCOUNTANT SHRI MEHTAB CHAND HIRAWAT HAD FILED AN AFFIDAVIT STATING THE REASONS FOR CONDONATION OF DELAY: 1. I HAVE BEEN LOOKING AFTER THE TAX MATTERS OF M/ S. RACHANA UDYOG SINCE AROUND 8 YEARS AS PRACTICING C.A. 2. THAT THE ORDER U/S. 263 WAS PASSED BY THE LEARNE D COMMISSIONER OF INCOME-TAX-18 IN THE CASE OF M/S. RACHANA UDYOG FOR THE ASSESSMENT YEAR 2003-04 ON 15.03.2007, WHICH WAS RE CEIVED BY THE ASSESSEE ON 23.3.2007 AND WAS FORWARDED TO OUR OFFICE IN THE SUBSEQUENT WEEK. 3. IN MY OPINION, NO APPEAL WAS REQUIRED TO BE FILE D AGAINST THE ORDER U/S 263 OF THE COMMISSIONER OF INCOME-TAX-18. I WAS OF THE OPINION THAT WHILE CALCULATING DEDUCTION U/S. 80HHC , THE AMOUNT OF STITCHING CHARGES RECEIVED WAS REMAINED TO BE CO NSIDERED AS PART OF TOTAL TURNOVER AND THE DEDUCTION U/S. 80HHC MAY BE REVISED TO THAT EXTENT. THE CIT-18 IN ORDER U/S. 26 3 HAS STATED THAT 80-HHC WORKING TO BE REDONE AS PER THE LAW. TH E LEGAL POSITION ON THAT DATE WAS AMPLY CLARIFIED BY THE DE CISION OF BOMBAY HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO. 260 ITR 371. THE FACT THAT THE STITCHING CHARGES RECEIVED B Y THE ASSESSEE IS PART OF THE MANUFACTURING ACTIVITY OF THE ASSESS EE AND THE SAME CANT BE EXCLUDED UNDER CLAUSE (BAA) OF THE EXPLANA TION BELOW SECTION 80-HHC(4-B). 4. AFTER PASSING THE ORDER U/S. 143(3) R.W.S. 263, THE APPEAL WAS FILED BEFORE CIT(A) AND THEREAFTER AN APPEAL WAS FI LED BEFORE I.T.A.T., WHICH WAS FIXED FOR HEARING ON 5.5.2010. FOR APPEARING BEFORE I.T.A.T, SHRI VIJAY MEHTA, CHARTERED ACCOUNT ANT WAS CONSULTED IN THE LAST WEEK OF APRIL 2010. HE WAS OF THE STRONG OPINION THAT AN APPEAL AGAINST THE ORDER U/S. 263 S HOULD ALSO HAVE BEEN FILED. ACCORDINGLY, I ADVISED THE APPELLA NT TO FILE AN APPEAL AGAINST THE ORDER U/S. 263, WHICH WAS FILED ON 5.5.2010 AND WAS LATE BY 1079 DAYS. 5. IN VIEW OF THE ABOVE, I SUBMIT THAT THE SAID DEL AY HAS OCCURRED ON ACCOUNT OF CIRCUMSTANCES AS STATED ABOVE AND HENCE I PRAY THAT THE DELAY IN FILING OF THE APPEAL MAY PLEASE BE CON DONED. 5. IN SUPPORT OF THE ADVICE GIVEN BY THE CONSULTANT, THE ASSESSEE ALSO PLACED ON RECORD AN AFFIDAVIT AND LETTER FROM PARTN ER ABOUT HIS ADVICE GIVEN TO THE ASSESSEE COMPANY NOT TO FILE AN APPEAL AGAIN ST THE ORDER OF 263. THE LEARNED COUNSEL SUBMITTED THAT ASSESSEE WAS ADVISED THAT NO APPEAL WAS ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 3 REQUIRED TO BE FILED AS THE CIT IN THE ORDER UNDER SECTION 263 DIRECTED THE A.O. TO COMPUTE DEDUCTION UNDER SECTION 80HHC IN AC CORDANCE WITH LAW AND AT THAT TIME THE DECISION IN THE CASE OF BANGAL ORE CLOTHING CO. 260 ITR 371 IN FAVOUR OF THE ASSESSEE WAS AVAILABLE. THEREF ORE ASSESSEE WAS ADVISED NOT TO FILE THE SECOND APPEAL. IT WAS SUBMITTED TH AT THE ASSESSEE WAS ADVISED TO PREFER AN APPEAL WHEN THE MATTER CAME-U P FOR ARGUMENT IN OTHER APPEAL ON CONSEQUENTIAL ORDER AS IT WAS NOTICED TH AT THE ORDER U/S 263 SHOULD HAVE BEEN CHALLENGED BEFORE THE ITAT OTHERWI SE ASSESSEE WOULD NOT HAVE ANY CHANCE TO CONTEST THE ISSUE ON MERITS AS T HE ASSESSING OFFICER HAS ONLY ISSUED CONSEQUENTIAL ORDERS CONSEQUENT TO THE DIRECTIONS OF THE CIT. THE ASSESSEE HAS RELIED ON THE FOLLOWING CASE LAW, IN SUPPORT OF THE CONDONATION PETITION: 1. N BALAKRISHNAN V M KRISHNAMURTHY (1998) 7 SCC 1 23 (SC) 2. J M BHANSALI & ORS V THE STATE OF MADRAS 21 STC 411 (MAD) 3. SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD V CIT 115 ITR 27 (GUJ) 4. U B DISTILLERIES LTD VS CIT 269 ITR 558 (CAL) 5. SUNILCHANDRA VOHRA VS ACIT 32 SOT 365 (MUM) 6. HARDILLIA CHEMICALS LTD VS CIT 221 ITR 194 (BOM) 7. COLLECTOR, LAND ACQUISITION VS MST KATIJI AND OR S. 167 ITR 471 (SC) 8. URUDAVAN INVESTMENT & TRADING P. LTD. ITA NO. 3 815 & 3918/MUM/2009 DATED 11.05.2010. 6. THE LEARNED D.R., HOWEVER, SUBMITTED THAT IN THE CA SE OF URUDAVAN INVESTMENTS & TRADING P. LTD. ITA NO. 3815/MU8M/200 9 DATED 11.05.2010 IT IS POSITIVE ADVICE NOT TO FILE APPEAL AGAINST TH E ORDER UNDER SECTION 263 WHEREAS IN THIS CASE IT WAS ONLY AN OPINION EXPRESS ED BY THE CHARTERED ACCOUNTANT AND THERE IS NOTHING ON RECORD THAT ASSE SSEE HAS ACTED ACCORDINGLY. THE LEARNED D.R. RELIED ON THE ORDER OF THE COORDI NATE BENCH IN THE CASE OF SHRI RASIKLAL B. DODIA IN ITA NO. 3562/ MUM/2011 DATED 30.06.2011 WHEREIN THE HON'BLE BENCH DECLINED TO CO NDONE THE DELAY. HE RELIED ON THE FOLLOWING CASE LAWS ON THE ISSUE OF SUFFICIENT CAUSE AND LENGTH OF DELAY: - ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 4 I) ADVANI (J.B.) AND CO. (P) LTD. VS. CIT II) VEDABAI ALIAS VAIJAYANATABAI BABURAO PATIL VS. SHAN TARAM BABURAO PATIL 253 ITR 797 (SC) III) KARAMCHAND PREMCHAND P. LTD. VS. CIT 101 ITR 46 (GU J) IV) FORAMER FRANCE VS. DCIT 2 ITR (TRIB) (DEL) 7. THE LEARNED COUNSEL IN REPLY DISTINGUISHED THE ABOVE DECISION OF RASIKLAL B DODIA (SUPRA) STATING THAT THE FACTS THERE WAS TH AT ASSESSEE FILED THE APPEAL AGAINST THE ORDER UNDER SECTION 263 AFTER 23 10 DAYS, I.E. MORE THAN SIX YEARS AND AS SEEN FROM THE FACTS THERE IS NO IN DICATION THAT ASSESSEE WAS PURSUING ANY ALTERNATE REMEDY WHEREAS IN ASSESSEES CASE ASSESSEE HAS ALREADY COME UP TO THE ITAT IN THE CONSEQUENTIAL PR OCEEDINGS. THEREFORE, IT CANNOT BE STATED THAT ASSESSEE IS NOT PURSUING REME DIES, ONLY THAT HE IS PURSUING WRONG REMEDY WHEREAS THE ORDER UNDER SECTI ON 263 SHOULD HAVE BEEN CONTESTED IN TIME. FURTHER ASSESSEE WAS PURSIN G APPEAL PROCEDURE BEFORE THE CIT(A) AND THE ITAT ON THE SAME ISSUE AN D THERE IS NO NEGLIGENCE ON THE PART OF ASSESSEE. IT IS A CASE OF PURSUING A WRONG REMEDY WHEREAS ASSESSEE COULD HAVE PREFERRED AN APPEAL ON THE ORDE R UNDER SECTION 263 ITSELF. HE RELIED ON THE PRINCIPLE ESTABLISHED BY T HE HON'BLE BOMBAY HIGH COURT IN THE CASE REFERRED ABOVE. IT WAS ALSO SUBMI TTED THAT THERE IS SUFFICIENT CAUSE AND LENGTH OF DELAY DOES NOT MATTE R IF ASSESSEE IS PURSUING ALTERNATE REMEDY. THEREFORE THE ABOVE JUDGEMENTS DO NOT APPLY TO THE FACTS OF THE CASE AND SOME OF THE PRINCIPLE IN FACT SUPPO RT THE ASSESSEE CASE. 8. WE HAVE CONSIDERED THE ARGUMENTS OF THE ASSESSEES COUNSEL AND LEARNED DEPARTMENTAL REPRESENTATIVE. ON SEEING THE FACTS OF THE CASE, THERE IS FORCE IN THE CONTENTIONS OF THE ASSESSEE THAT TH ERE WAS AN ADVICE NOT TO CONTEST THE ORDER BY THE CHARTERED ACCOUNTANT AND A CCORDINGLY THEY HAVE NOT PREFERRED THE APPEAL BUT IT WAS REALISED LATER THAT ASSESSEE SHOULD HAVE CONTESTED THE ORDER U/S 263 IN APPEAL, HENCE, THE A PPEAL WAS PREFERRED BELATEDLY WITH A PRAYER FOR CONDONATION. EVEN THOU GH THE LEARNED DEPARTMENTAL REPRESENTATIVE STATED THAT THERE IS NO CASE FOR CONDONING THE BELATEDLY FILED APPEAL, WE ARE OF THE VIEW THAT THE DELAY IN FILING THE APPEAL IS FOR GOOD AND SUFFICIENT REASON, HENCE, THE SAME IS TO BE CONDONED. THE FACTS OF THE CASE CLEARLY FALL WITHIN THE DECISION OF THE HONBLE MADRAS HIGH COURT ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 5 IN THE CASE OF AREVA T AND D INDIA LTD VS JCTI 287 ITR 555 (MAD). ACCORDINGLY, THE DELAY IN FILING THE APPEAL IS COND ONED AND APPEAL IS ADMITTED. 9. BRIEF FACTS OF THE CASE IN THIS APPEAL ARE THAT ASS ESSEE RECEIVED AN AMOUNT OF ` 91,47,070/- ON ACCOUNT OF STITCHING CHARGES. THE A SSESSEE CLAIMED DEDUCTION U/S 80HHC CONSIDERING THAT STITCH ING CHARGES AS FORMING PART OF BUSINESS PROFITS AND TOTAL TURNOVER. THE AS SESSING OFFICER ALLOWED THE SAME WITHOUT ANY MODIFICATION BUT ONLY TAKING UP TH E ISSUE OF DEPB RECEIPTS. THIS ISSUE WAS CONTESTED BEFORE CIT(A) AN D MATTER WAS RESTORED FOR FOLLOWING THE TAXATION LAWS(AMENDMENT) ACT,2005 AND RECOMPUTED DEDUCTION U/S 80HHC. THE CIT INVOKED PROVISIONS OF SEC 263 AND SET ASIDE THE ORDER. THE ASSESSEE IS CONTESTING THE EXERCISE OF JURISDICTION BY CIT. 10. LEARNED COUNSEL SUBMITTED THAT THE CIT EXERCISED JURISDICTION UNDER SECTION 263 ON A DIFFERENT ISSUE AND REFERRED TO TH E SHOW CAUSE NOTICE WHEREIN THE CIT CONSIDERED STITCHING CHARGES OF ` 91,47,070/- SHOULD BE EXCLUDED FROM BUSINESS PROFIT IN ORDER TO WORK OUT THE EXPORT PROFITS WHEREAS IN THE ORDER UNDER SECTION 263 HE HAS ADMIT TED THAT STITCHING CHARGES RECEIVED BY THE ASSESSEE IS IN THE NATURE O F BUSINESS RECEIPT AND IS INCLUDABLE IN THE PROFITS AND GAINS OF BUSINESS OF ASSESSEE BUT TO BE EXCLUDED AT 90% AS OTHER RECEIPTS UNDER EXPLANATION (BAA). THEREFORE, WHEN THE SHOW CAUSE NOTICE WAS ISSUED THE ISSUE WAS TO E XCLUDE THE STITCHING CHARGES FROM THE COMPUTATION OF INCOME WHEREAS IN T HE ORDER U/S 263 THE CIT DIRECTED THE A.O. TO EXCLUDE UNDER THE PROVISIO NS OF (BAA) OF 80HHC. THEREFORE, THE CIT EXERCISED JURISDICTION ON A COMP LETELY DIFFERENT ISSUE THAN THE ORIGINAL SHOW CAUSE NOTICE. HE RELIED ON THE OR DERS OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. CONTINENTAL ELECT RICALS PVT. LTD. 317 ITR 249 AND ITAT ORDER IN THE CASE OF GEOMETRIC SOFTWAR E SOLUTIONS CO. LTD. VS. ACIT 32 SOT 428. 11. ANOTHER ARGUMENT RAISED BY THE LEARNED COUNSEL IS W ITH REFERENCE TO THE DIRECTIONS OF THE CIT(A) ON (BAA). HEREIN ALSO IT WAS HIS CONTENTION THAT THE ASSESSEE CONSIDERED STITCHING CHARGES RECEIVED AS PART OF PROFIT OF BUSINESS ON THE BASIS OF THE HON'BLE JURISDICTIONAL HIGH COURT DECISION IN ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 6 THE CASE OF BANGALORE CLOTHING CO. 260 ITR 371 AND REFEREED TO THE REPLY GIVEN TO THE CIT IN THE COURSE OF PROCEEDINGS UNDER SECTION 263 TO SUPPORT HOW THE FACTS ARE COVERED IN FAVOUR OF ASSESSEE BY THE HON'BLE JURISDICTIONAL HIGH COURT JUDGEMENT. IT WAS HIS SUBMISSION THAT TH E CIT, WITHOUT DISCUSSING THE CASE LAW PERTAINING TO BANGALORE CLO THING CO. RELIED ON OTHER CASE LAWS, WHICH ARE NOT APPLICABLE TO THE FACTS OF THE CASE AND STILL DIRECTED THE A.O. TO EXCLUDE UNDER (BAA). ON THIS ISSUE IT W AS SUBMITTED THAT THE ITAT IN A.Y. 2004-05, I.E. IMMEDIATELY SUCCEEDING A SSESSMENT YEAR CONSIDERED THE ISSUE OF 90% EXCLUSION OF STITCHING CHARGES AND HELD IN FAVOUR OF THE ASSESSEE. THEREFORE, ON MERITS THE IS SUE IS IN FAVOUR OF THE ASSESSEE. 12. THE THIRD ARGUMENT MADE BY THE LEARNED COUNSEL IS W ITH REFERENCE TO THE ISSUE OF MERGER. IT WAS SUBMITTED THAT THE A.O. CONSIDERED THE ISSUE ON 80HHC IN THE ORIGINAL ASSESSMENT AND EXCLUDED THE A MOUNT OF DEPB UNDER (BAA), WHICH WAS CONTESTED AND THE CIT(A) VIDE HIS ORDER DATED 28.03.2006 CONSIDERED THE ISSUE OF 80HHC AND DIRECTED THE A.O. TO RECOMPUTE THE DEDUCTION UNDER SECTION 80HHC AS PER THE TAXATION ( AMENDMENT) ACT 2005. THEREFORE, IT WAS THE SUBMISSION THAT BY THE TIME T HE CIT EXERCISED JURISDICTION THE ORDER OF THE A.O. ON THE ISSUE OF 80HHC ALREADY GOT MERGED WITH THE ORDER OF THE CIT(A) AND HE RELIED ON THE J UDGEMENT OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NIRMA CHEMICAL WO RKS 309 ITR 67 AND THE TRIBUNAL ORDERS IN THE CASE OF SONAL GARMENTS V S. JCIT 98 TTJ 1020 (MUM) WITH REFERENCE TO THE DEFINITION OF MATTER AND ALSO DECISION IN THE CASE OF MARICO INDUSTRIES LTD. VS. ACIT 115 TTJ 497 (MUM). IT WAS HIS SUBMISSION THAT THIS ISSUE WAS COVERED BY THE PRINC IPLES OF MERGER AS THE CIT(A) HAS ALREADY PASSED THE ORDER ON THE SAME MAT TER THEREFORE, THE CIT CANNOT EXERCISE JURISDICTION UNDER SECTION 263. 13. THE LEARNED D.R. IN REPLY SUBMITTED THAT THE SHOW C AUSE NOTICE ISSUED BY THE CIT IS WITH REFERENCE TO THE PROFIT OF BUSI NESS AND IN ARRIVING AT THE PROFITS OF BUSINESS DETERMINATION OF PROFITS OF B USINESS UNDER (BAA) IS ALSO PART OF SECTION 80HHC. THEREFORE THE OBJECTION THAT CITS SHOW CAUSE NOTICE IS DIFFERENT FROM THE ULTIMATE ORDER IS NOT TENABLE . WITH REFERENCE TO THE ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 7 ISSUE OF MERITS ON APPLICATION OF EXPLANATION (BAA) , WHILE ADMITTING THAT THE ORDER IN A.Y. 2004-05 PASSED BY THE ITAT WAS IN FAV OUR OF THE ASSESSEE, IT WAS HIS SUBMISSION THAT THE CIT HAS CORRECTLY DIREC TED THAT STITCHING CHARGES SHOULD BE EXCLUDED AT 90% AS PER THE PROVIS IONS OF (BAA). HE RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. K. RAVINDRANATHAN NAIR 295 ITR 228. WITH REFERENCE TO THE ISSUE MERGER IT WAS HIS SUBMISSION THAT THE CIT(A) DIRECTED THE A.O. TO COMPUTE 80HHC TO THE LIMITED EXTENT OF CONSIDERING DEPB PROFITS AS PART OF SECTION 28 AND THERE IS NO DIRECTION WITH REFERENCE TO STITCHING CHARGES AN D THIS ISSUE WAS NOT EITHER RAISED BY THE A.O. OR RAISED BY THE CIT(A) IN THE O RIGINAL ASSESSMENT. THEREFORE THERE IS NO MERGER ON THE ISSUE. 14. WE HAVE CONSIDERED THE ARGUMENTS AND EXAMINED THE R ECORD. EVEN THOUGH THERE ARE ARGUMENTS THAT THE SHOW CAUSE NOTI CE IS DIFFERENT FROM THE FINAL ORDER PASSED BY THE CIT AND THERE IS MERGER O F THE ORDERS, THESE ISSUES BECOME ACADEMIC IN VIEW OF THE ORDER OF THE ITAT ON THE SAME ISSUE IN A.Y. 2004-05. IN A.Y. 2004-05 THE ISSUE OF TREATMENT OF STITCHING CHARGES AS PART OF BUSINESS PROFIT AND WHETHER REQUIRED TO EXCLUDED AT 90% WAS DECIDED BY THE CIT(A) IN FAVOUR OF THE ASSESSEE WHEN THE REVEN UE HAD COME UP IN APPEAL ON THE FOLLOWING ISSUE: - IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD . CIT(A) ERRED IN DIRECTING TO COMPUTE DEDUCTION U/S 80HHC WITHOUT EX CLUDING 90% OF STITCHING CHARGES OF RS.19,45,045/- IGNORING THE BO MBAY HIGH COURTS DECISION IN THE CASE OF CIT VS. S.G. ZAVERI CONSULTANCY LTD., 245 ITR 854 ON THE ABOVE QUESTION THE ITAT CONSIDERED THE ISSUE AS UNDER: - 4. BRIEF FACTS IN RESPECT OF GROUND NO. 2 ARE THAT ASSESSEE RECEIVED AN AMOUNT OF RS. 19,45,045/- ON ACCOUNT OF STITCHIN G CHARGES. THE ASSESSEE CLAIMED DEDUCTION U/S 80 HHC CONSIDERING THAT STITCHING CHARGES AS FORMING PART OF TOTAL TURNOVER. THE ASSE SSING OFFICER WAS OF THE VIEW THAT AS PER CLAUSE (BAA) OF EXPLANATION BELOW SECTION 80 HHC, SUCH RECEIPTS ARE REQUIRED TO BE EXCLUDED WHIL E WORKING OUT THE PROFIT OF BUSINESS FOR PURPOSE OF DEDUCTION U/S 80 HHC. THE CIT(A) BY FOLLOWING THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO. [2003] 180 CTR (BOM) 127, WH ICH IS ALSO REPORTED IN 260 ITR 371 ACCEPTED THE CLAIM OF THE A SSESSEE AND ALSO THE FOLLOWING CONTENTION OF THE ASSESSEE MENTIONED AT PAGE 5 OF CIT(A)S ORDER: ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 8 FROM THE ENCLOSED AUDIT REPORT IN FORM NO. 10CCAC, YOUR HONOUR MAY KINDLY SEE THAT WHILE COMPUTING THE DEDUCTION ADMISSIBLE U/S 8 0 HHC, THE AFORESAID STITCHING CHARGES OF RS. 19,45,045/- HAD BEEN DULY CONSIDERED AS FORMING PART OF THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION ADM ISSIBLE U/S 80 HHC. YOUR HONOUR IS THEREFORE REQUESTED THAT THE ASSESSING OF FICER MAY KINDLY BE DIRECTED TO COMPUTE AND ALLOW DEDUCTION U/S 80 HHC WITHOUT EXCL UDING 90% OF RS. 19,45,045/- BEING THE STITCHING CHARGES RECEIVED FR OM THE EXPORT BUSINESS INCOME FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80 HHC. 5. THE LEARNED DR SUBMITTED THAT THE ISSUE IS COVER ED IN FAVOUR OF THE REVENUE BY THE JUDGMENT OF THE APEX COURT IN TH E CASE OF CIT VS. K. RAVINDRANATHAN NAIR, 295 ITR 228 (SC). THE LEARN ED AR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE CIT(A) INC LUDING THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF BANGALORE C LOTHING CO. (SUPRA). 6. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. THE QUESTION BEFORE US IS WHET HER THE ASSESSEE ELIGIBLE TO DEDUCTION U/S 80 HHC ON STITCHING CHARG ES WHICH INCLUDED IN PROFIT & TURNOVER. FOR THIS PURPOSE, WE ARE CONC ERNED WITH S. 80 HHC (1) AND 80 HHC (3). TO DECIDE THIS MATTER, WE M AY QUOTE EXPLN. (BAA) TO SECTION 80 HHC, WHICH READS AS UNDER:- (BAA) PROFITS OF THE BUSINESS MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OF PROFESSI ON AS REDUCED BY_ (1) NINETY PER CENT OF ANY SUM REFERRED TO IN CLS. (IIIA), (IIIB, AND (IIIC) OF SECTION 28 OR ANY RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTER EST, RENT, CHARGES OR ANY OTHER RECEIPT OF SIMILAR NATURE INCLUDED IN SUCH PROFITS; AND (2) THE PROFITS OF ANY BRANCH, OFFICE, WAREHOUSE OR ANY OTHER ESTABLISHMENT OF THE ASSESSEE SITUATE OUTSIDE INDIA; 6.1 THE ABOVE CLAUSE (BAA) WAS INTRODUCED BY AMENDM ENT TO SECTION 80 HHC FOR AND FROM ASSESSMENT YEAR 1992-93. IT DEF INES THE EXPRESSION PROFITS OF BUSINESS, FOR THE PURPOSES OF SECTION 80 HHC, TO MEAN PROFITS OF BUSINESS AS COMPUTED UNDER S. 28 OF THE ACT, AS REDUCED BY 90 PERCENT OF ANY SUM REFERRED TO IN CLA USE (IIIA), (IIIB), AND (IIIC) OF SECTION 28 OR RECEIPTS BY WAY OF BROK ERAGE, COMMISSION, INTEREST, RENT CHARGES OR ANY OTHER RECEIPT OF SIMI LAR NATURE INCLUDED IN SUCH PROFITS. WE ARE NOT CONCERNED WITH THE REMA INING REQUISITE OF THAT EXPLANATION. THE NARROW POINT WHICH ARISES FOR DETERMINATION IN THIS CASE IS WHETHER STITCHING TURNOVER/RECEIPTS CA ME WITHIN THE WORD CHARGES UNDER THE ABOVE EXPLANATION. ACCORDING TO THE DEPARTMENT, STITCHING RECEIPT WAS SIMILAR TO BROKERAGE, COMMISS ION, INTEREST, RENT, LABOUR CHARGES, THEREFORE, STITCHING CHARGES WERE R EQUIRED TO BE REDUCED FROM BUSINESS PROFITS AS CONTEMPLATED BY TH E ABOVE EXPLANATION. 6.2 THE EXPORT PROFITS WERE REQUIRED TO BE COMPUTED IN THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER AS CONTEMPLATED B Y THE FOLLOWING FORMULA: PROFIT OF BUSINESS _ X EXPORT TURNOVER * TOTAL TURNOVER ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 9 6.3 EXPLANATION (BAA) WAS INTRODUCED INTO THE ACT B Y FINANCE (NO.2) ACT, 1991, WITH EFFECT FROM 1 ST APRIL, 1992. UNDER THE CIRCULAR OF CBDT BEARING NO. 621, DT. 19 TH DEC., 1991, IT HAS BEEN STATED THAT THE FORMULA GAVE DISTORTED FIGURE OF EXPORT PROFITS WHE N RECEIPTS LIKE INTEREST, COMMISSION, ETC. WHICH DO NOT HAVE ELEMEN T OF TURNOVER ARE INCLUDED BY THE ASSESSEE IN P&L A/C. THEREFORE, EXP LN. (BAA) CAME TO BE INTRODUCED. UNDER THAT EXPLANATION PROFITS OF BU SINESS, FOR THE PURPOSE OF SECTION 80 HHC, DOES NOT INCLUDE RECEIPT S WHICH DO NOT HAVE ELEMENT OF TURNOVER LIKE RENT, COMMISSION, INT EREST, ETC. HOWEVER, AS SOME EXPENDITURE MIGHT BE INCURRED IN E ARNING SUCH INCOMES AND AD HOC 10 PERCENT DEDUCTION FROM SUCH I NCOMES IS PROVIDED TO ACCOUNT FOR THOSE EXPENSES. THE DEPARTM ENT CANNOT INVOKE EXPLANATION (BAA) IN EVERY MATTER INVOLVING RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, LABOUR CHARG ES, ETC. THESE ITEMS OF INCOME HAVE GOT TO BE SEEN IN THE CONTEXT OF THE BUSINESS ACTIVITY OF THE ASSESSEE. TO GIVE AN EXAMPLE, IN TH E CASE OF MANUFACTURING COMPANY WHICH UNDERTAKES EXPORTS, RE CEIPT OF INTEREST OR COMMISSION MAY NOT BE OPERATIONAL INCOM E BECAUSE THEY DO NOT HAVE THE ELEMENT OF TURNOVER AND CONSEQUENTL Y EXPLN. (BAA) WILL APPLY. HOWEVER, THAT WILL NOT BE THE CASE IF T HE ASSESSEE IS CARRYING ON THE BUSINESS OF FINANCING BECAUSE IN T HE CASE OF FINANCING, THE INTEREST INCOME WHICH ACCRUES TO THE ASSESSEE WILL HAVE THE ELEMENT OF TURNOVER AND IN SUCH A CASE, RE CEIPTS LIKE INTEREST, WILL NOT ATTRACT EXPLN. (BAA). THE POINT IS THAT IN EVERY MATTER THE AO WILL HAVE TO ASCERTAIN WHETHER RECEIPT OF INTEREST, COMMISSION, LABOUR CHARGES, ETC. WERE A PART OF OPERATIONAL INCOME. FO R THIS PURPOSE ONE CANNOT LAY DOWN ANY STANDARD TEST FOR DECIDING WHAT WOULD CONSTITUTE OPERATIONAL INCOME. IT HAVE TO ASCERTAIN AS TO WHAT IS THE DOMINANT BUSINESS OF THE COMPANY AND WHETHER RECEIP TS LIKE INTEREST, COMMISSION, ETC. ACCRUES AS A PART OF THE MAIN BUSI NESS ACTIVITY OR WHETHER THEY ACCRUE OUT OF INCIDENTAL BUSINESS. THE TEST TO BE APPLIED IN ALL SUCH MATTERS IS, WHETHER INTEREST, SERVICE C HARGES, COMMISSION ACCRUES OUT OF THE MAIN BUSINESS ACTIVITY OF THE CO MPANY AND WHETHER THEY WERE OPERATIONAL INCOME, THE DEPARTMEN T JUST LOOKS AT THE NOMENCLATURE OF THE RECEIPT AND IF IT FINDS THA T THE NOMENCLATURE IS RENT, INTEREST, COMMISSION THEN WITHOUT ANY FURTHER INQUIRY INTO THE NATURE OF BUSINESS, THE DEPARTMENT INVOKES EXPLN. ( BAA) WHICH IS NOT THE PURPOSE AND THE OBJECT OF THAT EXPLANATION. THE EXPLANATION (BAA) ALSO BASED ON ACCOUNTING AND COMMERCIAL PRINCIPLE T HAT BUSINESS PROFIT ALWAYS COME THROUGH BUSINESS ACTIVITIES WHIC H IS CALLED TURNOVER, THAT IS THE REASON THE FORMULA STIPULATED FOR CALCULATION OF DEDUCTION BASED ON BUSINESS PROFIT AND TURNOVER. AN INCOME COME THROUGH TURNOVER IS ALWAYS A BUSINESS PROFIT. BUT T HERE ARE SOME INDEPENDENT ITEMS OF INCOME LIKE INTEREST OR COMMIS SION WHICH ARE NEVER COME THROUGH TURNOVER UNLESS ASSESSEE HAS BUS INESS OF SUCH NATURE. THEREFORE, FACTS OF EACH CASE TO SEE FOR CA LCULATION OF DEDUCTION UNDER SECTION 80 HHC AND ITS EXPLANATION (BAA). 6.4 THE FACTS BEFORE THE APEX COURT IN THE CIT V. K . RAVINDRANATHAN NAIR (SUPRA) ARE THAT FOR THE PURPOSE OF CALCULATIO N OF DEDUCTION U/S ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 10 80 HHC THE ASSESSEE DID NOT INCLUDE PROCESSING CHAR GES IN HIS TOTAL TURNOVER ON THE GROUND THAT THE PROCESSING CHARGES HAD NO NEXUS WITH THE EXPORT BUSINESS. HOWEVER, THE AMOUNT WAS C ONSIDERED AS BUSINESS PROFIT. THE RELEVANT FACTS AND QUESTION BE FORE THE COURT NOTED FROM JUDGMENT REPRODUCED AS BELOW: THE ASSESSEE MADE A CLAIM FOR EXPORT INCENTIVE UND ER S. 80HHC(3) IN HIS RETURNS FILED FOR THE ASST. YR. 1993-94. THE ASSESSEE DID N OT INCLUDE PROCESSING CHARGES (RECEIPTS) IN HIS TOTAL TURNOVER. IN HIS RETURN, HE INDICATED HIS BUSINESS PROFITS AT RS. 1,94,08,220. THE FIGURE OF RS. 1,94,08,220 INCLUDED THE PROCESSING CHARGES (RECEIPTS) TO RS. 1,54,68,811/-. HOWEVER, THE ASSES SEE DID NOT INCLUDE THE PROCESSING CHARGES AMOUNTING TO RS. 1,54,68,811 IN HIS TOTAL TURNOVER. HE CONTENDED THAT ALTHOUGH THE PROCESSING CHARGES (REC EIPTS) AMOUNTING TO RS. 1,54,68,811/- CONSTITUTED PART OF BUSINESS PROFITS AS COMPUTED UNDER S. 28 OF THE I.T. ACT, SINCE S. 80 HHC(3) WAS THE FORMULA TO WOR K OUT EXPORT INCENTIVE, THE SAID FIGURE OF RS. 1,54,68,811 WAS NOT INCLUDIBLE IN THE TOTAL TURNOVER IN THE FORMULA UNDER THE SAID S.80 HHC(3) OF THE IT ACT. ACCORDING TO ASSESSEE, S. 80 HHC(3) PROVIDED FOR COMPUTATION OF EXPORT INCENTIVE/CONCES SION TO BE COMPUTED BY ALLOCATING BUSINESS PROFITS IN THE RATIO OF EXPORT TURNOVER BY TOTAL TURNOVER. THIS ARGUMENT WAS NOT ACCEPTED BY THE DEPARTMENT. THE NARROW DISPUTE WHICH ARISES FOR DETERMINATION I S : WHETHER THE DEPARTMENT WAS RIGHT IN INCLUDING PROCESSING CHARGES, AMOUNTIN G TO RS. 1,54,68,811, IN THE TOTAL TURNOVER WHILE ARRIVING AT EXPORT PROFITS UNDER S. 80 HHC(3) OF THE ACT, AS IT STOOD AT THE MATERIAL TIME. 6.5 THE APPLICABILITY OF JUDGMENT OF K. RAVINDRANAT HAN (SUPRA) HAS BEEN DISCUSSED BY ITAT SPECIAL BENCH CHENNAI IN THE CASE OF ITO V. SAK SOFT LTD., 30 SOT 55 (CHENNAI) (SB) AS UNDER:- 25. WE NOW PROCEED TO EXAMINE THE CONTENTION OF THE REVENUE THAT THE PRINCIPLE OF PARITY BETWEEN EXPORT TURNOVER AND TOTAL TURNOVER W AS REJECTED BY THE SUPREME COURT IN K. RAVINDRANATHAN NAIRS CASE (SUPRA). IN THIS CASE THE NARROW DISPUTE WHICH AROSE FOR DETERMINIATION WAS WHETHER THE DEPA RTMENT WAS RIGHT IN INCLUDING THE PROCESSING CHARGES RECEIVED BY THE ASSESSEE IN THE TOTAL TURNOVER WHILE ARRIVING AT THE EXPORT PROFITS U/S 80HHC(3) AS IT STOOD IN R ELATION TO THE ASSESSMENT YEAR 1993-94. THE CONTENTION OF THE ASSESSEE BEFORE THE SUPREME COURT INTER ALIA WAS THAT THOUGH SUCH CHARGES WERE INCLUDIBLE IN THE BU SINESS PROFITS AS PER CLAUSE (BAA) OF THE EXPLANATION BELOW SECTION 80 HHC, THEY WERE NOT INCLUDIBLE IN THE TOTAL TURNOVER AS THEY HAD NO NEXUS WITH THE ACTIVITY OF EXPORTS (PLEASE SEE PAGE 232 OF THE REPORT). ON THE OTHER HAND, THE CONTENTION OF T HE REVENUE WAS THAT IN VIEW OF CLAUSES (BA) AND (BAA) OF THE EXPLANATION, WHEN THE PROCESSING CHARGES WERE INCLUDIBLE IN THE TURNOVER IN THE FORMULA (PLEASE S EE PAGE 232 OF THE REPORT). IT WILL THUS BE SEEN THAT THE COMPARISON K. RAVINDRANATHAN NAIRS CASE (SUPRA) WAS BETWEEN THE PROFITS OF THE BUSINESS, WHICH WAS ONE OF THE COMPONENTS OF THE FORMULA, AND THE TOTAL TURNOVER WHICH WAS ALSO A CO MPONENT OF THE FORMULA, WHEREAS IN LMWS CASE(SUPRA) THE COMPARISON WAS BET WEEN THE EXPORT TURNOVER AND THE TOTAL TURNOVER WHICH WERE RESPECTIVELY THE NUMERATOR AND THE DENOMINATOR IN THE FORMULA. THIS ASPECT WHICH WAS HIGHLIGHTED B EFORE US BY THE LEARNED REPRESENTATIVE FOR THE INTERVENERS MAX HEALTH SCRIB E LTD., AND CRIMSON LOGIC INDIA PVT. LTD., IS IMPORTANT AND HAS TO BE BORNE IN MIN D WHILE UNDERSTANDING THE RATIO OF THE JUDGMENT IN K. RAVINDRANATHAN NAIRS CASE. ACCO RDING TO THE SUPREME COURT, THE ASSESSEES CONTENTION THAT THE PROCESSING CHARG ES WERE INCLUDIBLE IN THE PROFITS OF THE BUSINESS BUT EXCLUDABLE FROM THE TOTAL TURNO VER CANNOT BE ACCEPTED BECAUSE THE PROCESSING CHARGES WHICH WERE PART OF THE GROSS TOTAL INCOME, WERE AN INDEPENDENT INCOME LIKE RENT, COMMISSION ETC., AND THEREFORE, 90 PER CENT OF THE SAID SUM SHOULD BE REDUCED FROM THE GROSS TOTAL INC OME TO ARRIVE AT THE BUSINESS PROFITS AND SINCE THE PROCESSING CHARGES WERE AN IM PORTANT COMPONENT OF BUSINESS PROFITS, THEY WERE TO BE INCLUDED IN THE TOTAL TURN OVER IN THE FORMULA PRESCRIBED TO ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 11 ARRIVE AT THE BUSINESS PROFITS IN TERMS OF CLAUSE ( BAA) OF THE EXPLANATION. ONE OTHER CONTENTION WAS RAISED BEFORE THE SUPREME COURT ON B EHALF OF THE ASSESSEE AND THAT WAS THAT THE PROCESSING CHARGES HAD NO NEXUS WITH T HE EXPORT BUSINESS AND, THEREFORE, THEY WERE NOT INCLUDIBLE IN THE TOTAL TU RNOVER (PLEASE SEE PAGE 240 OF THE REPORT, LAST PARA). IT WAS ALSO CONTENDED THAT THER E WAS NO ELEMENT OF TURNOVER IN THE RECEIPT OF PROCESSING CHARGES (PAGE 240 OF THE REPORT). FOR THESE TWO REASONS IT WAS CONTENDED THAT THE PROCESSING CHARGES WERE NOT INCLUDIBLE IN THE TOTAL TURNOVER. THIS ARGUMENT WAS REJECTED BY THE SUPREME COURT AT PAGES 241-242 OF THE REPORT. WHILE REJECTING THE ARGUMENT, THE SUPREME COURT EXP LAINED THAT UNDER SECTION 80 HHC WHICH WAS A CODE BY ITSELF FOR THE ASSESSMENT Y EAR 1993-94, RECEIPTS CONSTITUTING INDEPENDENT INCOME HAVING NO NEXUS WIT H EXPORTS WERE REQUIRED TO BE REDUCED FROM THE PROFITS OF THE BUSINESS ACCORDING TO CLAUSE (BAA) OF THE EXPLANATION, AND SINCE EVEN ACCORDING TO THE ASSESS EE THE PROCESSING CHARGES HAD NO NEXUS WITH THE EXPORT BUSINESS AND THUS CONSTITU TED INDEPENDENT INCOME, THEY WERE TO BE REDUCED FROM THE PROFITS OF THE BUSINESS . IT WAS FURTHER OBSERVED THAT EVERY INCOME MAY NOT BE ATTRIBUTABLE TO THE EXPORTS (AS IN THE CASE OF PROCESSING CHARGES) AND THAT WAS THE REASON FOR THIS COURT TO HOLD THAT INDIRECT TAXES LIKE EXCISE DUTY WHICH ARE RECOVERED BY THE TAX PAYERS F OR AND ON BEHALF OF THE GOVERNMENT, SHALL NOT BE INCLUDED IN THE TOTAL TURN OVER IN THE ABOVE FORMULA (SEE CIT V. LAKSHMI MACHINE WORKS [2007] 6 SCALE 168]. THE COURT REFERRED TO THE FACT THAT SINCE EVEN ACCORDING TO THE ASSESSEE THE PROCE SSING CHARGES HAD NO NEXUS WITH THE EXPORT AND CONSTITUTED INDEPENDENT INCOME SIMILAR TO RENT, COMMISSION, BROKERAGE ETC., THE SAME HAD TO BE REDUCED TO THE E XTENT OF 90 PER CENT AS PER THE ABOVE EXPLANATION FROM THE PROFITS OF THE BUSINESS. HOWEVER, THEY WERE INCLUDIBLE IN THE TOTAL TURNOVER IN THE FORMULA. AT PAGE 242 T HE SUPREME COURT GAVE THE REASON AS TO WHY THEIR JUDGMENT IN LMWS CASE (SUPRA) CAN HAVE NO APPLICATION TO THE CASE BEFORE THEM. THE COURT REASONED THAT THE NATURE OF EVERY RECEIPT NEEDS TO BE ASCERTAINED IN ORDER TO FIND OUT WHETHER IT FORMS P ART OR HAS ANY ATTRIBUTE OF AN EXPORT TURNOVER. REFERRING TO THE EARLIER JUDGMENT IN LMW CASE (SUPRA), THE COURT OBSERVED THAT AN INDIRECT TAX LIKE EXCISE DUTY IS C OLLECTED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT AND THOUGH IT MAY BE POSSIBLE TO CONSIDER THE SAME AS INCOME IN A CONCEPTUAL SENSE (OF SOMETHING COMING IN) OR INC OME UNDER THE INCOME-TAX ACT, WHILE APPLYING THE FORMULA PRESCRIBED BY SECTION 80 HHC(3), IT IS NECESSARY TO ASCERTAIN WHETHER THE SAID RECEIPT HAS AN ATTRIBUTE OF EXPORT TURNOVER. SINCE THE RECOVERY OF EXCISE DUTY DID NOT HAVE THE ELEMENT OF EXPORT TURNOVER, IT WAS HELD NOT INCLUDIBLE IN THE TOTAL TURNOVER IN THE CASE OF LMW S CASE (SUPRA). IT WILL BE APPRECIATED FROM THESE OBSERVATIONS OF THE SUPREME COURT APPEARING IN PAGES 241 AND 242 OF K. RAVINDRANATHAN NAIRS CASE (SUPRA), T HAT THE COURT ITSELF MADE A DISTINCTION BETWEEN THE RATIO LAID DOWN IN THE CASE OF LMW (SUPRA) AND THAT LAID DOWN IN THE CASE OF K. RAVINDRANATHAN NAIRS CASE ( SUPRA). A RECEIPT WHICH DOES NOT HAVE AN ELEMENT OF TURNOVER CANNOT FIND A PLACE IN THE EXPORT TURNOVER OR THE TOTAL TURNOVER FOR APPLYING THE FORMULA PRESCRIBED BY SECTION 80 HHC, EVEN THOUGH IT MAY BE AN INCOME IN THE GENERAL SENSE. IF IT IS AN INDEPENDENT INCOME HAVING NO NEXUS WITH THE EXPORT BUSINESS THEN SUCH INCOME HAS TO BE EXCLUDED ALSO FROM THE PROFITS OF THE BUSINESS TO THE EXTENT OF 90 PERCENT . BOTH THE JUDGMENTS STAND INDEPENDENTLY. WHEREAS IN THE CASE OF LMW(SUPRA) TH E COMPARISON WAS BETWEEN EXPORT TURNOVER AND TOTAL TURNOVER, IN THE CASE OF K. RAVINDRANATHAN NAIRS CASE (SUPRA) THE COMPARISON WAS BETWEEN PROFITS OF THE BUSINESS AND TOTAL TURNOVER. AS RIGHTLY POINTED OUT BY THE LEARNED REPRESENTATIVE F OR THE INTERVENERS MAX HEALTH SCRIBE LTD., AND CRIMSON LOGIC INDIA (P.) LTD., THE RE IS AN INTER SE RELATIONSHIP BETWEEN PROFITS OF THE BUSINESS AND TOTAL TURNOVER IN THE SENSE THAT THE TOTAL TURNOVER CONTRIBUTES TO THE PROFITS. IT MAY BE THAT BECAUSE OF THE STATUTORY DEFINITION OF PROFITS OF THE BUSINESS IN CLAUSE (BAA) OF THE E XPLANATION BELOW SECTION 80 HHC THAT INCOME WHICH IS INDEPENDENT OF THE EXPORT ACTI VITY HAS TO BE EXCLUDED THEREFROM TO THE EXTENT OF 90 PERCENT; NEVERTHELESS THE PROCESSING CHARGES RECEIVED BY THE ASSESSEE WOULD BE INCLUDIBLE IN THE TOTAL TU RNOVER AS LAID DOWN IN K. RAVINDRANATHAN NAIRS CASE (SUPRA). IT HAS TO BE BO RNE IN MIND THAT THE PRESENT DEFINITION OF PROFITS OF THE BUSINESS IN CLAUSE ( BAA) OF THE EXPLANATION WAS INSERTED BY THE FINANCE (NO.2) ACT, 1991 (WITH EFFECT FROM 1 .4.1992). BEFORE THIS DEFINITION ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 12 WAS INSERTED, CLAUSES (A) AND (B) OF SUB-SECTION (3 ) OF SECTION 80 HHC STIPULATED THAT PROFITS DERIVED FROM THE EXPORT OF GOODS SHALL BE THE ENTIRE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GA INS OF BUSINESS OR PROFESSION WHERE THE BUSINESS OF THE ASSESSEE CONSISTS ENTIREL Y OF EXPORTS; WHERE THE BUSINESS CONSISTS PARTLY EXPORTS AND PARTLY LOCAL SALES, EVE N THEN THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BU SINESS OR PROFESSION HAD TO BE DIVIDED IN THE SAME PROPORTION WHICH THE EXPORT TUR NOVER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS. THUS, THE EXPORT PROFITS WERE TO B E COMPUTED TAKING THE PROFITS ASSESSED UNDER THE HEAD BUSINESS AS THE BASIS. TH IS GAVE ROOM FOR INCLUSION OF RECEIPTS SUCH AS BROKERAGE, COMMISSION, INTEREST, R ENT OR ANY OTHER RECEIPT OF A SIMILAR NATURE (WHICH DID NOT HAVE ANY ELEMENT OF T URNOVER BUT WHICH WERE INCLUDED IN THE PROFIT AND LOSS ACCOUNT), IN THE PR OFITS OF THE BUSINESS SINCE SUCH RECEIPTS WERE ALSO ASSESSED AS BUSINESS INCOME. THI S PECULIAR POSITION WAS ELIMINATED BY THE FINANCE (NO.2) ACT, 1991 AND IN C IRCULAR NO. 621, DATED 19.12.1991(SUPRA) IT WAS EXPLAINED IN PARAGRAPHS 32 .10 AND 32.11 THAT THE AMENDED DEFINITION OF PROFITS OF THE BUSINESS IN CLAUSE (BAA) OF THE EXPLANATION WAS INTRODUCED TO CLARIFY THAT SUCH RECEIPTS WHICH DO NOT HAVE AN ELEMENT OF TURNOVER WILL NOT BE INCLUDED AS PROFITS OF THE BUS INESS TO THE EXTENT OF 90 PERCENT, A DEDUCTION OF 10 PER CENT BEING GIVEN TOWARDS COMMON EXPENSES. BUT FOR THIS DEFINITION INTRODUCED BY THE FINANCE (NO.2) ACT, 19 91, THERE WAS NO SCOPE FOR EXCLUDING INCOMES WHICH DID NOT HAVE ANY NEXUS WITH THE EXPORT ACTIVITY OR WHICH DID NOT HAVE AN ELEMENT OF TURNOVER FROM THE PROFIT S OF THE BUSINESS IF SUCH INCOMES HAD BEEN ASSESSED UNDER THE HEAD BUSINESS. IT MAY BE RECALLED THAT THE ASSESSMENT YEAR BEFORE THE SUPREME COURT IN K. RAVI NDRANATHAN NAIRS CASE (SUPRA) WAS 1993-94 FOR WHICH YEAR CLAUSE (BAA) OF THE EXPLANATION WAS APPLICABLE. SINCE THE ASSESSEE IN THAT CASE DID NOT DISPUTE THA T PROCESSING CHARGES RECEIVED BY HIM HAD NO NEXUS WITH THE EXPORT BUSINESS AND THUS CONSTITUTED INDEPENDENT INCOME, 90 PERCENT THEREOF HAD TO BE STATUTORILY E XCLUDED FROM THE PROFITS OF THE BUSINESS WHICH WOULD NOT HAVE BEEN POSSIBLE IF THE EARLIER DEFINITION OF THE EXPORT PROFITS IN CLAUSES (A) AND (B) OF SUB-SECTION (3) O F SECTION 80HHC HAD CONTINUED. THE SAID SUB-SECTION WAS SIMULTANEOUSLY SUBSTITUTED BY THE FINANCE (NO.2) ACT, 1991 WITH EFFECT FROM 01.04.1992. THEREFORE, THE SUPREME COURT DID NOT APPLY THE PARITY PRINCIPLE IN K. RAVINDRANATHAN NAIRS CASE (SUPRA) BETWEEN THE PROFITS OF THE BUSINESS AND THE TOTAL TURNOVER AND HELD THAT THOUG H 90 PER CENT OF THE PROCESSING CHARGES WERE TO BE REDUCED FROM THE PROFITS OF THE BUSINESS, THEY CANNOT BE EXCLUDED FROM THE TOTAL TURNOVER. AT FIRST READING IT WOULD CERTAINLY APPEAR, AS WAS CONTENDED BEFORE US BY THE DEPARTMENT, THAT IN K. R AVINDRANATHAN NAIRS CASE (SUPRA) THE SUPREME COURT HAS GIVEN A GO-BY TO THE PARITY PRINCIPLE EARLIER RECOGNIZED IN LMWS CASE (SUPRA), BUT ON DEEPER CON SIDERATION IT SEEMS TO US THAT IT WAS BECAUSE OF THE STATUTORY DEFINITION OF THE PRO FITS OF THE BUSINESS EXCLUDING RECEIPTS WHICH DO NOT HAVE AN ELEMENT OF TURNOVER O R WHICH HAD NO NEXUS WITH THE EXPORT ACTIVITY THAT THE PROCESSING CHARGES HAD TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS THOUGH NOT FROM THE TOTAL TURNOVER. THIS, COUPLED WITH THE FACT THAT THE SUPREME COURT ITSELF HAS BROUGHT OUT THE DISTINCTIO N BETWEEN LMWS CASE (SUPRA) AND K. RAVINDRANATHAN NAIRS CASE (SUPRA) AT PAGES 241-242 PERSUADES US TO HOLD THAT IN A CASE WHERE THE EXPORT TURNOVER IS TO BE C OMPARED WITH THE TOTAL TURNOVER, IT IS THE FORMER JUDGMENT IN THE CASE OF LMW(SUPRA) TH AT WILL GOVERN THE DECISION AND NOT THE JUDGMENT IN THE CASE OF K. RAVINDRANATHAN N AIRS CASE (SUPRA). 6.6 IN THE LIGHT OF THE ABOVE DISCUSSION OF ITAT S PECIAL BENCH, CHENNAI, WE FIND THAT THE JUDGMENT OF THE APEX COUR T IN THE CASE OF K. RAVINDRANATHAN NAIR (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE CASE UNDER CONSIDERATION. IN THE CASE UNDER CONSIDE RATION, STITCHING CHARGES WERE INCLUDED IN THE TURNOVER AS WELL AS IN THE PROFIT WHEREAS IN THE CASE BEFORE THE APEX COURT PROCESSIN G CHARGES WERE NOT INCLUDED IN TURNOVER. THE JUDGMENT OF HONBLE B OMBAY HIGH COURT IN THE CASE OF CIT VS. SG ZHAVERI CONSULTANCY LTD., (SUPRA) RELIED UPON BY THE REVENUE IS ALSO DISTINGUISHABLE ON FACT S. HONBLE ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 13 BOMBAY HIGH COURT WHILE DECIDING THE CASE OF BANGA LORE CLOTHING CO. (SUPRA) DISTINGUISHED THAT JUDGMENT OF SG ZHAVE RI CONSULTANCY LTD. (SUPRA). AS STATED ABOVE THAT EXPLANATION (BAA ) CANNOT BE INVOKED IN EVERY MATTER INVOLVING RECEIPTS BY WAY OF BROKER AGE, COMMISSION, INTEREST, RENT LABOUR CHARGES, ETC. THESE ITEMS OF INCOME HAVE GOT TO BE SEEN IN THE CONTEXT OF BUSINESS ACTIVITY OF THE ASSESSEE. IN THE CASE UNDER CONSIDERATION, THE ASSESSEE ENGAGED IN MANUFA CTURE AND EXPORT OF GARMENTS, MADE UPS AND FABRICS. THE STITC HING CHARGES ARE IN NATURE OF OPERATIONAL PROFIT ASSESSABLE UNDER TH E HEAD PROFITS AND GAINS OF BUSINESS. IT INCLUDED IN TURNOVER. UNDER T HE CIRCUMSTANCES STITCHING CHARGES ARE NOT INDEPENDENT INCOME LIKE I NTEREST ETC. IT IS OPERATIONAL PROFIT OF BUSINESS, THEREFORE, NO NEED TO EXCLUDE 90% BY INVOKING EXPLANATION (BAA) OF SECTION 80HHC OF THE ACT. THIS VIEW IS FORTIFIED BY THE JUDGMENT OF JURISDICTIONAL HIGH CO URT IN THE CASE OF CIT VS. BANGALORE CLOTHING CO.(SUPRA). THE CIT(A) F OLLOWED THE ABOVE JUDGMENT OF JURISDICTIONAL HIGH COURT, THEREFORE, W E DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A). ACCORDINGLY, WE C ONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS THE GROUND RAI SED BY THE REVENUE IN THIS REGARD. 15. IN VIEW OF THE COORDINATE BENCH DECISION IN FAVOUR OF ASSESSEE ON THE SAME ISSUE, THERE IS NO MERIT IN THE ACTION OF THE CIT IN INVOKING JURISDICTION UNDER SECTION 263 AND DIRECTING THE A.O. TO EXCLUDE THE AMOUNT. THEREFORE, WITHOUT GOING INTO THE ISSUE OF MERGER WITH ORDER O F THE CIT(A), AND THE ISSUE THAT THE ORDER OF CIT FINALLY PASSED WAS DIFF ERENT FROM THE ISSUE RAISED IN SHOW CAUSE NOTICE, WE ARE OF THE OPINION THAT AS SESSEES CONTENTIONS REGARDING EXERCISING JURISDICTION HAS TO BE ACCEPTE D ON THE MERITS. SINCE THE COORDINATE BENCH HAS ALREADY CONSIDERED SIMILAR ISS UE IN LATER YEAR IN FAVOUR OF THE ASSESSEE, RESPECTFULLY FOLLOWING THE SAME, WE ARE OF THE OPINION THAT THERE IS NO MERIT IN OBSERVING TO EXCLUDE STIT CHING CHARGES UNDER THE EXPLANATION OF (BAA) BY THE CIT IN THE ORDER UNDER SECTION 263. ACCORDINGLY TO THAT EXTENT THE ORDER OF THE CIT IS NOT ACCORDIN G TO THE PRINCIPLES OF LAW. 16. EVEN FOR ACADEMIC PURPOSE IF THE CONTENTION THAT THE ORDER OF THE A.O. GOT MERGED WITH THE ORDER OF THE CIT(A) ON THE ISSUE OF 80HHC IS TO BE EXAMINED, THE COORDINATE BENCH IN THE CASE OF SONAL GARMENTS VS. JCIT 98 TTJ 1020 (MUM) ON SIMILAR ISSUE HELD AS UNDER: - REVISION MERGER WITH APPELLATE ORDER-EXTENT THER EOF-SUBJECT-MATTER OF APPEAL WAS COMPUTATION OF DEDUCTION UNDER S. 80H HC CIT(A) GAVE SOME FINDINGS ON COMPUTATION OF DEDUCTION TH US, ASSESSMENT ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 14 ORDER MERGED WITH ORDER OF CIT(A) THEREFORE EXERC ISE OF POWER BY CIT UNDER S. 263 WAS NOT AVAILABLE. 17. SIMILAR VIEW WAS EXPRESSED BY THE COORDINATE BENCH IN THE CASE OF MARICO INDUSTRIES LTD. 115 TTJ (MUM) 497 AS UNDER: - REVISION MERGER WITH APPELLATE ORDER ISSUE SUB JECT-MATTER OF APPEAL BEFORE CIT(A) ISSUE OF DEDUCTION UNDER S. 80-IB HAVING BEEN MADE SUBJECT-MATTER OF APPEAL BEFORE CIT(A), THE SA ID ISSUE MERGED WITH THE ORDER OF THE CIT(A) AS A WHOLE HENCE WAS N O MORE AMENABLE TO REVISIONAL JURISDICTION OF CIT IN VIEW OF EXPLAN ATION (C) TO S. 263. 18. THEREFORE, WE ARE OF THE OPINION THAT THE ORDER OF THE A.O. HAS MERGED WITH THE ORDER OF THE CIT(A) BY THE TIME THE CIT EX ERCISED JURISDICTION UNDER SECTION 263 ON THE ISSUE OF COMPUTATION U/S 80HHC. THEREFORE CIT LACKS JURISDICTION TO REVISE THE ORDER ON ONE OF THE ASPE CT OF COMPUTATION U/S 80HHC. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSES SEE ARE UPHELD. ORDER OF THE CIT UNDER SECTION 263 DATED 15.03.2007 WAS S ET ASIDE. ITA NO. 2269/MUM/2009 19. IN THIS APPEAL THE GROUNDS ARE AS UNDER: - 1 ON FACTS IN LAW, THE LEARNED CIT(A) HAD ERRED IN HOLDING THAT STITCHING CHARGES OF RS.91,47,070/- ARE EXCLUDED FO R ALLOWING DEDUCTION U/S. 80-HON'BLE HIGH COURT AS DIRECTED BY LEARNED CIT-18 IN HIS ORDER U/S. 263 OF THE I.T. ACT, 1961 EVEN THOUGH NO SUCH DIRECTION WAS PASSED BY LEARNED CIT-18 IN HIS ORDER U/S. 263. UNDER THE FACTS THE CIRCUMSTANCES OF THE MATTE R, HE OUGHT NOT TO HAVE HELD SO. 2. ON FACTS AND IN LAW, THE LEARNED CIT(A) HAD FAIL ED TO APPRECIATE THAT THE STITCHING CHARGES FORMS PART OF THE TOTAL TURNOVER AND THE SAME CANNOT BE EXCLUDED FROM THE PROFITS FOR THE PU RPOSE OF CALCULATING DEDUCTION U/S. 80HHC. UNDER THE FACTS A ND CIRCUMSTANCES OF THE MATTER, STITCHING CHARGES SHOU LD NOT BE EXCLUDED FROM THE PROFIT FOR COMPUTING DEDUCTION U/ S. 80HHC. 3. ON FACTS AND IN LAW, THE LEARNED CIT(A) HAD ERRE D IN CONSIDERING THE ARGUMENTS THAT NETTING OF THE STITCHING CHARGES SHOULD BE ALLOWED BY STATING THAT ISSUES REQUIRING FRESH DETE RMINATION/ VERIFICATION OF THE FACTS CAN BE TAKEN DURING THE A PPELLATE PROCEEDINGS UNLESS TAKEN DURING ORIGINAL PROCEEDING S. UNDER THE FACTS AND CIRCUMSTANCES OF THE MATTER, HE SHOULD HA VE ADMITTED THE FRESH ARGUMENTS DURING THE APPEAL HEARING. 4. WITHOUT PREJUDICE TO GROUNDS OF APPEAL NO. 2, TH E LEARNED CIT(A) HAD FAILED TO APPRECIATE THAT ONLY NET AMOUNT OF ST ITCHING ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 15 CHARGES ARE REQUIRED TO BE EXCLUDED FROM THE PROFIT S WHILE CALCULATING DEDUCTION U/S. 80-HON'BLE HIGH COURT. 5. ON FACTS AND IN LAW, THE LEARNED CIT(A) HAD ERRE D IN HOLDING THAT THE ASSESSING OFFICER WAS RIGHT IN TAKING UP THE LE GAL ISSUES DURING CONTINUATION OF THE ASSESSMENT PROCEEDINGS I .E. 143(3) R.W.S. 263 OF THE ACT. UNDER THE FACTS AND CIRCUMST ANCES OF THE MATTER, HE OUGHT NOT TO HAVE HELD SO. 6. ON FACTS AND IN LAW, THE LEARNED CIT(A) HAD ERRE D IN HOLDING THAT RELIEF U/S. 80-IA SHOULD BE DEDUCTED FROM THE PROFI TS & GAINS OF THE BUSINESS BEFORE COMPUTING THE RELIEF U/S. 80HHC . UNDER THE FACTS AND CIRCUMSTANCES OF THE MATTER, HE OUGHT NOT TO HAVE HELD SO. 20. THIS APPEAL BY THE ASSESSEE IS CONSEQUENT TO THE DI RECTION GIVEN BY THE CIT UNDER SECTION 263. THE A.O. PASSED THE CONSEQUE NTIAL ORDER VIDE ORDER DATED 16.12.2007. THE CIT(A) DECLINED TO INTERFERE AS THE A.O. PASSED THE ORDER IN TUNE WITH THE ORDER OF THE CIT. ACCORDINGL Y THE GROUNDS ARE RAISED. 21. WE HAVE CONSIDERED THE ISSUE OF JURISDICTION OF THE CIT TO REVISE THE ORDER UNDER SECTION 263 IN EARLIER APPEAL AND CAME TO CONCLUSION THAT THE CIT HAS NOT EXERCISED JURISDICTION CORRECTLY AS HE LACKS JURISDICTION TO DO SO AND ACCORDINGLY THAT ORDER WAS SET ASIDE. CONSEQUEN TLY, THE SUBSEQUENT PROCEEDINGS BASED ON THE SAME ORDER BECOME VOID. IN VIEW OF THIS, THERE IS NO NEED TO CONSIDER THE ISSUES ON MERITS. EVEN OTHE RWISE, THE ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE IN AY 2004-05 BY THE COORDINATE BENCH WHICH WAS DISCUSSED IN ABOVE APPEAL, THEREFORE THE GROUND S RAISED BY ASSESSEE ARE TO BE ALLOWED. 22. NOT ONLY THAT, IT WAS NOTICED THAT THE CITS DIRECT ION IN 263 WAS TO CONSIDER EXCLUDING STITCHING CHARGES RECEIVED AT 9 0% UNDER THE PROVISIONS OF (BAA). AS SEEN FROM THE ORDER THE A.O. DID NOT E XCLUDE THE ABOVE AMOUNT (WE COULD NOT SEE THE SAME IN THE COMPUTATION) BUT ALSO DIFFERED AND DECIDED THE TOTAL TURNOVER, EXPORT TURNOVER, TRADING PROFIT S AND EXPORT PROFITS FROM WHAT WAS DETERMINED IN THE EARLIER PROCEEDINGS. NEI THER THE LEARNED COUNSEL NOR THE LEARNED D.R. COULD EXPLAIN HOW AND WHAT BAS IS THE A.O. PASSED THE CONSEQUENTIAL ORDER. THE ONLY ISSUE CONSIDERED BY T HE CIT WAS TO EXCLUDE THE STITCHING CHARGES FROM THE COMPUTATION OF PROFI TS OF BUSINESS IN THE PROCEEDINGS U/S 263. SINCE THE ORDER OF THE A.O. IS NOT IN CONSONANCE WITH ITA NOS. 2269 & 3542/MUM/2010 M/S. RACHANA UDYOG 16 THE DIRECTIONS OF THE CIT ON THAT REASON ALSO, THE ORDER CAN NOT BE SUSTAINED. THE GROUNDS OF THE ASSESSEE ARE TREATED AS ALLOWED. 23. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH AUGUST 2011. SD/- SD/- (D.K. AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 30 TH AUGUST 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) , MUMBAI 4. THE CIT XVIII, MUMBAI CITY 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.