Nahar Spinning Mills Limited V. The Commissioner of Income Tax, Ludhiana

ITA/338/2008

AI Insights

The case involves M/s Nahar Spinning Mills Limited, the appellant, contesting decisions made by the Income Tax Appellate Tribunal, Chandigarh, regarding two main issues for the assessment year 2004-05. The first issue was the disallowance of a compounding fee of ` 87,350 paid to the Municipal Corporation for legalizing building construction, which the Tribunal ruled was not an allowable business expenditure under Section 37 of the Income Tax Act. The second issue was the disallowance of a claim under Section 80HHC on export incentives received, specifically DEPB on yarn, which the Tribunal upheld based on the conditions not being met for exporters with turnover exceeding ` 10 crores. The High Court upheld the Tribunal's decision on the first issue and remanded the second issue to the Assessing Officer for re-evaluation based on the Supreme Court's precedent.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 795334 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 27-08-2014
• Assessment Year: misc
• Other Referred Cases: Topman Exports vs. Commissioner of Income Tax, Commissioner of Income Tax, Range XIV, Chennai vs. Sara Leather Industries
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: RAJESH KATOCH
• Assessee Lawyers: SANJAY BANSAL; RAJNI PAL
• Keywords: Assessment Year 2004-05; Business expenditure; DEPB; Export incentive; Legalizing construction
• Section: 143(3); 143(1); 37; 28; 260A; 80HHC(3)

Judgement Text

"ITA No.338 of 2008 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.338 of 2008 (O&M) Date of decision: 27.8.2014 M/s Nahar Spinning Mills Limited ……Appellant Vs. The Commissioner of Income Tax, Ludhiana …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE FATEH DEEP SINGH Present: Mr. Sanjay Bansal, Sr. Advocate with Ms. Rajni Pal, Advocate for the appellant. Mr. Rajesh Katoch, Advocate for the respondent. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the appellant assessee under section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 11.1.2008, Annexure P.1 passed by the Income Tax Appellate Tribunal, Chandigarh Bench A, Chandigarh (in short, “the Tribunal”) in Cross Objection No.1/CHANDI/2007 arising out of ITA No.808/CHANDI/2006 for the assessment year 2004-05, claiming following substantial questions of law:- “i) Whether on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the amount of ` 87,350/- paid to the Municipal Corporation, Ludhiana for legalizing the construction of its building was not an allowable business expenditure under Section 37 of the Income Tax Act, GURBAX SINGH 2014.09.12 15:22 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.338 of 2008 (O&M) 2 1961? ii) Whether on a correct interpretation of the amended provisions of Section 80HHC(3) of the Income Tax Act, 1961, was the Tribunal legally correct in upholding the order passed by the Assessing Officer whereby the latter had disallowed the claim of the appellant under section 80HHC on export incentive i.e. DEPB on yarn?” 2. A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. Return of income declaring total income at ` 17,08,00,823/- was filed by the assessee on 31.10.2004. The same was processed under section 143(1) of the Act on 31.3.2005. The Assessing officer vide order dated 27.3.2006 disallowed the amount of compounding fee of ` 87,350/- paid by the assessee to Municipal Corporation for the purpose of legalizing the construction of its building under section 37 of the Act. The Assessing officer also negatived the claim of the assessee on DEPB of ` 3,13,87,657/- for export of yarn as export incentive for computation of deduction under Section 80HHC of the Act vide order dated 27.3.2006, Annexure P.3. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 30.8.2006, Annexure P.2, the CIT(A) partly allowed the appeal. The appellant filed further appeal before the Tribunal. Vide order dated 11.1.2008, Annexure P.1, the Tribunal dismissed the appeal and partly allowed the cross objection filed by the assessee. Hence the instant appeal by the appellant assessee. 3. We have heard learned counsel for the for the parties and perused the record. 4. Learned counsel for the assessee fairly accepted that question GURBAX SINGH 2014.09.12 15:22 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.338 of 2008 (O&M) 3 No.(i) stands concluded by the decision of this Court in ITA No.69 of 2008 decided on 28.7.2014 in the case of the assessee in M/s Nahar Spinning Mills vs. The Commissioner of Income Tax, Ludhiana. Accordingly, question No.(i) is answered against the assessee. 5. Adverting to question No.(ii), learned counsel for the appellant submitted that the present case was akin to the decision of the Apex Court in Topman Exports vs. Commissioner of Income Tax, (2012) 342 ITR 49 and accordingly, matter be remitted to the Assessing Officer to recompute the deduction under Section 80HHC of the Act. 6. In Topman Exports's case (supra), the Supreme Court observed that it was essential to fulfill the two conditions incorporated in third Proviso to sub section 3 of Section 80HHC of the Act. It was further noticed that the matter had to be remanded to the Assessing Officer to examine whether on profits on transfer of DEPB under clause (d) of section 28 of the Act, the assessee was entitled to benefit of exclusion of a smaller figure from “profits of the business” under Explanation (baa) to section 80HHC of the Act. Reference be made to the following observations:- “Therefore, if the assessee having export turnover of more than Rs.10 crores does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to sub-section (3) of Section 80HHC. 22. The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs.10 crores and has made profits on transfer of DEPB under clause (d) of Section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of Section 80HHC, but he would get the benefit of exclusion of a smaller figure from “profits of the business” under explanation (baa) to Section GURBAX SINGH 2014.09.12 15:22 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.338 of 2008 (O&M) 4 80HHC of the Act and there is nothing in explanation (baa) to Section 80HHC to show that this benefit of exclusion of a smaller figure from “profits of the business” will not be available to an assessee having an export turnover exceeding Rs.10 crores. In other words, where the export turnover of an assessee exceeds Rs.10 crores, he does not get the benefit of addition of ninety per cent of export incentive under clause (iiid) of Section 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in computation of a bigger export profit.” 7. The Tribunal had recorded the following findings :- “9. The assessee has received the benefit of Duty Entitlement Pass Book Scheme and the same is assessable under the head 'profit and gains on business or profession' under section 28 (iiid) of the Act. A formula has been provided under section 80HHC(3) for computation of the profits derived from exporters. Certain adjustments have been provided under the provisos added to section 80HHC(3). The adjustments favourable to the assessee under 3rd proviso to Section 80HHC are valid only if the conditions (a) and (b) referred to in the said proviso are satisfied in the case of exporter whose turnover exceeds ` 10 crores. In the case of exporters such conditions are not required to be satisfied as they are covered under 2nd proviso to section 80HHC(3). In this case when the conditions under 3rd proviso to section 80HHC are not satisfied,the benefit of third proviso to section 80HHC is not available to the assessee.” The Madras High Court in Commissioner of Income Tax, Range XIV, Chennai vs. Sara Leather Industries, (2013) 33 Taxmann.com 157 (Madras), under similar circumstances on the basis of Topman Exports's case (supra) directed the Assessing officer to compute the deduction under section 80HHC of the Act in the light of the decision of the Apex Court in GURBAX SINGH 2014.09.12 15:22 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.338 of 2008 (O&M) 5 Topman Exports's case (supra) and pass fresh order. 8. Consequently, question No.(i) is answered against the assessee while question No.(ii) is disposed of by remanding the matter to the Assessing Officer who shall pass fresh order in the light of judgment of the Apex Court in Topman Exports's case (supra) after affording an opportunity of hearing to the assessee. The appeal stands disposed of accordingly. (Ajay Kumar Mittal) Judge August 27, 2014 (Fateh Deep Singh) Judge ‘gs' GURBAX SINGH 2014.09.12 15:22 I attest to the accuracy and integrity of this document High Court Chandigarh "