Case Law Details
ITO Vs Madhusudhan Industries (ITAT Ahmedabad)
Introduction: The Income Tax Appellate Tribunal (ITAT) Ahmedabad made a significant decision in the case of ITO vs Madhusudhan Industries, establishing that the deductions under Sections 80IA/80IB should be subtracted from business profits for the calculation of the deduction under Section 80HHC. The case saw both Revenue and the assessee presenting cross-appeals against a common order.
Analysis: According to the tribunal, the assessee’s argument that the deduction under Section 80HHC should be independently computed, without reducing relief granted under sections 80IA/80IB, was dismissed based on the jurisdictional High Court’s decision. Furthermore, the tribunal upheld the decision of the CIT(A) regarding the Revenue’s appeal, affirming that the miscellaneous income like the sale of scrap, stores, and contract compensation is part of business profits and eligible for deduction u/s 80HHC. This, in essence, confirmed that such income is generated from business activity.
Conclusion: The ITAT’s ruling in the case of ITO vs Madhusudhan Industries provides clarity on how deductions under different sections of the Income Tax Act should be computed. This could serve as a valuable precedent for similar cases in the future. The dismissal of both Revenue and the assessee’s appeals further solidifies the tribunal’s decision.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These are cross-appeals by the Revenue and the assessee against common order of the ld. CIT(A)-VIII, Ahmedabad dated 29-12-2011 under section 250(6) the Income Tax Act, 1961 (hereinafter referred to as the “Act’ for short) pertaining to the Asst.Year1999-2000. Both the appeals are disposed of by this common order.
2. The ld. DR filed an application seeking adjournment on the ground that he would be unable to attend the hearing since he had been called for a briefing meeting by Election Commission of India. The said adjournment application was placed before us. At this juncture, ld. Senior Counsel, Shri S.N. Soparkar, appearing for the assessee stated before us that as far the assesses appeal is concerned the same is liable to be dismissed since the issue raised in the appeal stands decided against the assessee covered by the decision of the jurisdictional High Court in the matter. He pointed out that the issue arising in the assessee’s appeal related to simultaneous claim of deduction of profits of business of the assessee under section 80IA and 80HHC of the Act, whether the deduction under section 80HHC of the Act is tobe allowed on the net profits remaining after the claim of deduction under section 80IA of the Act.
3. He pointed out that this issue had been referred to a Larger Bench of the Supreme Court in view of divergent views of the Hon’ble Judges in the case of ACIT Vs. M/s. Micro Labs Ltd. reported in 380 ITR 1 (SC).That pending disposal of this reference the present appeals were being adjourned time and again; that now this reference to the Larger Bench had been disposed of as dismissed. The ld.counsel for the assessee stated, therefore, that the issue had to be adjudicated in the light of the prevailing judgments of Hon’ble High Courts. He pointed out that the jurisdictional High Court had decided the issue against the case in the case of CIT Vs. Atul Intermediates, 45 com 275 (Guj), and therefore, he conceded that the assessee’s appeal was without any merits, and needed to be dismissed.
4. Having heard the ld. Sr. counsel for the assessee, we have further noted that the Revenues appeal relates to minor issues of claim of deduction u/s 80HHC of the Act on Miscellaneous incomes, which could be decided with the assistance of the Ld.CIT(DR) present in the court and on the basis of the material on record before us. Noting that the present appeals are very old instituted in 2012, i.e more than 10 years back , pertaining to A.Y 1999-2000,i.e more than 20 years old, and also noting the concession of the Ld.Sr counsel for the assessee in the assesses appeal which relates to the major issue in the appeals, in the interest of all concerned it was decided not to adjourn the matter any further and to proceed with the adjudication of the appeals. The adjournment application of the Ld.Sr.DR was accordingly rejected and the appeals were proceeded to be heard.
At the outset it was pointed out that this was the second round before us, with the ITAT having restored certain issues for reconsideration to the AO in the first round as under;
1. reducing deduction allowed u/s 80IA of the Act from the computation of deduction u/s 80HHC of the Act.
2. various items of Miscellaneous income whether entitled to deduction u/s 80HHC of the Act.
That the first issue was decided against the assessee both by the AO and the Ld. CIT(A) holding that deduction allowed u/s 80IA of the Act should be reduced while calculation deduction allowable u/s 80HHC of the Act. While on the second issue, out of various incomes included in Misc. Income, held to be not eligible to claim of deduction u/s 80HHC of the Act, the Ld. CIT(A) allowed this claim vis a vis income from scrap sales and contract compensation received by the assessee. Aggrieved by this order of the Ld. CIT(A) both the assessee and the Revenue have come up in appeal before us.
5. Taking up first the assessee’s appeal in ITA No.697/Ahd/2012, the grounds raised are as under:
“1. That the order passed by the Ld. CIT (Appeals)-Vlll, Ahmedabad is against law, facts and evidence on record.
2. The Ld. CIT (Appeals)-VIII has erred in law and on facts in directing that deduction entitled to the appellant company U/S.80IA/80IB of the Act be reduced from Business Profits for the purpose of computing deduction U/s.80HHC of the Act.
3. That the appellant company in law and on the facts claims that deduction U/s.80HHC should be independently computed without reducing relief granted to the appellant company U/s. 80IA/80IB of the Act.
4. That in law and on facts of the case, the appellant company submits that in view of the divergent and conflicting decisions of different High Courts view favorably to the appellant should be adopted while computing deducting U/S.80HHC of the Act by adopting Business Profit without reducing deduction entitled to the appellant company U/s.80IA/80IBof the Act.”
6. As is evident from the above, the solitary issue raised in the present appeal relates to the claim of deduction under section 80HHC of the Act; whether to be computed on the residual profits remaining after allowing deduction under section 80IA of the Act in terms of section 80IA(9) of the Act. Since the ld. counsel for the assessee has fairly conceded that the reference to the Larger Bench of the Supreme Court on this issue in the case of Micro Lab (supra) has been dismissed on 17.9.2018 in CA No.007427/2012 and Hon’ble jurisdictional High Court has decided the issue against the assessee in the case of Atul Intermediates (supra), the grounds raised by the assessee merits no consideration and are dismissed. The appeal of the assessee, is therefore, dismissed.
7. Taking up now, the Revenue’s appeal in ITA No.638/Ahd/2012, the ground raised are as under:
a) The Ld. CIT(A) has erred in law and on facts in directing the A.O. to include misc. income on sale of scrape, stores etc. from business profit while computing deduction u/s 80HHC without appreciating fact that the misc. income such as sale of scrap, stores etc. cannot be treated as part of business profit and is not generated from the business activity eligible for deduction u/s 80HHC.
b) The Ld. CIT(A) has erred in law and the facts in directing the A.O. to include contract compensation from business profit while computing deduction u/s 80HHC without appreciating fact that the contract compensation cannot be treated as part of business profit and is not generated from the business activity eligible for deduction u/s 80HHC.
c) On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
8. The only issue, as is evident from the grounds raised above, relates to allowance of claim of deduction under section 80HHC on the following incomes:
i) income such as sale of scrap, stores etc;
ii) Income in the nature of contract compensation.
9. The order of the authorities below reveals that components of such income was Rs.12,90,973/- and Rs.48,334/- respectively. The ld. CIT(A) allowed the claim of deduction under section 80HHC finding that both related to income arising from business activity of the appellant company ,which even the AO has treated as business income and not income from other sources. Applying the decision of Hon’ble Bombay High Court in the case of CIT Vs. Bangalore Clothing CO., (2003) 180 CTR (Bom) 127, the assessee claimed that deduction in relation to both sale of scrap and stores and contract compensation was allowed by the ld. CIT(A). His finding in this regard at page no.3 & 4 of the order is as under:
(c) Misc. income excluded from business profits.
Misc. income is sale of scrap, stores etc. which is arising from the business activities of the appellant company and the ld. AO has not considered it as income from other sources; therefore, it cannot be excluded from the business profits. In the decision of Delhi High Court in the case of Sony India (P) Ltd. Vs. Dy.CIT (2008) 114 ITD 448, this matter has been allowed as eligible business profit for computing deduction U/S.80HHC of the Act following the decision in the case of CIT vs. Bangalore Clothing Co. reported at [2003] 180 CTR (Bom.) page 127. Following these decisions, I hereby direct to include Misc. Income as business profits.
(e) Contract Compensation – Rs.48,334/- of Sanitaryware Division excluded from business profits.
The contract compensation – Rs.48,334/- of Sanitaryware Division is on account of claims made for breakages and losses in transit as well as compensation received under contract. The compensation is arising from business of manufacturing, selling and marketing products of the company. It is incidental to company’s own business and is not an independent source of income like rent or interest. Therefore, it being operational income of the unit, following the decision in the case of CIT vs. Bangalore Clothing Co. reported at [2003] 180 CTR (Bom.) page 127 it should be included in computation of business profits.”
10. We have gone through order of the ld. CIT(A) and we see no reason to interfere in the same. The ld. CIT(A) has recorded a finding of the fact that scrap and stores sold, arose from the business activity of the assessee-company. With regard to the contract compensation also, he noted, the same related to compensation recovered on account of claim made for breakages and loss in transit as well as compensation received under contract in the sanitary ware division of the assessee-company. This fact has remained uncontroverted before us.
11. Surprisingly, on going through the assessment order, we find that even the AO had treated the income from scrap sale to be included for the purpose of computing deduction under section 80HHC of the Act. His finding with regard to the income received from sale of scrap/stores at para 7.3 of the order is as under:
“7.3 Out of Misc. income of R.26,24,122/- income received from sale of scrap of store, writing off sundry debtors and creditors and foreign exchange variation has direct nexus with the export earnings. Hence, it is considered while working of business profits.”
Therefore, with regard to allowance of deduction under section 80HHC on the sale of scrap and parts, Revenue cannot be in any grievance since as per the AO itself, it is allowable to the assessee.
12. As far as the contract compensation received , considering the uncontroverted facts relating to the nature of the receipt, we agree with the Ld. CIT(A) that it has arisen from the business of the assessee, and therefore, the ld. CIT(A) has rightly held that the assessee is entitled to claim deduction under section 80HHC of the Act on the same.
In view of the above, the grounds raised by the Revenue are accordingly dismissed.
13. In the result, both the appeals Revenue and the assessee are dismissed.
Order pronounced in the Court on 14th June, 2023 at Ahmedabad.
