HIGH COURT OF PUNJAB AND HARYANA
R.N. Gupta Co. Ltd.
Commissioner of Income-tax (Appeals)-I
IT Appeal No. 119 of 2012
JANUARY 22, 2013
Hemant Gupta, J.
The present appeal under Section 260-A of the Income Tax Act, 1961 arises out of an order passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short ‘the Tribunal’) dated 6.1.2012 pertaining to the assessment year 2003-2004 raising following substantial questions of law:-
|Whether in facts and circumstances of the case, the action of the ld. authorities below in ignoring the fact that scrap is incidental to manufacturing of finished good and no expense is incurred for the same and therefore the entire scrap sale forms part of business profit and thus includible for the computation purposes u/s 80 HHC is legally unsustainable in the eyes of law?|
|Whether in fact and circumstances of the case, the action of the authorities below in acting on its own presumptions and ignoring the law laid down by this Hon’ble Court in CIT v. Bicycle Wheels (India) is legally unsustainable in the eyes of law?|
|Whether in fact and circumstances of the case, the action of the authorities below, the impugned orders Annexure A-1 and A-3 are legally sustainable in the eyes of law?|
2. Though the assessee has framed the aforesaid three questions of law, yet it is question No. (i) which arises for consideration of this Court.
3. The assessee is engaged in manufacturing of goods for export. In the process of manufacturing, the scrap is generated, which is a bi-product of manufacturing activity. The Assessing Officer has not accepted the explanation of the assessee that no expenses are incurred for generation of scrap, and therefore, expenditure should be taken as nil for not accepted. The Assessing Officer has disallowed the deductions claimed by the assessee under Section 80 HHC of the Income Tax Act, 1961.
4. The learned Commissioner of Income Tax (Appeals) accepted the appeal of the assessee relying upon a judgment of this Court in CIT v. Bicycle Wheels  335 ITR 384 that scrap is generated in the course of manufacturing of goods. The scrap is systematically sold by the assessee forming part of its business. It was held that value of scrap generated goes on to increase the profits of organization and that there is no profit element embedded in the value of scrap. Thus, the order of the Assessing Officer was set aside. But in further appeal before the Tribunal at the instance of Revenue, the Tribunal recorded the following findings:-
“9. As regards the inclusion of value of scrap sale in the profits of the business for computing the relief u/s 80HHC, the entire value of scrap sales cannot be included in the profits of the business. What can be included in the profits of the business for working out the relief u/s 80HHC is the profit element in respect of sales of scrap and not the total sales of scrap. On the facts of the case, the profit element on sale of scrap is estimated at 7.5%. The AO is directed to include 7.5% of sales of scrap in the profits of the business for working out the relief u/s 80HHC. In this view of the matter, the order of the ld. CIT(A) directing the AO to include the total sales of scrap in the profits of business is vacated. The AO is directed to include only 7.5% being estimated element of profit in the sale of scrap in the profits of the business for working out the relief u/s 80HHC.”
5. Learned counsel for the appellant has vehemently argued that the order of the Tribunal runs counter to the judgment of this Court in Mahavir Cycle Industries v. CIT I.T.A. No.823 of 2008 decided on 08.04.2011, wherein reliance has been placed upon an earlier order of this Court in Bicycles Wheels‘ case (supra) as well as the order of the Kerala High Court in CIT v. Kar Mobiles Ltd.  195 Taxman 425. Therefore, it is contended that the findings recorded by the Tribunal runs counter to the judgments of this Court.
6. Mr. Katoch, learned counsel for the revenue has argued that the scrap value has to be included in the total turn-over but cannot be included in business profit as only the profit after deducting the expenses of generation of scrap can be added in the business profit.
7. We find that the argument raised by Mr. Katoch is wholly untenable. The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is bi-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap. Since the question of law stands answered by this Court in favour of assessee in the above mentioned judgments, therefore, the first substantial question of law is answered in favour of the assessee and against the Revenue.