2007 (2) TMI 103 - HC - Income Tax

Two issue arises (i) Assessee claim expenses in replacement of machinery is revenue expenditure, (ii) Assessee claim for the exclusion of waste and scrape material generated during the manufacture, royalty received and guarantee commission for calculation of deduction Held (i) Remanded matter to AO by Tribunal (ii) excludible

Summary

Issues:
1. Expenditure on replacement of machinery - capital or revenue?
2. Treatment of scrap, waste materials, royalty, and guarantee commission for deduction under section 80HHC.
3. Inclusion of excise duty and sales tax in turnover for deduction under section 80HHC.

Analysis:
1. The first issue revolves around determining whether the expenditure on the replacement of machinery should be classified as capital or revenue expenditure. The court emphasized that this determination should be based on the provisions of the Income-tax Act rather than the assessee's accounting practice. The judgment referred to a previous case where it was held that all machinery forming a complete unit should be considered together. The court upheld the Tribunal's decision to remand the issue to the Assessing Officer for further investigation.

2. Regarding the treatment of scrap, waste materials, royalty, and guarantee commission for deduction under section 80HHC, the court cited precedents to support its decision. It was established that items not related to the export business of the assessee should be excluded from the turnover for the purpose of calculating the deduction. Furthermore, the court ruled that receipts like royalty and guarantee commission, which do not contribute to turnover, should also be excluded from business profit for deduction under section 80HHC.

3. The final issue dealt with the inclusion of excise duty and sales tax in the turnover for deduction under section 80HHC. Citing previous judgments, the court concluded that these indirect taxes, which are collected and paid over to the government, do not represent a profit element of the business. Therefore, excise duty and sales tax should not be considered part of the total turnover when computing the deduction under section 80HHC. The court dismissed the appeal, finding no substantial questions of law for consideration based on the analysis provided.