SCRAP SALE MUST BE REGARDED AS RECOVERY OF PART OF COST OF MATERIAL AND NOT TURNOVER

[C.A. DEV KUMAR KOTHARI]

Relevant links and references:

Section 10B and 44AB of the Income-tax Act, 1961.

M/s Rieter-LMW Machinery Ltd. Versus The ACIT Company Circle IV(2), Coimbatore 2012 (10) TMI 510 - ITAT CHENNAI

Scrap generated in a business:

In any business or other activity some kind of scrap material are outcome of consumption of main material. Even in domestic usages of material we find some items of scrap material  found  in course of consumption of main material or in course of repairing , maintaining or servicing of properties, apparatus etc.

Examples of scrap material:

Packing material of any material say even a carry bag for carrying vegetables for home or restaurant can be considered as a scrap material once it is found not as reusable. If it has a sale value and one collect some Bags and realize some value, the sale value can appropriately regarded as recovery of part of cost of material.

In case of any manufacturing or service activity we find scarp material in various activities. Some simple illustrations are given below to understand the nature of material as scrap material:

Packing material of various raw material, stores and spares, consumables, capital goods etc. e.g. old containers, bags, boxes, card-board sheets, strippers etc.

Used and unserviceable parts of building, furniture, machine and equipment e.g. old tube lights, bulbs, fittings, tyres and tubes of vehicles, old parts of machines etc.

Scrap material generated in course of manufacturing or service activity while using material in course of business e.g. wooden pieces, metallic scraps etc.

Scrap dealer and other business:

In case of scrap dealers, scrap bought and sold are their main goods in which scrap dealer deals. Therefore, sale of scrap material by a scrap dealer is his turnover.

However, in case of other business of manufacturing, servicing, or even trading buying and selling of scrap material or residuals is not turnover of business activity. These are just incidental to the main business. The sale of scrap is considered separately as sale of scrap or miscellaneous sale or miscellaneous receipts. For example, a professional person may treat or describe sale of old newspapers and magazines as part of recovery of expenses and credit the same in papers and magazine account or may treat as miscellaneous receipts, a manufacturer may treat costs recovered and credit to respective material account, if possible otherwise he may describe all such sales as sale of scrap, a trader may describe as bardana sale or reduce from cost of goods purchased. taxmanagementindia.com

Recovery of cost is true nature:

Sale of such scrap material is in fact recovery of a part of cost of materials purchased and / or used by a person in course of his activities which can be in personal field, professional field, trading or manufacturing or rendering of services etc.

Turnover of business:

Turnover of a business or profession is sale proceed or other considerations received for sale of business goods- goods in which one deals including by-products or consideration for services rendered etc.

Sale proceeds of by-products will be part of turnover.

The following items cannot be regarded as turnover of business:

Sale of capital assets, even if related with business,

Insurance claims received for capital assets

Insurance claim received even for items kept for trading or consumption that is inventory of business Cannot be called turnover of business.

Sale of scrap material unusable tools and equipment, out dated material etc.

Deeming provisions:

In relation of levy of tax in nature of sale tax levied by any name like VAT,ST,CST etc. we find some deeming provisions to include even sale of scrap

As a part of turnover or as taxable by way of specific provisions. However, that does not mean that sale of capital assets or scrap is ‘turnover’ of business in common parlance of trade and industry.

Incentive provisions prescribing calculations based on turnover:

Under various provision of subsidy or fiscal incentives sometimes amount of turnover- like total turnover or global turnover,  turnover of exported goods or services, turnover of specific unit etc. are factors to be considered for Ascertaining the amount of incentive allowable. In such cases, unless there is specific provision ot include items like sale of capital assets or sale of scrap to include in turnover of business or specific business or segment of business etc., such items cannot be included in turnover.

A recent decision of ITAT, which in view of author require further consideration:

In M/s Rieter-LMW Machinery Ltd. Versus The ACIT Company Circle IV(2), Coimbatore 2012 (10) TMI 510 - ITAT CHENNAI matter relating to expression ‘turnover’ came for consideration while computing amount of income exempted under section 10B.

Relevant portion of the order is reproduced below with highlights for analysis:

8. In assessment year 2002-03, it is observed that the scrap sale of the assessee was Rs. 21,91,984/-. The assessee has claimed deduction u/s 10B of the Act on Rs. 21,91,984/- also. The Assessing Officer has disallowed the deduction u/s 10B of the Act on the ground that the sale of scrap was made in India and the sale proceeds of scrap were not realized in convertible foreign exchange by the assessee. The Assessing Officer, therefore, held that it was income from other sources while computing the total income of the assessee and disallowed deduction u/s 10B of the Act on scrap sales.

9. On appeal, the CIT(A) confirmed the action of the Assessing Officer.

10. The A.R of the assessee argued that this scrap was generated during the manufacture of textile machinery, therefore, the sale of scrap was part of the trading receipts of the assessee. He submitted that the sale of scrap cannot be equated as income from other sources of the assessee. It was his submission that after omission of the second proviso to sub-section (1) of section 10B of the Act from assessment year 2002-03 and onwards, the assessee will get deduction for export sales on proportionate basis. He submitted that the scrap sales would form part of the total turnover of the assessee in the formula for computing the eligible deduction u/s 10B of the Act. He submitted that the sale proceeds of scrap cannot be reduced from the eligible profits of the business of the assessee.

11. The DR , on the other hand, supported the orders of the lower authorities.

12. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The undisputed facts of the case are that the assessee realized scrap sales of Rs. 21,91,984/- during the year under consideration and included the same in the total turnover of the assessee for working out deduction u/s 10B of the Act. The Assessing Officer reduced the receipt from scrap sales of Rs. 21,91,984/- from the business profits of the assessee and treated it as income from other sources of the assessee while computing the income of the assessee. The same was confirmed in appeal by the CIT(A).

13. We find that it is not the case of the Revenue that the scrap was not generated during the manufacturing of textile machinery by the assessee. Thus, the sale of scrap is part and parcel of the business receipt of the assessee. That being so, it has to be included in the total turnover of the assessee and cannot be reduced from the business profits of the assessee while computing the deduction u/s 10B of the Act. We, therefore, set aside the orders of the lower authorities and direct the Assessing Officer to recompute the deduction u/s 10B of the Act after including the sale proceeds of scrap in the total turnover of the assessee and including the same in the business income of the assessee.

Therefore, Ground Nos. 2 to 5 of the appeal of the assessee for assessment year 2002-03 are allowed.

Missed provisions:

Before commenting on proceedings and contentions raised in this case author think that it would be useful to consider some of provisions:

Relevant portion of Section 10B regarding turnover and computation of deduction:

[(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.]

Section 44AB – relating to audit:

In section 44AB the language used is as follows;

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore rupees] in any previous year; or

(b) carrying on profession shall, if his gross receipts in profession exceed twenty-five lakh rupees in any previous year; or

We find that the basis of computation of amount to be deducted from total income as per provisions of section 10B (and many other similar provisions) is the profit of the undertaking which is to be apportioned in taxable and  exempted income based on proportion of export turnover of business  of undertaking  and total turnover of business. of undertaking.

On comparison of the expression used in section 10B and 44AB we find that turnover and gross receipts are different. Where intention is to consider gross receipts of business or profession, the expression ‘gross receipt’ is used.

As discussed earlier, sale of scrap material cannot be regarded as turnover of business of export of computer software or articles or things. Selling scrap is not business of undertaking, it is just a part of recovery of costs of materials consumed. However this contention was not raised before the tribunal an therefore we do not have benefit of view of the Tribunal in this case.  

Thus we find that it is statutorily recognized that the expression turnover, and gross receipts are different. The turnover of business shall include only sale proceed of articles or things in which business is carried and will not include many items as discussed and illustrated earlier in this article.

An analysis of the case before Tribunal:

In this case assessee in the return of income has included sale of scrap in amount of total turnover of. During appeals also any effort was not made to contend that scrap sale is not part of turnover of business of eligible unit but is an incidental receipt in nature of recovered part of costs incurred on account of material etc. purchased. Accordingly the Tribunal held that scrap generated in the eligible unit was income of the unit and therefore, deduction was to be allowed subject to computation under formula which takes into account total turnover and export turnover. If the sale value of scrap material was reduced from consumption of material, then it would not form part of turnover. Even if in accounts the amount was included in sales, it could have been reduced as not in nature of turnover of business of articles or things or computer software etc.

M/s Rieter-LMW Machinery Ltd. Versus The ACIT Company Circle IV(2), Coimbatore 2012 (10) TMI 510 - ITAT CHENNAI