TMI Blog2010 (6) TMI 433X X X X Extracts X X X X X X X X Extracts X X X X ..... on paid to the workmen was therefore an allowable deduction within the meaning of section 37(1) since there was no closure of the business. - IT Appeal No. 128 of 2009 - - - Dated:- 18-6-2010 - CHANDRACHUD D. Y. DR., DEVADHAR J. P., JJ JUDGMENT Dr. D. Y. Chandrachud J.- The appeal by the Revenue under section 260A of the Income-tax Act, 1961 has raised the following questions of law : "(A) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the insurance claim amounting to Rs. 36.22 lakhs related to stock-in-trade of the assessee-company and therefore there was no justification to exclude 90 per cent. of the insurance claim while computing eligible profits under section 80HHC of the Income-tax Act, even though there is a clear finding of the Assessing Officer that the insurance claim is not directly related to business profit ? (B) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that sundry receipts amounting to Rs. 28.17 lakhs related to activity incidental to the business carried on by the assessee-company and therefore there was no justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the insurance claim is liable to be excluded from the profits of the business under Explanation (baa) to section 80HHC. Reliance was sought to be placed in this regard on the judgment of the Supreme Court in CIT v. K. Ravindranathan Nair [2007] 295 ITR 228. On the other hand, it was urged on behalf of the assessee that a contract of insurance indemnifies the insured for a loss that has occurred, in the present case to the stock-in-trade. Learned counsel submitted that the claim for insurance on account of the stock-in-trade, hence, did not constitute an independent item of income similar to commission, interest, rent, brokerage or other charges. On this foundation it has been urged that the insurance claim would not be susceptible to a deduction of 90 per cent. under Explanation (baa). 5. At the outset it would be necessary for the court to advert to the judg-ment of this Division Bench dated April 8, 2010, in CIT v. Dresser Rand India Pvt. Ltd. [2010] 323 ITR 429 (Bom) (Income-tax Appeal 2186 of 2009). The question of law which was formulated in the appeal by the Revenue was as follows (page 432) : "Whether on the facts and in the circumstances of the case, the Tribunal w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for determining the profits derived from the export of goods or merchandise to which the section applies. Where the export out ofIndiais of goods or merchandise manufactured or processed by the assessee, the profits derived from such export "shall be the amount which bears to the profits of the business", the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. In other words, the proportion between the export turnover and the total turnover of the business is applied to the profits of the business in order to deter- mine the extent to which the profits are to be regarded as being derived from export. 8. It would be necessary to advert to Explanation (baa) which defines the profits of business as follows : "(baa) `profits of the business' means the profits of the business as computed under the head `Profits and gains of business or profession' as reduced by- (1) ninety per cent. of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded from gross total income because such receipts had no nexus with the export turnover." 11. In determining in each case as to whether a receipt which forms part of the profits of business is liable to undergo a reduction of ninety per cent. as stipulated in clause (1) of Explanation (baa), it is necessary for the court to consider whether the receipt is "of a similar nature included in such profits". The rationale for excluding ninety per cent. of the receipts by way of brokerage, commission, interest, rent or charges is that these are independent incomes and their inclusion in the profits of business would result in a distortion. In determining whether any other receipt is liable to undergo a reduction of ninety per cent. the basic prescription which must be borne in mind is whether the receipt is of a similar nature and is included in the profits of business. To be susceptible to a reduction the receipt must be of a nature similar to brokerage, commission, interest, rent or charges. 12. In the present case, the insurance claim, it must be clarified, related to the stock-in-trade and it is only an insurance claim of that nature which forms the subject-matter of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods or merchandise the proportion of the export turnover to the total turnover of the business is applied to the profits of the business. The profits of the business in turn are defined in Explanation (baa) to section 80HHC. Hence, the element of export turnover is a facet which has been taken care of by the Legislature in the application of the formula which is referred to in subsection (3) of section 80HHC. In determining the profits of the business for the purposes of Explanation (baa), the incomes which are susceptible to a reduction of ninety per cent. are those which are specifically prescribed by the Legislature. These are, inter alia, the incomes referred to in clauses (iiia), (iiib) and (iiic) of section 28 and receipts by way of brokerage, commission, interest, rent, charges or receipts of a similar nature included in such profits. Therefore, before a receipt is liable to be excluded to the extent of ninety per cent. it must be a receipt of a nature similar to brokerage, commission, interest, rent or charges. For the reasons which we have already indicated, we have come to the conclusion that the claim on account of insurance for the stock-in-trade did not constitute a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity at various locations, all other support functions such as purchase, sales, marketing, distribution, finance and human resources were centralized with the head office. None of the manufacturing units functioned as independent profit centres. All purchases for the manufacturing units were centralized at the head office. The sales and marketing function was also centralized. The working capital requirements and capital commitments with regard to plant operations were also centralized. The Tribunal has entered a finding of fact that there was interdependence and a unity of control between the three units established by the existence of common management, a common business organization, administration and fund. The closure of the unit at Ankleshwar did not involve the closure of the business. The retrenchment compensation paid to the workmen was therefore an allowable deduction within the meaning of section 37(1) since there was no closure of the business. 18. In view of the finding that there has been no closure of the business as such, the payments which were made to the workmen, therefore qualify for a deduction under section 37. The view of the Tribunal does not suffer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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