TMI Blog2003 (1) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... 789. The Assessing Officer completed the assessment under section 143(3) on February 14, 1994, on the total income of Rs. 3,32,300 after allowing deduction under sections 80HHC and 80-I. This assessment order of the Assessing Officer, dated February 14, 1994, was revised by the Commissioner under section 263 of the Act. The order of the Commissioner is dated October 31, 1996. By the said order, the Commissioner of Income-tax directed the Assessing Officer to reconsider the claims made by the assessee under sections 80HHC and 80-I. In this case, we are concerned with computation of deduction under section 80HHC. Thereafter, the Assessing Officer passed the fresh order of assessment under section 143(3) read with section 263 of the Act. This was on March 30, 1998. By the said order, the Assessing Officer disallowed the claim of deduction under section 80HHC on the ground that the receipt of charges for job work done by the assessee in India amounting to Rs. 66,35,083 was not a part of the total turnover. In this connection, the Assessing Officer relied upon Explanation (baa) to section 80HHC. In short, it was held by the Assessing Officer that such charges did not form part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision under Explanation (baa) to section 80HHC, the Tribunal had erred in including labour charges in the business profits and excluding such charges from the total turnover. He contended that section 80HHC talks of deduction in respect of profits retained for export business. He contended that rent, brokerage, commission, interest and labour charges have no nexus with the export activity. That, such items do not earn foreign exchange for the country and, therefore, by way of Explanation (baa) inserted with effect from April 1, 1992, the Legislature has clarified that such items of income cannot form part of the business profits. He relied upon the judgment of this court in the case of CIT v. S.G. Jhaveri Consultancy Ltd. [2000] 245 ITR 854 in support of his contention. He contended that by including such charges in the business profits, a distorted figure of export profits is arrived at by the assessee. He submits that the issue is no more res integra in view of the above judgment. He contended that, in this case, when the Tribunal decided the matter, the above judgment of the High Court was not available. However, since then, the law is settled in numerous judgments of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rges from business profits, However, it was argued that in the present case, the facts are entirely different because, in this case, the assessee was a manufacturer, trader and processor. That, the job work was a part of composite business activity. In the circumstances, he submitted that the judgments of this court in K.K. Doshi and Co.'s case [2000] 245 ITR 849 and S.G. Jhaveri Consultancy Ltd. [2000] 245 ITR 854 did not apply. Mr. Inamdar contended that the assessee partly sold the manufactured garments and partly exported the same. He contended that job work was a part of composite activity undertaken by the assessee. He, therefore, contended that job work charges received by the assessee cannot be excluded from business profits. On the facts, he submitted that the total turnover of the assessee during the assessment year in question from the composite activity was Rs. 1,62,46,524 out of which the turnover attributable to job work was Rs. 66,35,083. He contended that the Department erred in excluding the said amount of Rs. 66,35,083 from the total turnover. He contended that under section 80HHC(3), as it stood at the relevant time, the total turnover included price of the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 1, 1992, deduction is calculated on items which are not real profits. He submitted on the facts that for the assessment year in question, the business income computed under section 28 was Rs. 18,55,545. He submitted that the only point which arises for determination in this appeal is the quantum of amount which needs to be deducted from Rs. 18,55,545. He contended that since job work charges received by the assessee form part of the composite business and since they were a part of total turnover, no amount on that account was deductible from Rs. 18,55,545 whereas, according to the Department, an amount of Rs. 66,35,803 was deductible. He submitted that in the case of CIT v. Kantilal Chhotalal [2000] 246 ITR 439, this court has held that total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature. He contended that he has no dispute with that proposition provided the labour charges received by the assessee had no linkage with the export activity. He submitted, however, that all these judgments proceed on the basis that the receipts had no nexus with the export activity. He contended that reassortment charges were dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business profits calculated for the purposes of section 80HHC? This matter needs to be decided in the light of the facts of this case. In this case, we are concerned with exports of goods manufactured by the assessee. The assessee manufactures and processes goods and sells the same domestically and by way of exports. Under section 80HHC, exporters are allowed, in the computation of their total income, a deduction of the entire profits derived from exports. The export profit is computed on the basis of the ratio of export turnover to total turnover. In effect the formula reads as under: 80HHC concession = Export turnover Export profits = Business profits x --------------- Total turnover In this case we are concerned with sections 80HHC(1) and 80HHC(3) as it stood at the relevant time. In this case we are concerned with the assessment year 1992-93. For the purposes of deciding this matter, we may quote the Explanation (baa) to section 80HHC. "(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), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business profits contemplated in the above formula. He contended that labour charges were similar to rent, commission, interest, mentioned in clause (baa). He, therefore, contended that such charges did not come within the ambit of business profits in the above formula. He contended that for the purposes of calculating deduction under section 80HHC, only those items of income are to be taken into account as business profits which items have relation to the export activity. He contended that, in the present case, receipt of labour charges had no nexus with the export activity. He, therefore, contended that labour charges stood excluded from the business profits in the above formula in view of Explanation (baa) to section 80HHC and consequently the Assessing Officer had erred in his order dated February 14,1994, in treating labour charges as part of business profits. We do not find any merit in the argument advanced on behalf of the Department. In this case, we are concerned with profits from the business of exports of goods manufactured by the assessee. Therefore, the export profits were required to be computed in the ratio of export turnover to total turnover as contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incidental business. In the case of CIT v. K.K. Doshi and Co. [2000] 245 ITR 849 (Bom), the assessee had received Rs. 19.60 lakhs as service charges. It was held that the service charges of Rs. 19.60 lakhs did not have the element of turnover because the charges were received for a seasonal activity which was not an integral part of the manufacturing activity. Therefore, the test to be applied in all such matters is, whether interest, service charges, commission accrue out of the main business activity of the company and whether they were operational income. The case of K.K. Doshi and Co. [2000] 245 ITR 849 (Bom) shows that service charges of Rs. 19.60 lakhs did not represent operational income and, therefore, came within Explanation (baa). However, we find that the Department just looks at the nomenclature of the receipt and if it finds that the nomenclature is rent, interest, commission then without any further inquiry into the nature of business, the Department invokes Explanation (baa) which is not the purpose and the object of that Explanation. In the present case, the receipt in question is labour charges. However, this nomenclature may not be accurate. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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