TMI Blog2021 (2) TMI 1158X X X X Extracts X X X X X X X X Extracts X X X X ..... that of the Assessing Officer for excluding receipts arising in the core business and not specified in Explanation (baa) to Section 80 HCC. The insurance claim and miscellaneous income are not directly attributable to the business, hence, they are liable for 90% deduction. The ratio laid down by the Hon'ble Supreme Court in the judgment [ 2007 (11) TMI 10 - SUPREME COURT] squarely applies to the facts and circumstances of the present case. Though there is no dispute with regard to the ratio laid down in the judgments relied upon by the learned counsel for the appellant, since the facts and circumstances of the present cases are different, the same are not applicable. No substantial question of law. - T.C.A.Nos.817 & 818 of 2010 - - - Dated:- 23-2-2021 - HON'BLE MR. JUSTICE M.DURAISWAMY AND HON'BLE MRS.JUSTICE T.V.THAMILSELVI For Appellant : Mr. R. Srinivasan (in both TCA) For Respondent : Mr. M. Swaminathan (in both TCA) Senior Standing Counsel Asst. by Ms. V. Pushpa COMMON JUDGMENT M. DURAISWAMY, J. T.C.A.No.817 of 2010 arises against the order passed in I.T.A.No.2418/Mds/2006 on the file of the Income Tax Appellate Tribunal, Chennai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom long term capital loss at ₹ 14,56,893/- to be carried forward. 6. The appellant is engaged in the business of manufacture of cloth at its factory at Sulakarai near Virudhunagar. In the said factory, the appellant manufactured clot both for domestic sales and export sales. The major portion of the cloth manufactured was exported. The appellant claimed deduction under section 80HHC by computing profits for the export division separately and accordingly the entire profit relating to export sales was claimed as deduction under section 80HHC. The Assessing Officer found that the appellant had not maintained separate books of account for domestic sales and export sales but based on the combined books of account apportioned the purchase and sales and other expenditure for domestic and export sales. The Assessing Officer was of the view that in a case where no separate books of account maintained, deduction under section 80HHC is to be worked out based on the proportion of export turnover to total turnover as laid down in section 80HHC. In these circumstances, the Assessing Officer rejected the claim of the appellant-assessee. The assessee admitted before the Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer that it is not attributable to business is not correct. Regarding the miscellaneous income, the assessee contended that it represents fine amount collected from employees towards fabric damage. Further it is contended that the appellant incurred expenditure by way of fabric damage on account of which the appellant received less sale consideration when the cloth was sold, which was partly compensated by the recoveries from the employees. Admittedly, the assessee's loss/damages was compensated by the insurance company. This compensation received from the insurance company cannot be termed as rent, commission, brokerage, interest, etc. Similarly, the fine amount collected from the employees towards fabric damage also cannot be reduced as it is only to compensate for less sale value. The appellant, while filing the return, offered the entire amount as business income and with reference to computation of deduction under section 80 HHC, the appellant treated the amount as receipts warranting 90% deduction under Clause (baa) to section 80HHC and increased the export profits with 90% of the said amounts in proportion to export turnover to total turnover as per the first pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... 8. 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 by the above formula. Explanation (baa) was introduced into the Act by the Finance (No. 2) Act, 1991, with effect from April 1, 1992. Under the Circular of the Central Board of Direct Taxes bearing No. 621, dated December 19, 1991 (see [1992] 195 ITR 154), it has been stated that the above formula gave a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included by the assessee in the profit and loss account. Therefore, Explanation (baa) came to be introduced. Under that Explanation profits of the business, for the purposes of Section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent. deduction from such incomes is provided to account f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment 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, the assessee is a manufacturer and exporter of garments. In the present case, the Tribunal has recorded a finding of fact which is not challenged, namely, that there was no difference between the activities relating to export business carried on by the assessee and the processes carried on for manufacturing garments for others under job work contracts. The Tribunal has further found, on the facts, that the activity of labour job involved use of machinery, labour and material which were also forming part of the activity of manufacturing garments for its own sales. The Tribunal further found that there was no difference between manufacturing of garments for the assessee's own sales and manufacturing of garments for others on labour job basis. These are findings of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein the Division Bench of this Court held as follows: ... 16. In Bangalore Clothing Co. [(2003) 260 ITR 371 (Bom.)], similar issue arose for consideration and the Court held that the Department cannot invoke Explanation (baa) in every matter involving receipts by way of brokerage, commission, interest, rent, labour charges, etc., and these items of income have to be seen in the context of the business activity of the assessee. It was pointed out that the Assessing Officer will have to ascertain whether the receipt of interest, commission, labour charges, etc., were a part of operational income. It was further pointed out that the Court cannot lay down any standard test for deciding what would constitute operational income and the Department will have to consider the memorandum of articles of association of company, the nature of the business, the nature of the activity and such other tests. Further, the Department will also have to ascertain as to what is the dominant business of the company and whether receipts like interest, commission, etc., accrue as a part of the main business activity or whether they accrue out of incidental business. In the said case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with exports were required to be reduced from Business Profits under Clause (baa). A bare reading of Clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges etc. formed part of gross total income being Business Profits. But for the purposes of working out the formula and in order to avoid distortion of arriving export profits Clause (baa) stood inserted to say that although incentive profits and independent incomes constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the I.T. Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the government, shall not be included in the total turnover in the above formula (See: Commissioner of Income Tax, Coimbatore v. Lakshmi Machine Works MANU/S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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