TMI Blog2007 (11) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... is filed by the assessee against the order of the Income-tax Appellate Tribunal (the "ITAT" for short), dated January 4, 2001, relating to the assessment year 1989-1990. According to the assessee the following substantial questions of law arise out of the order the Tribunal, namely: "1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in upholding the addition of Rs. 15,15,667 made to closing stock by the Assessing Officer? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing to exclude the amount of Rs. 81,33,667 from the book profits as defined in section 32AB(3) of the Income-tax Act, 1961? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest from customers, sales tax set-off and other refunds, claims, etc., do not form part of the business profit for calculating deduction under section 80HHC ?" The assessee is a public limited company engaged in the business of manufacture, designing and commissioning of complete plants for dairy and food processing industry. Question No.1: In the assessment year in question, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. of cost on the ground that the list of obsolete items was not produced by the assessee and the Tribunal was not justified in upholding the order of the Assessing Officer. Mr. Desai, learned senior advocate appearing on behalf of the respondents on the other hand, submitted that in the absence of any material to show that the items were obsolete and were not moving for the last three years, the Assessing Officer was justified in taking the realisable value of the obsolete items at 50 per cent. of the cost. In the present case, there is no dispute that the duly certified auditor's report placed before the Assessing Officer clearly justified valuation of obsolete items at 10 per cent. of cost. There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower. It is also not in dispute that the value of the closing stock has been taken as the value of the opening stock in the subsequent year. Moreover, it is also not disputed that the obsolete items were in fact sold in the subsequent year at a price less than 10 per cent. of the cost. Under the circumstances, it could not be said that the valuation of the obsolete items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act. On further appeal filed by the Revenue, the Income-tax Appellate Tribunal held that the assessee had erroneously increased the profit by Rs. 81,33,667 being the depreciation written off for the purpose of relief under section 32AB of the Act and accordingly upheld the order of the Assessing Officer in deducting the amount of Rs. 81,33,667 from the book profits while computing profits of business eligible for deduction under section 32AB of the Act. Mr. Inamdar, learned senior advocate for the assessee, submitted that the Tribunal committed a fundamental error in misconstruing the amount "written back" as the amount "written off". Referring to note 6 to the account (page 93 of the paper book) Mr. Inamdar submitted that in the earlier years the depreciation was provided as per specified life determined according to the rules of depreciation prescribed under the Income-tax Rules. In compliance with the circulars of the Company Law Board, the assessee had reworked the depreciation on the straight line method on the basis of specified life determined in accordance with the provisions of the Companies Act, 1956, for the respective years in which the assets were added/i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of the Income-tax Act, the profits of the business are required to be reduced by an amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account. In the present case, there is no withdrawal of amount from reserves or provisions and, therefore, the amount written back and credited to the profit and loss account, on account of reworking of the depreciation, as per the circulars of the Company Law Board, could not be reduced from the profits eligible for relief under section 32AB of the Income-tax Act. There was neither double relief nor writing off of the depreciation as held by the Tribunal. Once the reworking of the depreciation as per the Board circular is found to be in accordance with the provisions of the Companies Act, 1956, the Tribunal could not have held that the assessee has erroneously increased the profit. The increased profits arising on account of implementation of the circulars of the Company Law Board were not excludible from the book profits for the purpose of relief under section 32AB of the Income-tax Act. Accordingly, we answer question No.2 in the negative that is in favour of the assessee and against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss profits for the purpose of computation of relief under section 80HHC of the Act. Before us, Mr. Inamdar, learned counsel for the assessee, submitted that for computation of deduction under section 80HHC what is relevant is the profits of the business as computed under the head "Profits and gains of business or profession". In the present case, the interest from customers, sales tax set off, claims, refunds, etc., under the caption "other income" have been assessed under the head "Profits and gains of business or profession". Once these incomes are treated as part of business income and computed under the head "Profits and gains of business or profession", the same cannot be excluded from the business profits while computing deduction under section 80HHC of the Act. Relying upon the decision of this court in the case of CIT v. Bangalore Clothing CO. [2003] 260 ITR 371, Mr. Inamdar submitted that the amounts in question being part of operational income, the same could not be excluded for the purposes of deduction under section 80HHC of the Act. Mr. Desai, learned counsel for the Revenue, on the other hand, submitted that the income shown under the caption "Other income" had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Bangalore Clothing Co. [2003] 260 ITR 371 (Bom). In the case of Bangalore Clothing CO. [2003] 260 ITR 371 (Bom), it is held that the Assessing Officer must ascertain the nature of receipt in each case independently. Interest income mayor may not be out of business activity. If it is not part of operational business income, then, the Assessing Officer would have been justified in excluding the same for the purpose of deduction under section 80HHC of the Act. However, in the present case, the Assessing Officer has accepted that the interest income received from customers as well as sales tax set off are assessable under the head "Profits and gains of business or profession". Therefore, having accepted the said income as part of the business profit, the same could not be excluded from business profits while calculating deduction under section 80HHC of the Act. Accordingly, we answer question No.3 by holding that in the present case, the interest from customers and sales tax set off received by the assessee being assessed as part of the business profits under the head "Profits and gains of business or profession", the same could not be excluded while calculating deduction under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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