IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 30.07.2008 Coram : THE HONORUABLE MR.JUSTICE K.RAVIRAJA PANDIAN and THE HONORUABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.1011 of 2008 The Assistant Commissioner of Income-Tax Circle XV, Chennai 34 Appellant v. M/s.Pallava Granite Industries 10, North Street, Sriram Nagar Chennai 18. Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal Madras 'B' Bench dated 31.01.2006 made in I.T.A.No.2002/Mds/2002 for the assessment year 1997-98. For appellant : Mr.N.Muralikumaran, Standing Counsel for IT Department JUDGMENT
(Judgment of the Court was delivered by
K.RAVIRAJA PANDIAN, J.)
The appeal is filed against the order of the Income Tax Appellate Tribunal Madras ‘B’ Bench dated 31.01.2006 made in I.T.A.No.2002/Mds/2002. The relevant the assessment year is 1997-98.
2. The assessee is a partnership firm engaged in the business of quarrying of granites and exporting the same. During the accounting period relevant for the assessment year 1997-98, the assessee had exported the goods manufactured by it and it had also shown trading activities and arrived at a loss in respect of export of such traded goods. In the return of income filed on 31.10.1997, the assessee had shown the working towards deduction under section 80HHC of the Income Tax Act at Rs.1,02,17,696/-, but however, had restricted the claim to the gross total income of Rs.1,01,06,406/-. The return filed by the assessee was processed under section 143(1)(a) of the Act vide intimation dated 24.09.1999. While arriving at the figure of deduction under section 80HHC of the Act of Rs.10,21,796/- the assessee had actually ignored the loss arrived at in respect of the export of the traded goods which was Rs.31,73,613/-. The assessee had also shown raising charges of Rs.1,00,87,800/- in its profit and loss account for the year ended 31.03.1997 on which also it had claimed deduction under section 80HHC of the Act. The assessing officer found that the assessee’s claim of deduction under section 80HHC of the Act on raising charges was not correct and further the loss incurred on account of export of traded goods must be adjusted against the profits and deduction under section 80HHC of the Act is allowable only on the balance profits. Accordingly, he reopened the assessment by issue of notice under section 148 of the Act and passed an order under section 143(3) read with 147 of the Act wherein he allowed deduction under section 80HHC of the Act only to the extent of Rs.11.65,355/-. The assessing officer had arrived at this figure by excluding 90% of raising charges of Rs.90,79,020/- and also adjusting the loss on account of traded goods of Rs.31,73,613/-.
3. On appeal by the assessee, the Commissioner of Income Tax (Appeals) held that there is direct nexus of close degree between the raising charges received by the assessee and the export business of the assessee and the raising charges cannot be equated with brokerage, commission, interest, rent, charges appearing in explanation (baa) to section 80HHC(4A) of the Act. Observing so, the Commissioner of Income Tax (Appeals) directed the assessing officer not to exclude the raising charges of Rs.1,00,87,800/- from the business profits under explanation (baa) to section 80HHC(4A) of the Act for the purpose of determining the relief under section 80HHC of the Act and thus decided the issue in favour of the assessee.
4. The revenue took up the matter before the Tribunal. The Tribunal, by its order under challenge, held that the raising charges has to be considered as operational income as held by the Bombay High Court in the case of CIT v. Bangalore Clothing Co., (2003) 260 ITR 371. Once the raising charges are treated as operational income, Explanation (baa) to Section 80HHC of the Act may not have any application at all. Therefore, there is no question of exclusion of any part of the income by applying Explanation (baa) to section 80HHC of the Act. However, since the raising charges are considered to be operational income, the same has to be included both in the profits as well as in the total turnover. Since the receipt of raising charges has nexus and inter-linking with that of the export business of the assessee, in our opinion, the raising charges have to be included both in the profit as well as in the total turnover. The correctness of the said order is canvassed before us by formulating the following substantial question of law :
“Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the 100% raising charges are includible in computation of deduction under section 80HHC of the Act and there is no applicability of explanation (baa) to section 80HHC of the Act?”
5. We heard the learned counsel on either side and perused the materials on record.
6. Having regard to the facts of the case that the entire amount which is stated to be received by the assessee as raising charges was expended by the assessee for the purpose of exploitation of granite for export, which is having clear and direct nexus to the export business of the assessee , We find that there is no illegality or irregularity in the order passed by the Tribunal that the raising charges received by the assessee cannot be excluded from the business profit by applying Explanation (baa) to Section 80HHC (4C) and the same is prefectly correct.
7. In respect of the inspection charges, though the petitioner might have expertise, in choosing the granite block without any defect and the foreign buyer would have utilised the expertise of the assessee for marking the best quality material for the purpose of purchase, the activity of inspection of granite blocks for purchase on behalf of third parties and the income earned by the assessee for rendering of services by inspecting the materials would have no connection with the export business. In the absence of any nexus to the export, the receipt earned by the assessee as inspection charges cannot be regarded as a business receipt. If at all that could be regarded as income from other sources. To that extent, the order of the Tribunal is hereby modified . Useful reference can be had to the judgment in K.S.SUBBIAH PILLAI AND (INDIA ) PVT. LTD., VS. CIT (260 ITR 304). To the extent indicated above, the order of the Tribunal is modified. The tax case appeal is disposed of with the above said modification.
(K.R.P.,J.)(P.P.S.J.,J.)
30.07.2008
Index : Yes
Internet :Yes
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To
1.The Assistant Registrar,
Income-Tax Appellate Tribunal,
III Floor, Rajaji Bhavan,
Besant Nagar, Madras 90
(with records five copies).
2.The Secretary,
Central Board of Revenue,
New Delhi (3 copies).
3. The Commissioner of Income Tax,
Circle XV, Chennai 34.
4. The Commissioner of Income Tax
(Appeals-XII), Chennai 34
5. The Income Tax Appellate Tribunal
‘B’ Bench, Chennai 34
K.RAVIRAJA PANDIAN, J.
and
P.P.S.JANARTHANA RAJA, J.
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T.C.(A) No.1011 of 2008
30.07.2008