THE HONOURABLE MR v. M/s.Premier Polytronics Ltd.Coimbatore-640 018

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 06.11.2007CORAM:THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIANandTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANT.C. (Appeal) No.247 of 2004Commissioner of Income Tax ICoimbatore. .. AppellantversusM/s.Premier Polytronics Ltd.Coimbatore-640 018... RespondentPRAYER: Tax Case Appeal filed under Section 260-A of the Income TaxAct, 1961, against the order of the Income Tax Appellate Tribunal,Chennai "B" Bench dated 30.9.2003 in ITA No.935(Mds)/96(Assessment Year - 1992-93) against the order of Commissioner ofIncome Tax, Coimbatore C.No.1416 (12) 95-96 dated 6.3.1996 andagainst the order of the Deputy Commissioner of Income Tax, Spl.Range-I, Coimbatore in P.A.No.CZ-9022/SR-1 dated 31.3.1997.For appellant :Mr.V.MuralikumaranSenior Standing Counsel for Income TaxFor respondent :Mr.Venkatanarayananfor M/s.Subbaraya IyerJUDGMENT(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.)This Tax Case Appeal is filed by the Revenue, raising thefollowing substantial question of law:" Whether on the facts and in the circumstancesof the case the Income Tax Appellate Tribunalwas right in setting aside the order of theCommissioner of Income Tax under Section 263 ofthe Income Tax Act, holding that whilecomputing the deduction under Section 80 HHC inthe case of the assessee for the assessment https://hcservices.ecourts.gov.in/hcservices/ year 1992-93, 90% of the service income, leaseincome and packing and forwarding collectionshould be excluded from the profits of thebusiness and the said receipts would not bedisqualified under explanation to Section 80HHC (4A)? "2. The assessment year under consideration is 1992-93.Originally, while computing the relief under Section 80-HHC, theAssessing Authority did not exclude 90% of the receipts pertainingto the service income, lease income and packing and forwardingcollection. However, in exercise of power under Section 263 of theIncome Tax Act, 1961, the Commissioner of Income Tax (Appeals)revised the order of assessment. In the process, the Commissionerheld that the three items of receipt were not part of receipts fromthe manufacturing activities to have the character of a businessincome. Consequently, the Commissioner of Income Tax held thatSection 80 HHC being an incentive given for actual export businessand not over profits from non-export activities, they have to beexcluded under the computation of the eligible income in terms ofexplanation (baa) to sub Section (4A) of Section 80 HHC. TheCommissioner of Income Tax directed the Assessing Officer to re-compute the assessment under Section 80 HHC by excluding 90% ofthe total receipt of service income, lease income and packing andforwarding collection. 3. Aggrieved by the order of the Commissioner of Income Tax(Appeals), the assessee preferred an appeal before the Income TaxAppellate Tribunal, wherein it was contended that the receipts onservice are related to its business activity. It was also contendedthat the assessee had been selling plant and machinery to differentbuyers as part of its regular business. The assessee had alsoentered into Annual Maintenance Contracts with the buyers andcharging separate service charges for maintaining such contracts.As far as the leasing income is concerned, the assessee contendedthat they were carrying separate leasing division as part of thediversified business and the lease rentals were arrived as businessincome. As far as packing and forwarding collection is concerned,it was contended that it was in the nature of recoupment of suchexpenditure already incurred by the assessee on behalf of thebuyers while supplying the plant and machinery sold by theassessee. In support of its claim, the assessee relied on thedecision of the Bombay High Court reported in 260 ITR 371 (CIT Vs.BANGALORE CLOTHING COMPANY) to contend that the Bombay High Courthad held that the receipts forming part of the operational incomeof the assessee could not be excluded under Explanation (baa) tosub Section (4A) of Section 80 HHC. Applying the law declared bythe Bombay High Court, the Income Tax Appellate Tribunal set asidethe order of the Commissioner of Income Tax (Appeals). The Revenue https://hcservices.ecourts.gov.in/hcservices/ is on appeal challenging the correctness of the order of theTribunal.4. Learned counsel appearing for the Revenue submitted thatthe service charges and packing and forwarding charges did not formpart of the business of the assessee and were hit by Explanation(baa) to sub section (4A) of Section 80 HHC. In the circumstances,learned counsel seeks the reversal of the order of the Tribunal.5. A perusal of the order of the Tribunal shows that theassessee had received income on service charges as part of thecollections of the business of the assessee company. These claimswere against the Annual Maintenance Contracts. The assessee wasselling plant and machinery to various buyers and consequently, theTribunal held that for the smooth conduct of the assessee'sbusiness, the assessee had taken their responsibility of providingmaintenance services to the buyers; in the process, the assesseehad claimed service charges which are nothing but business receiptsof the assessee company and that the activity of providing repairmaintenance services is incidental and very much part of theassessee's principal business. Ultimately, the Tribunal held thatthese are part of the business receipts and as such, they cannot beexcluded in the computation of the benefits under Section 80 HHC.The Tribunal also pointed out that the assessee had expended on thesalary, etc., on the Engineer and Technician to discharge theircontractual obligation of the Annual Maintenance Contract. Asregards the expenses regarding the lease income, the Tribunal foundthat the the assessee was doing leasing business under a separatedivision. The assessee claimed depreciation which was also allowedon the plant and machinery deployed by the assessee in its leasingbusiness, and therefore it was a business income. As regardspacking and forwarding charges collection, the Tribunal found thatit was not an independent income in the hands of the assesseecompany. In the face of incurring expenditure for packing andforwarding of machineries to various destinations on behalf of itspurchasers, the reimbursement of the packing and forwarding chargesis very much part of the assessee's business and hence, these areto be taken as business income. Ultimately, the Tribunal foundthat applying the law laid down by the Bombay High Court reportedin 260 ITR 371 (CIT Vs. BANGALORE CLOTHING COMPANY) and consideringthe nature of business of the assessee, these income are very muchpart of the business income, which cannot be excluded forapplication of Explanation (baa) to sub Section (4A) of Section 80HHC. https://hcservices.ecourts.gov.in/hcservices/

6. In this connection, the decision of this Court as to thescope of Explanation (baa) to sub section (4A) of Section 80 HHCreported in 288 ITR 151 (K.R.M.MARINE EXPORTS LTD. Vs. ASSISTANTCOMMISSIONER OF INCOME TAX), to which one of us is a party(K.RAVIRAJA PANDIAN,J.), needs to be referred to. Referring to thedecision of the Bombay High Court reported in 260 ITR 371 (CIT Vs.BANGALORE CLOTHING COMPANY), this Court held that when receiptslike interest, commission, etc. are included in the businessprofits as the existing formula distorted the figure of exportprofits; therefore, in order to clarify the meaning of the businessprofits for the purpose of Section 80HHC Clause (baa) to explainthe same was inserted to remove the doubt in calculating exportprofits. This Court also held that the numerator and denominatorshowed that they referred to sale proceeds. The numerator and thedenominator are required to have a common element which is the saleproceeds. In this background, the profit referred to in Section80HHC is not the general profit, but is the export profit, whichhad to be calculated and worked out with reference to the otherprovisions and definitions contained in the Section itself, whichsort of exercise had not been done in that case. 7. The Bombay High Court in the decision reported in 260 ITR371 (CIT Vs. BANGALORE CLOTHING COMPANY), held that unless anduntil the officer concerned has necessary materials to show thenature of activity of the assessee to qualify for the non-application under Explanation (baa), it is not possible for anyauthority for that matter to straight away apply the formula torestrict the allowable deduction under Section 80 HHC. The BombayHigh Court also held that no standard test could be laid down tofind out what would constitute operational income. Hence, theDepartment has to consider the nature of the activity and thebusiness of the assessee and such other test to find out what wouldbe the dominant business of the company and whether receipts likeinterest, commission, etc., accrue as a part of the main businessactivity or whether they accrue out of incidental business, andapply such test. In this background, we look at the facts of thisassessment.8. The Tribunal, as a matter of fact, found that the incomefrom the leasing of the company, amount received by way of servicecharges as well as recoupment of packing and forwarding collectionare nothing but forming part of the business income. In the natureof the facts found by the Tribunal, unless and until there arefacts otherwise to show the character of the transaction, it is notpossible to accept the plea of the Revenue that the transactionsdoes not carry the character of business income. Hence, in the https://hcservices.ecourts.gov.in/hcservices/ face of the facts recorded by the Tribunal, it is not possible toaccept the plea of the Revenue in an appeal filed under Section260-A. Consequently, applying the decision reported in 288 ITR 151(K.R.M.MARINE EXPORTS LTD. Vs. ASSISTANT COMMISSIONER OF INCOMETAX), following the decision of the Bombay High Court reported in260 ITR 371 (CIT Vs. BANGALORE CLOTHING COMPANY), we do not findany merit in this appeal. Consequently, this Tax Case Appeal isrejected and the order of the Tribunal stands confirmed. No costs.Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.ksvTo:1. The Commissioner of Income Tax ICoimbatore.2. Deputy commissioner of Income Tax,spl. Range, I, Coimbatore.3. The Assistant Registrar,Income Tax, Appellate TribunalB Bench, Chennai.4. The Commissioner of Income Tax,Chennai-34.1 cc to Mr.N. Muralikumaran, SR.66628T.C. (Appeal) No.247 of 2004KM (CO)kk 29/11