Assistant Commissioner of Income Tax vs Pallava Granite Industries

K. Raviraja Pandian, J.—The appeal is filed against the order of the Tribunal Madras ''B'' Bench dt. 31st Jan., 2006 made in ITA No. 2002/Mad/2002. The relevant assessment year is 1997-98.

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 asst. yr. 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 31st Oct., 1997, the assessee had shown the working towards deduction u/s 80HHC of the IT 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 u/s 143(1)(a) of the Act vide intimation dt. 24th Sept., 1999. While arriving at the figure of deduction u/s 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 P&L a/c for the year ended 31st March, 1997 on which also it had claimed deduction u/s 80HHC of the Act. The AO found that the assessee''s claim of deduction u/s 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 u/s 80HHC of the Act is allowable only on the balance profits. Accordingly, he reopened the assessment by issue of notice u/s 148 of the Act and passed an order u/s 143(3) r/w 147 of the Act wherein he allowed deduction u/s 80HHC of the Act only to the extent of Rs. 11.65,355. The AO had arrived at this figure by excluding 90 per cent of raising charges of Rs. 90,79,020 and also adjusting the loss on account of traded goods of Rs. 31,73,613.

On appeal by the assessee, the CIT(A) 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 Expln. (baa) to Section 80HHC(4A) of the Act. Observing so, the CIT(A) directed the AO not to exclude the raising charges of Rs. 1,00,87,800 from the business profits under Expln. (baa) to Section 80HHC(4A) of the Act for the purpose of determining the relief u/s 80HHC of the Act and thus decided the issue in favour of the assessee.

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 Commissioner of Income Tax Vs. Bangalore Clothing Co., . Once the raising charges are treated as operational income, Expln. (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 Expln. (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 Tribunal was right in holding that the 100 per cent raising charges are includible in computation of deduction u/s 80HHC of the Act and there is no applicability of Expln. (baa) to Section 80HHC of the Act?

We heard the learned Counsel on either side and perused the materials on record.

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 Expln. (baa) to Section 80HHC(4C) and the same is perfectly correct.

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 Co. (India) Pvt. Ltd. Vs. Commissioner of Income Tax, . To the extent indicated above, the order of the Tribunal is modified.

The tax case appeal is disposed of with the above said modification.