M.K.J. Corporation vs The Commissioner of Income Tax

Dr. Satish Chandra, J.—All the appeals have been filed by the assessee against the consolidated order dated 1.12.2001, passed by the Income Tax Appellate Tribunal, Lucknow in I.T.A. Nos. 169, 170, 171, 264 and 172/Alld/2000 for the Assessment Years 1989-90, 1990-91, 1991-92, 1992-93 and 1993-94.

On 15.11.2011, a coordinate Bench has admitted the Appeals on the following substantial questions of law:--

"Whether on the facts and circumstances of the case, particularly that the assessee''s unit was a 100% Export Oriented Unit (EOU), recovery of cost of material by way of sale of scrap generated in its manufacturing process, could be treated as local sale on which relief under Section 80 HHC was not admissible." 3. In respect of Income Tax Appeal No. 88 of 2002, one more question of law was admitted, which is as under:--

"Whether on the facts and circumstances of the case, particularly that a period of 4 years had passed, after the regular assessment had been made in the instant case under Section 143(3) of the Act, (after full examination of all related facts as had been fully and truly disclosed by the assessee), notice under Section 147 could have been validly issued without having any regard to the proviso thereto." 4. The brief facts of the case are that during the assessment year under consideration, assessee''s firm was engaged in the business of manufacture of ''shoe uppers'' for export. The assessee''s firm was 100% export unit, it has maintained the books of account after the Audit under Section 44 AB of the Income Tax Act, and after claiming the deduction under Section 80 HHC. The assessee firm was filing return for Nil income during the assessment year under consideration, but the A.O. opined that the waste material which was sold by the assessee in the form of scrap in the local market, is part of profit and he made addition of this amount. So, he has disallowed the profit derived from the export business, details of which are as under:--

The CIT (A) as well as the Tribunal have confirmed the order passed by the A.O.. Still not being satisfied, the assessee has filed the present appeal.

Sri Ashish Bansal, learned counsel for the assessee submits that the scrap is an essential part of the fresh goods and the same will have to be thrown or sold in the local market as scrap. The sale proceeds derived by disposing of the scrap was duly accounted in the book of accounts and the same was reduced from the cost of raw material. He also submits that universally accepted "accounting standards" in the matter of accounting of ''recovery'' of cost through sale of self-generated scrap, had duly been followed by the assessee year after year and the Department had accepted the same. The entire proceeds on account of sale of scrap, stood duly reflected in the related Profit and Loss account. It is also the submission of the learned counsel that there was no occasion to initiate proceedings under Sections 148/147 of the Act by the A.O.. Finally, it is submitted by the learned counsel that the cost of the sale proceeds of scrap will have to be reduced from the cost of the raw material.

On the other hand, Sri R.K. Upadhyay, learned counsel for the department has justified the orders passed by the lower authorities. He submits that the assessee himself has withdrawn his claim under Section 80HHC as mentioned by the Tribunal in its order. It is also a submission of the learned counsel that the assessee should not have any grievance because the A.O. has only added portion of sale proceeds of leather scrap and waste material, whereas, he should have added the entire sale proceeds because the assessee has already claimed expenses in respect of manufacturing of ''shoe uppers'' and no cost could be attributed to production of leather scraps and waste material.

We have heard the learned counsel for the parties at length and gone through the material available on record. We also perused the written submission filed by Sri R.K. Upadhyay, learned counsel for the department.

From the record, it appears that the assessee''s firm was 100% export unit, it had maintained the books of account subject to Audit under Section 44(A)(B) of the Income Tax Act. The cutting of the leather resulting into scrap which either will have to be thrown or sold in the local market. When such scrap is sold, the sale proceeds of the scrap cannot be included in the term of "turnover", therefore, the proceeds of sale of such scrap would not be included in "sales" in the profit and loss account of the assessee. It may be mentioned that the Hon''ble Apex Court in the case of Commnr. of Income Tax-VII Vs. Punjab Stainless Steel Industries, has observed that:--

"28. The intention behind the enactment of section 80HHC of the Act was to encourage export so as to earn more foreign exchange. For the said purpose, the Government wanted to encourage businessmen, traders and manufacturers to increase the export so as to bring more foreign exchange in our country. If the purpose is to bring more foreign exchange and to encourage export, we are of the view that the Legislature would surely like to give more benefit to persons who are making an effort to help our nation in the process of bringing more foreign exchange. If a trader or a manufacturer is trying his best to increase his exports, even at the cost of his business in a local market, we are sure that the Government would like to encourage such a person. In out opinion, once the Government decides to give some benefit to someone who is helping the nation in bringing foreign exchange, the Revenue should also make all possible efforts to encourage such traders or manufacturers by giving such business units more benefits as contemplated under the provisions of law." 10. In the light of the above discussion and by considering the totality of the facts and circumstances of the case, we are of the view that the assessee was not primarily dealing in scrap but was a manufacturer of ''shoe uppers''. So, only the sale proceeds from sale of ''shoe uppers'' would be treated as its turnover, as per the normal accounting practice profits. The income derived from the sale of scrap would not be included in the total turnover and the same will have to be reduced from the cost of the raw material.

Therefore, we are of the opinion that the proceedings under section 148/147of the Act were not required as no fresh material was brought on record. This is a case of merely accounting principle. Therefore, we set aside the proceedings under Section 148/147 of the Act initiated by the A.O. for all the assessment years under consideration. All the impugned orders are hereby set aside.

The answer to the substantial questions of law is in favour of the assessee and against the department.

In the result all the appeals filed by the assessee are allowed.