C I T vs. ASHOK SINGH GARCHA

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 30.8.2006, Annexure A.III passed by Income Tax Appellate Tribunal, Chandigarh Bench ‘B’, Chandigarh (in short, “the Tribunal') in ITA No.738/CHAND/2004, for the assessment year 2000-01. The appeal was admitted on September 24, 2007 to consider following substantial questions of law:- “i) Whether on the facts and law, the Hon’ble Income Tax Appellate Tribunal was justified in holding that the turnover of the unit inherited by the assessee during the year does not form integrity of this document High Court Chandigarh part of total turnover of the assessee for the purpose of calculating deduction under section 80HHC of I.T.Act 1961? ii) Whether on the facts and law the Hon’ble Tribunal was justified in holding that export business was separate business of the assessee disregarding the fact that goods manufactured by other unit of the assessee inherited during the year were exported by the existing export unit?”

A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. The respondent assessee is an individual. He filed return of income for the assessment year 2000-01 on 31.10.2000 declaring income of ` 9,28,750/- besides agricultural income of ` 2,85,000/-. The assessee was doing the business of trading and export of goods as a proprietor of Safe Trade. For the purpose of export, assessee used to make purchases from manufacturing unit of his father. In the previous year relevant to assessment year under appeal, after the death of his father on 29.6.1999, the assessee inherited the said manufacturing unit i.e. Sherpur Forgings. The assessment was completed by the Deputy Commissioner of Income Tax I, Ludhiana on 7.3.2003, Annexure A.I at income of ` 29,67,770/-. While completing the assessment, deduction under section 80HHC of the Act was computed at ` 5,27,411/- as against ` 19,91,516/- claimed in the return by taking into account the turnover of both units of the assessee as part of total turnover and also by considering the export of manufactured goods and not of trading goods. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 19.3.2004, Annexure A.II, the CIT(A) partly allowed the appeal holding that both the units were separate entities and turnover of Sherpur Forgings, which was in the business of manufacture integrity of this document High Court Chandigarh and sale of steel forgings, should not be included in the turnover of Safe Trade which was in the business of trading and export of combine parts and auto parts. The CIT(A) directed that deduction under Section 80HHC of the Act should not be reduced by adding turnover of both units in the total turnover of the assessee. Dissatisfied with the order, the revenue filed appeal before the Tribunal. Vide order dated 30.8.2006, Annexure A.III, the Tribunal dismissed the appeal. Hence the instant appeal by the revenue.

Learned counsel for the appellant submitted that the assessee had inherited the business from his father Late Shri Devinder Singh Garcha on 29.6.1999 on his demise which continued as such till 31.3.2000. According to the learned counsel, the total turnover of the export business and also the business inherited from his father was required to be taken as one and deduction under Section 80HHC of the Act was to be calculated thereafter.

After hearing learned counsel for the revenue, we do not find any merit in the appeal.

The CIT(A) while accepting the contention of the assessee had noticed in its order dated 19.3.2004, Annexure A.II as under:- “I have examined the rival positions and I find force in the contentions of the learned counsel for the following reasons:-

The aforesaid findings were affirmed by the Tribunal vide its order dated 30.8.2006, Annexure A.III as under:- “8. We have given our careful consideration to the rival contentions. In this case, it is not disputed that the manufacturing unit was owned by the father of the assessee till latter’s death on 29.6.1999. After the death of the father of the assessee, the assessee inherited the unit from 1.4.2000 the said unit became the property of the partnership concern. It was only in the intervening period of about 9 months that the assessee was the sole proprietor of the manufacturing unit. In the light of these facts, there is no doubt about the existence of separate unit engaged in the manufacturing activities. The assessee used to make purchases from the said unit owned by his father. In the year under appeal, the goods have been transferred from the manufacturing unit to assessee’s unit and Commissioner of Income Tax (Appeals) decline to interfere.”

From the perusal of the aforesaid, it would be clear that the assessee was carrying on business in the name and style of M/s Safe Trade which was dealing in exports. However, on the demise of his father, he had inherited the business of M/s Sherpur Forgings on 29.6.1999 which was carrying on domestic production and sales. Further, the said business was styled as M/s Sherpur Forgings and his father had been filing returns separately and regularly though the assessee had incidentally become the proprietor of Sherpur Forgings on the demise of his father but the respondent was maintaining separate books of account of Sherpur Forgings from his own export business which were duly audited. In such circumstances, it could not be said that there was one composite business which was being carried on by the assessee. The manufacturing unit which was earlier owned by the father of the assessee was a separate independent unit. It has further been noticed that with effect from 1.4.2000, unit of Sherpur Forgings became the property of the partnership concern. It was only in the intervening period of about nine months that the assessee was the sole proprietor of the manufacturing unit.

Further, the Madras High Court in CIT v Rathore Brothers, (2002) 254 ITR 656 relating to similar issue had noticed as under:- integrity of this document High Court Chandigarh “2. The Tribunal has held, and rightly, that the assessee had maintained separate accounts and that its trading receipts and P&L account had also been maintained separately for export sales and domestic sales and, therefore, there was no warrant for disallowing any portion of the export earning pro rata by invoking sub section (3)(b) of section 80HHC of the Act. The tribunal was right in so allowing the decision in its entirety.

The purpose of sub section (3)(b) of section 80HHC of the Act is to disallow a part only when the entire deduction claimed cannot be regarded as being relatable to exports. Here, there was sufficient material to show that the income claimed was entirely due to export and was supported by all the necessary documents which were not disputed. We, therefore, answer the question referred to us in favour of the assessee and against the revenue.”

Learned counsel for the revenue has not been able to show any defect or error in the orders passed by the CIT(A) as well as the Tribunal. Consequently, the substantial questions of law are answered against the appellant. The appeal stands dismissed. (Ajay Kumar Mittal) Judge August 07, 2014 (Fateh Deep Singh) Judge ‘gs’