C I T vs. M/S NAHAR SPINNING MILLS LTD.

2009 had passed the following order:- Singh Gurbachan 2014.05.12 15:23 integrity of this document High Court Chandigarh -2- “Learned counsel for the revenue states that though three questions have been proposed in the appeal, question (i) may be covered by judgment of the Hon'ble Supreme Court in Hero Exports v. Commissioner of Income Tax (2007) 295 ITR 454 while question (ii) is covered against the revenue by judgment of the Hon'ble Supreme Court in Commissioner of Income Tax v. Lakshmi Machine (2007) 290 ITR 667 and judgment of this Court in Commissioner of Income Tax v. Vardhman Polytex Ltd. (2008) 296 ITR 382. Question (iii) in para 6 of the appeal is substantial question of law, which is to be decided by this Court. Admitted to consider question proposed in para 6 of the appeal.” Accordingly, question (iii) in para 6 of the appeal which arises for consideration reads thus:- “Whether on the facts and the circumstances of the case, the Hon'ble ITAT was right in law in holding that service charges amounting to Rs.10,46,44,301/- be excluded from the total turnover of the assessee while computing deduction u/s 80HHC?”

Briefly, the relevant facts necessary for disposal of the present appeal as relating to question No. (iii) only as narrated therein may be noticed. The assessee is a manufacturer and exporter of cotton yarn, woollen hosiery garments and also trades in cotton yarn. It filed the return of income on 30.11.2000 for the assessment year 2000-01 Singh Gurbachan 2014.05.12 15:23 integrity of this document High Court Chandigarh -3- declaring the income at ` 9,92,49,470/-. The Assessing Officer vide order dated 30.7.2002 (Annexure A-1) framed the assessment at ` 11,95,87,260/-. The Assessing Officer treated service charges as part of total turnover. It was further observed that in case the plea of the assessee that it did not form part of total turnover is accepted, then the income from service charges will be treated as income as per explanation (baa) to Section 80 HHC and, therefore, 90% of income from service charges be reduced from the profits of the business while calculating deduction under Section 80 HHC of the Act. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]who vide order dated 24.2.2003 (Annexure A-2) partly allowed the appeal directing the Assessing Officer not to include service charges as part of the total turnover and also not to exclude 90% of income from service charges from the profits of the business as per explanation (baa) to Section 80 HHC of the Act relying upon his order passed in the case of the assessee for assessment year 1999-2000. Against the order dated 24.2.2003 (Annexure A-2), the revenue approached the Tribunal by way of an appeal. The Tribunal vide order dated 12.8.2005 (Annexure A-3) held that service charges are to be excluded from the total turnover and are also to be excluded from the business profits for the purpose of computation of deduction under Section 80 HHC of the Act. Hence, the present appeal.

The matter herein relates to whether the service charges are to be excluded from the total turnover of the assessee and 90% of income from service charges is to be reduced from the profits of the business and deduction under Section 80HHC of the Act to be Singh Gurbachan 2014.05.12 15:23 integrity of this document High Court Chandigarh -4- calculated accordingly.

The matter is no longer res integra. The Madras High Court in Commissioner of Income-Tax v. Kadri Mills Ltd. (2014) 360 ITR 595 (Mad) following the judgments of the Hon'ble Apex Court in Commissioner of Income Tax v. Ravindranathan Nair (2007) 295 ITR 228 (SC) and ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax (2012) 343 ITR 89 (SC) had held as under:- “Even from the reading of the order of the Income Tax Appellate Tribunal, it is clear that the issue raised herein is only as to whether 'net conversion charges' has to be considered under clause (baa) of Explanation to Section 80HHC of the Act in the adjusted business profits for computation of deduction and the question is not on the gross conversion charges. In the decision reported in ACG Associated Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC) the Apex Court after referring to the decision of the Apex Court in the case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 (SC) held that the processing charges formed part of the gross total income as an independent income like Rent, Commission, brokerage, etc. Consequently, the Apex Court held that the 90 per cent of the said sum has to be reduced from the gross total income, to arrive at the business profits. Since the processing charges was an important Singh Gurbachan 2014.05.12 15:23 integrity of this document High Court Chandigarh -5- component of the business profits, it has to be included in the total turnover in the said formula to arrive at the business profits for computing deduction under clause (baa) of Explanation to Section 80HHC of the Act. Thus going by the Apex Court's judgment reported in CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 (SC) and ACG Associated Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC), we hold that the net conversion charges would also form part of the gross total income. Therefore, 90 per cent of the said sum has to be reduced in the total turnover of the assessee for arriving at the business profits.”

In view of the above, the appeal is partly accepted and question No. (iii) reproduced in para 2 above is answered accordingly. It is held that service charges would be included in the total turnover and 90% of the service charges shall be excluded from the gross total income for arriving at the profits of the business for calculating the deduction under Section 80HHC of the Act. (AJAY KUMAR MITTAL) JUDGE March 6, 2014