M/S SARLA HANDICRAFTS PVT. LTD. vs. ADDL. COMMISSIONER OF INCOME TAX

ITA/118/2007HC Punjab & HaryanaPHHC01072789200716 April 2007Author: MR. JUSTICE M.M. KUMAR,MR. JUSTICE RAJESH BINDAL3 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the assessee is not entitled to add the income of Rs. 13 lacs surrendered on account of stock shortage to the business income for the purpose of calculating deduction under Section 80HHC. The Court reasoned that the deduction under Section 80HHC is available only upon fulfillment of specific conditions laid down in the section. There can be no presumption that a surrender made due to a difference found in stock during a survey represents income from exports. Since this presumption cannot be made, the assessee cannot be held entitled to add the surrendered income in the income from business for the purpose of calculating the deduction under Section 80HHC. The Court relied on its earlier decision in I.T.A. No.302 of 2005 – M/s National Legguard Works, Jalandhar v. Commissioner of Income Tax (Appeals), Jalandhar. The appeal was dismissed.

What were the facts?

The assessee, M/s Sarla Handicrafts Private Limited, is a 100% export-oriented unit. During a survey under Section 133A of the Income Tax Act, 1961, a stock shortage of Rs. 12,77,906/- and a discrepancy in construction investment were found. The assessee surrendered an additional income of Rs. 13 lacs for the stock shortage and Rs. 6 lacs for the construction investment. The assessee claimed deduction under Section 80HHC on the total surrendered income of Rs. 19 lacs, treating it as business income. The Assessing Officer rejected this claim. The Commissioner of Income Tax (Appeals) allowed the assessee's appeal. However, the Income Tax Appellate Tribunal reversed the CIT(A)'s order, holding that the Rs. 13 lacs surrendered income on account of stock shortage was not eligible for deduction under Section 80HHC.

What were the issues?

1. Whether, in the facts and circumstances, the appellant is entitled to deduction under Section 80HHC as an exporter on the surrendered income of Rs. 13 lacs, given it is a 100% export-oriented unit and does not sell goods domestically? 2. Whether the deduction under Section 80HHC is admissible on the Rs. 13 lacs shown as miscellaneous income, considering the real character of the transaction should be seen? Assessee's contentions: The assessee argued that as a 100% export-oriented unit with no domestic sales, the surrendered income of Rs. 13 lacs on account of stock shortage must be considered as income from export earnings, thus qualifying for Section 80HHC deduction. They also contended that the real character of the transaction should be considered, not the nomenclature of 'miscellaneous income'. Revenue's contentions: The revenue contended that deduction under Section 80HHC is only available upon fulfillment of specific conditions, and there is no presumption that a surrender made due to stock discrepancies represents income from exports. The judgment does not explicitly record the revenue's arguments before the Tribunal or High Court, but their stance is implied by the Tribunal's decision.

Which sections of the Income-tax Act were involved?

Section 80HHC,Section 133A,Section 143(1)(a)

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-1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH

**** Date of Decision:16.04.2007 M/s Sarla Handicrafts Private Limited, Aggarwal Bhawan, Ambala City .....Appellant Vs. Addl. Commissioner of Income-tax, Spl. Range, Panchkula .....Respondent CORAM:- HON'BLE MR. JUSTICE M.M.KUMAR HON'BLE MR. JUSTICE RAJESH BINDAL Present:- Mr. M.L.Garg, Advocate for the appellant. **** RAJESH BINDAL, J. The assessee has approached this Court, by filing the present appeal, raising the following substantial questions of law, arising out of order dated 31.8.2006 passed by the Income Tax Appellate Tribunal, Chandigarh Bench `A', Chandigarh in I.T.A. No.757/Chandi/2002, for the assessment year 1998-99:- “i) Whether, in the facts and circumstances of the case, learned Tribunal was right in law in holding that the appellant is not entitled to deduction under section 80 HHC as an exporter on surrendered income of Rs.13.00 lacs when it is not disputed that the appellant is not selling any goods within the country and is 100% Export Oriented Unit? ii) Whether the learned

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