C.I.T.UDAIPUR vs. M/S WOLKEM INDIA PVT.LTD.

Judsment / Order 25/01/2018

the appeal of the department .-?a% and* "T rt-Y7-- partly allowed the appeal of the assessee. [%>M-kp

in Tax Appeal No. 8/20rl-5&2% MS. uUAda,i,$~j- Mineral Development r d ?$Ttq * \J=$ fq Syndicate (P) Ltd., decided on 19.7.2017 wherein it has been held as under:

for the respondent has relied on the following decisions: (i) Commissioner of Income Tax vs. Sesa Goa IN vs. Arihant Tiles & Marbles P Ltd. 320 ITR 79 (SC) (v) Narne Tula Man Mfrs. P. Ltd. vs. Collector Central Excise 73 STC 8 1 (SC) (7 of 7) [ITA207/2009] (vi) CIT vs. Shri Swasan fa A"spfnw%]!I"&Co. vs. CIT 251 ITR 32 3 (sS,~.~ AtJ328)' ( i&)ddifL$s2~~a "-." l l i ka rj IJ n ~eores@"&s ' 'essociates 341 '74 4ITR7\ 581 (Uttrakhand) at p. 584 (x) CIT vs. Empire. PQly Ltd. 320 ITR 665 (SC) at p. 667 (X/)-~IT v%%~hri Swasan Chemical (M) P Ltd. 300 i?-I?.;:* e- ;?-K3 :~4;25 (Mad). 4 % . r#&3

element of turnover are included by the assessee in the profit and loss account. Therefore, Explanation (baa) came to be introduced. Under that Explanation projits of the business, for the purposes of Section 8oHHC, does not include receipts which do not have an element of turnover like rent, commission, interest, etc. However, as some expenditure might be incurred in earning such incomes an ad hoc 10 per cent. deduction from such incomes is provided to account for those expenses. However, learned counsel for the Department cannot invoke Explanation (ban) in every matter involving receipts by way of brokerage, commission, -intere%t, rrent labour charges, etc. % & p4 pj\ 8 {f? .> These items pf&cmne have got 'to-belseeii-zn fihe context of the k\% bW -* 8 %* -'% B A- business a~tivzty of the assessee. To give an examp1e)in the case v.\ v3 %.-- ,.f./?nj of aAmanufacturing company which undertakes e x p o s cqceipt '.% c of,in<erest or commission may not be operationalgncbme k- - .<?J dbg-cause they do not have the element of turnoue??(arid \c-" /$a consequently Explanation (baa) will apply. However, that iozll not be the case if the as rrying on the business of which accrues ill not attract to ascertain whe charges, etc., were a come. We cannot lay hat would constitute operational income. artment will have to consider the me association of the and such othe ill also have to part of the main b~~i~ess~ac'tiuity orauhetker they accrue out of ,A $,I] i.-. 1 * $"A -3 !qy $?- @& t* 5 incidental business. Ink the case o f t 3 LT ", @. % " K. K. Doshi and Co. [~OOO] 245 ITR 849 (Bom), the assessee had received Rs. 19.60 lakhs as service charges. It was held that the service charges of Rs. 19.60 lakhs did not have the element of turnover because the charges were received for a seasonal activity which was not an integral part of the manufacturing activity. Therefore, the test to be applied in all such matters is, whether interest, service charges, commission accrue out of the main business activity of the company and whether they were operational income. The case of K. K. Doshi and Co. [~OOO] 245 ITR 849 (Bom) shows, that service charges of Rs. 19.66 lakhs did not represent (Uploaded on 18/07/2024 at 03:07:25 PM)

operational income and, therefore, came within Explanation (baa). However, we find that the Department just looks at the nomenclature of the receipt and if it finds that the nomenclature is rent, interest, .commission then without any Jirrther inquiry into the nature of business, the Department invokes Explanation (baa) which is not the purpose and the object of that Explanation. In the present case, the receipt in question is labour charges. However, this nomenclature may not be accurate. In the present case, the assessee is a manufacturer and exporter of garments. In the present case, the Tribunal has recorded a $inding of fact which is not $r; ip, 14 y-3 //if?!@-"- challenged, namely)-i$ft--there -wcis~no&i~erence between the &'p'% $3 f i activities k~eJatihg to export business Carrie on by the assessee k'%\ 9 L $=-), andrfhe,iprocesses carried on for manufacturing garr;n'ents for \ b % - : A -'i@' others:; under job work contracts. The Tribunal has%,&r?her TP" .,+p2. * . dound, .. .L-=.-- on the facts, that the activity of labour job i n v o l v ~ ~ ~ ~ s ~ ~ ~ '*% . of machinery, labour and material which were also formigg part of the activity of ng garments for its own assessee's own sales and man basis. These are d above, each case ing Oficer. As stated above, in each case charges, rent, interest commission, etc., 11 have to ascertain whether the elem e present case, the the nature of broke~a~e,so"m~mission~~~e~~,interest or charges 4q-leU44~k \d,cawfli as mentioned in Explcinatzon (&a) to,Sec&on 80HHC. Further, the assessee received Rs. 66,35,083 as processing charges. This can be seen from the profit and loss account. The company is engaged in manufacture and sale of garments, both domestically and by way of exports. The processing charges earned was by using the entire undertaking of the company which also manufactured garments for domestic sales and export sales and which processing charges were earned by incurring expenditure for the factory like wages, electricity charges, etc., debited in the profit and loss account. That, the income of Rs. 66,35,083 was only an income from business and (Uploaded on 18/07/2024 at 03:07:25 PM)

the expenditure for earning this income is included in several items of expenditure debited in the profit and loss account. In these circumstances, we do not wish to interfere with the finding of fact recorded by the Tribunal. As stated above, if the receipt of labour charges (job work charges), interest, commission, etc., accrues by way of operating income then it falls outside Explanation (baa). In the present case, the receipt accrued from manufacturing activity, The Tribunal has found that job processing activity was linked to the manufacturing activity of the assessee. In the circumstances, on the facts, the judgments to this case. 326 (Mad.) resources or b [f&-&! of the Tribunal holE not have been excl deduction under Sec

i~q--+* unde ~ ~ 4 0 ~ & ~ ~ P ~ of Business or The expression "included any such profits" in clause (I) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and Gains of Business or Profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits (Uploaded on 18/07/2024 at 03:07:25 PM)

and Gains of Business or Profession", ninety per cent of such quantum of receipts cannot be reduced under Clause (I) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (I) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the assessee under Explanation (baa) to Section 8oHHC.

receipt cannot be deducted under Explanation (baa) to Section 8oHHC. ia.If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included;.in,.the,p.rofits of the business of the i$> ti"* b!! , F b assessee as cBpP$fe~jtpdei the &ebd '2rofits and Gains of fiii ;j ;* " Business or-ProJSesszon", ';==: ninety per cent of such q-&aytum of the $ .. P r

receip~,&$GAt or interest will not be deducted &der clause (I) *q, 3@ W J ' ? k . oJExplanation . >---. .-!-- (baa) to Section 8oHHC. In other ~ords.~~nznety T I '" Y' ,&.&cent of not the gross rent or gross interest but only thtthnct 4.. $ 4 tqterest or net rent, which has been included in the profitsg~f .. business of the assessee d under the head "Profits be deducted under 5. In order to d diture is revenue expenditure or c has to look at the expenditure from a c The assessee got a suitable to its o ssional rent. The mises at a lower monthly amounts. e n

for f y Y

expending these \ # t. "-4 s ~ I i6$i 4 Q k4j q 3 , The saving zn expenditure was saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, expenditure appears to be revenue expenditure. (Uploaded on 18/07/2024 at 03:07:25 PM)

[ITA- 9/ 20121

the expenditure was to employ what was taken imas c.apitai'of '-" @ the business. Again, it is to be seen whether the expenditured incurred was part of thefied capital of the business or part of its circulating capital.