C.I.T.UDAIPUR vs. M/S WOLKEM INDIA PVT.LTD.
What did the High Court hold?
The High Court decided the issues based on previous pronouncements. For Issue No. 1, concerning the deletion of disallowance on amounts claimed under Section 80HHC, the Court found that the ITAT's decision was justified. The Court elaborated on Explanation (baa) to Section 80HHC, stating that the nomenclature of a receipt (e.g., labour charges, processing charges) is not determinative. The key is whether such income arises from the main business activity and constitutes operational income. The Tribunal's finding of fact, which was not challenged, that there was no difference between activities relating to export business and processes for manufacturing garments for others under job work contracts, was crucial. The Court held that if the income is part of the main business activity, it does not attract Explanation (baa). The assessee's receipt of processing charges was considered income from business, with expenditures incurred for earning it being debited in the profit and loss account. For Issue No. 2, regarding the deletion of the proportion of deduction on account of exclusion of certain incomes, the Court referred to its interpretation of Explanation (baa) and the distinction between revenue and capital expenditure. The Court held that expenditure incurred to obtain a lower rent was revenue expenditure as it did not create a capital asset and provided an enduring business advantage. The Court concluded that Issue No. 1 was decided in favour of the assessee against the department, and Issue No. 2 was decided in favour of the Department against the assessee. The appeals were partly allowed to the extent of these decisions.
What were the facts?
The appeals were filed by the Commissioner of Income Tax, Udaipur, against the judgment and order of the Income Tax Appellate Tribunal (ITAT). The ITAT had dismissed the department's appeal and partly allowed the assessee's appeal. The assessee is M/s Wolkem India Pvt. Ltd. The appeals concern assessment years not explicitly stated but relate to the deletion of disallowances and deductions claimed by the assessee. The High Court admitted the appeals, framing substantial questions of law. The judgment refers to previous decisions of the High Court concerning the assessee itself and another entity, M/s Udaipur Mineral Development Syndicate (P) Ltd., which were decided on June 1, 2017, and July 19, 2017, respectively. The core of the dispute revolves around the computation of export profits under Section 80HHC and the classification of certain receipts and expenditures.
What were the issues?
1. Whether, in the facts and circumstances of the case, the ITAT has been justified in deleting the disallowance on the amount claimed under Section 80HHC of the Income Tax Act, 1961? 2. Whether, in the facts and circumstances of the case, the ITAT has been justified in deleting the proportion of deduction on account of exclusion of certain incomes from the computation of profits under Section 80HHC? Assessee's Contentions (implied from reliance on various case laws): The assessee likely argued that certain receipts, such as labour charges and processing charges, were operational income integral to its main business of manufacturing and exporting garments. Therefore, these should not be excluded from the computation of profits under Explanation (baa) to Section 80HHC. The assessee also likely contended that the expenditure incurred for obtaining a lower rent was revenue expenditure, not capital expenditure, and that the benefit obtained was an enduring business advantage rather than a capital asset. Revenue's Contentions: The revenue likely contended that the ITAT erred in deleting the disallowance and allowing the deduction. The revenue's argument would have been that receipts like labour charges and processing charges, even if termed as such, did not have an element of turnover and should be excluded from the profits for Section 80HHC computation as per Explanation (baa). The revenue might have also argued that certain expenditures were capital in nature or that the benefit derived was not operational income.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
Judsment / Order 25/01/2018
By way of these appeals, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed
the appeal of the department .-?a% and* "T rt-Y7-- partly allowed the appeal of the assessee. [%>M-kp
This b~o@rt Y& P' while admitting the appeals fKamed following 3. 1--. cl .\->:y substa,.ntlal question of law: - j' *.. ' Appeal No. 9/2012, Appeal No. 10/2012, Appeal No. t e , 11/2012 &Appeal Noi 138 &,";7) &%2~%5%& <f+-q fy g?j?&?s;p <@*"%&yf?: '6$ ( I ) wh&g&$%p circumstances oFfhe ;p< f!%~ ?&A:$*$*&% in deleting the disai&q.ggn,@ under Section (2) Wheth circumstances of in the justified claimed 1961? in the / I T ~ T has been justified I:$ $</ :k# h# -88 a e .t, d~qallo wance on the in deleting the profot$ion t ::'! f .,! t! Yj* \I& X a a cco un t of e x c l u s i o ~ ~ g ~ ~ & ohJ&%; &:_+;> in corn e from &ni[dedu-&~Qn . . ~ . e s ~ l ~ + : ...,-,- -,.-. -.,- ~e,rd. $. under decision of this Court > - -
in Tax Appeal No. 8/20rl-5&2% MS. uUAda,i,$~j- Mineral Development r d ?$Ttq * \J=$ fq Syndicate (P) Ltd., decided on 19.7.2017 wherein it has been held as under:
However, now the issue is covered by the decision of this court in the case of assessee itself in D.B. ITA No.207/2009 decided on 1.6.20.17 which reads as under:-'
Counsel for the appellant has supported the order of the Assessing Officer and contended that the view taken by the CIT(A) and the other authorities is required to be reversed.
However, counsel (Uploaded on 18/07/2024 at 03:07:25 PM)
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
Therefore, in view of the decision of '
Regarding issue the case of CI thus: - nt has sought to 8. We do not find behay of the profits @om re concerned with of goods manufactured by the assessee. Therefore, the export profits were required to be computed in the ratio of export turnover to total turnover as contemplated by the above formula. Explanation (baa) was introduced into the Act by the Finance (No. 2) Act, 1991, with eflect @om April I, 1992. Under the Circular of the Central Board of Direct Taxes bearing No. 621, dated December 19, 1991 (see [igg2] 195 ITR (St.) 154)~ it has been stated tlzat the above formula gave a distorted figure of export profits when receipts like interest, commission, etc., which do not have an (Uploaded on 18/07/2024 at 03:07:25 PM)
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
In the case on hand, it any receipts by charges or any o re included in any such profits are as computed Profession". . Y e
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.
For this interpretation of Explanation (baa) to Section a T- 8oHHC of the ~ e [ ~ i u e b ~ l ~ ~ o n the j.u<g@"n~f~o$-the Constitution (4:;' b ypL .~f"*i Bench of kfiis 6'0,ui.t zn Distributors (Baroda) I?. Ltdpv. Union of /,>s*.. India 1. and-:&hers lp p (supra). Section 8oM of the ~dtp?ovzded for %: .?h '&&P'?- de-dyctjon in respect of certain intercorporate dividencand it f 277 %NHdk gro!vided in sub-section (I) of Section 8oM that "where6tAe f 3L.J ' V o s s total income of an assessee being a company includes any income bu wau of dividends received bu it from a domestic d and subject to the that the Court mus n its own language and arrive at its ording to the plain natural meaning of the legislature and so 1 income but also Explanation (baa), the words "receipts by way of brokerage, ~ ~ ~ ~ ; ---i fTi{--$q commission, interes& ~xe,en~$ic&aPgk~6r;~~y other receipt of a similar nature included in such profits" will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head "Profits and Gains of Business or Profession" referred to in the first part of the Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (I) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the (Uploaded on 18/07/2024 at 03:07:25 PM)
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' ,&.¢ 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$i 4 Q k4j q 3 , The saving zn expenditure was saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, expenditure appears to be revenue expenditure. (Uploaded on 18/07/2024 at 03:07:25 PM)
[ITA- 9/ 20121
The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal (27 ITR 34). In that case, the appellant-company had acquired from the Government of Assam lease of certain lime-stone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospetting~1ice~nc.e for lime-stone. This MI'."?. It j!p< 3 Court e u a q j p e ~ J t e J b ~ - ~ a b . 2L 3b Pr-- downi 4 2 s . . + - ? &$ious cases for . ,-4 % 2" ,F%, distinguzsh.zZng %between capital expendztf6e {hnd revenue p.,., -@" ,$%- eqendzture. One of the standard tests now in usk_w. laid '$+. ". down,:in a r---p the case of Atherton v. British Insulated j2~(Ir61es Ltd. ([1925] lo Tax. Cases 155). It said : 2 4 ,"2 "-?-. expenditure is made, not only once and for all but or an advantage for the I Moreover, as the ab not apply if there a nces pointing to the mmarised the tests as "\ T-
Expenditure mayrpbstqecztgd i * a ~ ~ - ~ 0 3 e r l ~ attributable to $ 4 q *&qq/ @&je y$+i! 4"$ qq capital when it is made not only onee and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade ........... Ifwhat is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether.
Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring (Uploaded on 18/07/2024 at 03:07:25 PM)
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.
All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else a!nd,.the company derived an It1 T p . en during busjne?s a.dg~n tage!. by je&pdn d i g the am o un t. .$yt $& -- h+yA.8f%$& In all these kzz.2x. ca,ses, the expense has be'eniloo'kegi upon as % 'p. havinc-b$:eh' made for the purpose of conductrng the 33,. k w > $ a busrness of the assessee more profitably or/ . ore qp3F .~JA, ~~uqcessfully. In the present case also, since the -asset *gjwy "3 'Weated by spending the said amounts did not belonc~.;tb" advantage of us a low rent, thus should be looke
We have O/O of job charges the assessee. --*m-*&%%e%<fi*~*..,*..* B m - . 5 . ""ri $$ 4 "..4' .ii.~ie.,L ti ye^
I n that view of thea~ha2k$-e:q % i1ssure8 - 4 N.9:: . t s , u 1: is decided in fav % assessee against the. department and issue No.2 is decided in favour of Department against the assessee.
Appeals stand partly allowed to the extent above. I (DR. PUSHPENDRA SINGH BHAT1)J. (K. S. JHAVERI)J.//brn Powered by TCPDF (www.tcpdf.org) (Uploaded on 18/07/2024 at 03:07:25 PM)
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