C.I.T.UDAIPUR vs. M/S HYCRONE INDIA

HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR D.B. Income Tax Appeal No. 58 / 2010 Commissioner of Income Tax, Udaipur. Versus M/S Hycrone India, Noble House, Near Swaroop Sagar, Udaipur Connected With 6 9) h \-aJ pJ ftf-p ?.- D . ~ , e x ~ ik, Q~Q ?\,. I..-- m b ~ a x Appea.1 M: 464$-/ 2 0 1 0 .*q Commissioner oI2,ng~me Tax, Udaipur. 4 &Y-+?~ &by0 ",. % 3 , ~ - ~ - - A p p e l l a n t %?+= Cf>. d ., A. >>' Versus %.4r"3 -.-a? P % M/S HyZi'one India, Noble House, Near Swaroop Sagar, ~ d $ $ u r fg$?fff+ P23.7 ----Respondent . -2):. &*,<e-%>,\ " ' 2 4 %

/.i*%r*& r.,@ f , .+ik\?. Z";.;cg$2< '&(*?v&ij"J c J i O o m - ',., I - ' * .-,, 4 . . - 1 1 1 -- r I:* i(i B lr For Appel la nt(s) : For Respondent(s) : HON'BLE DR. JU C , 7 L " * * W >t?> , , ,,A* $jf$?y, 1 6 25/01/2018 b >% j a . , fjp:, "&ia , r *. .,% * .& i .i $,.t p <.pa .,,$-+: / # " A { &:P .b * .& >Ii! ,,, \ !tri&2*.z;*L,t 3.x f i ' t.*; ,i " I&2$- ..%$ 7yp&*@J fie ~ ~ ~ ~ ~ % ~ $t~~ky s% 1. In both these a p p ~ a ~ ~ s ~ ~ ~ o ~ r n m o n ~ q ~ e s t i o n s - A ~ ~ . S S L ~ C : ; ~ J : ~ ~ ~ ~ . : : - + W of law and facts 1 - -=- 3- are involved, hence the~a;~e;8d&f@~ed~by: Ebss common judgment. 947% G 4 -=q ?+ 8 2. By way of these appeals, the appellants have assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal of the department. , 3. This court while admitting the appeals framed following substantial question of law:- (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) Appeal No. 58/2010 & Appeal No. 60/2010 "(iii) Whether in the facts and in the present circumstances of the case as well as in law, the Tribunal was justified in confirming the order passed by the learned CIT (A) in deleting the addition made by the A0 on account of disallowance of deduction under Sec. 80IA of the I.T. Act holding that the Assessing Officer was not justified in disallowing deduction claimed under Section 80IA on the ground that the audit report in Form No. IOCCB was not filed alongwith return of Income? *II- 3 (iv) Whethe[ fn ithe @akt~/pamd in the present . 2% . Y , ' r circumsFq,nces ~sq . 3'- of the case as h&lk$s in the la w, the . ,9t2,''%$ ~ r i b u 6 3 bvas justified in confihng +L." #4.73 the order by the learned CIT (A) in direotlng %,-J &fi the A0 ;h&'to exclude 90% of job charges from the p ~ o fit of 'ha.+*:% V h

Ithe business for computing the deduction~;'?umder ' tr- *+(Section 80HHC of the I.T. Act 1961?" , -% -*-.,, r ..&:"9, w' B$ix"jPP-wr 4. Counsel for the a~~ella@&aon$e:ndec the Tribunal on and everything 5. upon the following :qq 3 that the view tak si %,,*?p2%+ $4%C !acy.;i~-la w The balance ,-,ji . . 7's.- t s. *J&! 2 :,: ?&$*) ./ 9 I! ;, $p; sue No.1 has I . CIT V/s Pana 661 (SC) Afier hearin , therefore, direct .$$j<$* b+;%Jp$'c/<;4$<% opinion that a ques7@o~x$:lawt dj *k&$Fe.$$&$s23g7%5&<s3 the Tribunal to state &he$@d$j~&_n'&~@r~f# $following question of law to the High Court~fse~~~[g~,o,gJ~~~gg5 ITR 684, 685): - . .,-&& P vx*q "Whether, on thefacts'~.andhiri:lfHe ci$cumstances of the case, the Tribunal was justzjTed in law in holding that the claim of the assessee under Section 801 is justzFed even if he had not filed the audit report in Form No. loCCB along with a return of income ?" 2. CIT V/s Panama chemicals works (2007) 292 ITR 147 (MP) :en by sheet relied 6. Form No. IoCCB provides for submission of audit report under Sections 801(7), 8oLA(7), 8oIB and 8oIC. The question that falls for our consideration is as to zllhether the requirement of submission of Form No. loCCB is mandatory or directory. As (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) observed by the Bombay High Court, the requirement offiling the report is mandatory and failure to file it is fatal. But that is not so insofar as the requirement of filing it along with the return is concerned. If, in a given case, the assessee fails to file such report along with the return and files it subsequently, but before completion of the assessment, it will not be fatal to the claim of the assessee and the IT0 will have the power to accept the same if he is satisfied that the delay in filing the same was for good and suficient reasons. It is not disputed that return was filed in time. The question that has been raised is as to what would be the eflect+if?For@iiliz%rNo: 1.oCCB is filed later on ,"$ 1% fq J-41 j/K) * during pendep~jr~f&h_~assessmen't;JBrq~tn~t Zlisputed that the e4; +\ A' " -3" 3: p"-, report in t: e prescribed Form No. I O C C B ~ ; ~ ~ ~ fled by the fxh, ..&l -s, : ,,?I- assessekc-before completion of the assessment. It zs,+i-&eefore, y cley%$hat the assessee complied with all the provision$'>''law .,.f " J t cescept that in submission of Form No. ioCCB, there was delay:' - %t;& +* . + ,.<A Y 7: We are of the view that even if an assessee fails to file information in Form 7 NofFd.ge@B~-.;along .+:.: (.,+. with the return, he case, the Tribunal w olding that the claim of the assessee unde d even if he had not filed the audit repor ong with the return. We, therefore, ans the Revenue and in (1 993) 201 ,2-Q"C.I1-* w -* 9_Y.*K7mWm 3. When section 8 Q ~ ~ ~ & ~ 4 ~ n

&+4P@ is juxtaposition % 8 "* with sub-section (6A) hereof; it becomes clear that the benefit of this provision is available to new undertakings or ships or hotel business. It is no doubt a beneficial provision for giving incentives to such new establishments. It is of course true that this benefit will be subject to what is provided by sub-section (6A). When we turn to the first part of sub-section (6A), we find that there is a mandate to the assessing authority that the deductions under sub-section (I) fiom profits and gains shall not be admissible unless the accounts for the previous year relevant to the assessment year for which the deduction is (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) claimed have been audited by an accountant. That part of the provision obviously refers to the stage where the assessing authority sits down to apply its mind on the returned figures with a view to finding out whether the deductions contemplated by sub-section (I) of section 8oJare admissible or not and at that stage, the assessing authority has to find out whether the account of the concerned industrial undertaking claiming such deduction so far as the previous year relevant to the assessment year is concerned are audited or not and such audit has to be done by an accountant as defined by the Explanation to sub- section (2) ofsection 28860f'Sthe?*Actrlt cannot, therefore, be .#@ -5:. [h \, %r fl-;j .!/ gainsaid andflit. qas-not.dz&$ite&by % 2..+- hny .bl lf&e$parties I that this &" 5.1- * J @-% part of t:tz,ee~p.~ovzsion is mandatory in nahrqe. Ijt becomes b.* 9 1, CcbY the obvioug tkat when the assessment is being f r a ~ e q g C """H In~"qme-tax Oficer, the assessee, i.e., the concerned inijusfrial $ i "i , 4 .r2qn%rtaking /- - -.- must be able to show to the Income-tax 0jsTi3er 'fi I fhat the relevant accounts for the previous year have been a 288 of the Act. It is the Income-tax Oficer as they w es round the second part of sub-section e assessee, while he filed the returns on tfirnished along with the return, the au ined in the second part of section 8 0 ~ - s u b ~ s e c ~ o ~ ~ 6 ~ ) ~ u e : r e ~ ~ , o t complied with by ' 3 i f i i U ~ ; j %Hva@ the assessee as t h e k o r t dask not ifurnz,shed along with the return of income but subsequent to thefiling of the return. It is only on this ground that they denied the benefit ofsection 80Jof the Act to the assessee. The Tribunal took a contrary view on a close scrutiny of sub-section (6A) of section 80J of the Act. In our view, the first part of section 8oJis mandatory in nature but the second part thereof which is procedural in nature and requires the assessee to submit a report of the audit along with the return is merely directory in nature and it calls for only substantial compliance. The reasons are obvious. It is possible that at the time when the returns of income are filed, (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) [ITA- 58/2010] by some mischance or negligence of the clerk of for any other reason, even though the audited report is available, it might not have been annexed to the return and on such mistake being found out, the report may be tendered on the next day or even a few days thereafter to the Income-tax OJjTcer. If any literal compliance with the words "assessee firnishes report along with his return of income" is insisted upon, then, in such an unforeseen contingency, the assessee would be denied benefit of section 8oJof the Act. One other illustration can be considered to highlight the position. As per section 139(1) read with section isg(5) of the A ~ ~ t h ~ ~ a . s s e ~ ~ g e ~ c a n f i l e return within -j & \-q ir;j ijn r -. the period pg5&fged thereunder and .&q$- di.@ing the extended '* y i>k.-- ;$$ ?*.I . ,A .% period or:&znfiIe a revised return as p a thzs pt;o_ision, of -,kt .. A*;^ " cou7:~,e,'afterfollouring the procedure laid down th&$ii2..~ the 'k?+* b . asppee zs prompt, he may file the return in time, buff"&t."*tkat &"* *?i ,-$Lcqtage, for reasons beyond his control, the audit report Tskriot /Q?%? % /Ah .a@ 9 ieady, he files the return in time but without its bezng the return in the time when the assessments are eports are made itor along with the return is not a martdato,~yBp"~~O~.isi~~~~nd~~t4requires substantial tiq .p4 $&r. .?r&l compliance in the sense that it shoul& be made available to the Income-tax OJjTcer before the assessment is framed and, by that time, if the assessee puts his house in order, the Income-tax OJjTcer will be required to consider the case of the assessee for deductions under section 80J(1) of the Act on the merits. It has also to be kept in view that, by the mere non-filing of the auditor's report along with the return of income, the assessee does not stand to gain anything nor does the Revenue stand to lose as even aj?er the return is filed, it is obvious that it may take time before the Income-tax OJjTcer applies his mind to the merits of the return when he sits down to frame the assessment. (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) In fact, that is the relevant stage at which the house of the assessee should be in order. If that stage is missed, obviously, the assessee will not be entitled to the benefit of section 80J(1) but, till that time, the reGmfiled would be just lying in the once of the Income-tax 0dcer awaiting disposal and the Income-tax OfSicer, in the meantime, was not expected to apply his mind to such a pending return till he takes it up for consideration. By that time, if the report is already made available, all the procedural requirements of sub-section (6A) can be considered to have been complied with. The Revenue thereby would both , stand;to;'lose . ! %, *. 4-3k Gr *,; .su&5er , ? anything while, on the other ha7cIi-ifpnly: J& i?. +- gn. th~~ground-thQ,tB;al&lbzg. with the return -2 the auditog$3.r$port was not filed but subsequent~$";.'~was made "p-. availa&~$~", Income-tax OfSicet refuses to look znto the merits %'$, -if@ ~ ~ ~ i $ e ~ c l a i m , such new concern or establishment fore\,d$jfe a* ,9 -&> & >, , rcbs$efit the provisions of sections ofsection 80J(1) have. been, %$4 .,4&$ $acted would stand to suffer only on a technicality without is also necessary to keep under the Civil unt and other when the assessing a the purpose of -tax affer framing that stage that the requirements of se ad with sub-section the filing of the retuzn so a~~toenable~~h&.assessee to claim the (k$ eqi ?ST & J5. & i 1 ~ ' 6 ..- i ?? 9 1 benefit of section 80J of the !Act. The first,apart of sub-section (6A) of section 80J(i) shows that the Income-tax Oficer will not admit the deductions as claimed by the assessee unless it is shown to his satisfaction that the accounts of the industrial undertaking of the previous year for which deductions have been claimed have been audited by a qualzj7ed accountant. Thus, it is at the stage of decidiizg whether the deductions are admissible or not that the Income-tax OfSicer has to look into these aspects of the matter and not at the previous stage of the filing of the return. It was then submitted by learned counsel for the Revenue that, if the Income-tax OfSicer had framed the (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) [ITA- 58/2010] assessment prior to the time when the audited accounts and the auditors' report were submitted by the assessee on March 7, 1979, the assessee could not have raised any grievance about the rejection of his claim. This is neither here nor there. So long as that had not happened, the assessee had locus penitentiae to put his house in order by submitting the report which he has done in this case and, therefore, on the construction of the provisions, we find that the view taken by the Tribunal is quite just and appropriate and it needs no interference. However, we may refer to some of the decisions on the point which were ca3eei;of.CIT v. Kaira District Co- . p ed'~ w nzon &td. i.[i97gi] 216 ITR 319, the -z* /y this court was concerned'wi~fi%>ction 84 of LO The Division Bench, speaking though B. K. -&f? :. that the scheme of tax holiday as envzsaged "do rule 19 of the Income-tax Rules was q -.d$ meant fir the benefit of the ritiw g was to be construed was was to be construed was or the purpose of s frustrated by an manner as to avoid d irrational or absurd ose of the main enactment can b Act. Consequently, $d irrational or absurd -7 . ;. "2,: ;i;s ;i .. 4% : ~ v l Y Y ~ t ~ ~ ~ , ~ l i d a y on the basis of +*;$~*$d$ h.wa **tgd. or3 frustrated by an p3RLfi&$e$ q$, 'a? zn '%I . ,theprovisions of the rule, g-4 g!.?&& .; R# :uc manner as to avoid <,T ,+ li$i$ eloprnent,benefit to the new W A ~ ~ S & > $ ~ ,,r t &5gg3g9$+the Act. Consequently, while considering n to see that the relevant purpose s augmented and fortified and not frustrated by a construction put upon the said provision. Even assuming that another view is possible on the construction of the second parfi of sub-section (6A) of section 805, as that view is likely to frustrate the very object and purpose of the scheme underlying section 805(1) and would result in absurdity as indicated earlier, the other view by which the beneficial provision of section 80J(i) is made filly operative should be preferred and even in that view of the matter also, we endorse the interpretation put upon these provisions by the Tribunal. It is true that, as submitted by learned counsel for the (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) Revenue, a Divisions Bench of $he Punjab and Haryana High Court has taken a contrary view in the case of CIT v. Jaideep Industries [ig8g] 180 ITR 81 (P&H). In that case, the Division Bench of the Punjab and ~ a r ~ h n a High Court examined the very same question. Sodhi J., speaking for the Division Bench of that High Court, read section 80J(1), sub-section (6A), and, observed that there is no escape from the conclusion that the requirement offiling the audito~s' report along with the return is rendered mandatory by the provisions thereof. It is pertinent to note in this behaw that this provision clearly lays down for the assessee to file along zroith" therretum the audit report in the %.-dl $ $$'-y *- . k t it if j I gc prescribed fonii~~i&vsrgne~ a$d-2verzfie"d 6y;~the accountant. ,p.r".q'\ if '-" f ' d ,p% With due zespect, z t is not possible to agre,"w"iih fhzs uiew of the *-d %+ A$?* punjabbid ~ a r ~ a n a High Couk which is merely dn dixit "%, %' w e

oFthe:learned %+7.b2 judges. They have not shown how the sec&;dpart "" ,<;?% c$$ection 80J, sub-section (6A) is mandatory in nature. Sqyan ,"+% 'Q-Y P" p as the admissibility of the deduciions is concerned, it is found; in seen that it is iate how non- with the return would necessar is concerned. We, 4.CIT v./s Dr LM Singhvi 5. CIT V/s Punjab Fin otice some of the - 73T2i&~ ~-w.wwt=~i -&A R ,f (I) The question &!$y e$$r k~gtatute % ? % + $ is mandatory or directory depends upon the intent of the Legislature and not upon the language in which theiintent is clothed. The meaning and intention of the ~e~islature'must govern, and these are to be ascertained, not only from the phraseology of the provision, but also by considering its nature, its design, and the consequences which would follow from construing it one way or the other--Crawford on Statutory Construction (Edition 1940, art. 261, page 516). (2) The use of the word "shall" in a statutory provision, though generally taken in a mandato+y sense, does not necessarily (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) mean thatin every case it shall'have that eflect, that is to say, that unless the words of the stakte are punctiliously followed, the proceeding or the outcome: of the proceeding, would be invalid. On the other hand, it is ,not always correct to say that where the word ''may" has been used, the statute is only permissible or directory in the s'ense that non-compliance with those provisions will not renderi the proceedings invalid--State of U. P. v. Manbodhan La1 Trivastava, AIR 1957 SC 912 (headnote). (3) All the parts of a statute or sections must be construed - -p T XY -w together and e u ~ ~ ~ c l a + ~ e ,o&a se~~ibn"rPsh~u1d be construed with 4 px.& +4 &*&&g $g-, F A , . . reference =A,; to@e .>,\ gntext and other clauses~~~hereof so that the G.'-, ,:w . Q "". construc_tiori?.~ ?,... put to be on a particular pr&qjs&n A makes 6;/ 3 con.&ept enactinent of the whole statute. This wo~.!ldd$.e~more 'i *' so@$~h literal constructio.n of a particular clause haflsj:to - P -&mnifestly absurd and anomalous results which could not hav>&. been intended by the Legislature. (4) The principle ns such as a 10. maintained by the died in this sub- % However, this is n hich only provides forging of the report of audit prepared by the accountant as dejined in the Explanation below Sub-section (2) of Section 288 along with the return of inkome. The assessee's claim for deduction under clause (a) of Sub-section (I) ofsection 32AB does not depend on the submission of the audit report along with the return of income, but on deposit of the amount in the account maintained by him with the Development Bank before the expiry of six month2 from the end of the previous year or beforefirnishing the return of his income, whichever is earlier. In this context, it is important to bear in mind (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) that Section 139 of the Act which provides forfiling of return in the prescribed form within the stipulated time also provides for filing of revised return and rect!fication of defect in the return. Therefore, the requirement of bling the duly audited report along with the return cannot be treated as mandatory and the assessee cannot be deprived of $the benefit of deduction if the same is filed before the finalisaFn of the assessment. In other words, the Assessing Oficer can, for the purpose of allowing deductions in terms of Sub-section (I) of Section 32AB of the Act, accept the audit report even though the same may not have been fled along with the remrn, BSSrre,.ui ed by Sub-section (5). .-% j n ) t G * lhJ fi.d2: h. 4 k* -\ 18. In viewg&f '%hep'abbve d i s c u s s ~ a n ~ ~ w ~ hold that Section fi xt;3,. 2- * *+. i:" P:""*~ 32AB(5) i & ~ p t ' ", mandatory and the Assessing @fJic?e,r- &has the p '.%**V "- y 9 discre-Qqn"to entertain the audit report even thougk,$he@same [Y 2- h8sP&t been filed with the rdturn and give beneft-o&& '., ".r~<.--" &aeduction to the assessee in temb of Section 3 m ( l ) . y ,/A 9 Y &yp 6. On second issue, counse%-fo:lt,.the a ~ ~ e l l a n t has relied . . ) @yd*:;C 4 7 $ iI.%${i." $&. ?@ 2%. %- ! @ f ~ ~ a v i ~ d ~ a : n a t h a n Nair ( *&,, k*+(>;. v,%$~~L]$., *_e- h, & y&"$" 2% r i 4 $ 2 e $

qg: ?.,,, g3Jigh d% Xr(xyb'rF. 2 9 5 ITR 2 2 8 ( S C) w h e ~e~:nk~$~b:~S~bse;qj~,~$~~a s u nd e r : i s P ; f l v-'. # . , upon 2007) alia provided th tal income" a deduction of the assessee from the export of goods at the words "profits derived sub-section was Laws (Amendm 1.4.89. The expression "de d sub-section is narrower than the pq?fqs@z$"f t$~z$$le to'; therefore, it is only "profits dekived fr~m~exports" which become the basis for working out the said formula in Section 80HHC(3) of the Act. Similarly, by Finance Act, 1991 w.e. f. 1.4.92, for the first time, the expression "profits of the business" stood defined to mean the "profits of the business" as computed under the head 'profits and gains of business" under Sections 28 to 440 of the I.T. Act. Therefore, before giving Deduction, under Section 80HHC(3)(a)(b)or(c) of the I.T. Act, the gross total (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) (11 of ,25) [ITA- 58/2010] income of the assessee being firofits from business had to be arrived at in terms of blause (baa) to the said Explanation. However, one doint needs to be noted, namely, while calculating "Business Profits" the same had I to be done in terms of Sectioh 28 to Section 440 of the I.T, Act alone. Other provisions like Sections 70 and 71 of the I. T. Act were excluded. Tflerefore, in our view, if the said processing charges were a part of gross total income of the taxpayer being profits from business then it had to -\ iT be included in the total terrmov&.j1in7 the, above formula. It 3 , &A% -$.AJ~K a,&k. is importanlt&a&deduction has to *be: iJ?oip-profits as Gg -% i % f ? understdpd 4n the commerciql sense. Moreoveq under 7 f . P t .:.z2,<5 ~lause'ib%a)(l), 90% of any ahount referred to 1n$Cla21se 'y==:rg I %+@ 2% "-6w (iiia)t(iiib) and (iiic) of sectioh 28 of the I. T. Act ofivany " 2 @ $

I r& receipts by way of brokerage, .commission, interest, rent, charges or any other receip'~@ha~similar 8*flsx Mrs.i.+ ,&-;c.~,~ nature included in d.-y%.- " s2+$ 4 such profits. The sa@ g = ~ ~ e $ -.* g 23 '+axx $*~q~f&';~~ .-: indicated that t@x&$qb&:q2 "y*: $:., ?$$ ;$nc/bded in such profits" ':;a qv&&yFwv :.+ P. pg. .$ ~h;a:rge$Xormed part of .2: '% .y..+: g.$+*:s-%%$ i.r; ;* 2,J( $3' 7) , *.i&?&. *?. *yh,,.&...6~.&, ,i&.us1mess3profits~ This has ,.. . p&wA&> +.+: . . @gi &%&Sl : :,p:$+y been clarified by &qRs;ba~i9?i d "C said Explanation which inserted the m business" in the said Section 80 18. In the presen d out Business Profits of Rs. I, come on the basis of income pages 50 and 52 to assessees, in the aboge formula his Business Profits 3 7 2 % x 2

:T~*$$ & * w # ' ~ * included the a bq&q=mken!~o.~e'& 1 \&&~essing -r 9 charges. However, according to assesdes, the said charges were not to be included in the tdtal turnover. We are not inclined to accept the contention of the assessees. The I above discussion indicates thbt the formula in Section 80HHC(3) of the I. T. Act provided for a fraction of export turnover divided by total turnover to be applied to Business Profits calculated after deducting 90% of the sums mentioned in Clause (baa) to the said Explanation. (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) I That, profit incentives and items like rent, commission, I brokerage, charges etc. though formed part of gross total income had to be excluded as they were "independent incomes" which had no elemeqt of export turnover. That, the said items distorted the' figure of export profits. 19. In our view, for the above reasons, the said processing charges, which was: part of gross total income, was an independent income like rent, commission, brokerage sum had to at the be).i8cluded ,-. z ---.- in the total turnolver in the said f o r m " ~ $ ? ~ '/A ,ry p. a;%e at business profits in terms of Clause (baa) to the saidExplanation. 20. OnewiDint i i ~ ~ ~ ~ . ~

wx& still remains for consideration. cashew nuts for nexus with the includible in the tota /SO further argued that export incentive profits on export nection, it was from an activity n with exports. According to ass ver arose from processing of raw sessees for third ----?pme.yqs +m8&Q parties and, th eref0ke--@p3~<a&f a id not constitute an element of total turnovek. Therefore, according to I assessees, the A.O. had eryed in including the said charges in the total turnovei. According to assessees, profits derived from local sales8 were includible in Business Profits but not in the total turn0 ver. 21. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year 1993-94. At that time Section 80HHC(3) of the I.T. ' (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) Act constituted a Code by itsel:. Subsequent amendments have imposed restrictions/qua/ifications by which the said provision has ceased to be a code by itself. In the above I formula there existed four variables, namely, business profits, export turnover, total i turnover and 90% of the sums referred to in 'Clause (bda) to the said Explanation. In the computation of deducti4n under Section 80HHC all four variables had to be taken into account. All four I variables were required to be given weightage. The 6- 7 substitution of Section t?(3gHC$--3# $?epu~e$ profits derived " Be 3 . 4 % &._ __.&,?{ 'i g ;." .- from the expdfis b f @kgible goods. ~here,K8@, SF ifwall \. the four ,--.--. b-f- iC1 i'c 1 va ria b 1 e 3 ~ ~ . ; ~ k e ~ t in mind, it' becomes c l e a ~ i' it every . A: %\, 5. '" a, ., * ,;& receipt 3,s not income and ievery income w&<da"':tpt 'x?? I 4 2. ae~essarily k~..,.~2=- include element !of export turnover. ph7;~, x ,:* >. \*-/ > as&t needs to be kept in mind while interpreting Clause (baa) to the 90% of incentiv commission, in like nature deducted from B ted in terms of Sections 28 to 440. r words, receipts constituting indepe exports were require under Clause (ba Clause (baa) ( I ) indicates that rece e, commission, interest, rent, c income being B working out the fo arriving exp that although incentive profits bnd "independent incomes" constituted part of gross totdl income, they had to be excluded from gross total incbme because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On I reading all the variables it becomes clear that every receipt may not constitute sdle proceeds from exports. t That, every receipt is not income under the I.T. Act and 1 every income may not be attributable to exports. This was I (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) (14 of 25) [ITA- 58/2010] the reason for this Court to hold that indirect taxes like excise duty which are recoverdd by the taxpayers for and I on behalf of the government, shall not be included in the I total turnover in the above formula (See: Commissioner of Income Tax, Coimbatore v. t Lakshmi Machine Works I MA NU/SC/7335/2O 07: 2D07]290ITR667(SC) 1 22. I n the present case, the processing charges were included in the gross total income from cashew business. That, even according to assessee the said charges I - \ T I?--$T constituted an important @omp'on:en*t'-of~gross total income ."q .a -,ts i'l j! if -". ++4“i j. FRP from c a s h ~ ~ ~ B u s ~ ~ . e s s . This is not disputed %.% ;here fore, in = %

3- if f. terms .ofig@,&e (baa), 90% of the "indepenaeqt*iqcorne" b ~ $ 2 had &\be deducted from grodF total income to amve at py WN9h Buymess Profits to which the kraction had to be a p q g ~ l ~ -% k-ss,*e > Slnce, the processing chargds constituted independent were includible in e formula under Section 80HHC(3) 6.1 He relied o urt in Devraj R. Ag Vs. Assistant C (2016) 389 ITR (Gujarat) wherei nt has drawn the %\ "., y - -"' wvv,". .& * ".,.^...' attention of this @o%,q7fQAQ$eit$p;i;@ in the case of 4 . 4 4 Commissioner of Income-tax 4. Padmini Technologies Ltd. reported in M A N U / D E / ~ ~ ~ ~ / Z ~ I 1 : [2011] 245 CTR 611 i (Delhi) and relevant paragraptis of the said decision reads I as under:-- 1 464% ' etc., which formed had to be aa) to arrive sing charges e formula under , Court in Devraj R. Ag (2016) 389 ITR "3.1. ~earned- Coun nt has drawn the . . "., g8b in the case of "8. I n our view, the conthion is completely rnis- I conceived. The issue involved in the present case is: where an assessee runs and manages two separate units, one of which, is engaged fully or partially in earning income (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) i through exports then, in the ,calculation of proportionate deductible profits, would the &pression "total turnover of the business" would include only the turnover of the export business or also that of i the domestic business. 9. Before we proceed further it may be relevant to note even though provisions of Section 80 HHC have been amended from time, the expression "total turnover of the business" has not undergone a change. The expression finds I assessee main ounts and also and balance sheets. In the rationa/e given is : ss" which follows the expression "to ve to be confined to only those go section applies. I turnover of ,ee mainta id undertakings, the ounts and also and balance . (supra), the ss" which follows ve to be confined section applies. $6 11 rcniythe pi:i total turnover of business would of business of goods to which n of turnover of goods to which would be doing violence to the la (6). Sub-section (3) is inserted only tible profits out of the total profi ' wqT@ can be attributed to G the export business. We are iii, respectful agreement with the rationale adopted by the dadras High Court in Madras I Motors Ltd. (supra). As a matter of fact, there could be a I circumstance where one unit; is completely engaged in export and not partially as was the case in Madras Motors Ltd. (supra). In those circumstances, there would be no occasion for disallowing a portibn of the export earnings by adopting formula provided in kection 80 HHC of the I.T. Act. This view was taken by the Madras High Court not only (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) I in Rathore Brothers (supra) but also in M. Gani & Co. (supra) which in turn followed another judgment of the Madras High Court in the cast$ of CIT v. Suresh B. Mehta I MANU/TN/7542/2007 : (q007) 291 ITR 462. I I 11. Ms. Aggarwal's submission that the judgment of the Supreme Court in IPCA ~aborakor~ Ltd. (supra) and Simco I Industries Ltd. (supra) woulq apply is according to us completely untenable. This is demonstrable from the facts % T obtaining in the two $ u d p enkfci:'teld-before us. In IPCA , pagq Laboratory (supra), the , assessee:' yaas,q,nning an $-?-., 3)- I -"I-,\ I Q export hause':' For the assesslment year 1996i3-r997, the 4%". y " { .i? \ I ,"?A" assesseg had filed a return of income declariflg Ynil" y'. k -->' inome. The assessee 's income before claiming dedut&dh$ I /5.$.3 under Chapter VIA of the I.Tw Act was Rs. 4.39 crores. e had claimed various deductions incl ection 80 HHC course of the e assessee ctured by it but also those whi by supporting manufacturers. The revealed that the assessee had manufactured by s exports made by the assessee the assessee of disclaimer in favour of supporting manufa~turers in respect of goods I I supplied by them for the purpyses of export It is in these circumstances that the Assessing Officer came to the conclusion that no deduction as available to the assessee on export of goods as it had as a matter of fact recorded a net loss. Therefore, the qulstion which came up for I consideration before the Supreme Court was whether the assessee was entitled to a deduction in respect of the sum I of Rs. 3.78 Crores without taking h t o account the loss of I (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) (17 of ;25) [ITA- 58/2010] 7. I d eci ITR Rs. 6.86 Crores recorded by tde assessee in respect of the I exports carried out by it qua the goods of supporting manufacturers. The supreme Court after a detailed 1 consideration of the matter cari7e to the conclusion that the I expression "profits from such ~;xports" appearing in section 80 HHC(3)(c) could only mean lprofits of self manufactured goods plus profit of exports o,f trading goods (i.e., those supplied by supporting manufacturers). The court concluded that profits had to be calculated by taking into T r y w account both e x p o ~ ~ s , i a . a ~ ~ ~ h ~ ~ ~ d e ~ u c t i o n 'i' was permissible &- y.@*+ ;-'\%,A- J.L ki r under sectio.nf%O l$HC'(3)(1) onJy if the~k:'$$s psitive profit s, -$- - f P

\., in the e ~ o 8 o f both self maiufactured goods ga%wel as 8\*c7 -Afi trading , goods. The supremL Court in r e p e l l h n the -$?v I cgqtention of the assessee, in addition, took recourse- to .%.." " ',&j the'provisions of section 80AB ! and section 80B(5). ~ F i s I evident, the obtaining in the 4. Learned Co taken this Court 80HHC and the Explanation imme 4 and contended that in view o r the purpose of this section, the Leg d the definition of all the terms which export turnover, to of the business." He further relie sion of Supreme Cou 395 (SC) an int Commissi also 382 oner I of Income Tax, (2016) 382 ITR 30fj. t 8. However, counsel for the respondent has sought to reply on the following decisions: (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) I . CIT v/s Banglore clothing co (2003) 260 l722 371 (Born) 1 I 8. We do not find any merit {n the argument advanced on behalf of the Department. In this case, we are concerned with profits from the business of expbrts of goods manufactured by I the assessee. Therefore, the expbrt profits were required to be computed in the ratio of expore turnover to total turnover as contemplated by the above formula. Explanation (baa) was introduced into the Act by the qinance (No. 2) Act, 1991, with effect from April I , Circular of the Central Board of Direct December 19, 1991 (see stated that the the purposes of Section 80 such incomes z However, learned receipts by way of brokerage, commis business activity of example, in the case kes exports, receipt turnover and not be the case if financing because t%$h~ps@@fi@+q$dthe interest income t d which accrues to the assessee"w~l1 have the element of turnover and in such a case, receipts Yike interest, will not aitract Explanation (baa). The point hhich we would like to make, I therefore, is that in every maiten the Assessing OJjTcer will have to ascertain whether receipt o) interest, commission, labour charges, etc., were a part of ope~ational income. We cannot lay down any standard test for deciding what would constitute operational income. Broadly, !he Department will have to consider the memorandum and articles of association of the company, the nature of the business, the nature of the activity (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) and such other tests, The ~hpartment will also have to ascertain as to what is the domknant business of the company and whether receipts like interedt, commission, etc., accrue as a part of the main business activi$ or whether they accrue out of incidental business. In the case'of CIT v. 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 Zakhs did not have the element of turnover because the charges were received for a seasbnal activity which was not an integral part of the rnanufactur!ng activity. Therefore, the test nomenclature of the if it finds that the nomenclature is nomenclature may not be accurate. manufacturer and activities relatin of machinery, labo were also forming part of the activity=.ofmqsa%u$a~hrsill. arzments for its own sdvd&!di imiQr4 sales. The ~ribuna&fu~ther found that the.re was no difference between manufacturing of ga&nents for the assessee's own sales and manufacturing of g a r ~ e n t s for others on labour job basis. These are findings of fact.l~hey have not been challenged in the memo of appeal. The meko of appeal proceeds only on the basis that because the receipt is by way of labour charges, Explanation (baa) stood attracted. As stated above, each case will have to be examined by tlje Assessing OfSicer. As stated above, in each case of receipt ojlabour charges, rent, interest commission, etc., the Assessing1 OfSicer will have to ascertain whether the element of turnover :existed. In the present case, the (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) I Tribunal has found, on the that there was an element of I job work turnover and, therefore, the Tribunal concluded on the facts of this case that the receipt of labour charges was not in 1 the nature of brokerage, commiksion, rent, interest or charges as mentioned in Explanation (bJa) to Section 80HHC. Further, the assessee received Rs. 66,35,083 as processing charges. This can be seen from the profit and loss account. The company is engaged in manufacture and sale of garments, both I domestically and by way of exports. The processing charges earned was by using the entire undertaking of the company which also man~factured~gbr7fii~ents~3 f o ~ domestic sales and 4 j %%@"-!+ :4; x 4 "4 Y export sales~.and~.-whi~~~~r8ces~in~~~cfi~~~s % ";t- ?'\9'\9 pi'"- ;were earned by -& y ,"F3%,* incurriFgQq6diture v~k,h for the jhctory like %ages,- electricity s.,-, %J * ,#P""t chacgesif-etc., debited in the profit and loss accoun't~~hat, the % b income of Rs. 66~5,083 was only an income from busi&ssh,nd ish to interfere with the finding of fact rec income then it accrued from ma judgments cited by t unal in relation to (2008) 302 Ill2 Tl. --*. ,3,,' ~. " ? % = 4;y.$ *d4;$;;21 "y~$%-<*4s-&""' 6. In the case on hil;n@;ztg$sr~gtzp @;s~2~$e;f$at the income from job work earned by the assessek is by utilisation of the entire resources or business apparatui. The Tribunal had also found that the job work is linked to the manufacturing activity of the assessee. If that be so, we find no error or infirmity in the order of the Tribunal holding that 90% of the job work charges should I not have been excluded from bdsiness profits while computing deduction under Section 8oHHC!of the Act. (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) [ITA- 58/2010] 3. ACG Associated Capsules I? Ld. V/s IT [ZOIZ) 343 ITR 89 (SC) lo. Under Clause (I) of ~xplanhtion (baa), ninety per cent of i any receipts by way of brokerage, commission, interest, rent, I charges or any other receipt of a/ similar nature included in any such profits are to be deducted &om the profits of the business as computed under the head "Piofits and Gains of Business or Profession". The expression "iizcluded any such profits" in clause (I) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of frr lgr , the business as compu~edhnvder atbe head<;Ppfits and Gains of 32, D~ \ j\ ;i f; Business gq*$p@$n,":M~herefo7e," $& '2 IJ >q i uantum &-* of the receipt$~~bIJx~w?tiy of brokerage, commission, icte,gest, rent, '8%" q 4 charbes or any other receipt of la similar nature is all64ed as >f zp. e3;eegses under Sections 30 to 44D of the Act and is not znaluded )&bb&ze profits of business as cohputed under the head "Pr@fit3: "3%$* I flip- ahd Gains of Business or Profession", ninety per cent of su,ch I the nature me assessee under Exp 11. For this interpr tion (baa) to Section 80HHC of the Act, of the Constitution India and Other deduction in re dividends and it that '%here the gross total income ~o$an~as~&~s.e.d~ b,eing.-a-&npan includes any .;dF$?'I f ;i t A 12dj J,I{77ij income by way of\dzvzderids recezued by :!.it from a domestic I company, there shall, in accorqance with and subject to the provisions of this Section, be allowed, in computing the total income of the assessee, a deducAbnfrom such income by way of dividends an amount equal tor' a certain percentage of the income mentioned in this Section. The Constitution Bench held that the Court must construe Section 80M on its own language l and arrive at its true interprqtation according to the plain natural meaning of the words lsed by the legislature and so construed the words "such inconie by way of dividends" in sub- section (I) of Section 8oMmusf be referable not only to the (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) category of income included in khe gross total income but also to the quantum of the incbme so included. Similarly, I Explanation (baa) has to be conqtrued on its own language and as per the plain natural mebning of the words used in Explanation (baa), the words "teceipts by way of brokerage, commission, interest, rent, cha~ges or any other receipt of a similar nature included in such Arofits" 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 of the quantum of any of Explanation I I i" $$bpY%&;, 12.g we now apply&Epli $7 .%* k;qp&;~ fhis judgment @b~fih.e&acts~o . d Y t -g*> &>q>h'*.> interest is a recez~&c~aq.4;eab.le,, - --&TW - y $-jJl<$% ; &b$&&*&[, +kt. and chargeable toktm & ~ J ~ ; & ; ~ ~ ~ ~ ~ J ~ + ~ u n erSe-pQ quantum of the re an expense in acc o to 440 of the Act and is not to b assessee as compute d under clause (I) business of the as the head "Profits and Gains of Bus e deducted under clause (I) of tion 8oHHCfor determining the profits of the bubiness. 10. CIT v/s madras auto services (1998) ITR 468 (SC) I 5. In order to decide whethed this expenditure is revenue expenditure or capital expendziture, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) [ITA- 58/2010] suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assesske made substantial savings in monthly rent for a period of 3g years by expending these amounts. The saving in expenbiture was saving in revenue expenditure in the form of rynt. Whatever substitutes for revenue expenditure should norplly be considered as revenue expenditure. Moreover, assessee in the present case did not get ! any capital asset by spending the said amounts. The assessee, therefore, could not have-~Jatmed an~d~p,reciation. Looking to 4 I S Q q $1 y %-., the nature ~&gh&~a@~anYage whzch--the a%s$s.9ee obtained in a &,,* ,y\ 1% %*,4 ;$T commerczab sense, expenditute appears toy be revenue ?*:, *;..@ ! -L mjt expegdzt;ure. -\. .. t.dy$$, , f ".. % .? ;r Y 5bd >y3 f-\; Y % ;? -,' %67'The i)r test for distinguishing between capital expenditure %n2:$ U p k rbrenue expenditure in our cobniry was laid down by this inter alia, agreed period of the lease that payment, the 1 e for lime-stone. This Court examined re and revenue in use was laid down in the cas said : "When an to bringing into enduring benefit ~ - * r ~ ~ z ; ~ = r - d ~ , w ~ ~ + m&-a+s?.zlaw.Ay e - ~ ~ t ~ n ~ ~ ~ ( a ~ ' ~ ~ $ P ' ; ~ , ~ r f d advantage for the of a trade, I jthink that there is very good reason (in the absence of specic$l circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revqnue but to capita." Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage' itself provides, this test would not apply if there are special circumstances pointing to the contrary. This Court in the aboie case summarised the tests as follows :(p. 44) : (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) I . Outlay is deemed to be capital when it is made for the initiation of a business, for ednsion of a business, or for a substantial replacement of equipinent. 2. Expenditure may be treatea as properly attributable to capital when it is made not oniy once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade ........... If what is got rid of by a lump sum payment is an annual businpss expense chargeable against revenue, the lump sum paymend should equally be regarded as a business expense, but $the li,Fp- Sum payment brings in a Q l\l k 4 !,!.<qcrr: capital asset, *, $,. thehthht,p:~t~ ve a',x\ - thii. 'uuszneqs hanother footing * . $3 *j. >k .; F ? ,% sj : altogether&-_ %, -+, v2;P I 3. dhether for the purpose of the expenditure, any c 3% 3 *.%2-% wz~fi-drawn, or, in other words, whether the object of incuqzng f* -.> i tg'.d '%&e expenditure was to employ what was taken in as capithl ofi .S the business. Again, it is to be'seen whether the expenditure ,J#~I"~'WP~..,, incurred was part of the&C$$>ca~z~a .--....,, ' X , .l of the business or part of 11. All these nditure which benefit to the company as when the expenditure did asset for the com belonged to some In all these cas business of $eAiten I*J I ce any capital 8&G?'?~which was created ompany derived an ending the amount. - gg%%* QLw nse has been looked upon as Y""*w%*,& i" h%*~i~!g,..?v \/,;pu~po'ssql:'iof conducting the dl;i~T%\&~~h./rf (L r ; . a ~ m t a I or more 9: ye- ,&; since the asset :@qmq$@&@ sj ib[-%mo-i38ts did not belong to va* the assessee bgji I t the business advantage of using t a low rent, thus saving considerable revenue !expenditure for the next 39 years, both the Tribunal as hell as the High Court have rightly come to the c~ncl?~ion that the expenditure should be looked upon as revenue expenditure. I I 9. We have heard the learned cbunsel for the parties. (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM) 9.1 I n our considered opinion, 9O0/0 of job ch'a'rges'Tr8"rir?':thG' profit of the business is not for the purpose of export; *ther;eforG~~' we are not inclined to accept the s,ubmissions of the learned counsel for the assessee. 9.2 Taking into consideration the above decisions, issue No.1 is decided in favour of assessee and against the Department. However, issue Department and , (DR. PUSHP~NDRA Powered by TCPDF (www.tcpdf.org) (Uploaded on 18/07/2024 at 02:53:26 PM) (Downloaded on 28/10/2026 at 08:03:41 AM)