1. This appeal filed by the revenue is directed against the order dated 31-1-2005 of the Id. Commissioner (Appeals)-XX, Mumbai pertaining to the assessment year 2001-02.
1. The Ld. Commissioner (Appeals) has erred on facts and in law and in the circumstances of the case in directing the assessing officer to calculate the claim of Bdeduction under Section 80HHC(3)( b) amounting to Rs. 31,40,823 without appreciating the manufacturing activity carried on by the assessee in purchasing rough logs of wood which were sold as teak wood sawn timbers.
The Ld. Commissioner (Appeals) has failed to appreciate that the assessing officer has allowed the proportionate deduction under Section 80HHC(3)(a) treating the assessee as manufacturing exporter.
The Ld. Commissioner (Appeals) has failed to appreciate that the assessee has not maintained separate books of account for export sales and local sales and the fact that the export sale out of total turnover is of 19.81% only, hence, the assessing officer has correctly allowed the proportionate deduction under Section 80HHC.3. The facts relating to controversy involved in this ground of appeal are discussed by the assessing officer in pages 2 to 6 of the assessment orders. The assessee is not maintaining separate books of account for export sales and local sales. The local sale is 80.19% of the total turnover and export sale is 19.81 % of the total turnover.
The assessee claimed deduction under Section 80HHC(3)(&) of the Income Tax Act, in the capacity of a trading exporter whereas the assessing officer granted the deduction under Section 80HHC(3)(a) of the Income Tax Act by treating the assessee as a manufacturer or processor.
Accordingly, the assessing officer worked out the deduction under Section 80HHC at Rs. 3,80,015 as against Rs. 44,84,223 claimed by the assessee as per Form No. lOCCAC attached with the return of income.
4. On appeal, in the impugned order, the Commissioner (Appeals) following the decision of the Hon'ble Supreme Court in the case of State of Orissa v. Titaghur Paper Mills Co. Ltd. 60 STC 213, which was rendered in the context of Sales Tax Act directed the assessing officer to treat the assessee engaged in the business of trading activities and allow deduction under Section 80HHC based on Clause (b) of Sub-section (3). Aggrieved by this order, the revenue is in appeal before us.
5. At the time of hearing, the Ld. D.R. contended that the assessee-firm cannot be categorized as a trader since the assessee had imported 'teak wood round logs' whereas it had exported 'teak wood sawn timber'. Therefore, it cannot be said that the assessee is merely purchasing and selling the same commodity. He further invited our attention to the profit and loss account at page 8 of the paper book filed by the assessee, wherein, the assessee has paid sawing charges of Rs. 1,93,123. Apart from this, the A assessee has also generated the fire wood which was sold separately for Rs. 22,625. In Clause (a) of Sub-section (3) of Section 80HHC, after manufacture, the Legislature inserted the words "or processed" was inserted by the Finance Act, 1992 with effect from 1 -4-1992. In view of this insertion, the case of the assessee is squarely covered by Clause (a) of subsection (3) of Section 80HHC. Therefore, the assessing officer rightly computed the profits derived from export by invoking Clause (a) of subsection (3) of Section 80HHC of the Income Tax Act. The decision of the B Hon'ble Supreme Court in the case of Titaghur Paper Mills Co. Ltd. (supra) relied by the Commissioner (Appeals) for bringing the case of the assessee under Clause (b) of Sub-section (3) of Section 80HHC pertain to Sales Tax Act. In this case, the assessee was exporting the goods after processing Le., purchase of round log, cutting and sawing the same. The goods manufactured were exported. There was identity of goods manufactured and exported.
6. On the other hand, the Id. Counsel for the assessee supported the order of the CIT (Appeals) and further contended that the case of the assessee is squarely covered by the decision of the Supreme Court in the case of Titaghur Paper Mills Co. Ltd. (supra) which is relied by the Commissioner (Appeals) for holding that the assessee is only a trader.
7. Having heard both the sides, we have carefully gone through the orders of the authorities below. Prior to insertion of the words "or processed" by the Finance Act, 1992 in Clause (a) of Sub-section (3) of Section 80HHC, it D was essential that for application of said clause, export out of India, was of goods or mercandised manufactured by the assessee. After the insertion of words "or processed", it is not necessary that the goods or merchandise should only be manufactured.
Even in respect of processed goods, the said clause is applicable. In view of this, the assessee cannot be called a trader. The commercial name of the goods that the assessee was importing 'teak wood round log' or 'roughly squared teak wood' or 'roughly squared teak wood logs' as per the bills of entry for home consumption. The goods that v/ere exported under the commercial name is 'teak wood sawn timber' as per the bank certificate of export and realization and the bills of lading for export. All these clearly indicate that the assessee is importing round logs and exporting the sawn timber. Once the goods are processed, profit derived from export is to be computed as per formula given in Clause (a) of Sub-section (3) of Section 80HHC of the Income Tax Act, 1961. Apart from this, the assessee is not maintaining p separate books of account.
8. In order to understand the object inserting "or processed" in Clause (a) of Sub-section (3) of Section 80HHC by the Finance Act, 1992 we have gone through the CBDT Circular No. 636, dated 31-8-1992 reported in 198 ITR (St.) 1 being explanatory notes to Finance Act, 1992 which reads as under : 40. Rationalisation of provisions relating to tax concession for export profits. Under the provisions of Section 80HHC of the Income Tax Act, exporters are allowed, in the computation of their total income, a deduction of the entire profits derived from export. There exists a dual system for computation of export profits. The first method operates in cases where the export is of goods manufactured by the taxpayer. The export profit is computed on the basis of the ratio of export turnover to total turnover. In effect,80HHC concession = export profits = total profits Export turnover x --------------- Whereas the export is of goods purchased from third parties, ie., 'trading goods', the second method of computation operates, that is to say, the export profits is calculated by deducting from the export turnover, the direct and indirect cost attributable to such export, ie., 80HHC concession = export profits = export turnover - (direct costs + Cindirect cost) 'Trading goods' have been defined to mean goods not manufactured by the assessee. Thus, even where goods are processed by the taxpayer, they are treated as trading goods. To remove this anomaly, the Finance Act, 1992, has amended the definition of 'trading goods' to mean 'goods not manufactured or processed by the assessee'. Thus, in effect, where goods processed by the taxpayer are exported, the first method of computation will apply.
9. After the insertion of words "or processed" in Clause (a) of Sub-section (3) of Section 80HHC of the Income Tax Act, 1961, it is not necessary that goods must be manufactured by the assessee. Even in respect of processed goods, the said clause is applicable. The assessee in the instant case is importing 'teak wood round log', whereas, it had exported teak wood sawn timber, which clearly indicate that the assessee exported goods after processing. In view of this, the assessing officer rightly computed the profits of the business eligible for deduction under Section 80HHC of the Income Tax Act by applying Clause (a) of Sub-section (3) of Section 80HHC of the Income Tax Act.
The decision rendered under the Sales Tax Act in the case of Titaghur Paper Mills Co. Ltd. (supra) relied by the Commissioner (Appeals) in the impugned order is not relevant because the expression "processed" is wider than "manufacture" or "production"; it is an action which brings forth some change or alteration of the goods of material subjected to act p or processing as held by the Apex court in the case of Delhi Cold Storage (P.) Ltd. v. CIT In common parlance, 'processing' is understood as an action which brings forth some change or alteration of the goods or material which is subjected to the act of processing. The dictionary meaning of the term is not very different from this meaning in one sense, while various other A meanings of wider amplitude are also available. The view taken by the Allahabad and Calcutta High Courts did not find favour with the Three Judge Bench of this court and, in clear terms, the judgment indicates that processing involves bringing into existence a different substance from what the material was at the commencement of the process.
The expression "manufacture" or "production" or "processed of goods" or article in the case of conversion of timber into rafters came for consider-ation before the Hon'ble J&K High Court in the case of CIT v.Abdul Ahad Najar , wherein, it was held that converting tree to logs and planks is manufacturing or processing eligible for deduction under Section 80J of the Income Tax Act, 1961.
In the case of B.S. Bajaj & Sons v. CIT , the Hon'ble High Court held that conversion of timber into rafters amount to manufacturing or processing of goods for the purpose of allowing deduction under Sections 80J and 80HH of the Income Tax Act, 1961. In the impugned, the CIT(A.) has q distinguished the law laid down by Punj. & Har. High Court in the case of B.S. Bajaj & Sons (supra) which was rendered under the Income Tax Act, 1961 with the decision of the Apex court in the case of Titaghur Paper Mills (supra) which was rendered under the Sales Tax Act. In our opinion, the decision rendered under the Income Tax Act, is relevant for deciding the issue in hand.
We, therefore, respectfully following the decisions of the Punj. & Har.
High Court in the case of B.S. Bajaj & Sons (supra) under the Income Tax Act;, as well as keeping in view the amendment made by the Finance Act, 1992 in CBDT Circular No. 636, dated 31-8-1992 reported in 198 ITR (St.) 1 (supra) hold that the assessing officer rightly worked out the profits derived from the export under Clause (a) of Sub-section (3) of Section 80HHC of the Income Tax Act, 1961. We, therefore, reverse the order of the Commissioner (Appeals) on this issue and. restore that of the assessing officer.
10. In the result, the appeal is treated as allowed for statistical purposes.