Export profit: Deduction u/s. 80HHC: A. Y. 2003-04: Computation: Scrap is by-product of manufacturing activity: There were no expenses which could be excluded from sale of scrap:

The assessee is engaged in manufacturing of goods for export. In the process of manufacturing, the scrap is generated, which is a by-product of manufacturing activity. The assessee included the receipts on sale of scrap as business income for computing the deduction u/s. 80HHC of the Income-tax Act, 1961. The Assessing Officer rejected the claim for deduction in respect of scrap sales. The CIT(A) allowed the assessee’s appeal and also held that no expenditure is incurred in generation and sale of scrap. Accordingly, the whole of the sale proceeds was includible in the business profit. The Tribunal held that only the profit on sale of scrap is includible and estimated such profit at 7.5%.

On appeal by the assessee, the Punjab and Haryana High Court held as under:

“i) Mr. Katoch, learned counsel for the revenue has argued that the scrap value has to be included in the total turn-over but cannot be included in business profit as only the profit after deducting the expenses of generation of scrap can be added in the business profit.

ii) We find that the argument raised by Mr. Katoch is wholly untenable. The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is by-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap.

 iii) Since the question of law stands answered by this Court in favour of assessee in the above mentioned judgments, therefore, the first substantial question of law is answered in favour of the assessee and against the Revenue.”