MS. SUSHMA CHOWLA, J.M. These two appeals filed by Revenue against separate orders of CIT(A)- XXXII, Mumbai dt. 9th Sept., 2004 relating to asst. yr. 1997-98 and dt. 16th Sept., 2004 relating to asst. yr. 2001-02 are against orders under s. 143(3) of IT Act, 1961. 2. notice for hearing was sent to assessee through RPAD but same were returned with remark left . Revenue was directed to serve notice of hearing on assessee. notice has been served on assessee for fixing date of hearing for 4th Oct., 2007. None appeared on behalf of assessee and we proceed to dispose of appeal after hearing learned Departmental Representative for Revenue. 3. grounds of appeal raised by Revenue are as under : "1. On facts and circumstances of case and in law, learned CIT(A) erred in reducing net profit to 2 per cent of disclosed sale from 4 per cent net profit computed by AO on disclosed sale. 2. On facts and circumstances of case and in law, learned CIT(A) erred in considering fact that net profit has varied from year to year. In asst. yr. 1996-97 net profit disclosed by assessee was 12.57 per cent. 3. appellant prays that order of CIT(A) on above grounds be set aside and that of AO be restored." 4 . brief facts of case are that assessee had initially filed return of income accompanied by audited P&L a/c showing loss of Rs. 13.46 lakhs. Subsequently, assessee during course of assessment proceedings furnished different set of audited accounts claiming latter audited accounts reflected correct picture of business activity. AO sought approval from CIT under s. 142(2)(A) of IT Act to get his account audited by accountant appointed by IT Department as there was variation in figures of sales, purchases, unsecured credits etc. in two audited accounts of assessee. auditor appointed by tax Department pointed out several defects and deficiencies. On basis of said adverse findings of auditors, AO rejected book results and estimated profits of business on anad hocbasis. income was estimated at rate of 4 per cent of net sales by AO. CIT(A) estimated net profits at rate of 2 per cent of net turnover and directed AO to allow deduction under s. 80HHC of Act in respect of export profits. 5 . estimation made by AO is purely hypothetical. AO while estimating net profit rate had based its estimation on net profit shown by assessee in asst. yr. 1996-97 at 12.57 per cent, which was in fact first year of operation. assessee had shown varied percentage of net profits as is apparent from chart of total sales and net profits relating to asst. yrs. 1996-97 to 2003-04, as detailed below : Net Asst. Net profit Total sales profit ratio yr. before tax before tax 1995- - -11,153 96 1996- 10,86,870 1,36,655 12.57 97 1997- - 3,82,25,253 -4.18 98 15,96,957 1998- - 6,09,66,563 -4.39 99 26,75,168 1999- - 9,07,31,770 -23.31 2000 2,11,46,072 2000- 18,53,02, 79 39,50,241 2.13 01 2 2001- 5,77,46,848 2,40,002 .42 02 2002- 12,16,69,258 1,25,001 .1 03 2003- 8,62,56,380 5,40,085 .63 04 - 64,19,85,734 -3.18 2,04,37,366 6. appeals before us relate to asst. yr. 1997-98 wherein assessee has shown negative net profit. There is no basis for estimation of net profit rates merely because assessee has shown higher net profit rate in preceding year. Each order is independent year and result of preceding year cannot be basis for estimating net profit rates for current year. Though results shown by assessee cannot be accepted and relied upon as bench mark of his business activities, as assessee himself had revised figures of sales, purchase and unsecured credits in revised profit and loss filed during course of assessment proceedings. Further, special auditor appointed in case had also pointed out defects in audited books of account maintained by assessee. In totality of facts and circumstances of case, we uphold order of CIT(A) in estimating net profit at rate of 2 per cent of total turnover being reasonable and appropriate. We confirm order of CIT(A) in this regard and dismiss grounds of appeal raised by Revenue in asst. yr. 1997-98. ITA No. 8801/Mum/2004 Asst. yr. 2001-02 7. Revenue has raised following grounds of appeal : "1. On facts and circumstances of case and in law, learned CIT(A) erred in directing labour charges should not be reduced to arrive at point of business for purpose of deduction under s. 80HHC. 2. On facts and circumstances of case and in law, learned CIT(A) erred in not appreciating fact that labour charges received by assessee were devoted to job work done for other parties for whom labour charges were paid and therefore were incidental to assessee s business and not part of operational income of assessee. 3. On facts and in circumstances of case and in law, CIT(A) erred in directing that capital receipts should be excluded from book profit of assessee rejecting AO s computation of book profit as per provisions of s. 115JB. AO has taken profit as per P&L a/c and only additions prescribed in cls. (a) to (f) and deductions prescribed in cls. (i) to (vii) of Explanation to s. 115JB(2) are made." 8. issue in ground Nos. 1 and 2 raised by Revenue is against treatment of labour charges while computing deduction under s. 80HHC of Act. AO had excluded labour charges from business profits, while computing deduction under s. 80HHC of IT Act. CIT(A) after considering submissions of assessee held as under : "I have considered submissions of appellant. appellant is engaged in manufacture of jewellery. spare capacity of plant and machinery employed in jewellery manufacturing were utilized by appellant for manufacturing jewellery of its clients and customers on job work basis. Therefore, labour charges received for such job work, constitute part and parcel of appellant s business income and manufacturing jewellery for clients on job work basis is only extension of appellants existing business activity. These receipts are not at par with items enumerated in Expln. (baa). facts of appellant s case are covered by judgment of Bangalore Clothing Company and AO is directed to include labour charges in business profits of appellant." 9. Their Lordships of Bombay High Court inCIT vs. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127 : (2003) 260 ITR 371 (Bom)have held that in case any income earned by assessee constitutes operational income, receipts from same are includible in business profits while computing deduction under s. 80HHC of IT Act. labour charges received by assessee for job-work carried out is in line with manufacturing activity carried on by assessee constitutes, operational income and profits and receipts from said labour charges are includible in business profits of assessee, while computing deduction under s. 80HHC of IT Act. We confirm order of CIT(A) in this regard and dismiss ground of appeal in ground Nos. 1 and 2 raised by Revenue. 10. ground No. 3 raised by Revenue is against computation of book profits under s. 115JB of IT Act. During year under consideration assessee had transferred some of its capital assets to its holding company and profit arising on such transfer was credited to P&L appropriation account. assessee did not include capital profits arising on transfer of assets to holding company in book profits as capital gains arising on such transfer had been specifically excluded from purview of s. 45 by virtue of s. 47(v) of IT Act. claim of assessee was that said capital profits were capital receipts, which do not have any element of income. assessee also claimed that such capital receipts were not chargeable to tax. AO rejecting claim of assessee included capital receipts as part of book profits while computing net profit under s. 115JB of Act, relying on judgment of Hon ble Supreme Court inApollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 5 21 : (2002) 255 ITR 273 (SC), wherein it had been held that profits disclosed in P&L a/c constituted book profits by purpose of s. 115JB of Act. 11. CIT(A) after considering arguments of assessee observed that as per specific provisions of Companies Act, i.e., s. 349, which provides that credit for profit arising from sale of any immovable property or fixed assets of capital nature is not to be taken into P&L a/c. CIT(A) further observed that in view of said specific provision of Companies Act profit arising from sale of capital assets to holding company cannot be considered as part of book profits of assessee. Further, it was observed that receipt on transfer of assets to holding company are of non-income category and cannot be subjected to tax by employing mechanism of s. 115JB. 12. We have perused records and found that profits arising on transfer of capital assets by assessee to its holding company is capital receipt in hands of assessee being not taxable in view of provisions of s. 47(v) of IT Act. intention of bringing s. 115JB of Act on statute was that companies should be made to pay taxes on basis of net profits shown in its P&L a/c. For purpose of computing mat profit under s. 115JB of Act. business profits as declared in P&L a/c are to be considered by AO. section further provides certain adjustments to be made in respect of different sets of income and expenditure. In present case, assessee is not liable to pay any tax on gains arising on transfer of its assets to holding company. Such profits are exempt from tax under s. 47(v) of IT Act. Though for computing Mat profit under s. 115JB of Act, business profits shown in profit and loss are to be adopted but in case said profits include certain receipts which are not of income nature, same are to be excluded before making any calculations in that regard. Sec. 349 of Companies Act clearly provides that credit for profit arising on sale of any immovable property or fixed assets of capital nature should not be taken into P&L a/c and accordingly, profits/gains arising on transfer of assets to holding company is not includible in profits of assessee company. 13. We confirm order of CIT(A) that capital receipts which do not constitute income under IT Act cannot be brought to tax net by employing mechanism of s. 115JB and said section has not intended to bring all non- income items within domain of IT Act. We dismiss ground No. 3 raised by Revenue in this regard. 14. In result, both appeals filed by Revenue are dismissed. *** INCOME TAX OFFICER v. SU-RAJ JEWELLERY (INDIA) LTD.