Judgment:
Civil Appeal No. 3204 OF 2007 (Arising out of SLP (C) 12461/2007)
Dr. Arijit Pasayat, J.
- Leave granted.
Challenge in this appeal is to the order passed by a Division Bench of
the Bombay High Court relating to the question whether sales tax and
excise duty form part of the total turnover. Dispute relates to the
Assessment year 1997-
98.
Background facts in a nutshell are as follows:
While making assessment under Section 143(3) of the
Income Tax Act, 1961 (in short the 'Act'), assessing officer
included excise duty and sales tax on the total turnover for
computing the deduction under Section 80 HHC (3)(b) of the
Act. The Commissioner of Income Tax (Appeals), Special
Range 1, Nasik (in short the 'CIT' (A), held that while
calculating deduction under Section 80 HHC amounts of
excise duty and sales tax collected by the assessee, are not to
be included in the total turnover for the purpose of computing
deductions under Section 80HHC. Revenue preferred an
appeal before the Income Tax Appellate Tribunal, Pune Bench,
Pune, (in short the 'Tribunal"). The appeal was dismissed
following a decision of the Bombay High Court in CIT v.
Sudarshan Chemical Industries Ltd. [(2000) 245 ITR 769
(Bom.)]. Appeal was preferred by the Revenue before the High
Court which by the impugned order dismissed the appeal
answering the question raised in the appeal in favour of the
assessee and against the revenue.
plain meaning of the word "turnover" in the formula applied
for computation. It was urged that there was no need to call
for any rule of interpretation or external aid to interpret the
said word. In essence, it was urged that having regard to the
plain words of the Section 'excise duty' and 'sales tax' ought to
have been included in the "total turnover". It is to be noted
that a similar plea was raised in Commissioner of Income Tax,
Coimbatore v. M/s. Lakshmi Machine Works [JT 2007(6) SC
236. In para 18 it was noted as follows:
"We do not find any merit in the above
contentions advanced on behalf of the
Department. It is important to note that tax
under the Act is upon income, profits and
gains. It is not a tax on gross receipts. Under
Section 2(24) of the Act the word "income"
includes profits and gains. The charge is not
on gross receipts but on profits and gains
properly so-called. Gross receipts or sale
proceeds, however, include profits. According
to The Law and Practice of Income Tax by
Kanga and Palkhivala, the word "profits" in
Section 28 should be understood in normal
and proper sense. However, subject to special
requirements of the income tax, profits have
got to be assessed provided they are real
profits. Such profits have to be got to be
ascertained on ordinary principles of
commercial trading and accounting.
However,
the income tax has laid down certain rules to
be applied in deciding how the tax should be
assessed and even if the result is to tax as
profits what cannot be construed as profits,
still the requirements of the income tax must
be complied with. Where a deduction is
necessary in order to ascertain the profits and
gains, such deductions should be allowed.
Profits should be computed after deducting the
expenses incurred for business though such
expenses may not be admissible expressly
under the Act, unless such expenses are
expressly disallowed by the Act {SEE page 455
of The Law and Practice of Income Tax by
Kanga and Palkhivala]. Therefore, schematic
interpretation for making the formula in
Section 80H HC workable cannot be ruled out.
Similarly, purposeful interpretation of Section
8OHHC which has undergone so many
changes cannot be ruled out, particularly,
when those legislative changes indicate that
the legislature intended to exclude items like
commission and interest from deduction on
the ground that they did not possess any
element of "turnover" even though commission
and interest emanated from exports. We have
to read the words "total turnover" in Section
8OHHC as part of the formula which sought to
segregate the "export profits" from the
"business profits".
Therefore, we have to read
the formula in entirety. In that formula the
entire business profits is not given deduction.
It is the business profit which is
proportionately reduced by the above
fraction/ratio of export turnover - total
turnover which constitute 8OHHC concession
(deduction). Income in the nature of "business
profits" was, therefore, apportioned. The above
formula fixed a ratio in which "business
profits" under Section 28 of the Act had to be
apportioned. Therefore, one has to give
weightage not only to the words "total
turnover" but also to the words "export
turnover", "total export turnover" and
"business profits". That is the reason why we
have quoted hereinabove extensively the
illustration from the Direct Taxes (Income tax)
Ready Reckoner of the relevant word.
In the
circumstances, we cannot interpret the words
"total turnover" in the above formula with
reference to the definition of the word
"turnover" in other laws like Central Sales Tax
or as defined in accounting principles. Goods
for export do not incur excise duty liability. As
stated above, even commission and interest
formed a part of the profit and loss account,
however, they were not eligible for deduction
under Section 8OHHC. They were not eligible
even without the clarification introduced by
the legislature by various amendments
because they did not involve any element of
turnover. Further, in all other provisions of the
income tax, profits and gains were required to
be computed with reference to the books of
accounts of the assessee. However, as can be
seen from the Income Tax Rules and from the
above Form No.1OCCAC in the case of
deduction under Section 8OHHC a report of
the auditor certifying deduction based on
export turnover was sufficient.
This is because
the very basis for computing Section 8OHHC
deduction was "business profits" as computed
under Section 28, a portion of which had to be
apportioned in terms of the above ratio of
export turnover to total turnover. Section
8OHHC(3) was a beneficial section. It was
intended to provide incentives to promote
exports. The incentive was to exempt profits
relatable to exports. In the case of combined
business of an assessee having export
business and domestic business the legislature
intended to have a formula to ascertain export
profits by apportioning the total business
profits on the basis of turnovers.
Apportionment of profits on the basis of
turnover was accepted as a method of arriving
at export profits. This method earlier existed
under Excess Profits Tax Act, it existed in the
Business Profits Tax Act.
Therefore, just as
commission received by an assessee is
relatable to exports and yet it cannot form part
of "turnover", excise duty and sales tax also
cannot form part of the "turnover". Similarly,
"interest" emanates from exports and yet
"interest" does not involve an element of
turnover. The object of the legislature in
enacting Section 8OHHC of the Act was to
confer a benefit on profits accruing with
reference to export turnover. Therefore,
"turnover" was the requirement. Commission,
rent, interest etc. did not involve any turnover.
Therefore, 90% of such commission, interest
etc. was excluded from the profits derived from
the export. Therefore, even without the
clarification such items did not form part of
the formula in Section 8OHHC(3) for the
simple reason that it did not emanate from the
"export turnover", much less any turnover.
Even if the assessee was an exclusive dealer in
exports, the said commission was not
includible as it did not spring from the
"turnover". Just as interest, commission etc.
did not emanate from the "turnover", so also
excise duty and sales tax did not emanate from
such turnover. Since excise duty and sales tax
did not involve any such turnover, such taxes
had to be excluded. Commission, interest, rent
etc. do yield profits, but they do not partake of
the character of turnover and, therefore, they
were not includible in the "total turnover". The
above discussion shows that income from rent,
commission etc. cannot be considered as part
of business profits and, therefore, they cannot
be held as part of the turnover also.
In fact, in
Civil Appeal No. 4409 of 2005, the above
proposition has been accepted by the A.O [
page No. 24 of the paper book], if so, then
excise duty and sales tax also cannot form part
of the "total turnover" under Section
8OHHC(3), otherwise the formula becomes
unworkable. In our view, sales tax and excise
duty also do not have any element of
"turnover" which is the position even in the
case of rent, commission, interest etc. It is
important to bear in mind that excise duty and
sales tax are indirect taxes. They are recovered
by the assessee on behalf of the Government.
Therefore, if they are made relatable to
exports, the formula under Section 8OHHC
would become unworkable. The view which we
have taken is in the light of amendments made
to Section 80HHC from time to time."
5. We are in respectful agreement with the view expressed.
Appeal is without merit and is dismissed. There will be no
order as to costs.
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