2007 (4) TMI 202 - SC - Income Tax

Computation of deduction under section 80HHC - Inclusion of excise duty and sales tax in the total turnover - amendments to section 80HHC(3) indicate exclusion of book profits - Interpretation of word Total Turnover - difficulty arises because the formula is based on the hybrid system of profits namely actual and statutory profits namely actual and statutory profits. HELD THAT - Purposeful interpretation of section 80HHC 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 80HHC 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 constitutes section 80HHC 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 80HHC. 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 Act profits and gains were required to be computed with reference to the books of account of the assessee. However as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC 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 80HHC(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 the 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 80HHC 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 per cent. 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 80HHC(3) for the simple reason that they 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 . In fact in Civil Appeal No. 4409 of 2005 the above proposition has been accepted by the Assessing Officer if so then excise duty and sales tax also cannot form part of the total turnover under section 80HHC(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 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time. The amendments to section 80HHC(3) indicate exclusion of book profits. For example commission interest etc. do form part of the profit and loss account but for the purposes of calculation of profits derived from local sales and exports they stand excluded. The difficulty arises because the formula is based on the hybrid system of profits namely actual and statutory profits. Therefore this judgment should be read in the context of the above parameters. Our reasoning in this judgment is confined to the workability of the formula in section 80HHC(3) of the Act as it stood at the material time. Thus we see no merit in these appeals filed by the Department and accordingly they are dismissed with no order as to costs.

Summary

Issues Involved:
1. Inclusion of excise duty and sales tax in "total turnover" for the purpose of computing deduction under section 80HHC of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Inclusion of Excise Duty and Sales Tax in "Total Turnover" for Section 80HHC Deduction:
Facts:
- The assessee filed its return for the assessment year 1993-94, declaring taxable income and computing the allowable deduction under section 80HHC without including sales tax and excise duty in the total turnover.
- The Department issued a notice under section 143(2) questioning the exclusion of sales tax and excise duty from the total turnover.
- The Assessing Officer included these amounts in the total turnover, rejecting the assessee's objections.

Appellate Proceedings:
- The Commissioner of Income-tax (Appeals) sided with the assessee, holding that sales tax and excise duty were liabilities to the Government and should not be included in the total turnover.
- The Tribunal upheld this decision, following the Bombay High Court's judgment in CIT v. Sudarshan Chemicals Industries Ltd.

Supreme Court's Analysis:
- The core issue was whether excise duty and sales tax should be included in the "total turnover" for the formula under section 80HHC(3).
- The Court analyzed section 80HHC, which provides a deduction for profits derived from exports, calculated using a specific formula involving "export turnover" and "total turnover."
- The Court noted that the term "total turnover" should be interpreted in a manner consistent with the legislative intent to promote exports.

Interpretation of "Total Turnover":
- The Court emphasized that tax under the Act is on income, profits, and gains, not on gross receipts.
- The term "profits" should be understood in its normal and proper sense, computed after deducting business expenses unless expressly disallowed by the Act.
- The Court highlighted that the formula under section 80HHC is designed to apportion business profits based on export turnover relative to total turnover.

Exclusion of Excise Duty and Sales Tax:
- The Court reasoned that excise duty and sales tax do not form part of business profits as they are collected on behalf of the Government and do not involve any element of turnover.
- Including these amounts in the total turnover would distort the formula and make it unworkable.
- The Court cited legislative amendments that excluded items like commission and interest from business profits, reinforcing that such items did not possess any element of turnover.

Conclusion:
- The Court concluded that excise duty and sales tax should not be included in the total turnover for the purpose of computing the deduction under section 80HHC.
- The appeals filed by the Department were dismissed, and the decisions of the lower authorities were upheld.

Significance:
- The judgment clarified the interpretation of "total turnover" in the context of section 80HHC, ensuring that only amounts involving an element of turnover are included.
- This interpretation aligns with the legislative intent to provide incentives for export profits without distorting the computation formula.

Final Order:
- The appeals by the Department were dismissed with no order as to costs, affirming that excise duty and sales tax are not includible in the "total turnover" for section 80HHC deductions.