EXCISE DUTY, SALES TAX AND CONVERSION CHARGES DO NOT FORM PART OF TURNOVER FOR CALCULATION OF DEDUCTIONS UNDER SEC. 80HHC OF INCOME TAX ACT, 1964

[Mr. M. GOVINDARAJAN]

            Section 80HHC deals with the deductions allowed. There are many litigations arised out in allowing deductions. In the case 'Commissioner of Income Tax, Madurai V. Thiagarajar Mills Ltd.,' - [2008 -TMI - 3202 - MADRAS HIGH COURT] the Madras High Court decided that the excise duty, sales tax and conversion charges do not form part of turnover for calculation of deductions under Section 80HHC.

            The assessee is a company incorporated under the Companies Act. For the assessment years 1999-2000, 1997-98 and 1998-99 the assessee filed returns of income and Assessing Officer completed the assessments and restricted the benefit under Section 80HHC of the Income Tax Act by including excise duty, sales tax and conversion charges to the total turnover.  The assessee claimed a portion of additional liability on account of purchase of plant and machinery, which arose due to exchange fluctuation, as revenue expenditure, which was disallowed by the Assessing Officer treating it as capital expenditure.  On the appeal filed by the assessee the Commissioner (Appeals) held that the excise duty, sales tax and conversion charges are not includible in the turn over for the purpose of Section 80HHC of the Act and allowed the additional liability on account of plant and machinery which arose due to fluctuation as revenue expenditure. The Revenue filed the present appeal against the order before the tribunal. The tribunal also dismissed the appeals and confirmed the orders of the Commissioner (Appeals).

            The Revenue filed under Section 260A of the Income Tax Act against the order of the tribunal, Chennai Bench.  For the assessment year 1999-2000 the Revenue raised the following substantial questions of law:

> Whether in the facts and circumstances of the case, the Tribunal was right in holding that excise duty and sales tax do not form part of the turnover, for the purpose of calculation of deduction under Section 80HHC?

>Whether in the facts and circumstances of the case, the Tribunal was right in holding that additional liability on account of purchase of plant and machinery, which arose due exchange fluctuation, has to be treated as revenue expenditure?

            For the assessment years 1997-98 and 1998-99 the Revenue raised the following substantial questions of law:

> Whether in the facts and circumstances of the case, the tribunal was right in holding that excise duty, sales tax and conversion charges do not form part of the turnover, for the purpose of calculation of deduction under Section 80HHC?

> Whether in the facts and circumstances of the case, the Tribunal was right in holding that additional liability on account of purchase of right in holding that additional liability on account of purchase of plant and machinery, which arose due exchange fluctuation, has to be treated as revenue expenditure?

            The Revenue fairly stated that the issue in respect of Question No. 1 in both the tax cases, stand covered by the Supreme Court's judgment reported in 290 ITR 667 in the case of 'Commissioner of Income Tax V. Lakshmi Machine works' [2008 -TMI - 6557 - SUPREME Court]. Hence the Court held that in respect of Question No.1 in both the tax cases, no substantial questions of law arise for consideration of the High Court. Thus the decision of the Commissioner (Appeals) that the excise duty, sales tax and conversion charges do not form part of turnover for calculation of deduction under Section 80HHC of the Income Tax Act, 1961 as confirmed by the Tribunal was confirmed by the High Court, Madras.

            In respect of the question No.2 the Court found that the tribunal followed the assessee's own case relating to the earlier assessment year 1995-96 and held as follows:

"It transpires that this issue, on identical facts, has been decided in favor of the assessee by the Tribunal in ITA 1778/Mds/98 in assessee's own case for the assessment year 1995-96. In this decision, the tribunal had placed reliance on Hon'ble Madras High Court decision in149 ITR 716 wherein it was held that additional liability arising out of devaluation can be taken to be of the same character as of the original receipt or the original liability and it cannot be taken to be having a different character.   Adhering to the doctrine of binding precedents, we uphold the order of the Commissioner of Income Tax (Appeals) treating the liability on exchange fluctuation of machinery which was claimed as replacement in earlier year as revenue expenditure."

            The Court found that the tribunal consistently followed the issue in favor of the assessee for the earlier assessment years, by relying on the judgment of Madras High Court reported in 149 ITR 716 in the case of 'Lakshmi Card Clothing Manufacturing Company Private Limited V. Commissioner of Income Tax, Tamil Nadu - V, Madras. The Court further held that the Revenue is unable to bring to the notice of the court any compelling reason to take  a different view and also there is no detail as to whether the Revenue has preferred any appeal against the earlier tribunal orders or not. In view of the same the Court did not find any error or legal infirmity in the orders of the tribunal so as to warrant interference. The Court dismissed the appeal of the Revenue.