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2016 (8) TMI 259 - GUJARAT HIGH COURT

2016 (8) TMI 259 - GUJARAT HIGH COURT - TMI - Reduction of the amount of excise duty and sales tax while computing the total turnover for the purpose of deduction under section 80-HHC - Held that:- Tribunal has not committed any error in holding that the components of sales tax and central excise do not form part of sale proceeds for the purpose of Section 80HHC of the Act despite insertion of Section 145 A of the Act See Lakshmi Machine Works (2007 (4) TMI 202 - SUPREME Court ) and Shiva Tex Ya .....

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ted an error in treating the trial run expenditure incurred by the appellant in the process of expansion of its existing manufacturing facilities as capital expenditure. See BELL CERAMICS LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX [2016 (8) TMI 202 - GUJARAT HIGH COURT] - TAX APPEAL NO. 508 of 2009 With TAX APPEAL NO. 556 of 2009 - Dated:- 29-7-2016 - MR. KS JHAVERI AND MR. G.R.UDHWANI, JJ. FOR THE APPELLANT : MR KM PARIKH, ADVOCATE FOR THE OPPONENT : MR BS SOPARKAR, ADVOCATE for MRS SWATI SO .....

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order of Commissioner (Appeals) directing to reduce the amount of excise duty and sales tax while computing the total turnover for the purpose of deduction under section 80-HHC of the Income Tax Act, 1961 even after insertion of the provisions of section 145A(b) of the Act? TAX APPEAL No.556 of 2009 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the CIT(A) directing to reduce the amount of excise duty and sales tax .....

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rned advocate for the appellant submitted that the Tribunal has committed an error in allowing exclusion of Sales Tax and Excise duty from the total turnover for computing deduction under section 80HHC even after insertion of section 145A of the Act. It is also submitted that the Tribunal has committed an error while allowing the trial run expenses of ₹ 1,24,63,848/- as revenue expenditure without appreciating the fact that such expenses are incurred before the commencement of commercial p .....

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of 2006 decided on 13/11/2014. (iv) Tax Appeal No.1430 of 2005 decided on 26/12/2013. 4.1 As far as second question framed in Tax Appeal No.556 of 2009 is concerned, he has relied upon the decision of this Court in Tax Appeal No.1243 of 2006 decided on 13/7/2006. 4.2 He submitted that in view of the observations of this Court in the aforesaid decisions, present appeals may be disposed of. 5. We have heard learned counsel for both the side and also perused the record. We have also gone through th .....

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006 and allied appeals in para 3 and 4 the Division Bench has observed and held as under: [3.0] Having heard Shri Manish Bhatt, learned counsel appearing on behalf of the Revenue and Shri Soparkar, learned counsel appearing for assessee in respective appeals and the substantial question of law raised, referred to hereinabove, and the decisions of the Honble Supreme Court in the cases of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra), we are of the opinion that the substantial ques .....

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could not be regarded as relatable to exports. Therefore, while interpreting the words total turnover in the above formula in Section 80HHC one has to give a schematic interpretation to that expression. There is one more reason for giving schematic interpretation. The various amendments to Section 80HHC show that receipts by way of brokerage, commission, interest, rent etc. do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regard .....

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ndment to Section 80HHC commencing from 1.4.92. The said amendment made it clear that though commission and interest emanated from exports, they did not involve any element of turnover and merely for the reason that commission, interest, rent etc. were included in the profit and loss account, they did not become eligible to deduction. We have to give purposeful interpretation to the above section. The said section is entirely based on the formula. The amendments from time to time indicate that t .....

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and sales tax ought to have been included in the total turnover. Learned counsel submitted that the word turnover even in the ordinary sense would include the above two items. Learned counsel urged that the formula should be read strictly. In this connection, he pointed out that the legislature had expressly excluded items of freight and insurance and not sales tax and excise duty from the said definition. It was urged that while construing a taxing statute strict interpretation should be given .....

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ems were includible in the definition of the words total turnover. In this connection, learned counsel placed reliance on the judgment of the Supreme Court in the case of M/s. Chowringhee Sales Bureau (supra). Reliance was also placed on The Law and Practice of Income Tax by Kanga and Palkhivala (eighth edition) at page 123. In support of the contention that a tax or duty is part of the dealers trading/business receipts, even if the tax or duty is charged separately or credited to a separate acc .....

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e case of Love v. Norman Wright (Builders), Ltd. # (1944) 1 All E.R. 618, in which it has been held that if a seller quotes a price of x + purchase tax, the buyer has to pay the amount of the tax as part of the price and since the tax is charged on the wholesale value of the goods the tax element has to be taken into account. It was urged that one has to give strict interpretation to the word turnover. It was urged that there was no question of giving purposeful interpretation to the word turnov .....

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overnment and, therefore, it was not includible in the total turnover. Learned counsel urged that there was no merit in the contention advanced on behalf of the assessee that the components of export turnover and total turnover should be the same in the above formula. Learned counsel submitted that the formula would become unworkable if the components in the export turnover and the components in the total turnover are the same. Learned counsel submitted that there was no merit in the argument ad .....

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er 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. 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 pro .....

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e 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 80HHC workable cannot be ruled out. Simil .....

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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 w total turnover which constitute 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. Ther .....

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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, profits and gains were required to be computed with r .....

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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 met .....

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nce 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 80HHC(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 c .....

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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. [See: 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 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element .....

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rn Ltd. (Supra), the Honble Supreme Court even with respect to assessment order after section 145A, has followed the decision of the Honble Supreme Court in the case of Lakshmi Machine Works (Supra). [4.0] Applying the ratio of law laid down by the Honble Supreme Court in the case of Lakshmi Machine Works (Supra) to the facts of the cases on hand, the question raised is held against the Revenue and it is held that the learned Tribunal has not committed any error in holding that the excise duty i .....

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in holding that the components of sales tax and central excise do not form part of sale proceeds for the purpose of Section 80HHC of the Act despite insertion of Section 145 A of the Act. 6. In view of above observations, the first question posed for our consideration in both these appeals is answered in favour of the assessee and against the revenue. 7. So far as the question as to whether trial run expenses can be allowed as revenue expenditure, this Court while deciding Tax Appeal No.1243 of .....

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ith the testing of the plant established for the manufacture of the scooters, but was an expenditure incurred in connection with the trial of the scooters. The trial revealed that the scooters had stood up the test satisfactorily and in subsequent years commercial production was commenced. Under the circumstances, the expenditure incurred in testing the scooters must be treated as expenditure of a revenue nature. It is difficult to conceive how it can be said to be an expenditure of a capital na .....

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pany had established an altogether new unit at a different center, name, Bangalore, and all the expenditure incurred in this connection was treated as revenue expenditure by reason of the fact that it could not be considered to be a new business undertaking. The reasoning which found favour with the court was that the production of both the units was considered the production of the assessee-company itself and that both the lines of business constituted the "same business" of the asses .....

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ufacture the product. The decision in CIT v. Saurashtra Cement & Chemical industries Ltd., (Income-tax Reference No. 26 of 1973 decided on August 25, 1975-[1981] 127 ITR 47 (Guj)) will not, therefore, come to the rescue of the Revenue in the facts and circumstances of the present case. In that case, the expenditure was incurred "before" a new plant commenced production. It was in that context that the court took the view that it was an expenditure of a capital nature having regard .....

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chinery which was to produce the cement, the court understandably took the view that it was added to the actual cost of the plant as laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The principle laid down in the aforesaid decision is that as per accepted accountancy principle all expenditure incurred in order to bring into existence a capital asset and put it in working condition would form a part of the fixed assets. We may again emphasise that, here, the exp .....

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