Commissioner Of Income Tax, Coimbatore v. M/S. Lakshmi Machine Works

COMMISSIONER OF INCOME TAX, COIMBATORE MIS. LAKSHMI MACHINE WORKS APRIL 25, 2007 (S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] Income Tax Act, 1961: Section 80HHC-AY 1993-94-Profits retained for export business-c Deduction in respect of-Schematic interpretation-"Turnover "-Elements in-Assessee filed its return of its income for AY 1993-94-A notice under S. I 43(2) was issued in which one of the items was the quantum of deduction under S. 80HHC-The assessee was asked to explain why the total turnover should not be recomputed by including sales tax and excise duty-The D [Assessing Officer held that under ][S. ][80HHC(ba) deduction from "total ]turnover" was restricted only to three items, namely, profit on sale of import licence, duty drawback and CCS-However, the appellate authority held that sales tax and excise duty were liabilities of the assessee to the Government and were not liable to be included in the "total turnover" for working out the deduction under S. 80HHC-The Tribunal and the High Court dismissed E the appeals filed by the Department--Held: in the formula under S. 80HHC there are three concepts, namely, "'business profit", "export turnover" and "total turnover"-Jn order to make the formula workable a schematic interpretation has to be given to S. 80HHC-Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part F [of ]["turnover", excise duty and sales tax also cannot form part ][of ][the ]"turnover"-Jncome from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the "turnover" a/so---Sa/es 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.-They are recovered by the assessee on behalf of the Government-Hence, sales tax G and excise duty are not includible in the ''turnover''. Words & Phrases: "Turnover"-Meaning of-In the context of Section 80HHC of the Income Tax Act, 1961. For the assessment year 1993-94, the respondent-assessee filed its return of income. Intimation under Section 143(1)(a) of the Income Tax Act, 1961 was sent by the appellant accepting the returned income. Later on a notice was issued under Section 143(2) of the Act in which one of the items was the quantum of deduction under Section 80HHC of the Act. The respondent-assessee had computed the allowable deduction under Section 80HHC without taking into account in the total turnover the sales tax and exci~e duty. The assessee was asked to explain why the total turnover should not be recomputed by including sales tax and excise duty. The Assessing Officer held that under Section 80HHC(ba) of the Act deduction from "total turnover" was restricted only to three items, namely, profit on sale of import licence, duty drawback and CCS. The Assessing Officer further held that from the profits of business, the assessee was entitled to deduct the above three items and also brokerage, commission, interest, rent, D charges or any other receipt of similar nature. The appellate authority held that sales tax and excise duty were liabilities of the assessee to the Government and were not liable to be included in the "total turnover" for working out the deduction under Section 80HHC. The Tribunal and the High Court dismissed the appeals filed by the appellant. E Hence the appeal. The following question arose before the Court:- Whether excise duty and sales tax were includible in the "total turnover", which was the denominator in the formula contained in Section F 80HHC(3)diploma-holder Dismissing the appeal, the Court Section: CONCLUSION HELD: 1.1. Under Section SOHHC of the Income Tax Act, 1961, the exporters were allowed, in the computation of their total income, a deduction G of the entire profits derived from exports. During the relevant year, there existed a dual system for computation of export profits. The first method operated in cases where the export was of goods manufactured by the tax payer. In those cases the export profit had to be computed on the basis of the ratio of "export turnover" to "total turnover". [Para 7) (635-E-F] (2007] 5 S.C.R. 1.2. Where the export consisted of goods purchased from third parties (trading goods) there was a second method of computation in which the export profits were to be calculated by deducting from the export turnover, direct and indirect costs attributable to such exports. [Para 8] 635-G] 2.1. All assessable entities were not eligible for deduction under Section B 80HHC of the Act. According to Section 80HHC only an Indian company or a non-company assessee who was the resident in India was eligible for deduction provided he was engaged in the export business of eligible goods. (Para 10] (636-C] 2.2. In the formula under Section 80HHC there were three concepts, c namely, "business profit", "export turnover" and "total turnover". The first step was to find out the business profit. This was to be done in accordance with the provisions of Sections 28 to 43 of the Act. Under Section 80HHC the above three export incentives, namely, CCS, duty drawback and profit on sale of import licence, were includible in the "business profits" and, therefore, D they were taxable. The Finance Act, 1992 restricted the term "export turnover" to FOB sale proceeds. However, the said Act excluded CCS, duty drawback and profit on sale of import entitlement from the term "total turnover". [Para 12] [639-E] 3. The formula under Section 80HHC was very simple as far as it related E to the sole business of exports. The formula became complicated in cases of composite business. In the case of direct exporter there were three categories of assesses - (i) an assessee who exported goods manufactured by him; (ii) an assessee who did not export goods manufactured by him but exported goods manufactured by others; and (iii) an assessee who exported manufactured F goods as well as trading goods. The formula became complicated in the case of the third category. It also became complicated in the cases of an assessee who did not directly export goods but supplied goods to an Export House/ Trading House for the purpose of export (subordinate manufacturer). [Para 15] [644-E-F) 4. The principai reason for enacting the above formula was to disallow a part of S. 80HHC concession when the entire deduction claimed 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 a schematic interpretation. The various amendments to Section 80HHC -JI' -JI' show that receipts by way of brokerage, commission, interest, rent etc. do not A form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. In fact, Section 80 HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, com mission etc., which did not have the B element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the amendment to Section SOHHC 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 C commission, interest, rent etc. were included in the profit and loss account they did not become eligible to deduction. A purposeful interpretation has to be given to the above Section. The said Section is entirely based on the formula. The amendments from time to time indicate that they became necessary in order to make the formula workable. Hence, a schematic interpretation has to be given to Section HHC of the Act. [Para 16] (644-G-H; 645-A-B-C] D 5.1.. It is important to note that tax under 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, E however, include profits. [Para 18] (646-H; 647-A] Chowringhee Sales Bureau (P) Ltd v. CIT, (1973) 83 ITR 542 SC, referred to. 5.2. However, subject to special requirements to the income tax, profits F have got to be assessed provided they are real profits. Such profits have to be ascertained on ordinary principles of commercial trading and accounting. However, the Income Tax Act has laid down certain rules to be appiied 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. [Para 18] (647-B] Kanga and Palkhiva/a: "The Law and Practice of Income Tax" 8th Edn. · P. 123, referred to. 6.1. Where a deduction is necessary in order to ascertain the profits 626 SUPREME COURT REPORTS [2007] 5 S.C .R. 2007 ] 5 A 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. Therefore, schematic interpretation for making the formula in Section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80HHC which has undergone so many changes B 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 "turnover" even though commission and interest emanated from exports. The words "total turnover" in Section 80HHC have to be read as part of the formula which C sought to segregate the "export profits" from the "business profits". Therefore, the formula has to be read in entirely. In that formula the entire business profits is not given deduc:tion. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover+ total turnover which constitute 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. [Para 18) (647-C-F) Kanga and Palkhivala: 'The Law and Practice of Income Tax" 8th Edn. P. 455, referred to. 6.2. One has to give weightage not only to the words "total turnover" but also to the words "export turnover'', "total export turnover" and "business E profits". In the circumstances, the words "total turnover" in the above formula cannot be interpreted 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, F 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. [Para 18) [647-G-H; 648-A) CIT'i. Sudarshan Chemicals Industries Ltd. [2000) 245 ITR 769 (Born) G and Paprika Ltd v. Board of Trade, [1944) 1 All E.R. 372 and Love v. Norman Wright (Builders) Ltd, [1944) 1 All E.R. 618, referred to. 7.1. However, as can be seen from the Income Tax Rules and from the Form No. 10 CCAC in the case of deduction under Section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. H This is because the very basis for computing Section 80HHC deduction was COMMR. OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS "business profits" as computed under Section 28, a portion of which had to A 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 B ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of tur