Commissioner Of Income Tax Madras v. M/S.india Pistons Limited, Husur Garden, Sembium, Chennai-600 011

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 8.2.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) Nos.39 to 42 of 2006& TCMP Nos.35 to 37 of 2006 Commissioner of Income TaxMadras...Appellant in all the TCs Vs. M/s.India Pistons Limited,Husur Garden, Sembium,Chennai-600 011..Respondent in all Tcs Appeals under Section 260A of the Income Tax Act, 1961 againstthe common order of the Income Tax Appellate Tribunal, Madras 'A'Bench dated 15.03.2005 in ITA Nos.247, 1038, 435 & 1157/Mds/99 for theassessment years 1995-96 and 1996-97 against the order dated 2.12.1998& 12.5.99 in ITA.Nos.17/98-99 and 231/98-99 on the file of theCommissioner of Income-Tax (Appeals) -V, Chennai 34, against the orderdated 9.3.98 and 21.12.1998 in PAN/GIR No.47-004-7357 and AAA.CI.1439Erespectively on the file of the Deputy Commissioner of Income Tax,Special Range I, Chennai. For Appellant:Ms. Pushya Sitaraman, Sr.S.C. for Mr. J. Naresh Kumar ----- The above tax case appeals are directed against the common orderof the Income-tax Appellate Tribunal in ITA Nos.247, 1038, 435 &1157/Mds/99, dated 15.03.2005. 2. The Revenue is the appellant. The assessee is a manufacturerof Pistons for automobiles and other stationary engines. The assesseefiled returns of income for the assessment years 1995-96 and 1996-97,wherein the assessee claimed inter alia, deduction under Section 80HHCof the Income Tax Act (herein after referred to as 'The Act') inrespect of its income from exports, deduction in respect of intereston foreign bills (for 1995-96 only), and deduction of customs dutyfrom closing stock. The assessing officer found that the assessee hadexcluded the sales tax and excise duty from the total turnover for thepurpose of computation of deduction under Section 80HHC of the Act andaccordingly he re-computed the total turnover including theseelements. The assessing officer also disallowed the interest onforeign bills under Section 40(a)(i) as no tax was deducted at source,and included the value of customs duty into the valuation of closingstock. Hence, the assessee filed appeals before the Commissioner ofIncome-tax (Appeals), who allowed the appeals in favour of the Revenuewith regard to the issue inclusion of sales tax and excise duty in thetotal turnover for the purpose of 80HHC and other two issues in favourof the assessee. On appeals, at the instance of the Revenue as wellas by the assessee, the Income Tax Appellate Tribunal dismissed theappeals filed by the Revenue by following its own earlier orders inITA 1044/Mds/98 and allowed the appeals filed by the assessee. 3. Aggrieved by the same, the Revenue has preferred the aboveappeals raising the following substantial questions of law: "1. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that theinterest on foreign bills is a deductibleexpenditure? 2. Whether in the facts and circumstances of thecase, the Tribunal was right in holding that theexcise duty and sales tax should be excluded fromthe total turnover to arrive at the deductionunder Section 80HHC?3. Whether in the facts and circumstances of thecase, the Tribunal was right in holding thatcustoms duty paid is not to be included in thevalue of closing stock?" 4.1. With regard to the first question whether in the facts andcircumstances of the case, the Tribunal was right in holding that theinterest on foreign bills is a deductible expenditure, it is not indispute that the assessee claimed deduction in respect of Interest onForeign Bills. The assessing officer made disallowance by followingthe earlier assessment orders. The Commissioner of Income Tax(A)deleted the disallowance made by the assessing officer. On appeals bythe Revenue, the Appellate Tribunal allowed the issue in favour of theassessee. 4.1. With regard to the first question whether in the facts andcircumstances of the case, the Tribunal was right in holding that theinterest on foreign bills is a deductible expenditure, it is not indispute that the assessee claimed deduction in respect of Interest onForeign Bills. The assessing officer made disallowance by followingthe earlier assessment orders. The Commissioner of Income Tax(A)deleted the disallowance made by the assessing officer. On appeals bythe Revenue, the Appellate Tribunal allowed the issue in favour of theassessee. 4.2. It could be found that the conditions for supply of goods bythe non-resident to the assessee were that the payment of purchaseprice in instalments was to be made with the condition that theassessee will compensate the supplier by means of interest on theunpaid instalments. The unpaid instalment was not the same as loanand therefore, interest paid could not be treated as paid on the loanand hence, deduction of tax at source was not attracted. Since it isnot the case of the Revenue that interest was paid with reference toloan so that the requirement of tax deduction at source would havebeen attracted, no disallowance under Section 40(a)(i) can be made.Section 40(a)(i) contemplates that interest, royalty, fees fortechnical services or other sum shall not be deducted in computing theincome chargeable under the head 'Profits and gains of business orprofession", which reads as follows: "40. Notwithstanding anything to the contrary in Sections 30to 38, the following amounts shall not be deducted incomputing the income chargeable under the head 'Profits andgains of business or profession",- (a) any interest (not being interest on a loan issued forpublic sub-subscription before the 1[st] day of April, 1938),royalty, fees for technical services or other sum chargeableunder this Act, which is payable- (A) outside India; or (B) in India to a non-resident, not being a company or to aforeign company,* * * * * * * * That apart, even in the assessment order, the assessing officermentioned that this was interest pertains to foreign bills. If thatbe so, since the amount was not a loan and the amount of interestpaid was not interest on loan, deduction of tax at source, is notattracted and as such, we find that the directions of the Commissioneras well as the Tribunal are strictly in compliance with Section 42(a)(i) of the Act, which requires no interference. 5.1. In respect of question No.2 viz., whether in the facts andcircumstances of the case, the Tribunal was right in holding that theexcise duty and sales tax should be excluded from the total turnoverto arrive at the deduction under Section 80HHC, this Court inCOMMISSIONER OF INCOME TAX VS. WHEELS INDIA LTD. (275 ITR 319) andCOMMISSIONER OF INCOME TAX VS. SUNDARAM FASTENERS LTD.(272 ITR 652)held that it is highly impossible to accept the contention that theterm 'turnover' would include the excise duty and sales tax componentswhich are all indirect taxes and which the assessee has to collect and pay over to the Government and such statutory dues will not have anyelement of profit of business and therefore, the Sales tax and exciseduty are not to be included in the total turnover while computing thededuction under Section 80HHC. 5.2. In view of the ratio laid down by this Court in thedecisions cited supra, we hold that the sales tax and excise duty arenot to be included in the total turnover, while computing thededuction under Section 80HHC. pay over to the Government and such statutory dues will not have anyelement of profit of business and therefore, the Sales tax and exciseduty are not to be included in the total turnover while computing thededuction under Section 80HHC. 5.2. In view of the ratio laid down by this Court in thedecisions cited supra, we hold that the sales tax and excise duty arenot to be included in the total turnover, while computing thededuction under Section 80HHC. 6.1. As far as the third question, viz., whether in the factsand circumstances of the case, the Tribunal was right in holding thatcustoms duty paid is not to be included in the value of closing stock,this Court, in COMMISSIONER OF INCOME TAX VS. ENGLISH ELECTRIC CO.OFINDIA LTD. (243 ITR 512) held that the liability for payment ofexcise duty was incurred when the process of manufacture was completein relation to an excisable item. All payments and liability incurredtowards duty were exhibited separately. The assessee's liability forpayment of duty could not be regarded as part of the assets held bythe assessee in the form of higher value assigned to the closingstock. A liability could not be converted into an asset in thatmanner. A liability was an item deductible for the purpose ofarriving at the profits for the year and only when such deduction wasgiven the amount could be added to the value of the closing stock. 6.2. In view of the ratio laid down by this Court in thedecision cited supra, we hold that the Custom Duty on Closing stockare not to be included in the total turnover, while computing theincome under Section 80HHC of the Act. 7. In view of the foregoing conclusion, we find no error orillegality in the order of the Tribunal and the same requires nointerference. Hence, no substantial question of law would arise forconsideration of this Court. Accordingly, the tax case appeals aredismissed. Consequently, TCMP Nos.35 to 37 of 2006 are alsodismissed. sl Sd/Asst.Registrar /true copy/ Sub Asst.Registrar To 1. The Assistant Registrar,Income Tax Appellate Tribunal Madras Bench "A" Rajaji Bhavan, III Floor, Besant Nagar, Chennai 90. Madras Bench "A" Rajaji Bhavan, III Floor, Besant Nagar, Chennai 90. 2. The Commissioner of Income Tax (Appeals) V, Chennai. Chennai. 3. The Deputy Commissioner of Income Tax, Special Range I, Chennai. Chennai. 4. The Commissioner of Income Tax, Chennai. Chennai. 5. The Joint Commissioner of Income Tax, Special Range I, Chennai. Special Range I, Chennai. + 1 cc to Mrs. Pushya Sitaraman, Advocate SR No.5766 GM(CO)SR/6.3.2006 T.C.(A) Nos.39 to 42 of 2006& TCMP Nos.35 to 37 of 2006& TCMP Nos.35 to 37 of 2006