This Court, In Commissioner Of Income-Tax v. M/S Shiva Distilleries Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 13.02.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A).No.74 of 2007 Commissioner of Income Tax,coimbatore...Appellant M/s.Shiva Distilleries Ltd., 252, Mettupalayam Road,coimbatore. ...Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, 'D' Bench, Chennai dated13.1.2006 in ITA No.1430/Mds/2003 for the assessment year 2000-2001(ITA.No.60/02-03 dated 4.4.2003 on the file of the Commissioner of Income-Tax (Appeals) I Coimbatore against PAN/GIR.No. 5-53,49-502-CZ-2367 dated26.3.2002 on the file of the Assistant Commissioner of Income-Tax CompanyCircle -I (2), Coimbatore) -----J U D G M E N T (Delivered by P.D. DINAKARAN, J.) The above tax case appeal is directed against the order of theIncome-tax Appellate Tribunal in ITA No.1430/Mds/ 2003, dated 13.1.2006,raising the following substantial questions of law. 1. Whether on the facts and in the circumstances of thecase, the Income-tax Tribunal is right in law inallowing the expenditure on replacement of machinery asrevenue expenditure and not capital? 2. Whether on the facts and in the circumstances ofthe case, the Income-tax Tribunal is right in law inholding that the scrap and waste materials generatedduring the course of manufacture, royalty received and https://hcservices.ecourts.gov.in/hcservices/ the guarantee commission for the purpose of calculationof 80HHC deduction would have to be excluded frombusiness profit for the purpose of calculation ofdeduction under 80HHC? 3. Whether on the facts and in the circumstances ofthe case, the Income-tax Tribunal is right in law inholding that excise duty and sales tax are to beincluded in the turnover while calculating 80HHCdeduction? 2. As the 3[rd] question, ex facie, is not happily worded, we reframethe same as under: Whether on the facts and in the circumstances of the case,the Income-tax Tribunal is right in law in holding that exciseduty and sales tax are not to be included in the turnover whilecalculating 80HHC deduction? 3. The Revenue is the appellant. During the previous year relevantto the assessment year, the assessee replaced certain machinery andclaimed the said expenditure as revenue expenditure, but the assessingofficer treated the same as capital expenditure. The assessing officerrejected the claim of the assessee for the exclusion of waste and scrapmaterial generated during the course of manufacture, royalty received andguarantee commission for the purpose of calculation of deduction undersection 80HHC of the Income-tax Act, 1961 (in short, 'the Act'). TheAssessing Officer also included excise duty and sales tax collection tothe total turnover, while calculating deduction under Section 80 HHC ofthe Act. 4. Against the said order, the assessee filed an appeal before theCommissioner of Income Tax (Appeals), who decided the issue of inclusionof sales tax and excise duty for the purpose of deduction under section 80HHC of the Act in favour of the assessee and dismissed the appeal inrespect of other issues. 5. On appeal at the instance of the Revenue, the Income Tax AppellateTribunal, remitted the issue of replacement of machinery to the AssessingOfficer to decide the issue on the basis of materials. So far as scrap andwaste materials generated during the course of manufacture, royalty andguarantee commission are concerned, the Appellate Tribunal decided theissue in favour of the assessee. The Appellate Tribunal also decided theissue of inclusion of excise duty and sales tax to the total turnover infavour of the assessee. Aggrieved by the same, the Revenue has preferredthis appeal raising the questions of law referred above. 6.1. As regards the 1[st] question, the issue whether the expenditure on https://hcservices.ecourts.gov.in/hcservices/ 5. On appeal at the instance of the Revenue, the Income Tax AppellateTribunal, remitted the issue of replacement of machinery to the AssessingOfficer to decide the issue on the basis of materials. So far as scrap andwaste materials generated during the course of manufacture, royalty andguarantee commission are concerned, the Appellate Tribunal decided theissue in favour of the assessee. The Appellate Tribunal also decided theissue of inclusion of excise duty and sales tax to the total turnover infavour of the assessee. Aggrieved by the same, the Revenue has preferredthis appeal raising the questions of law referred above. 6.1. As regards the 1[st] question, the issue whether the expenditure on https://hcservices.ecourts.gov.in/hcservices/ replacement of machinery is capital or revenue is not determined by thetreatment given in the books of account or in the balance sheet. Theclaim has to be determined only by the provisions of the Act and not bythe accounting practice of the assessee. 6.2. This Court, in COMMISSIONER OF INCOME-TAX v. JANAKIRAM MILLSLTD. (2005) (275 ITR 403), held that all plant and machinery put togetheramount to a complete spinning mill which is capable of manufacturing yarnand hence, each replaced machine could not be considered as an independentone and no intermediate marketable product was produced. 6.3. In the instant case, to find out the nature of the newmachinery, the Appellate Tribunal remanded the issue to the AssessingOfficer. In our considered opinion, the Revenue is not, in any way,aggrieved by the remand of the issue, which is only to find out the fact.Accordingly, we do not find any error in the order of the Tribunal inremanding the matter to the Assessing Officer. 7.1. With regard to the 2[nd] question, it deals with scrap and wastematerials generated during the course of manufacture, royalty received andguarantee commission. 7.2. With respect to the scrap and waste materials generated duringthe course of manufacture, it is useful to refer the decision of thisCourt in C.I.T. v. Madras Motors/M.M.Forgings Ltd. (257 ITR 60) where itwas held that the turnover from the business of sale of motorcycles,motorcycle spare parts and television sets could not be included in thetotal turnover of the assessee for the purpose of computation ofdeduction under section 80HHC of the Act as the total turnover in section80HHC is only the turnover relating to export business of the assessee andnot the turnover relating to other business of the assessee. 7.3. Applying the ratio laid down by this Court in C.I.T. v. MadrasMotors/M.M.Forgings Ltd. (257 ITR 60), we hold that the scrap and wastematerials, which would not be relatable to export business of theassessee, have to be excluded from business profit for the purpose ofcalculation of deduction under section 80HHC of the Act. 7.4. On the question of includibility of royalty as well as theguarantee commission for the purpose of calculation of deduction undersection 80HHC of the Act, the Bombay High Court in Commissioner ofIncome-tax (Appeals) v. Bangalore Clothing Co. (260 ITR 0371) held thatthe Explanation (baa) to section 80HHC of the Income-tax Act, 1961, wasinserted by the Finance (No. 2) Act, 1991, with effect from April 1, 1992and under that Explanation, “profits of the business”, for the purposesof section 80HHC does not include receipts which do not have an element ofturnover like rent, commission, interest, etc. This Court in C.I.T. v.Sundaram Clayton Ltd. (281 ITR 425) also held that the charges ofmiscellaneous income and commission do not form part of the turnover forthe purpose of calculation of deduction under section 80HHC of the Act. Applying the above ratio to the facts of the case, we are of the view thatthe guarantee commission as well as royalty, viz., a payment for using aright, have to be excluded from the business profit for the purpose ofcalculation of deduction under section 80HHC of the Act. 8.1. With regard to the 3[rd] question as reframed, viz., whether theexcise duty and sales tax are not includable in the turnover whilecalculating the deduction under Section 80HHC, this Court in COMMISSIONEROF INCOME TAX VS. WHEELS INDIA LTD. (275 ITR 319) and COMMISSIONER OFINCOME TAX VS. SUNDARAM FASTENERS LTD.(272 ITR 652), which were followedby this Court in COMMISSIONER OF INCOME-TAX VS. INDIA PISTONS LTD. (282ITR 632), held that it is highly impossible to accept the contention thatthe term 'turnover' would include the excise duty and sales tax componentswhich are all indirect taxes and which the assessee has to collect and payover to the Government and such statutory dues will not have any elementof profit of business and therefore, the sales tax and excise duty are notto be included in the total turnover while computing the deduction underSection 80HHC of the Act. 8.2. In view of the ratio laid down by this Court in the decisionscited supra, we hold that the sales tax and excise duty are not to beincluded in the total turnover, while computing the deduction underSection 80HHC of the Act. Therefore, finding no substantial questions of law that arise for ourconsideration, the appeal is dismissed.kpl/na Sd/-Assistant Registrar, /true copy/ To Sub Assistant Registrar. 1. THE ASSISTANT REGISTRARINCOME TAX APPELLATE TRIBUNAL, RAJAJI BHAVAN III FLOOR, BESANT NAGAR, CHENNAI -902. THE COMMISSIONER OF INCOME TAXAPPEALS I, COIMBATORE.3. THE COMMISSIONER OF INCOME TAXCOIMBATORE. 4. THE ASSISTANT COMMISSIONEROF INCOME TAX, COMPANY CIRCLE I (2) COIMBATORE. + One cc to Mr. N. Murali kumaran, Senior Standing Counsel for IT SR.No. 9148JRG (co)sg 16/3/07T.C.(A).No.74 of 2007.13.2.2007