COMMISSIONER OF INCOME TAX-I V. AMBUJA INTERMEDIATES LTD

TAXAP/1452/2008

AI Insights

The case involves the Commissioner of Income Tax-I as the appellant and Ambuja Intermediates Ltd as the respondent. The core issue was whether excise duty and sales tax should be included in the total turnover for the purpose of computing deductions under Section 80HHC of the Income Tax Act, 1961, following the insertion of Section 145A. The ITAT had ruled in favor of the respondent, leading to the appeal by the Commissioner of Income Tax. The Gujarat High Court, referencing decisions from the Supreme Court, upheld the ITAT's decision, emphasizing that excise duty and sales tax are not part of the turnover as they do not involve any element of 'turnover' in the context of export profits.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 733301 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 21-12-2013
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Lakshmi Machine Works, Commissioner of Income Tax vs. Shiva Tex Yarn Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: B D KARIA
• Assessee Lawyers: MAUNA BHATT
• Keywords: Deduction; Excise Duty; Income tax appellate tribunal; Sales Tax; Supreme Court; Total Turnover
• Section: 80HHC; 145A

Judgement Text

"O/TAXAP/1452/2008 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1452 of 2008 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH sd/­ and HONOURABLE MR.JUSTICE R.D.KOTHARI sd/­ ============================================= 1. Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2. To be referred to the Reporter or not ? NO 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO ============================================= COMMISSIONER OF INCOME TAX­I....Appellant(s) Versus AMBUJA INTERMEDIATES LTD....Opponent(s) ============================================= Appearance: MRS MAUNA M BHATT, ADVOCATE for the Appellant(s) No. 1 MR. B.D. KARIA, LD. ADV FOR MR RK PATEL, ADVOCATE for the Opponent(s) No. 1 ============================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.D.KOTHARI Date : 21/12/2013 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.0. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal, Ahmedabad (hereinafter referred to as the “ITAT”) dated 21.09.2007 passed in ITA No.3820/AHD/2003 for AY 2000­01, the Page 1 of 9 O/TAXAP/1452/2008 JUDGMENT revenue has preferred present Tax Appeal raising following substantial question of law. “Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to exclude excise duty and sales tax from the total turnover computing deduction u/s. 80HHC, even after insertion of Section 145A?” 2.0. We have heard Ms. Mauna Bhatt, learned advocate for the revenue and Shri B.D. Karia, learned advocate appearing for Shri R.K. Patel, learned advocate for the respondent assessee. 3.0. As stated hereinabove, present Tax Appeal has been admitted to consider the substantial question of law whether the Appellate Tribunal is right in law and on facts in holding that excise duty is to be excluded for the purpose of computation of deduction under Section 80HHC ? 4.0. Having heard Ms. Mauna Bhatt, learned advocate for the revenue and Shri B.D. Karia, learned advocate appearing for Shri R.K. Patel, learned advocate for the respondent assessee, it appears that the aforesaid substantial question of law framed is now not res integra and the aforesaid substantial question of law is held against the Revenue by the Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. Lakshmi Machine Works reported in 290 ITR 667 [paras 16 to 18] and the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. Shiva Tex Yarn Ltd. reported in (2012) 25 Taxmann.Com 302 (SC). 5.0. It is required to be noted that initially Ms. Mauna Bhatt, learned counsel appearing on behalf of the Revenue tried to distinguish Page 2 of 9 O/TAXAP/1452/2008 JUDGMENT the aforesaid two decisions by submitting that in the said decisions section 145A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) has not been considered and dealt with. However, considering the fact that as such there is no amendment in section 80HHC of the Act and considering the observations made by the Hon’ble Supreme Court in paras 16 to 18 in the case of Lakshmi Machine Works (Supra), Ms. Mauna Bhatt, learned counsel appearing on behalf of the Revenue is not in a position to satisfy the Court as to how the decisions of the Hon’ble Supreme Court in the cases of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra) would not be applicable to the facts of the case on hand. 6.0. Identical question came to be considered by this Court in Tax Appeal No.884 of 2006 and other allied Tax Appeals and relying upon the decisions of the Hon’ble Supreme Court in the case of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra), the aforesaid question is held against the revenue. In the aforesaid decision in Tax Appeal No. 884 of 2006 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 Hon’ble Supreme Court in the cases of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra), we are of the opinion that the substantial question of law raised in the present tax appeals is now not res integra and the same is squarely covered against the Revenue by the decisions of the Hon’ble Supreme Court in the cases of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra). In paras 16 to 18 in the case of Lakshmi Machine Works (Supra), the Hon’ble Supreme Court has observed and held as under: “16. The principal reason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the Page 3 of 9 O/TAXAP/1452/2008 JUDGMENT 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 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, commission etc. which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the above amendment 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 they became necessary in order to make the formula workable. Hence, we have to give schematic interpretation to Section 80HHC of the Act. 17.Shri P.P. Malhotra, leaned senior counsel appearing for the Department (appellant), submitted that one has to give plain and unambiguous meaning to the word “turnover” in the above formula; that there was no need to call for any rule of interpretation or external aid to interpret the said word; that having regard to the plain words of the section, excise duty 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 by the Courts. It was urged that the definition of the words “total turnover” did not include freight/insurance. He urged that since the legislature had excluded only Page 4 of 9 O/TAXAP/1452/2008 JUDGMENT insurance and freight, it was not open to the courts to exclude excise duty and sales tax from the concept of “total turnover” in the said formula. He contended that the word “turnover” referred to the aggregate amount for which the goods were sold and since sales tax and excise duty formed part of the value of the goods, the said two items 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 dealer’s trading/business receipts, even if the tax or duty is charged separately or credited to a separate account. Reliance was also placed on the judgment of the King’s Bench Division in the case of Paprika, Ltd., and Another v. Board of Trade (1944)1 All E.R. 372, in which it has been held that wherever a sale attracts purchase tax, that tax affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even if the price is expressed as cost x + purchase tax. Reliance was also placed on the judgment of the Court of Appeal in the 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 “turnover” in the said Section 80HHC of the Act. It was urged that the legislature had used the expression “total turnover” from which it became clear that the said expression referred to the aggregate amount for which the goods were sold and since the above two items formed part of the value of the goods, they were includible in the “total turnover”. Learned counsel urged that there was no merit in the contention advanced on behalf of the assessee that excise duty was the liability of the assessee to the Government 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 Page 5 of 9 O/TAXAP/1452/2008 JUDGMENT 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 advanced on behalf of the assessee that excise duty and sales tax did not form part of trading receipts. Learned counsel submitted that there was no merit in the contention of the assessee that the expression “business profits” in Section 80HHC did not include receipts which did not emanate for exports and, therefore, such receipts did not constitute an element of turnover. 18.We do not find any merit in the above contentions advanced on behalf of the Department. It is important to note that tax under 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 proper sense. However, subject to special requirements of the income tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income tax has laid down certain rules to be applied 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. Where 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. Similarly, purposeful interpretation of Section 80HHC which has undergone so many changes 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 of “turnover” even though commission and interest Page 6 of 9 O/TAXAP/1452/2008 JUDGMENT emanated from exports. We have to read the words “total turnover” in Section 80HHC as part of the formula which sought to segregate the “export profits” 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. Therefore, one has to give weightage not only to the words “total turnover” but also to the words “export turnover”, “total export turnover” and “business profits”. That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words “total turnover” in the above formula 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, 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 reference to the books of accounts of the assessee. However, as can be seen from the Income Tax Rules and from the above Form No.10CCAC in the case of deduction under Section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing Section 80HHC deduction was “business profits” as computed under Section 28, a portion of which had to 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 ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment Page 7 of 9 O/TAXAP/1452/2008 JUDGMENT of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of “turnover”, excise duty and sales tax also cannot form part of the “turnover”. Similarly, “interest” emanates from exports and yet “interest” does not involve an element of turnover. The object of the legislature in enacting Section 80HHC of the Act was to confer a benefit on profits accruing with reference 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 commission was not includible as it did not spring from the “turnover”. Just as interest, commission etc. did not emanate from the “turnover”, so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the “total turnover”. The above discussion shows 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 of “turnover” which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under Section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to Section 80HHC from time to time. Even in the subsequent decision in the case of Page 8 of 9 O/TAXAP/1452/2008 JUDGMENT Shiva Tex Yarn Ltd. (Supra), the Hon’ble Supreme Court even with respect to assessment order after section 145A, has followed the decision of the Hon’ble Supreme Court in the case of Lakshmi Machine Works (Supra). [4.0] Applying the ratio of law laid down by the Hon’ble 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 is excise duty is to be excluded for the purpose of computation of deduction u/s. 80HHC.” 7.0. Applying ratio laid down by the Hon’ble Supreme Court in the case of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra) as well as recent decision of this Court in Tax Appeal No. 884 of 2006 and other allied appeals, to the facts of the case on hand the question raised in the present Tax Appeal is answered against the revenue and it is held that the learned 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. 8.0. Under the circumstances, present Tax Appeal deserves to be dismissed and is accordingly dismissed. No costs. sd/­ (M.R.SHAH, J.) sd/­ (R.D.KOTHARI, J.) Kaushik Page 9 of 9 "