THE COMMISSIONER OF INCOME TAX V. M/S MOTOR INDUSTRIES CO LTD

ITA/857/2008

AI Insights

This case involves an appeal by the Revenue against the order of the Income Tax Appellate Tribunal, Bangalore, which had favored the assessee, M/s. Motor Industries Co. Ltd. The primary issues revolved around the inclusion of excise duty, sales tax, and certain receipts in the total turnover for the purpose of computing deductions under Section 80HHC of the Income Tax Act, 1961. The High Court of Karnataka, referencing several precedents, concluded that such items should not be included in the turnover, thereby dismissing the appeal by the Revenue.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728985 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 05-08-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax vs. Lakshmi Machine Works, Commissioner of Income-Tax vs. Punjab Stainless Steel Industries & Others, Commissioner of Income-Tax and Another vs. Motor Industries Co.Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K P KUMAR
• Assessee Lawyers: K V ARAVIND
• Keywords: Deduction; Excise Duty; Income tax appeal; Sales Tax; Substantial questions of law; Total Turnover
• Section: 80HHC; 145A; 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 5TH DAY OF AUGUST, 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MRS.JUSTICE RATHNAKALA INCOME TAX APPEAL NO.857 OF 2008 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX, C.R. BUILDING, QUEENS ROAD, BANGALORE. 2. THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-12(1), C.R. BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI K.V.ARAVIND, ADV.) AND: M/S. MOTOR INDUSTRIES CO. LTD., (BOSCH LTD.,) HOSUR ROAD, ADUGODI, BANGALORE – 560 030. ...RESPONDENT (BY SRI K.P. KUMAR, SR.COUNSEL FOR M/S KING & PATRIDGE, ADVS.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 14-03-2008 PASSED IN ITA NO.278/BNG/2005, FOR THE - 2 - ASSESSMENT YEAR 2001-02, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.278/BNG/2005, DATED 14-03- 2008 CONFIRM THE ORDERS OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. THIS APPEAL COMING ON FOR HEARING THIS DAY, N.KUMAR J., DELIVERED THE FOLLOWING: J U D G M E N T This appeal is by the Revenue against the order passed by the Income Tax Appellate Tribunal, Bangalore. 2. This appeal was admitted on 15.7.2009 to consider the following substantial questions of law: 1) Whether the Appellate Authorities were correct in holding that excise duty and sales tax amounting to Rs.259,70,00,717/- cannot be included in the total turnover in the light of the judgment of this Hon’ble Court in ITA No.928/2006 applicable to assessment year 1994-95 without taking into - 3 - consideration the amended Section 145A of the Act introduced w.e.f. 1.4.1999 and applicable to the current assessment year? 2) Whether the Appellate Authorities were correct in holding that receipts of Rs.5,24,63,704/- from sale of scrap cannot be included in the total turnover for the purpose of computation of deduction u/s.80HHC of the Act? 3) Whether the Appellate Authorities were correct in holding that 90% of the fees received from Robert Bosch of Rs.4,32,08,798/- cannot be excluded in accordance with Explanation to Section 80HHC of the Act? 3. The first substantial question of law arose for consideration before the Apex Court in the case of Commissioner of Income-Tax –vs- Lakshmi Machine Works reported in (2007) 290 ITR 667 (SC) wherein it was held as under: - 4 - “Section 80HHC of the Income-tax Act, 1961, is a beneficial section. It was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. Just as commission received by the assessee is relatable to exports and yet it cannot form part of “turnover’ for the purposes of section 80HHC, excise duty and sales tax also cannot form part of “turnover”. Just as interest, commission, etc., do not emanate from the “turnover” so also excise duty and sales tax do 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 are not includible in the “total turnover”. If so, excise duty and sales tax also cannot form part of the “total turnover” under section 80HHC(3)”. Accordingly, the first substantial question of law is answered in favour of the assessee and against the Revenue. 4. The second substantial question of law arose for consideration before the Apex Court in the case of Commissioner of Income-Tax –vs- Punjab Stainless Steel - 5 - Industries & Others reported in (2014) 364 ITR 144 (SC) wherein it was held as under: “Normally, the term “turnover” would show the sales effected by a business unit. In the course of the business, in addition to the normal sales, the business unit may also sell some other things. In ordinary accounting parlance, as approved by all accountants and auditors, the term “sales”, when reflected in the profit and loss account, would indicate sale proceeds from sale of the articles or things in which the business unit is dealing. When other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in “sales” but would be shown separately. Sale proceeds from scrap may either be shown separately in the profit and loss account or may be deducted from the amount spent by the manufacturing unit on the raw material from which goods are manufactured. The raw material, which is not capable of being used for manufacturing the goods will have to be either sold as scrap or might have to be re-cycled of disposed of to someone who would re-cycle the scrap. When such scrap is sold, the sale proceeds of the scrap cannot be included - 6 - in the term “turnover”. Therefore, the proceeds of sale of such scrap would not be included in “sales” in the profit and loss account of the assessee. The situation would be different in the case of the buyer, who purchases scrap from the assessee and sells it to someone else. The sale proceeds for such a buyer would be treated as “turnover” for the simple reason that the buyer of the scrap is a person who is primarily dealing in scrap”. Therefore, the said substantial question of law is also answered in favour of the assessee and against the Revenue. 5. The third substantial question of law arose for consideration in the case of assessee itself, which is reported in (2011) 331 ITR 79 (Karn) in Commissioner of Income- Tax and Another –vs- Motor Industries Co.Ltd., wherein it was held as under: “The assessee was a public limited company carrying on the business of manufacture and sale of automobile parts like spark plugs, fuel injection equipment etc. For the year 1994-95 the assess received Rs.64,75,373 as fees towards - 7 - developmental work from a foreign enterprise. The assessee claimed deduction under section 80-O of the Act, which was granted. For the purpose of deduction under section 80HHC of the Act, the Assessing Officer deducted 90 percent of the amount applying the provisions of Explanation (baa) to section 80HHC of the Act. The assessee objected to the deduction. The assessee contended that the proviso to Explanation (baa) could be applied only to those items which are specifically mentioned therein. The Tribunal accepted the assessee’s contention. On appeal to the High Court: Held, dismissing the appeal, that admittedly that the assessee was in the business of export of goods and merchandise. The assessee was earning foreign exchange out of that export business. The disputed income was earned by the assessee for its fees towards developmental work from the foreign enterprise. The developmental work was intimately connected with the business of manufacture and sale of goods by the assessee. There was immediate nexus between the activity of export and the developmental work. The consideration received for developmental work was not liable to - 8 - be deducted under clause (baa) in computing the profits of the business.” Therefore, the said substantial question of law is also answered in favour of the assessee and against the Revenue. Accordingly, the appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE KNM/- "