Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs Fashion Sports (I) (P.) Ltd. on 22 March, 2000
Equivalent citations: [2001]78ITD41(MUM)
ORDER
R.V. Easwar, J.M.
1. The only question in this appeal by the department is whether the CIT(A) is right in excluding the insurance claim of Rs. 11,97,400 from the 'total turnover' while computing the deduction under section 80HHC.
2. The Assessing Officer while computing the deduction noticed that the assessee had received the aforesaid sum from the United Indian Insurance Co. Ltd. on account of loss of goods in fire which occurred in the factory of its sister-concern to which the assessee had sent the goods for labour job. He added the amount to the "total turnover" for the purposes of section 80HHC, while applying the formula :
Export turnover Profits & Gains of business X ---------------------
Total turnover The result was that the denominator in the formula got enhanced and the deduction got reduced.
3. The CIT(A) held that though the amount was includible in the income of the company, it will not go into the 'total turnover'. He directed the Assessing Officer to recompute the deduction accordingly.
4. It is the correctness of the above decision that is called in question before us at the instance of the department.
5. Section 80HHC prescribes a formula for determining export profits, which are fully exempt from income-tax. The formula, which is given above, contains 3 components. As regards "profits & gains of business" and "Export turnover", there is no dispute. The dispute is with reference to "total turnover". Explanation (ba) below sub-section (4B) of section 80HHC explains "total turnover" as under :
"total turnover' shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962)."
The so-called definition is couched in negative language and only says what is not includible. In the case of c.i.f. exports (i.e. cost, insurance, freight), insurance and freight charges, included in the price, have to be excluded. That is all that the definition says. The real question is whether the insurance claim can be considered at all as part of the "total turnover". That question can be answered only by examining the nature and meaning of "total turnover" and the so-called definition is of no help. 'Turnover' refers to the act of a businessman in "turning over" the goods he deals in, services he renders or the facilities he provides, into money. This involves the idea of quid pro quo as consideration for parting with goods or rendering the services or providing the facilities. This idea is the very basis of a business, the "raison d'etre". When he stores goods in a place belonging to a sister-concern, and due to fire they got destroyed and he receives money from the insurers, he does not "turnover" those goods into money in the normal course of a business transaction, in the sense of selling the goods, services or facilities for a price; he actually suffers a loss and there is no element of sale or quid pro quo involved. He gets the money by virtue of the contract of insurance. In Vania Silk Mills (P.) Ltd.
v. CIT [1991] 191 ITR 647 at 652, the Supreme Court held, approving the judgment of the Madras High Court in C. Leo Machodo v. CIT [1988] 172 ITR 744, that "the payment of insurance claim is not in consideration of the property taken over by the insurance company, for one is not the consideration for the other.... It is not a consideration for the damaged property". The nature of the insurance monies being compensation for the loss, under a contract of indemnity, it is difficult to view it as anything resembling "turnover". The word "total" preceding the word "turnover' does not take the case further is used only to denote the "aggregate" and is not descriptive of the items of receipts that may properly fall to be considered as "turnover".
6. There is one other angle from which the question may be viewed. The section exempts export profits. The formula has therefore got to be applied in such a manner as would be in harmony with the object. It cannot be disputed that insurance claim received in respect of goods destroyed by fire has no close nexus with the export activity; the connection is too remote, in the sense that the goods might have been meant for export. But we have to only arrive at "total turnover" and not the "total receipts" of the business. Not all items appearing in the profit & loss account can be properly described as "total turnover" of the business.
7. Section 41(2) as it existed prior to 1-4-1993 gives a clue. Any insurance monies received in respect of goods, the cost of which has been earlier allowed as deduction "shall be deemed to be profits and gains of business" under the provision. The fiction was unnecessary if such receipts were to be considered as "turnover" as normally understood.
8. We are therefore of the view that the decision of the CIT(A) is correct. We uphold the same and dismiss the appeal.