Bombay High Court
Commissioner Of Income-Tax vs Sudarshan Chemicals Industries Ltd., ... on 8 August, 2000
Equivalent citations: [2000]245ITR769(BOM)
Author: S.H. Kapadia
Bench: S.H. Kapadia, R.M.S. Khandeparkar
JUDGMENT S.H. Kapadia, J.
1. All the above appeals deal with a common question of law and facts and, therefore, they are decided together by this judgment. For the sake of convenience, however, the facts in Income-tax Appeal No. 120 of 2000 are mentioned hereinbelow.
2. Income-tax Appeal No. 120 of 2000 concerns the assessment year 1994-95. The Assessing" Officer held that sales tax and excise duty are statutory levies and, therefore, they constitute trading receipts. Accordingly, he recomputed the deduction under Section 80HHC by including the above two items in the total turnover. Being aggrieved by the said order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) who allowed the claim of the assessee relying on the earlier judgment of the Tribunal for the earlier years in the assessee's own case in which the Tribunal held that sales tax and excise duty should be excluded from the total turnover while working out the deduction under Section 80HHC. Being aggrieved by the said order of the Commissioner of Income-tax (Appeals), the Department preferred an appeal. The Tribunal upheld the order of the Commissioner of Income-tax. Hence, the Department has come in appeal under Section 260A of the Income tax Act. The appeal was admitted. It came up for final hearing.
3. This appeal raises an important question of law as to whether sales tax and excise duty ought to be included in the total turnover while working out the deduction under Section 80HHC.
4. Mr. Deodhar, learned counsel for the Department, submitted that having regard to the plain words of the section, the above two items ought to have been included in the total turnover. He submitted that the Legislature has expressly excluded items of freight and insurance from the "export turnover". However, the Legislature did not exclude sales tax and excise duty from the export turnover. He contended that while construing a taxing statute, strict interpretation should be given by the court. He accordingly contended that the above two items cannot be excluded from the total turnover. He also relied upon the definition of the word "total turnover" in the Explanation to the said section which defines total turnover not to include freight/insurance. He accordingly, submitted that since the Legislature has excluded only insurance and freight from the total turnover, it is not open to the assessee to contend that excise duty and sales tax should also be excluded from the total turnover. He further contended that the Legislature has used the expression "total turnover" and not only the word "turnover" and, therefore, if the expression "total turnover" is read in the context of Section 80HHC, it is clear that the said expression refers to the aggregate amount for which goods are bought or sold and since sales tax and excise duty form part of the value of the goods, the same are includible in the total turnover. He relied upon the judgment of the Supreme Court in that regard in the case of George Oakes (Private) Ltd, v. State of Madras .
5. On the other hand, Mr. Inamdar, learned counsel for the assessee, contended that one has to keep in mind the object of Section 80HHC. He contended that at the relevant time, i.e., for the assessment year 1986-87, for which the previous year ended on December 31, 1985, Section 80HHC of the Act provided for deduction of an amount, not exceeding 50 per cent. of the profits derived from the export of specified goods, i.e., 50 per cent. of export profits from the total income. He contended that as per Section 80HHC(3)(b), in order to compute the deduction one is required to determine export profits as the ratio of the export turnover to the total turnover multiplied by profits of the business. In this connection, he pointed out that under Section 80HHC(3)(b), the deduction of export profits is allowed from the gross total income in accordance with the following formula :
Profits of the business X Export turnover Total turnover
6. He contended that it is an admitted position that the expression "export turnover" in the numerator did not include sales tax or excise duty as the same was not chargeable on export sales. He accordingly contended that in the circumstances, the said two items cannot be included in the denominator. He contended that the word "turnover" did not mean or include statutory levies. It simply meant the value of that which is turned over in the business. He contended that the special definitions under the other enactments cannot be imported into the Income-tax Act without looking at the context. He contended that the definition of "total turnover" excluded freight and insurance to remove an anomaly in the earlier law as otherwise, the definition of "export turnover" excluded freight and insurance while "total turnover" did not and with the result, in CIF transactions, while the export turnover was taken as FOB value, the total turnover included sale proceeds of exports at CIF value. With a view to remove this anomaly, it was proposed to clarify that the total turnover will also not include freight or insurance (see Circular No. 621 (see [1992] 195 ITR (St.) 154), dated December 19, 1991--Chaturvedi and Pithisoria, fifth edition, page 3535). He contended that the above position is also explained in the memorandum to the Finance (No. 2) Bill of 1999 (see [1991] 190 ITR (St.) 270, 300). He accordingly contended that the object of the amendment was to bring on par, the export turnover vis-a-vis the total turnover. He contended that Section 80HHC provides for incentives to the assessee for promoting growth of export turnover and, therefore, the said section must be liberally construed. He contended that the object of the above formula is to ascertain the profits derived from the export and, therefore, the turnover should be restricted to such receipts only which have an element of profit in it. He contended that having regard to the object of the section, it is only the actual sale price which is relevant and anything charged by way of statutory levies by the assessee over and above the sale price which the assessee is legally obliged to hand over to the Government, should be excluded because they do not have an element of profit. He contended that even according to the accounting principles such levies did not form part of the trading and profit and loss account ; that such levies are charged separately in addition to the price and the same are separately credited to their respective accounts and when such amounts are paid to the Government, they are debited to such accounts and the balance is shown as a liability in the balance-sheet. He accordingly contended that the statutory levies had no effect on the determination of the profits of the business and, therefore, in the context of Section 80HHC, the word "turnover" cannot include excise duty and sales tax. He contended that if the Department's argument is accepted, it would defeat the object of the section as it would artificially reduce the export profits and it would, in turn, result in reducing relief to the exporters. He contended that if the same word, viz., "turnover", is used in the numerator and denominator of a formula, then both should bear the same meaning. In other words, the ingredients of export turnover should also constitute the ingredients of total turnover to enable working out the proportionate profit from exports, otherwise the formula cannot work out. He further contended that sales tax and excise duty are State levies which have no relevance to the object of Section 80HHC. He contended that a small scale industry is exempt from excise duty. Therefore, if the Department's argument is accepted, it would lead to an anomalous position because two assessees situated in identical situations would be entitled to different amount of reliefs under the said section. He accordingly contended that such interpretation should be avoided. It would result in unequal deductions being given to two asses-sees who are similarly situated.
7. We find merit in the contentions of the assessee. Under Section 80HHC, the Legislature intends that the profits from exports should not be taxed. For this purpose, a formula has been introduced whereby if the business is of composite nature then the proportionate profit relatable to the export business is to be found out by multiplying the profits of a business by the export turnover and dividing the product by the total turnover. This formula finds place in Section 80HHC(3) as it stood at the relevant time. Under Clause fb) of the Explanation to Section 80HHC, export turnover is defined to mean sale proceeds received in India by the assessee in foreign exchange. Under the said definition, export turnover is defined to mean the sale proceeds of any goods which are exported out of India but which will not include freight or insurance. Clause (ba) defines total turnover to exclude freight or insurance. This Clause (ba) explains the turnover in a negative manner so as to exclude freight or insurance. Therefore, a combined reading of the' above two clauses shows that they include anything which has nexus with the sale proceeds. Correspondingly, they show that they exclude everthing which has no nexus with the sale proceeds. Further, the meaning of export turnover in Clause (b) of the Explanation to Section 80HHC, therefore, clearly shows that export turnover did not include excise duty and sales tax. The export turnover is the numerator in the above formula whereas the total turnover is the denominator. The above formula has been prescribed to arrive at the profits from exports. In the circumstances, the above two items, namely, sales tax and excise duty, cannot form part of the total turnover. In fact, if the denominator was to include the above two items and if the numerator excluded the above two items then the formula would become unworkable. In the circumstances, we are of the view that in order to ascertain the export profits, the above two items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to. Ultimately, the object of Section 80HHC is required to be kept in mind in order to encourage exports. The Legislature has applied the above formula in order to find out the profits derived from the exports. In this connection, Section 80HHC(1) may also be noticed. Under Section 80HHC(1), it is, inter alia, provided that where an assessee is engaged in the business of exports of any goods, there shall be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods. In other words, in computing the total income of such an assessee, profits derived by the assessee from the exports are deductible. The above expression, namely, "profits derived from exports" also finds place in Section 80HHC(3)(a). It says that where the export is of goods, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business. In fact, the earlier section 80HHC(3) consisted of two parts, namely, whether the assessee carried on a business as 100 per cent. exporter and secondly whether the assessee carried on a composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head "Profits and gains of business", the same proportion as the export turnover to the total turnover. The emphasis is on the words "profits derived from the exports". Therefore, weightage must be given to such profits. Such profits cannot be reduced artificially by including statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have an element of profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even according to the accounting principles, such levies do not form part of the profit and loss account. In fact, they are shown as liability in the balance-sheet. In the circumstances, the above two items cannot be included in the total turnover. We prefer this interpretation as it advances the object sought to be achieved by the Legislature. Lastly, we are of the view that sales tax and excise duties are levied under the separate enactments which have different objects. We are concerned with Section 80HHC which is a separate code by itself. Hence, the general definition of the word turnover or the case law dealing with the said definition under the Sales Tax Act which is a State levy, cannot be imported into Section 80HHC of the Income-tax Act. Hence, we do not find any merit in these appeals.
8. Accordingly, all the above three appeals fail with costs.