2000 (8) TMI 73 - HC - Income Tax

Section 80HHC: Sales Tax and Excise Duty Excluded from Total Turnover for Deduction under Proportionate Profit Formula

HC held that for computing deduction under section 80HHC, sales tax and excise duty are excluded from total turnover. Export turnover (numerator) ... Interpretation of section 80HHC - total turnover - inclusion of sales tax and excise duty - trading receipts - expression 'export turnover' - whether sales tax and excise duty should be included in the total turnover for calculating deduction under section 80HHC - HELD THAT:- 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 (b) 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. 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. Issues involved: Interpretation of whether sales tax and excise duty should be included in the total turnover for calculating deduction under section 80HHC of the Income-tax Act.Summary:The judgment of the High Court of Bombay, delivered by S. H. Kapadia J., addressed the common question of law in multiple appeals regarding the inclusion of sales tax and excise duty in the total turnover for computing deduction under section 80HHC. The specific case, Income-tax Appeal No. 120 of 2000, concerned the assessment year 1994-95, where the Department contended that these items should be included in the turnover for deduction purposes.Department's Argument:The Department argued that as per the plain words of the section, sales tax and excise duty should be included in the total turnover for section 80HHC deduction calculation. They emphasized that the legislative exclusion of only insurance and freight from the turnover indicated that other items, like sales tax and excise duty, should not be excluded. They also cited a Supreme Court judgment to support their interpretation.Assessee's Argument:On the other hand, the assessee contended that the object of section 80HHC was to promote export turnover growth and that sales tax and excise duty should not be included in the turnover calculation. They highlighted that the formula for deduction under section 80HHC aimed to ascertain profits derived from exports and that including these statutory levies would artificially reduce export profits.Court's Decision:The High Court found merit in the assessee's contentions, emphasizing that the legislative intent behind section 80HHC was to incentivize exports by not taxing export profits. They noted that the formula for deduction clearly excluded sales tax and excise duty from the export turnover, indicating that these items should not be part of the total turnover calculation. The Court highlighted that the object of the section was to encourage exports and that including these statutory levies in the turnover would defeat this purpose. They concluded that sales tax and excise duties, being levied under separate enactments with different objectives, should not be included in the total turnover for section 80HHC deduction calculation.In conclusion, the High Court dismissed all appeals, upholding that sales tax and excise duty should not be included in the total turnover for computing deduction under section 80HHC of the Income-tax Act.