High Court upholds exclusion of excise duty and sales tax from turnover for Section 80HHC deduction

The Gujarat High Court affirmed the decision of the Income Tax Appellate Tribunal (ITAT) that excise duty and sales tax should be excluded from the total turnover for calculating the deduction under Section 80HHC of the Income Tax Act. Citing Supreme Court precedents, the court held that these taxes, not linked to export activity, should not be part of the turnover. The Revenue's appeal was dismissed, and no costs were awarded, upholding the exclusion of excise duty and sales tax from the total turnover for Section 80HHC deduction.

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Issues Involved:
1. Whether the Appellate Tribunal is right in law and on facts in holding that Sales Tax and excise duty cannot be included in working out total turnover for the purpose of Section 80HHCRs.

Issue-Wise Detailed Analysis:

1. Inclusion of Sales Tax and Excise Duty in Total Turnover for Section 80HHC:
The primary issue in this case is whether sales tax and excise duty should be included in the total turnover for the purpose of calculating the deduction under Section 80HHC of the Income Tax Act, 1961. The Revenue challenged the decision of the Income Tax Appellate Tribunal (ITAT) which excluded these components from the total turnover.

Legal Precedents:
The Gujarat High Court referred to the Supreme Court's decisions in *Commissioner of Income Tax vs. Lakshmi Machine Works* and *Commissioner of Income Tax vs. Shiva Tex Yarn Ltd.*. The Supreme Court in these cases held that sales tax and excise duty do not form part of the total turnover for the purposes of Section 80HHC. The rationale was that these taxes do not have any nexus with the activity of exports and are collected by the assessee on behalf of the government.

Arguments by Revenue:
The Revenue's counsel, Mr. Varun K. Patel, argued that the Supreme Court had not considered Section 145A of the Income Tax Act in its previous decisions. However, the court noted that there had been no amendment in Section 80HHC that would alter the applicability of the Supreme Court's observations in *Lakshmi Machine Works*.

Court's Analysis:
The court reiterated that the issue is no longer res integra (an undecided legal question) and is squarely covered against the Revenue by the Supreme Court's decisions. The court emphasized the purpose of Section 80HHC, which is to provide incentives for export profits and not to include taxes like sales tax and excise duty, which do not involve any element of turnover.

Supreme Court's Observations:
The Supreme Court had pointed out that the term "total turnover" should be interpreted schematically to exclude components that do not involve turnover, such as excise duty and sales tax. The court noted that these taxes are indirect and collected on behalf of the government, thus should not be part of the total turnover for the purpose of calculating export profits under Section 80HHC.

Conclusion:
Applying the Supreme Court's ratio in *Lakshmi Machine Works* and *Shiva Tex Yarn Ltd.*, the Gujarat High Court held that the ITAT did not err in excluding excise duty and sales tax from the total turnover for the purpose of Section 80HHC. Consequently, the tax appeal by the Revenue was dismissed, affirming that these taxes should not be included in the total turnover for the computation of the deduction under Section 80HHC.

Judgment:
The Tax Appeal was dismissed, and no costs were awarded. The court upheld the ITAT's decision that excise duty and sales tax should be excluded from the total turnover for the purpose of Section 80HHC deduction.

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