2016 (8) TMI 259 - HC - Income Tax

Court affirms exclusion of taxes from turnover for deductions, trial run expenses as revenue expenditure

The court upheld the Income Tax Appellate Tribunal's decision to exclude excise duty and sales tax from the total turnover for section 80-HHC deductions, ... Interpretation of 'total turnover' in Section 80HHC - Exclusion of indirect taxes from turnover for purpose of Section 80HHC - Effect of insertion of Section 145A on computation of turnover for Section 80HHC - Treatment of trial run expenses as revenue expenditureInterpretation of 'total turnover' in Section 80HHC - Exclusion of indirect taxes from turnover for purpose of Section 80HHC - Effect of insertion of Section 145A on computation of turnover for Section 80HHC - Components of sales tax and excise duty do not form part of total turnover for computing deduction under Section 80HHC even after insertion of Section 145A. - HELD THAT: - The Court applied the ratio of the Supreme Court in Lakshmi Machine Works and Shiva Tex Yarn and followed earlier Division Bench decisions of this Court to hold that Section 80HHC must be given a schematic and purposeful interpretation. The formula under Section 80HHC apportions business profits by reference to export turnover as a proportion of total turnover; items which do not possess the element of turnover (such as commission, interest, rent) were excluded by legislative amendments and judicial interpretation. Excise duty and sales tax are indirect taxes recovered on behalf of the Government and do not spring from turnover in the commercial sense; including them would make the statutory formula unworkable. The insertion of Section 145A does not alter that conclusion and the Tribunal was correct in excluding excise duty and sales tax while computing total turnover for Section 80HHC. [Paras 6, 7]First question answered in favour of the assessee and against the revenue; excise duty and sales tax excluded from total turnover for Section 80HHC.Treatment of trial run expenses as revenue expenditure - Trial run expenses incurred in connection with testing of product in the expansion of an existing manufacturing unit are revenue expenditure and allowable. - HELD THAT: - Relying on precedent of this Court, the Court distinguished expenditure incurred for testing product from expenditure incurred to bring a new plant into existence. Where the assessee is already engaged in manufacturing and the trial run relates to product-testing in the course of expanding existing facilities (and does not form part of cost of plant or create an enduring capital advantage), such expenses are of revenue nature. The Tribunal erred in treating the trial run expenditure as capital; the claim for revenue deduction was correctly allowed by the lower authority. [Paras 7, 8]Second question answered in favour of the assessee and against the revenue; trial run expenses held to be revenue expenditure.Final Conclusion: Both appeals by the revenue were dismissed; the Tribunal's orders were confirmed - excise duty and sales tax excluded from total turnover for deduction under Section 80HHC, and the trial run expenses were held to be revenue expenditure. Issues involved:1. Whether the Income Tax Appellate Tribunal was justified in upholding the order of Commissioner (Appeals) directing to reduce the amount of excise duty and sales tax while computing the total turnover for the purpose of deduction under section 80-HHC of the Income Tax Act, 1961, even after the insertion of the provisions of section 145A(b) of the Act.2. Whether the Appellate Tribunal was right in law in allowing the trial run expenses of Rs. 1,24,63,848/- as revenue expenditure incurred before the commencement of commercial production.Issue 1: Reduction of Excise Duty and Sales Tax from Total Turnover for Section 80-HHC DeductionThe appellant challenged the Income Tax Appellate Tribunal's decision to exclude excise duty and sales tax from the total turnover while computing deductions under section 80-HHC of the Income Tax Act, 1961, even after the insertion of section 145A(b). The appellant argued that the Tribunal erred in allowing this exclusion.The respondent's counsel cited several decisions, including *Commissioner of Income Tax v. Meghmani Industries Ltd.*, and other Tax Appeals, where the courts consistently held that excise duty and sales tax should be excluded from the total turnover for the purpose of section 80-HHC deductions. The court observed that the Supreme Court in *Lakshmi Machine Works* and *Shiva Tex Yarn Ltd.* had ruled that excise duty and sales tax do not form part of the total turnover as they do not involve any element of turnover. These items are indirect taxes collected on behalf of the government and should not be included in the total turnover for the purpose of section 80-HHC.The court held that the Tribunal did not commit any error in excluding excise duty and sales tax from the total turnover, reaffirming the decisions in *Lakshmi Machine Works* and *Shiva Tex Yarn Ltd.*. Consequently, the first issue was resolved in favor of the assessee and against the revenue.Issue 2: Allowability of Trial Run Expenses as Revenue ExpenditureThe appellant contended that the Tribunal erred in allowing trial run expenses of Rs. 1,24,63,848/- as revenue expenditure, arguing that these expenses were incurred before the commencement of commercial production.The respondent's counsel referred to the decision in Tax Appeal No.1243 of 2006, where the court had held that expenses incurred in the trial run for expanding an existing unit should be treated as revenue expenditure. The court in *Gujarat Small Scale Industries Corporation Ltd.* observed that if the expenditure was incurred before the commencement of production, it could be considered revenue expenditure if it did not bring into existence any capital asset or advantage of an enduring nature.In this case, the expenses were incurred for the trial run to increase the installed capacity of an existing manufacturing plant. The court found merit in the respondent's argument, concluding that the trial run expenses were indeed revenue in nature. The Tribunal's decision to treat these expenses as revenue expenditure was upheld.ConclusionThe court dismissed both appeals, confirming the impugned orders. The first issue was resolved by excluding excise duty and sales tax from the total turnover for section 80-HHC deductions, and the second issue was resolved by allowing the trial run expenses as revenue expenditure. Both decisions were in favor of the assessee and against the revenue.