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, citing precedents that these taxes should not be considered part of turnover. Additionally, the court affirmed the Tribunal's treatment of trial run expenses as revenue expenditure, following a previous ruling that such expenses incurred before commercial production can be considered revenue if they do not create lasting assets. Consequently, both issues were decided in favor of the assessee, leading to the dismissal of the appeals and confirmation of the Tribunal's orders.

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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 Deduction

The 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 Expenditure

The 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.

Conclusion

The 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.

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