2008 (11) TMI 188 - HC - Income Tax

Court rules for assessee on tax turnover deductions but limits benefit extension under section 80HH, Revenue wins on 11th year.

The court ruled in favor of the assessee on the first three substantial questions of law regarding the inclusion of sales tax in total turnover for ... How to calculate ten years for claiming exemption u/s 80HH – tribunal allowed deduction u/s 80HH for the 11th year on the ground that for the first year there was no specific previous year – held that tribunal is incorrect in allowing deduction for the 11th year – sales tax does not form part of total turnover for the purpose of calculation of deduction under section 80HHC - interest accrued but had not become due in the present assessment year is not assessable to tax for the assessee following the mercantile system of accounting Issues Involved:1. Whether sales tax forms part of total turnover for the purpose of calculation of deduction under section 80HHC.2. Whether the amount received out of local sale forms part of the total turnover for the purpose of calculation of deduction under section 80HHC.3. Whether interest accrued in the present assessment year is assessable to tax for the assessee following the mercantile system of accounting.4. Whether the benefit under section 80HH can be allowed for the 11th year when the section specifies only 10 assessment years of usual sequence.Issue-wise Detailed Analysis:1. Sales Tax and Total Turnover under Section 80HHC:The first substantial question of law pertains to whether sales tax should be included in the total turnover for the purpose of calculating deductions under section 80HHC. The learned senior standing counsel for the Revenue conceded that this issue has been resolved against the Revenue by the Supreme Court in CIT v. Lakshmi Machine Works [2007] 290 ITR 667. Consequently, the court decided this question in favor of the assessee.2. Local Sale Amount and Total Turnover under Section 80HHC:The second substantial question of law concerns whether the amount received from local sales should be included in the total turnover for the purpose of section 80HHC deductions. The learned senior standing counsel acknowledged that this issue was also decided against the Revenue in CIT v. Ashok Leyland Ltd. [2008] 297 ITR 107 (Mad). Therefore, this question was similarly decided in favor of the assessee.3. Interest Accrued and Tax Assessment under Mercantile System:The third substantial question of law involves whether interest accrued but not due should be included in the taxable income for an assessee following the mercantile system of accounting. The Revenue argued that interest accrued as of March 31 of the previous year should be treated as income of that year, irrespective of the actual receipt date. The assessee contended that the interest was 'accrued but not due,' hence not taxable until it became due on April 1 of the next year. The Tribunal agreed with the assessee, referencing CIT v. Tamilnadu Mercantile Bank Ltd. [2007] 291 ITR 137 (Mad), which supported the view that interest income should be recognized based on the method of accounting followed. Thus, this question was decided in favor of the assessee, affirming that interest 'accrued but not due' does not form part of the income for the relevant year.4. Benefit under Section 80HH for the 11th Year:The fourth substantial question of law addresses whether the benefit under section 80HH can be extended to the 11th year due to a change in the previous year, despite the section allowing benefits only for 10 assessment years. The Revenue relied on Rockweld Electrodes (India) Ltd. v. CIT [1990] 185 ITR 62 (Mad), which emphasized the 'natural sequence of ten assessment years.' The Tribunal had allowed the assessee's claim without providing substantial reasoning. The court referred to multiple precedents, including Kar Mobiles Ltd. v. CIT [1998] 229 ITR 701 (Ker) and Premier Cable Co. Ltd. v. CIT [1999] 237 ITR 202 (SC), which clarified that assessment years are fixed periods and should follow a natural sequence, irrespective of changes in the previous year. Consequently, the court held that the benefit under section 80HH is limited to ten consecutive assessment years, starting from the initial assessment year 1982-83, and the 11th year claim for 1992-93 was not permissible. This question was thus decided in favor of the Revenue.Conclusion:The court resolved the first three substantial questions of law in favor of the assessee, based on established precedents. However, the fourth question was decided in favor of the Revenue, emphasizing that the benefit under section 80HH is confined to a natural sequence of ten assessment years. The appeal was allowed with no costs.