2000 (2) TMI 189 - AT - Income Tax

Inclusion of Sales-Related Items in Turnover for Deductions

The Tribunal held that certain items closely connected with sales operations, such as subsidy on export and duty drawbacks, should be included in the ... Inclusion of receipts in 'total turnover' for computation under section 80HHC(3) - parity between export turnover and total turnover in the 80HHC(3) formula - retrospective operation of an explanatory proviso - turnover versus nonturnover receiptsInclusion of receipts in 'total turnover' for computation under section 80HHC(3) - turnover versus nonturnover receipts - Certain exportlinked receipts and salesrelated items form part of the 'total turnover of the business' for computation under section 80HHC(3). - HELD THAT: - The Tribunal held that receipts closely connected with export and trading operations - specifically subsidy on export (cash assistance) falling within section 28(iiib), sale of rep licence (clause (iiia) type receipt) and duty drawback (clause (iiic) type receipt), together with sundry sales, offal sales, sale of raw materials and sale of byproducts - were received in the process of or in connection with the assessee's normal trading activities and therefore constitute part of the total turnover of the business. The Tribunal applied the commercial and legal test of nexus with sale operations and relied on the principle that turnover includes sums received and receivable as a result of the company's trading, whether normal or abnormal, to conclude these items are includible. [Paras 8]The named exportlinked receipts and sales items are includible in 'total turnover' for assessment year 1987-88.Turnover versus nonturnover receipts - exclusion of nontrading receipts from turnover - Certain miscellaneous receipts without nexus to sale operations are not part of 'total turnover'. - HELD THAT: - The Tribunal identified items that do not represent sale proceeds or are reductions of expense/liability and therefore lack nexus with trading turnover. Specifically, rent recoveries, a cash discount from a supplier (characterised as a deduction from purchases), octroi recoveries (treated as expense adjustments), provision written back (remission of past liability) and other sundries unconnected with sale were held not to be components of turnover and were ordered to be deducted from the total turnover figure. [Paras 8]Rent recoveries, the specified cash discount, octroi recoveries, provision written back and other sundries are not includible in 'total turnover' and must be excluded.Retrospective operation of an explanatory proviso - construction of amendment with specified commencement date - The proviso to clause (ba) of the Explanation to section 80HHC, which excludes sums referred to in clauses (iiia), (iiib) and (iiic) of section 28 with effect from assessment year 1991-92, cannot be treated as retrospectively operative to exclude those sums for earlier years. - HELD THAT: - The Tribunal observed that the proviso expressly states its effect in relation to assessment years commencing on or after 141991. Unlike cases where an amendment was construed as clarificatory without an express commencement limitation, the clear date in this proviso indicates prospective operation from assessment year 199192. Therefore, the question whether those items are includible for years prior to 199192 must be determined on ordinary principles of whether such receipts are properly part of 'total turnover'; the proviso itself does not render the exclusion retrospective. [Paras 9]The proviso is not to be read as having retrospective effect for assessment year 198788; its exclusion applies from assessment year 199192 only.Parity between export turnover and total turnover in the 80HHC(3) formula - ratio extraction rule in computation under section 80HHC(3) - Maintaining parity between numerator and denominator in the 80HHC(3) computation is achieved by recognising the same items in profits and turnover when those items have nexus with trading; no distortion or absurdity arises from including the exportlinked receipts in turnover. - HELD THAT: - The Tribunal explained the mathematical and commercial basis of the statutory formula for computing export profit under section 80HHC(3). By viewing the formula alternatively - either as a proportion of total profits apportioned to exports or as export turnover multiplied by the ratio of total profits to total turnover - items that form part of both profits and turnover preserve parity. The Legislature later effected parallel adjustments (by excluding specified receipts from turnover and reducing profits correspondingly) to preserve parity from 199192; but for the year in issue the Tribunal found no absurdity in including exportconnected receipts in turnover and therefore rejected the assessee's plea to exclude them solely to secure parity with the definition of export turnover. [Paras 10, 11]Parity is satisfied by recognising the exportlinked receipts in both profits and turnover where they have a trading nexus; inclusion does not produce absurdity for assessment year 198788.Final Conclusion: The appeal is partially allowed: exportlinked and salesconnected receipts specified in the order are to be included in 'total turnover' for computing export profit under section 80HHC(3) for assessment year 198788, while the identified nonturnover miscellaneous receipts are to be excluded; the proviso excluding certain receipts from turnover operates only from assessment year 199192 and is not retrospectively applicable to 198788. Issues Involved:1. Inclusion of subsidy on export and miscellaneous income in the 'total turnover of the business' for the purpose of computation of deduction under section 80HHC(3).Issue-wise Detailed Analysis:1. Inclusion of Subsidy on Export and Miscellaneous Income in Total Turnover:The primary issue in this appeal is whether the 'total turnover of the business' should include the subsidy on export (Rs. 10,29,736) and miscellaneous income (Rs. 56,65,969) for the purpose of computing the deduction under section 80HHC(3). The miscellaneous income includes various items such as sundry sales, offal sales, rent recoveries, sale of rep license, cash discount, sale of raw materials, sale of by-products, octroi recoveries, claims received, drawback received, provision written back, and other sundries.The Assessing Officer included these items in the total turnover, and this decision was upheld by the CIT(A).Arguments by the Assessee:The assessee contends that the deduction under section 80HHC(3)(b) should be computed as follows:\[ \text{Export turnover} \times \left( \frac{\text{Profits & gains of business}}{\text{Total turnover}} \right) \]The assessee argues that since the 'export turnover' does not include items like subsidy on exports and duty drawbacks, the 'total turnover' should also exclude these items. The assessee relies on two ITAT Calcutta Bench decisions to support this contention, emphasizing the need for parity between items included in 'export turnover' and 'total business turnover'.Definition of Total Turnover:The definition of 'total turnover' in section 80HHC was modified by the Finance Act, 1990 and Finance (No. 2) Act, 1991. The assessee argues that the definition is an excluding definition and should not include items that do not represent sale proceeds. The assessee also contends that the exclusion of sums referred to in clauses (iiia), (iiib), and (iiic) of section 28 should be considered retrospective, as these provisions are clarificatory in nature.Legal Precedents:The assessee relies on several judgments to support the argument that amendments which are clarificatory should be construed retrospectively. These include:- K.P. Varghese v. ITO [1981] 131 ITR 597 (SC)- CIT v. J.H. Goila [1985] 156 ITR 323 (SC)- Allied Motors (P.) Ltd v. CIT [1997] 224 ITR 677 (SC)- CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 6251 (SC)Arguments by the Revenue:The Revenue argues that items with a nexus to sales should be included in the turnover. The Revenue relies on judgments such as:- Smt. T. C. Usha v. Dy. CIT [1999] 70 ITD 279 (Coch.)- Salgaocar Mining Industries Ltd v. Dy. CIT [1997] 61 ITD 105 (ITAT - Pune)- Nathani Steels Ltd. v. Dy. CIT [1996] 57 ITD 584 (ITAT - Bombay)The Revenue contends that since the exclusion of items like subsidy on export and duty drawbacks was specifically omitted from the statute starting from April 1, 1991, these items should be included in the turnover for the assessment year 1987-88.Tribunal's Findings:The Tribunal held that certain items like subsidy on export, duty drawbacks, sundry sales, offal sales, sale of raw materials, and sale of by-products should be included in the total turnover as they are closely connected with the sale operations. However, items such as rent recoveries, cash discount, octroi recovery, provision written back, and other sundries should not be included as they do not have a direct connection with the sale operations.The Tribunal also addressed the question of whether the proviso to section (ba) of the Explanation to section 80HHC leads to an absurd result. The Tribunal concluded that the proviso, which applies from April 1, 1991, does not suggest that items should be included in the total turnover for periods prior to that date. The Tribunal emphasized that the computation of export profit should maintain parity between the numerator and the denominator in the formula provided in section 80HHC(3).Conclusion:The Tribunal concluded that the items closely connected with the sale operations should be included in the total turnover, while items without a direct connection to sales should be excluded. The appeal filed by the assessee was partially allowed to this extent.