2007 (4) TMI 202 - SC - Income Tax

Excise duty and sales tax excluded from total turnover for section 80HHC deduction computation

The SC held that excise duty and sales tax cannot be included in 'total turnover' for computing deduction under section 80HHC(3). The Court applied ... Total turnover - export turnover - profits of the business - apportionment of export profits on turnover basis - indirect taxes recovered on behalf of the Government are not part of turnover - schematic and purposive interpretation of a statutory formula in a taxing provisionTotal turnover - export turnover - profits of the business - indirect taxes recovered on behalf of the Government are not part of turnover - apportionment of export profits on turnover basis - Excise duty and sales tax are includible in 'total turnover' for computing deduction under section 80HHC(3) as it stood for AY 1993-94. - HELD THAT: - The Court examined section 80HHC(3) as a formulaic provision that apportions profits relatable to export by reference to the ratio of export turnover to total turnover and must be read purposively to make the formula workable. 'Profit of the business', 'export turnover' and 'total turnover' are interrelated elements of that formula. The legislative history and amendments (notably restricting certain receipts such as brokerage, commission, interest and specified export incentives to 10 per cent. treatment) show Parliament intended to exclude items that do not have the character of 'turnover' even if they appear in the profit and loss account. Commission, interest and rent yield profits but lack the element of turnover and were therefore excluded by the statute; by parity of reasoning excise duty and sales tax, being indirect taxes recovered by the assessee on behalf of the Government and not forming part of the assessee's turnover, cannot be treated as part of 'total turnover' for the purposes of the section. The Court rejected the Department's contention that a literal construction of 'turnover' requires inclusion of excise and sales tax, holding instead that a schematic/purposive reading of the provision - giving weight to the words 'export turnover', 'total export turnover' and 'profits of the business' and to the objective of apportionment - requires exclusion of such indirect taxes to preserve the workability of the formula and to accord with the legislative scheme.Excise duty and sales tax are not includible in 'total turnover' for the computation under section 80HHC(3) as it stood for the assessment year 1993-94.Final Conclusion: The appeals by the Department are dismissed; excise duty and sales tax were excluded from 'total turnover' for computing the deduction under section 80HHC(3) for AY 1993-94. Issues Involved:1. Inclusion of excise duty and sales tax in 'total turnover' for the purpose of computing deduction under section 80HHC of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Inclusion of Excise Duty and Sales Tax in 'Total Turnover' for Section 80HHC Deduction:Facts:- The assessee filed its return for the assessment year 1993-94, declaring taxable income and computing the allowable deduction under section 80HHC without including sales tax and excise duty in the total turnover.- The Department issued a notice under section 143(2) questioning the exclusion of sales tax and excise duty from the total turnover.- The Assessing Officer included these amounts in the total turnover, rejecting the assessee's objections.Appellate Proceedings:- The Commissioner of Income-tax (Appeals) sided with the assessee, holding that sales tax and excise duty were liabilities to the Government and should not be included in the total turnover.- The Tribunal upheld this decision, following the Bombay High Court's judgment in CIT v. Sudarshan Chemicals Industries Ltd.Supreme Court's Analysis:- The core issue was whether excise duty and sales tax should be included in the 'total turnover' for the formula under section 80HHC(3).- The Court analyzed section 80HHC, which provides a deduction for profits derived from exports, calculated using a specific formula involving 'export turnover' and 'total turnover.'- The Court noted that the term 'total turnover' should be interpreted in a manner consistent with the legislative intent to promote exports.Interpretation of 'Total Turnover':- The Court emphasized that tax under the Act is on income, profits, and gains, not on gross receipts.- The term 'profits' should be understood in its normal and proper sense, computed after deducting business expenses unless expressly disallowed by the Act.- The Court highlighted that the formula under section 80HHC is designed to apportion business profits based on export turnover relative to total turnover.Exclusion of Excise Duty and Sales Tax:- The Court reasoned that excise duty and sales tax do not form part of business profits as they are collected on behalf of the Government and do not involve any element of turnover.- Including these amounts in the total turnover would distort the formula and make it unworkable.- The Court cited legislative amendments that excluded items like commission and interest from business profits, reinforcing that such items did not possess any element of turnover.Conclusion:- The Court concluded that excise duty and sales tax should not be included in the total turnover for the purpose of computing the deduction under section 80HHC.- The appeals filed by the Department were dismissed, and the decisions of the lower authorities were upheld.Significance:- The judgment clarified the interpretation of 'total turnover' in the context of section 80HHC, ensuring that only amounts involving an element of turnover are included.- This interpretation aligns with the legislative intent to provide incentives for export profits without distorting the computation formula.Final Order:- The appeals by the Department were dismissed with no order as to costs, affirming that excise duty and sales tax are not includible in the 'total turnover' for section 80HHC deductions.