The Commissioner of Income Tax vs Sundaram Fasteners Ltd.

P.D. Dinakaran, J.—In this appeal, the following substantial questions of law were raised for determination:

(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that excise duty does not form part of the total

turnover for the purpose of calculation of deduction u/s 80HHC of the Income Tax Act?

(ii) Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in not considering the judgments of the

Supreme Court reported in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, and in the case of Sinclaire

Murray and Co. (P) Ltd. Vs. The Commissioner of Income Tax, Calcutta, ?

2.1 Question No. (1): Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that excise duty does not form

part of the total turnover for the purpose of calculation of deduction u/s 80HHC of the Income Tax Act?

2.2. The Bombay High Court in the decision reported in Commissioner of Income Tax Vs. Sudarshan Chemicals Industries Ltd., Rathi Engineering

Works and Klockner Windsor (I) Ltd., , rejected the contention of the Department to the effect that having regard to the plain words of the

Section 80HHC of the Income Tax Act (for brevity ""the Act""), two items, such as Excise Duty and Sales Tax ought to have been included in the

total turnover. It is further held that, the Legislature has expressly excluded items of freight and insurance from the ""export turnover"". However, the

Legislature did not exclude sales tax and excise duty from the export turnover. While construing a taxing statute, strict interpretation should be

given by the Court. Thus, the Bombay High Court, In Commissioner Of Income -Tax V. Sudharshan Chemicals Industries Limited And Others,

referred supra, held as follows:

Under Section 80HHC(1) of the Income Tax Act, it is inter alia provided that where an assessee is engaged in the business of export of any

goods, there shall be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of

such goods. In other words, in computing the total income of such an assessee, profits derived by the assessee from the exports are deductible.

The above expression, namely, ""profits derived from exports"" also find place in Section 80HHC(3)(a). It says that where the export is of goods,

the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in

respect of such goods bears to the total turnover of the business. In fact, the earlier section 80HHC(3) consisted of two parts, namely, where the

assessee carried on a business as 100 percent. Exporter and secondly where the assessee carried on a composite business. In the latter case, it

was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head

Profits derived from the exports"". Therefore, weightage must be given to such profits. Such profits cannot be reduced artificially by including

statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have an element of

profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken

into account as they do not have any element of profit. Even, according to accounting principles, such levies do not form part of the profit and loss

account. In fact, they are shown as liability in the balance sheet. In the circumstances, the above two items cannot be included in the total turnover.

Section 80HHC is a separate code by itself. Hence, the general definition of the word turnover or the case law dealing with the said definition

under the Sales Tax Act which is a State levy, cannot be imported into section 80HHC of the Act.

2.3. The above proposition of law has been followed by Calcutta High Court in the case of Subikash Roy Vs. Smt. Leena Chatterjee, and Kerala

High Court in the case of Commissioner of Income Tax Vs. K. Rajendranathan Nair, K. Raveendranathan Nair and Smt. T.C. Usha, , wherein it

is held that in computing the special deduction u/s 80HHC of Act, in respect of profits from export business, while determining the proportion of

export turnover to total turnover, since octroi, sales tax and excise duty are excluded from the export turnover, they should be excluded from the

figure of ""total turnover"", as it is a settled law that the words of a statute, where there is a doubt about their meaning, are to be understood in the

sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view.

2.4. In (2002) 257 ITR 60 , where the assessing officer took the total turnover to be the turnover for the purpose of Section 80HH of the Act to

be the turnover from all the sources of business of the assessee, this Court acknowledging the ratio laid down in the Commissioner of Income Tax

v. Sudharshan Chemicals Industries Limited and Ors., referred supra, accepted the contention of the assessee that the total turnover must be

confined to the turnover of the product which was exported by the assessee and held that the amount received by the way of Modvat credits could

not have been received by the assessee, had the assessee not purchased the raw materials for running its industry of manufacturing forgings. This

court, thus, held that the amount received by the assessee under Modvat credits were eligible for deduction u/s 80HH of the Act, and that the

amount earned by the assessee by the International Price Rationalisation Scheme was also eligible for deduction u/s 80HH of the Act.

2.5. In view of the law, as enunciated from the decisions referred supra, we are of the firm opinion that the Tribunal was right in holding that excise

duty does not form part of the total turnover for the purpose of calculation of deduction u/s 80HHC of the Act.

3.1. Question (ii) - Whether on the facts and in the circumstances of the case, the Income Tax Tribunal is right in law in not considering the

judgments of the Supreme Court reported in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, , and in the

case of Sinclaire Murray and Co. (P) Ltd. Vs. The Commissioner of Income Tax, Calcutta, ?

3.2. In the case of Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, , the issue was whether the sales tax

collected by an auctioneer who issued cost memos showing itself as seller was to be excluded from the assessee`s business income. In that

context, their Lordships of the Supreme Court held that the sum of Rs. 32,986 realised as sales tax by the assessee in its character as an

auctioneer forms part of its trading or business receipts. The discussion was more on the issue that the sales by an auctioneer was a sale for the

purposes of the Sale of Goods Act and the amount collected by it was as a dealer and, therefore, a trading or business receipt. In this context it

was observed that: ""as the amount of sales tax was received by the appellant in its character as an auctioneer, the amount, in our view, should be

held to form part of its trading or business receipt.

3.3. In Sinclaire Murray and Co. (P) Ltd. Vs. The Commissioner of Income Tax, Calcutta, again the dispute was that the sales tax collected by a

trader was liable to be included in the total income of the assessee and it was held that the matter stood concluded by the decision in the case of

Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, .

3.4 It is a settled law that though the ""total turnover"" may include the receipts of excise duty and sales tax, etc., in its general parlance and under

specific statutes, because of its wider coverage in the definitions given thereunder, it has to be given a restrictive meaning while computing the

export profit"" for the purposes of section 80HHC, namely, only that part of the receipt for sale consideration is to be taken as part of the total

turnover which has an element of profit therein, and, accordingly, the receipts of excise duty and sales tax which do not include an element of profit

should be excluded from the ""total turnover"".

3.5. From a perusal of the aforesaid decisions of the Supreme Court, viz., (i) Chowringhee Sales Bureau P. Ltd. case; and (ii) Sinclair Murray and

Co. P. Ltd. v. CIT case, we find that these decisions were rendered under the Sales Tax Act whereunder the definition given for turnover included

the total amount set out in the bill of sale (or if there is no bill of sale the total amount charged) as the consideration for the sale or purchase of

goods (whether such consideration be cash, deferred payment or any other thing or value) including any sum charged by the dealer for anything

done in respect of goods sold at the time of or before the delivery of the goods and any other sums charged by the dealer, whatever be the

description, name or object thereof"". The said definition would clearly indicate that the total amount charged as the consideration for the sales

would have to be taken into account for determining the turnover. The word ""turnover"" as defined under the Sales Tax Act, therefore cannot be

given effect to while interpreting the expression ""total turnover"" under the Income Tax Act.

3.6. We are , therefore of the view that the Tribunal was right in law in not placing reliance on the ratio laid down in (i) Chowringhee Sales Bureau

P. Ltd. case; and (ii) Sinclair Murray and Co. P. Ltd. v. CIT case, as they are not applicable to the facts of this case.

In the result, the above appeal is dismissed. No costs.