2007 (10) TMI 543 - HC - Income Tax

Whether in the facts and circumstances of the case, the Tribunal was right in holding that depreciation and other allowances to be carried forward in a case where book profits had been subject to tax is to be separately determined taking into account the profit assessed under Section 115J of the Act? Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that Sales Tax and Excise Duty should not be included in the total turnover for the purpose of computation of deduction under Section 80HHC of the Income-tax Act? Held that - The fact that a part of the income, which was set off against the carried forward loss and depreciation even when, as a result of such set off, was not available for being taxed, was nevertheless deemed to be available for taxation to the extent of thirty per cent, of the book profit, could not therefore result in the assessee becoming entitled to carry forward the extent of the loss which could not be utilised for reducing the burden of taxation by setting off the same against the profits being carried forward to a succeeding assessment year or years. Section 115J allows only the unabsorbed losses, depreciation, investment allowance, etc., which could otherwise have been carried forward, to be carried forward. The allowances need not have been quantified under sub-section (1) of Section 115J to be carried forward under sub-section (2). Therefore the first question of law is answered in favour of the revenue. The second question of law has been decided against the revenue in the case of Commissioner of Income-tax v. Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME Court by saying that Section 80HHC of the Income-tax Act, 1961 is a beneficial section. Just as interest, commission, etc., do not emanate from the turnover so also excise duty and sales tax do not emanate from such turnover . Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent, etc., do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the total turnover . If so, excise duty and sales tax also cannot form part of the total turnover under Section 80 HHC(3).

Summary

Issues: Appeal against Income-tax Appellate Tribunal's order for assessment year 1990-91 - Disallowed claims including book profit liability under Section 115J - Deduction under Section 80HHC - Inclusion of excise duty and sales tax in turnover.

Analysis:
1. Book Profit Liability under Section 115J:
The assessing officer disallowed certain claims, including the adjustment of book profit liability under Section 115J. The Commissioner of Income-tax (Appeals) clarified that the computation of book profit under Section 115J does not affect the computation of loss or depreciation carried forward under normal provisions. The Tribunal ruled in favor of the assessee concerning carry forward loss and allowances under Section 115J. The High Court, referring to previous decisions, upheld that only unabsorbed losses, depreciation, investment allowance, etc., could be carried forward under Section 115J, regardless of quantification under sub-section (1).

2. Deduction under Section 80HHC:
Regarding the deduction under Section 80HHC, the Tribunal held that excise duty and sales tax should not be included in turnover for calculating benefits. The High Court cited the Supreme Court's decision in Commissioner of Income-tax v. Lakshmi Machine Works, emphasizing that excise duty and sales tax do not form part of turnover under Section 80HHC. The Court agreed with the Supreme Court's interpretation that excise duty and sales tax, not being part of turnover, should be excluded from the total turnover for Section 80HHC computation.

3. Judicial Precedents:
The High Court referred to past decisions to support its rulings. It mentioned the case of Commissioner of Income-tax v. Fab Exports, where it was held that Section 115J(2) preserves the right to carry forward unabsorbed deductions. Additionally, the Court cited Karnataka Small Scale Industries Development Corporation Limited v. Commissioner of Income-tax, which clarified the provisions allowing the carry forward of unabsorbed deductions under Section 115J. In the case of Lakshmi Machine Works, the Supreme Court emphasized the beneficial nature of Section 80HHC and excluded excise duty and sales tax from turnover for computation.

4. Final Decision:
Based on the above analysis and legal interpretations, the High Court ruled in favor of the revenue concerning the book profit liability under Section 115J. However, the Court decided against the revenue on the issue of excise duty and sales tax inclusion in turnover for Section 80HHC deduction. Consequently, the appeal was disposed of in line with these decisions, affirming the Tribunal's rulings on the respective issues.