2013 (12) TMI 1592 - HC - Income Tax

Excise duty is to be excluded for the purpose of computation of deduction u/s. 80HHC. See Commissioner of Income-Tax Versus Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME Court

Summary

Issues Involved:
1. Whether the Appellate Tribunal was right in law in upholding the order of the CIT(A) directing to exclude sales tax and excise duty while computing total turnover for the purpose of deduction u/s. 80HHC of the I.T. Act?

Issue-wise Detailed Analysis:

1. Substantial Question of Law:
The primary issue in the appeal was whether the Appellate Tribunal was correct in law in upholding the CIT(A)'s decision to exclude sales tax and excise duty from the total turnover for the purpose of deduction under Section 80HHC of the Income Tax Act, 1961.

2. Legal Precedents and Applicability:
The court noted that the substantial question of law raised is not res integra (an unsettled question) and has been settled against the Revenue by the Supreme Court in the cases of Commissioner of Income Tax vs. Lakshmi Machine Works and Commissioner of Income Tax vs. Shiva Tex Yarn Ltd. The Supreme Court in these cases held that excise duty and sales tax should be excluded from the total turnover for the purpose of Section 80HHC.

3. Arguments by Revenue:
The Revenue's counsel attempted to distinguish the aforementioned Supreme Court decisions by arguing that Section 145A of the Income Tax Act had not been considered in those decisions. However, the court observed that there had been no amendment to Section 80HHC and that the Supreme Court's observations in the Lakshmi Machine Works case were still applicable.

4. Supreme Court Observations:
The Supreme Court in Lakshmi Machine Works emphasized that the formula in Section 80HHC is intended to exclude receipts like brokerage, commission, interest, and rent from business profits as they do not have a nexus with export activity. The court highlighted that excise duty and sales tax do not involve any element of turnover and should be excluded from the total turnover to make the formula workable.

5. Purposeful Interpretation:
The court noted that a purposeful interpretation of Section 80HHC is necessary. The section is based on a formula designed to segregate export profits from business profits. Including excise duty and sales tax in total turnover would distort the calculation of export profits, which is not the legislature's intent.

6. Subsequent Decisions:
The court also referenced the Supreme Court's decision in Shiva Tex Yarn Ltd., which followed the Lakshmi Machine Works ruling even after considering Section 145A, reinforcing that excise duty and sales tax should be excluded from total turnover.

Conclusion:
Applying the Supreme Court's ratio decidendi from the Lakshmi Machine Works and Shiva Tex Yarn Ltd. cases, the Gujarat High Court concluded that the Tribunal had not erred in excluding excise duty and sales tax from the total turnover for the purpose of Section 80HHC deduction. Consequently, the Tax Appeal was dismissed with no costs.

Final Judgment:
The Tax Appeal was dismissed, affirming that the exclusion of excise duty and sales tax from the total turnover for Section 80HHC deductions was correct.