2014 (3) TMI 468 - HC - Income Tax

Computation of deduction 80HHC of the Act - Exclusion of Excise duty and sales tax from turnover - Whether the Tribunal is right in directing the AO to exclude excise duty and sales tax from the total turnover computing deduction u/s 80HHC of the Act Held that - The decision in CIT v. Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME Court followed - There was no merit in the contentions of the revenue - tax under the Act is upon income, profits and gains - It is not a tax on gross receipts - Under Section 2(24) of the Act the word income includes profits and gains. The words total turnover in the cannot be interpreted with reference to the definition of the word turnover in other laws like Central Sales Tax or as defined in accounting principles. Goods for export do not incur excise duty liability - even commission and interest formed a part of the profit and loss account were not eligible for deduction under Section 80HHC - It is important to bear in mind that excise duty and sales tax are indirect taxes - They are recovered by the assessee on behalf of the Government - if they are made relatable to exports, the formula under Section 80HHC would become unworkable thus, the excise duty is excise duty is to be excluded for the purpose of computation of deduction u/s. 80HHC Decided against Revenue.

Summary

Issues Involved:
1. Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to exclude excise duty and sales tax from the total turnover computing deduction under Section 80HHC?

Detailed Analysis:

1. Exclusion of Excise Duty and Sales Tax from Total Turnover for Section 80HHC Deduction:

The primary issue revolves around whether excise duty and sales tax should be excluded from the total turnover when computing deductions under Section 80HHC of the Income Tax Act, 1961. The Revenue challenged the decision of the Income Tax Appellate Tribunal (ITAT) which directed the Assessing Officer to exclude these components from the total turnover.

The court noted that this issue is no longer res integra, meaning it has already been settled by higher judicial authorities. Specifically, the Supreme Court in the cases of CIT v. Lakshmi Machine Works (290 ITR 667) and CIT v. Shiva Tex Yarn Ltd. ([2012] 25 taxmann.com 302) had held that excise duty and sales tax should indeed be excluded from the total turnover for the purpose of Section 80HHC deductions.

The Revenue's counsel, Ms. Mauna Bhatt, attempted to distinguish these Supreme Court decisions by arguing that Section 145A of the Income Tax Act had not been considered in those cases. However, the court observed that there had been no amendment to Section 80HHC that would affect the applicability of these decisions. Consequently, the Revenue was unable to demonstrate why the Supreme Court's rulings should not apply to the present case.

The court further referenced its own previous decisions in Tax Appeal No. 884 of 2006 and allied appeals, where it had similarly held against the Revenue based on the Supreme Court's rulings. The court reiterated the Supreme Court's reasoning that the term "total turnover" in Section 80HHC must be interpreted schematically. The Supreme Court had clarified that excise duty and sales tax do not form part of the "total turnover" because they do not involve any element of turnover and are merely collected on behalf of the government.

The Supreme Court had emphasized that the formula in Section 80HHC is intended to segregate export profits from business profits, and including excise duty and sales tax in the total turnover would distort this calculation. The court highlighted that the charge under the Income Tax Act is on income, profits, and gains, not on gross receipts, and thus, excise duty and sales tax, being indirect taxes, should not be included in the total turnover.

The Gujarat High Court, applying the Supreme Court's rationale, concluded that the ITAT had not erred in directing the exclusion of excise duty and sales tax from the total turnover for the purpose of computing deductions under Section 80HHC. The court dismissed the Revenue's appeal, affirming that the components of sales tax and central excise do not form part of sale proceeds for the purpose of Section 80HHC, even after the insertion of Section 145A.

Conclusion:

The court dismissed the Revenue's appeal and upheld the ITAT's decision, confirming that excise duty and sales tax should be excluded from the total turnover when computing deductions under Section 80HHC. This decision aligns with the Supreme Court's rulings in CIT v. Lakshmi Machine Works and CIT v. Shiva Tex Yarn Ltd., thereby reinforcing the established legal interpretation.