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Issues involved: Calculation of tax deduction allowance under s. 2(5) of the Finance (No. 2) Act, 1962 for an Indian company engaged in exporting goods outside India.
Summary: The High Court of Madhya Pradesh addressed a reference under s. 256(1) of the Income Tax Act, 1961 concerning the calculation of tax deduction allowance for an Indian company involved in exporting goods. The company claimed that certain benefits related to exports should be included in the turnover calculation for tax purposes. The Income Tax Officer (ITO) and subsequent authorities rejected this claim, leading to an appeal and reference to the High Court. The main questions revolved around the interpretation of turnover in the context of export profits calculation. The company argued that benefits like drawback of customs duty and refund of excise duty should be considered in the turnover calculation, while the ITO and Tribunal held that such indirect benefits should not be included as they were already part of the total profits. The Court analyzed the relevant provisions of the Finance Act and the Income-tax (Determination of Export Profits) Rules, 1962 to determine the scope of turnover for tax deduction purposes. It was established that the word "turnover" should not be narrowly construed to only include invoice sales but should encompass all income directly related to the export business. The Court cited precedents and legal principles to support the inclusion of certain benefits in the turnover calculation. Regarding the specific item of income arising from import entitlements, the Court differentiated between transferable and non-transferable entitlements. It was concluded that the profits from non-transferable entitlements, though related to the export business, should not be included in the turnover calculation as the direct source of income was the import business. In conclusion, the Court ruled that certain benefits like drawback of customs duty and refund of excise duty should be included in the turnover calculation, while profits from non-transferable import entitlements should be excluded. The concept of double advantage raised by the Tribunal was deemed irrelevant, and the Court provided a clear interpretation of the turnover calculation for tax deduction purposes.
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