2009 (11) TMI 16 - HC - Income Tax

Capital Receipt versus Revenue Receipt - the Additional Price received for sale of free sugar - Exclusion of Excise Duty and Sales-tax Collection from the total turn over for the purpose of computing the Income under Section 80HHC of the Income-tax Act, 1961 - held that - the character of the receipt of a subsidy in the hands of the assessee under a Scheme has to be determined with respect to the purpose for which the subsidy was granted. In other words, one has to apply the purpose test - Additional Price received for sale of free sugar is a capital receipt - Just as commission received by the assessee is relatable to exports and yet it cannot form part of turnover for the purposes of section 80HHC, excise duty and sales tax also cannot form part of turnover . Just as interest, commission, etc., do not emanate from the turnover so also excise duty and sales tax do not emanate from such turnover. - excise duty and sales tax also cannot form part of the total turnover under section 80HHC(3).

Summary

Issues involved:
1. Whether the additional price received for the sale of free sugar is a capital receipt and should not be included in the total income?
2. Whether excise duty and sales tax collection should be excluded from the total turnover for computing income under Section 80HHC of the Income-tax Act, 1961?

Analysis:

Issue 1:
In Tax Case Appeal No. 1091 of 2009, the appellant, a manufacturer of sugar, granite alcohol, etc., claimed additional sales receipts from free sugar sales as a capital receipt due to a scheme for capital goods repayment. The assessing officer treated the incentives as revenue receipts, but the Commissioner of Income-tax (Appeals) ruled in favor of the appellant. The Income Tax Appellate Tribunal also favored the appellant, citing a previous judgment in the appellant's favor. The Supreme Court, in Commissioner of Income-tax vs. Ponni Sugars and Chemicals Limited, clarified that the character of a subsidy receipt depends on its purpose. If the subsidy aims to enhance business profitability, it is a revenue receipt; if it aims for new unit setup or expansion, it is a capital receipt. Following this, the Court dismissed the appeal as the issue was settled against the Revenue.

Issue 2:
In Tax Case Appeal No. 1092 of 2009, the revenue contended that excise duty and sales tax were not included in the turnover for computing income under Section 80HHC of the Income-tax Act, 1961. The assessing officer included these amounts, but the Commissioner of Income-tax (Appeals) upheld the officer's decision. However, the Income Tax Appellate Tribunal ruled in favor of the appellant, citing a precedent involving Commissioner of Income-tax vs. M/s. Sundaram Fasteners Limited. The Supreme Court, in Commissioner of Income Tax vs. Lakshmi Machine Works, clarified that Section 80HHC aims to promote exports by exempting export-related profits. Excise duty and sales tax, not being part of the turnover, should be excluded. Similar to how commission and interest are excluded, excise duty and sales tax should not be considered in the total turnover. Consequently, the Court dismissed the appeal, as the issue had been conclusively decided against the Revenue.

In conclusion, both appeals were dismissed based on settled Supreme Court judgments, affirming that the additional price from free sugar sales should be treated as a capital receipt and that excise duty and sales tax should be excluded from turnover calculations under Section 80HHC of the Income-tax Act, 1961.