2000 (2) TMI 189 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of subsidy on export and miscellaneous income in the "total turnover of the business" for the purpose of computation of deduction under section 80HHC(3).

Issue-wise Detailed Analysis:

1. Inclusion of Subsidy on Export and Miscellaneous Income in Total Turnover:

The primary issue in this appeal is whether the "total turnover of the business" should include the subsidy on export (Rs. 10,29,736) and miscellaneous income (Rs. 56,65,969) for the purpose of computing the deduction under section 80HHC(3). The miscellaneous income includes various items such as sundry sales, offal sales, rent recoveries, sale of rep license, cash discount, sale of raw materials, sale of by-products, octroi recoveries, claims received, drawback received, provision written back, and other sundries.

The Assessing Officer included these items in the total turnover, and this decision was upheld by the CIT(A).

Arguments by the Assessee:

The assessee contends that the deduction under section 80HHC(3)(b) should be computed as follows:
\[ \text{Export turnover} \times \left( \frac{\text{Profits & gains of business}}{\text{Total turnover}} \right) \]

The assessee argues that since the "export turnover" does not include items like subsidy on exports and duty drawbacks, the "total turnover" should also exclude these items. The assessee relies on two ITAT Calcutta Bench decisions to support this contention, emphasizing the need for parity between items included in "export turnover" and "total business turnover".

Definition of Total Turnover:

The definition of "total turnover" in section 80HHC was modified by the Finance Act, 1990 and Finance (No. 2) Act, 1991. The assessee argues that the definition is an excluding definition and should not include items that do not represent sale proceeds. The assessee also contends that the exclusion of sums referred to in clauses (iiia), (iiib), and (iiic) of section 28 should be considered retrospective, as these provisions are clarificatory in nature.

Legal Precedents:

The assessee relies on several judgments to support the argument that amendments which are clarificatory should be construed retrospectively. These include:
- K.P. Varghese v. ITO [1981] 131 ITR 597 (SC)
- CIT v. J.H. Goila [1985] 156 ITR 323 (SC)
- Allied Motors (P.) Ltd v. CIT [1997] 224 ITR 677 (SC)
- CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 6251 (SC)

Arguments by the Revenue:

The Revenue argues that items with a nexus to sales should be included in the turnover. The Revenue relies on judgments such as:
- Smt. T. C. Usha v. Dy. CIT [1999] 70 ITD 279 (Coch.)
- Salgaocar Mining Industries Ltd v. Dy. CIT [1997] 61 ITD 105 (ITAT - Pune)
- Nathani Steels Ltd. v. Dy. CIT [1996] 57 ITD 584 (ITAT - Bombay)

The Revenue contends that since the exclusion of items like subsidy on export and duty drawbacks was specifically omitted from the statute starting from April 1, 1991, these items should be included in the turnover for the assessment year 1987-88.

Tribunal's Findings:

The Tribunal held that certain items like subsidy on export, duty drawbacks, sundry sales, offal sales, sale of raw materials, and sale of by-products should be included in the total turnover as they are closely connected with the sale operations. However, items such as rent recoveries, cash discount, octroi recovery, provision written back, and other sundries should not be included as they do not have a direct connection with the sale operations.

The Tribunal also addressed the question of whether the proviso to section (ba) of the Explanation to section 80HHC leads to an absurd result. The Tribunal concluded that the proviso, which applies from April 1, 1991, does not suggest that items should be included in the total turnover for periods prior to that date. The Tribunal emphasized that the computation of export profit should maintain parity between the numerator and the denominator in the formula provided in section 80HHC(3).

Conclusion:

The Tribunal concluded that the items closely connected with the sale operations should be included in the total turnover, while items without a direct connection to sales should be excluded. The appeal filed by the assessee was partially allowed to this extent.