2007 (4) TMI 202 - SC - Income Tax

Whether excise duty and sales tax were includible in the total turnover which was the denominator in the formula contained in section 80HHC(3) as it stood in the material time - amendments to section 80HHC(3) indicate exclusion of book profits - difficulty arises because the formula is based on the hybrid system of profits namely actual and statutory profits - Our reasoning in this judgment is confined to the workability of the formula in section 80HHC(3) as it stood at the material time

Summary

Issues Involved:
1. Inclusion of excise duty and sales tax in "total turnover" for the purpose of computing deduction under section 80HHC of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Inclusion of Excise Duty and Sales Tax in "Total Turnover" for Section 80HHC Deduction:
Facts:
- The assessee filed its return for the assessment year 1993-94, declaring taxable income and computing the allowable deduction under section 80HHC without including sales tax and excise duty in the total turnover.
- The Department issued a notice under section 143(2) questioning the exclusion of sales tax and excise duty from the total turnover.
- The Assessing Officer included these amounts in the total turnover, rejecting the assessee's objections.

Appellate Proceedings:
- The Commissioner of Income-tax (Appeals) sided with the assessee, holding that sales tax and excise duty were liabilities to the Government and should not be included in the total turnover.
- The Tribunal upheld this decision, following the Bombay High Court's judgment in CIT v. Sudarshan Chemicals Industries Ltd.

Supreme Court's Analysis:
- The core issue was whether excise duty and sales tax should be included in the "total turnover" for the formula under section 80HHC(3).
- The Court analyzed section 80HHC, which provides a deduction for profits derived from exports, calculated using a specific formula involving "export turnover" and "total turnover."
- The Court noted that the term "total turnover" should be interpreted in a manner consistent with the legislative intent to promote exports.

Interpretation of "Total Turnover":
- The Court emphasized that tax under the Act is on income, profits, and gains, not on gross receipts.
- The term "profits" should be understood in its normal and proper sense, computed after deducting business expenses unless expressly disallowed by the Act.
- The Court highlighted that the formula under section 80HHC is designed to apportion business profits based on export turnover relative to total turnover.

Exclusion of Excise Duty and Sales Tax:
- The Court reasoned that excise duty and sales tax do not form part of business profits as they are collected on behalf of the Government and do not involve any element of turnover.
- Including these amounts in the total turnover would distort the formula and make it unworkable.
- The Court cited legislative amendments that excluded items like commission and interest from business profits, reinforcing that such items did not possess any element of turnover.

Conclusion:
- The Court concluded that excise duty and sales tax should not be included in the total turnover for the purpose of computing the deduction under section 80HHC.
- The appeals filed by the Department were dismissed, and the decisions of the lower authorities were upheld.

Significance:
- The judgment clarified the interpretation of "total turnover" in the context of section 80HHC, ensuring that only amounts involving an element of turnover are included.
- This interpretation aligns with the legislative intent to provide incentives for export profits without distorting the computation formula.

Final Order:
- The appeals by the Department were dismissed with no order as to costs, affirming that excise duty and sales tax are not includible in the "total turnover" for section 80HHC deductions.