2007 (6) TMI 256 - AT - Income Tax

Computation of total turnover for the section 10A - expenses incurred in foreign currency - excluded from the total turnover - section 10A is akin to section 80HHE - HELD THAT - We find that section 10A also is a beneficial section. It is intended to provide incentive to promote exports. In fact section 10A is meant to provide a larger benefit than that provided by section 80HHE by providing the tax holiday to the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover, the benefit granted by section 10A would be considerably reduced. This, in our opinion, cannot be the scheme of the Act. In this regard the apex court in the case of K.P. Varghese v. ITO 1981 (9) TMI 1 - SUPREME COURT held that a literal construction that leads to absurdity, unjust result or mischief should be avoided. Similarly the apex court in the case of Bajaj Tempo Ltd. v. CIT 1992 (4) TMI 4 - SUPREME COURT with respect to relief for new industrial undertaking u/s 15C of the Indian Income-tax Act, 1922 has held that such provisions should be construed liberally. Very literal construction which defeats the very purpose of enacting the provision should be avoided. Thus, these expenditures incurred in foreign currency which are excluded from the export turnover should also be excluded from the total turnover in order to properly work out and grant relief that is intended by this section. Hence, in our opinion, these items which are to be excluded from the export turnover cannot be included in the total turnover while calculating the relief u/s 10A. Hence, we uphold the order of the ld CIT (A) in this regard and decide the issue in favour of the assessee. In the result, this appeal by the Revenue is dismissed.

Summary

Issues:
- Interpretation of the exclusion of expenses incurred in foreign currency from total turnover for the purpose of section 10A of the Income-tax Act, 1961.

Analysis:
The appeal before the Appellate Tribunal ITAT Chennai involved a dispute regarding the treatment of expenses incurred in foreign currency for services provided outside India concerning the computation of deduction under section 10A of the Income-tax Act, 1961. The Assessing Officer initially deducted the said expenditure from the export turnover but not from the total turnover. The Commissioner of Income-tax (Appeals) held that the expenses in foreign exchange should be excluded from both the total turnover and export turnover, drawing a parallel with a similar deduction under section 80HHE. The Tribunal examined the definitions of "export turnover" and "total turnover" under section 10A and section 80HHE, noting that what is excluded from export turnover is also excluded from total turnover. Citing the apex court decision in CIT v. Lakshmi Machine Works, the Tribunal emphasized the intention of providing incentives for exports under section 10A and the need for a broader interpretation to grant the intended relief.

Furthermore, the Tribunal referred to the apex court's interpretation of "total turnover" in the context of section 80HHC, highlighting the exclusion of certain items like excise duty and sales tax to ensure the formula's workability. Applying this reasoning to section 10A, the Tribunal concluded that excluding expenses incurred in foreign currency from the export turnover but not from the total turnover would significantly reduce the benefits intended by the provision. Relying on judicial precedents emphasizing the avoidance of absurd or unjust results, the Tribunal held that such expenditures excluded from export turnover should also be excluded from total turnover to ensure the proper calculation and grant of relief under section 10A. Consequently, the Tribunal upheld the Commissioner's order and decided the issue in favor of the assessee, resulting in the dismissal of the Revenue's appeal.