2014 (5) TMI 238 - SC - Income Tax

Interpretation of term Total turnover Purpose of enactment of section 80HHC of the Act Scrap sale - Whether the sale proceeds from the scrap should have been included in the total turnover as the assessee was also selling scrap and that was also part of the sale proceeds Held that - The term turnover would show the sale effected by a business unit - It may happen that in the course of the business, in addition to the normal sales, the business unit may also sell some other things - the word turnover would mean only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in - the sale proceeds of the scrap cannot be included in the term turnover for the reason that the assessee s-unit is engaged primarily in the manufacturing and selling of steel utensils and not scrap of steel - the proceeds of scrap would not be included in sales in the Profit and Loss Account of the assessee. The intention behind enactment of Section 80HHC of the Act was to encourage export so as to earn more foreign exchange - If the purpose is to bring more foreign exchange and to encourage export, the legislature would surely like to give more benefit to persons who are making an effort to help our nation in the process of bringing more foreign exchange - once the Government decides to give some benefit to someone who is helping the nation in bringing foreign exchange, the Revenue should also make all possible efforts to encourage such traders or manufacturers by giving such business units more benefits as contemplated under the provisions of law HC was correct coming to the conclusion that the proceeds generated from the sale of scrap would not be included in the total turnover Decided against Revenue.

Issues Involved:
1. Interpretation of the term "Total Turnover" under Section 80HHC of the Income Tax Act, 1961.
2. Inclusion of sale proceeds from scrap in the "Total Turnover" for the purpose of calculating deductions under Section 80HHC.

Issue-wise Detailed Analysis:

1. Interpretation of the term "Total Turnover" under Section 80HHC of the Income Tax Act, 1961:
The core issue in this case revolves around the interpretation of the term "Total Turnover" as mentioned in Section 80HHC of the Income Tax Act, 1961. This section is designed to encourage exports by providing deductions from income derived from export profits. The calculation of this deduction requires an understanding of three components: profits of the business, export turnover, and total turnover.

The term "Total Turnover" is not defined in the Act or explained by any CBDT circulars. Therefore, its meaning must be derived from ordinary accounting or commercial parlance. In general accounting terms, "turnover" reflects the sales effected by a business unit. This includes the sale proceeds from the primary goods the business deals in, but typically excludes proceeds from the sale of ancillary items like scrap or old assets.

2. Inclusion of sale proceeds from scrap in the "Total Turnover" for the purpose of calculating deductions under Section 80HHC:
The specific contention in this case is whether the sale proceeds from scrap generated during the manufacturing process should be included in the "Total Turnover" of the assessee, who is a manufacturer and exporter of stainless steel utensils. The Revenue argued that these proceeds should be included as they form part of the sale proceeds. The assessee, however, contended that the sale proceeds from scrap should not be included in the "Total Turnover" because the business is not primarily dealing in scrap, but in manufacturing utensils.

The Supreme Court analyzed the ordinary accounting parlance and the guidance provided by the Institute of Chartered Accountants of India (ICAI). According to ICAI's "Guidance Note on Tax Audit Under Section 44AB of the Income Tax Act," the term "turnover" generally means the total sales of the goods in which the business unit is dealing. It does not include ancillary sales like scrap, which should either be shown separately or deducted from the cost of raw materials.

The Court also considered the purpose of Section 80HHC, which is to encourage exports and earn foreign exchange. The legislative intent is to provide maximum benefit to those who contribute to this goal. Including scrap sales in the total turnover would reduce the benefit available under Section 80HHC, contrary to the legislative intent.

Conclusion:
The Supreme Court concluded that the term "turnover" should be interpreted in the context of the primary business activity. For a manufacturer of stainless steel utensils, the sale proceeds from scrap should not be included in the "Total Turnover." This interpretation aligns with normal accounting practices and the legislative intent behind Section 80HHC. Therefore, the High Court's decision to exclude the sale proceeds from scrap from the "Total Turnover" was upheld, and the appeal by the Revenue was dismissed.

Final Order:
The appeal was dismissed with no order as to costs. Consequently, other related appeals were also dismissed on the same grounds.

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