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TMI Blog2016 (8) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the CIT(A) directing to reduce the amount of excise duty and sales tax while computing the total turnover for the purpose of deduction u/s.80HHC of the Act, even after the insertion of the provisions of section 145A(b) ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law allowing the trial run expenses of Rs. 1,24,63,848/- as revenue expenditure incurred without appreciating the fact that the expenses incurred before the commencement of commercial production ?" 3. At the time of hearing of present appeals, learned advocate for the appellant submitted that the Tribunal has committed an error in allowing exclusion of Sales Tax and Excise duty from the total turnover for computing deduction under section 80HHC even after insertion of section 145A of the Act. It is also submitted that the Tribunal has committed an error while allowing the trial run expenses of Rs. 1,24,63,848/- as revenue expenditure without appreciating the fact that such expenses are incurred before the commencement of commercial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words total turnover in the above formula in Section 80HHC one has to give a schematic interpretation to that expression. There is one more reason for giving schematic interpretation. The various amendments to Section 80HHC show that receipts by way of brokerage, commission, interest, rent etc. do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. In fact, Section 80 HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, commission etc. which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the above amendment to Section 80HHC commencing from 1.4.92. The said amendment made it clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a separate account. Reliance was also placed on the judgment of the Kings Bench Division in the case of Paprika, Ltd., and Another v. Board of Trade (1944)1 All E.R. 372, in which it has been held that wherever a sale attracts purchase tax, that tax affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even if the price is expressed as cost x + purchase tax. Reliance was also placed on the judgment of the Court of Appeal in the case of Love v. Norman Wright (Builders), Ltd. # (1944) 1 All E.R. 618, in which it has been held that if a seller quotes a price of x + purchase tax, the buyer has to pay the amount of the tax as part of the price and since the tax is charged on the wholesale value of the goods the tax element has to be taken into account. It was urged that one has to give strict interpretation to the word turnover. It was urged that there was no question of giving purposeful interpretation to the word turnover in the said Section 80HHC of the Act. It was urged that the legislature had used the expression total turnover from which it became clear that the said expression referred to the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [SEE: page 455 of The Law and Practice of Income Tax by Kanga and Palkhivala]. Therefore, schematic interpretation for making the formula in Section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any element of turnover even though commission and interest emanated from exports. We have to read the words total turnover in Section 80HHC as part of the formula which sought to segregate the export profits from the business profits. Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover w total turnover which consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot form part of turnover, excise duty and sales tax also cannot form part of the turnover. Similarly, interest emanates from exports and yet interest does not involve an element of turnover. The object of the legislature in enacting Section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, turnover was the requirement. Commission, rent, interest etc. did not involve any turnover. Therefore, 90% of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in Section 80HHC(3) for the simple reason that it did not emanate from the export turnover, much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the turnover. Just as interest, commission etc. did not emanate from the turnover, so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both these appeals is answered in favour of the assessee and against the revenue. 7. So far as the question as to whether trial run expenses can be allowed as revenue expenditure, this Court while deciding Tax Appeal No.1243 of 2006 has observed as under:- "5.1 In Gujarat Small Scale Industries Corprn. Ltd. (supra), this Court observed as under:- "6. If the expenditure was incurred before the commencement of the production, the matter might have stood on a different footing. The combined effect of these factors impels one to the conclusion that the expenditure was in the nature of revenue. The assessee- Corporation was carrying on numerous activities for about 10 years and the expenditure incurred was not in connection with the testing of the plant established for the manufacture of the scooters, but was an expenditure incurred in connection with the trial of the scooters. The trial revealed that the scooters had stood up the test satisfactorily and in subsequent years commercial production was commenced. Under the circumstances, the expenditure incurred in testing the scooters must be treated as expenditure of a revenue nature. It is difficult to conceive how it can be said t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the cost of the plant and machinery having regard to the fact that it was incurred in order to test the machinery which was to produce the cement, the court understandably took the view that it was added to the actual cost of the plant as laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The principle laid down in the aforesaid decision is that as per accepted accountancy principle all expenditure incurred in order to bring into existence a capital asset and put it in working condition would form a part of the fixed assets. We may again emphasise that, here, the expenditure was not incurred in connection with the testing of the plant and machinery which was installed in order to produce the scooters. The expenditure was incurred in connection with the testing of the product, namely, the scooters manufactured at the plant. The conclusion is, therefore, inescapable that the expenditure incurred is of the nature of revenue expenditure and the AAC was right in upholding the claim of the assessee. The Tribunal committed an error in reversing the view taken by the AAC. This question must, therefore, be answered in the negative and against the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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