Sales tax & Excise not includible in the "total turnover" for 80HHC deduction: SC

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NEW DELHI. Dismissing bunch of appeals filed by the Revenue; the Apex Court vide AIT-2007-156-SC has finally settled formula for 80HHC deduction and ruled that sales tax and excise duty  were not includible in the "total turnover" for working out the deduction under Section 80HHC.

The assessee had computed the allowable deduction under Section 80HHC without taking into account in the total turnover the sales tax and excise duty.  The assessee was asked to explain why the total turnover should not be recomputed by including sales tax and excise duty.  The assessee objected to the above inclusion.  However, that objection was dismissed by the A.O. on the ground that under Section 80HHC(ba) deduction from "total turnover" was restricted only to three items, namely, profit on sale of import licence, duty drawback and CCS.  The A.O. further held that from the profits of business, the assessee was entitled to deduct the above three items and also brokerage, commission, interest, rent, charges or any other receipt of similar nature.  Before the A.O., the assessee contended that items which cannot be regarded as profits, the question of treating those items as part of "total turnover" did not arise.  The A.O. treated certain miscellaneous receipts and interest receipts as part of business profits to which the assessee objected.  The assessee pointed out that under Section 80HHC as it stood in the assessment year 1993-94, a deduction of 10% was allowed whereas the balance 90% stood excluded from the business profits.  However, the assessee's argument for non-inclusion of sales tax and excise duty was not accepted by the A.O. 

The C.I.T. (Appeals) held that sales tax and excise duty were liabilities of the assessee to the Government.  They were shown separately from the value of the goods, therefore, they were not included in the "total turnover" for working out the deduction under Section 80HHC. 

The Department carried the matter in appeal to the Tribunal.  The Department's appeal stood dismissed. 

The short point which arose for consideration in appeals before SC was 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. 

T H E    R U L I N G

• The principal reason 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 though commission and interest emanated from exports, they did not involve any element of turnover and merely for the reason that commission, interest, rent etc. were included in the profit and loss account, they did not become eligible to deduction.  We have to give purposeful interpretation to the above section.  The said section is entirely based on the formula.  The amendments from time to time indicate that they became necessary in order to make the formula workable.  Hence, we have to give schematic interpretation to Section 80HHC of the Act.

• It is important to note that tax under the Act is upon income, profits and gains.  It is not a tax on gross receipts.  Under Section 2(24) of the Act the word "income" includes profits and gains.  The charge is not on gross receipts but on profits and gains.  The charge is not on gross receipts but on profits and gains properly so-called.  Gross receipts or sale proceeds, however, include profits.  According to "The Law and Practice of Income Tax" by Kanga and Palkhivala, the word "profits" in Section 28 should be understood in normal and proper sense.  However, subject to special requirements of the income tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the income tax must be complied with.  Where a deduction is necessary in order to ascertain the profits and gains, such deductions 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 .  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 constitute 80HHC concession (deduction).  Income in the nature of "business profits" was, therefore, apportioned.  The above formula fixed a ratio in which "business profits" under Section 28 of the Act had to be apportioned.  Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export turnover" and "business profits". 
• In the circumstances, we cannot interpret the words "total turnover" in the above formula with reference to the definition of the word "turnover" in other laws like Central Sales Tax or as defined in accounting principles.  Goods for export do not incur excise duty liability.  As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under Section 80HHC.  They were not eligible even without the clarification introduced by the legislature by various amendments because they did not involve any element of turnover.  Further, in all other provisions of the income tax, profits and gains were required to be computed with reference to the books of accounts of the assessee.  However, as can be seen from the Income Tax Rules and from the above Form No.10CCAC in the case of deduction under Section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient.  This is because the very basis for computing Section 80HHC deduction was "business profits" as computed under Section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover.  Section 80HHC(3) was a beneficial section.  It was intended to provide incentives to promote exports.  The incentive was to exempt profits relatable to exports.  In the case of combined business of an assessee having export business and domestic business the legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers.  Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits.  This method earlier existed under Excess Profits Tax Act, it existed in the Business Profits Tax Act.  Therefore, just as commission received by an assessee is relatable to exports and yet it 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 partake of the character of turnover and, therefore, they were not includible in the "total turnover".  The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. 
• excise duty and sales tax also cannot form part of the "total turnover" under Section 80HHC(3), otherwise the formula becomes unworkable.  In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc.  It is important to bear in mind that excise duty and sales tax are indirect taxes.  They are recovered by the assessee on behalf of the Government.  Therefore, if they are made relatable to exports, the formula under Section 80HHC would become unworkable.  The view which we have taken is in the light of amendments made to Section 80HHC from time to time.

• profits are of three types, namely, book-profits, statutory profits and actual profits.  The amendments to Section 80HHC(3) indicate exclusion of book profits.  For example, commission, interest, etc. do form part of the profit and loss account but for the purposes of calculation of profits derived from local sales and exports, they stand excluded.  The difficulty arises because the formula is based on the Hybrid System of Profits, namely, actual and statutory profits.  Therefore, this judgment should be read in the context of the above parameters.

(Click here for full text of ruling AIT-2007-156-SC)