ORAL JUDGMENT
S.H. Kapadia, J.
All the above Appeals deal with common question of law and facts and, therefore they are decided together by this Judgment. For the sake of convenience, however, facts in Income Tax Appeal No. 120 of 2000 are mentioned hereinbelow.
2.Income Tax Appeal No. 120 of 2000 concerns assessment year 1994-1995. The A.O. held that sales tax and excise duty are statutory levies and therefore, they constituted trading receipts. Accordingly, he recomputed the deduction under Section 80-HHC by including the above two items in the total turnover. Being aggrieved by the said order, the assessee filed an Appeal before CIT (Appeals) who allowed the claim of the assessee relying on the earlier judgment of the Tribunal for the earlier years in the assessees own case in which the Tribunal held that sales tax and excise duty should be excluded from the total turnover while working out deduction under Section 80-HHC. Being aggrieved by the said order of the CIT (Appeals), the department preferred an Appeal. The Tribunal upheld the order of the CIT. Hence the department has come in Appeal under Section 260A of the Income Tax Act. The Appeal was admitted. It came up for final hearing.
3.This Appeal raises an important question of law as to whether sales tax and excise duty ought to be included in the total turnover while working out deduction under Section 80-HHC.
4.Mr. Deodhar, learned counsel for the department submitted that having regard to the plain words of the Section, the above two items ought to have been included in the total turnover. He submitted that the legislature has expressly excluded items of freight and insurance from the "export turnover". However, the legislature did not exclude sales tax and excise duty from export turnover. He contended that while construing taxing statute, strict interpretation should be given by the Court. He accordingly contended that the above two items cannot be excluded from total turnover. He also relied upon definition of the word "total turnover" in the explanation to the said Section which defines total turnover not to include freight/ insurance. He accordingly submitted that since the legislature has excluded only insurance and freight from total turnover, it is not open to the assessee to contend that excise duty and sales tax should also be excluded from total turnover. He further contended that the legislature has used the expression "total turnover" and not only the word "turnover" and, therefore, if the expression "total turnover" is read in the context of Section 80-HHC, it is clear that the said expression refers to the aggregate amount for which goods are bought or sold and since sales tax and excise duty form part of the value of the goods, the same are includible in the total turnover. He relied upon the judgment of the Supreme Court in that regard in the case of George Oakes v. State of Madras AIR 1962 SC 1351 [LQ/SC/1961/189] = 1962 (13) S.T.C. 98.
5.On the other hand, Mr. Inamdar, learned counsel for the assessee contended that one has to keep in mind, the object of Section 80-HHC. He contended that at the relevant time i.e. for assessment year 1986-1987 for which the previous year ended on 31st December 1985, Section 80HHC of theprovided for deduction of an amount. not exceeding 50% of the profits derived from export of specified goods i.e. 50% of export profits from the total income. He contended that as per Section 80HHC(3)(b), in order to compute the deduction one is required to determine export profits as the ratio of export turnover to total turnover multiplied by profits of the business. In this connection, he pointed out that under Section 80-HHC(3) (b), the deduction of export profits is allowed from the gross total income in accordance with the following formula:
Export Turnover
Profits of the business X
Total Turnover
He contended that it is an admitted position that the expression "Export Turnover" in the numerator did not include sales tax or excise duty as the same was not chargeable on export sales. He accordingly contended that in the circumstances, the said two items cannot be included in the denominator. He contended that the word "turnover" did not mean or include statutory levies. It simply meant value of that which is turned over in business. He contended that special definitions under other enactments cannot be imported into the Income Tax Act without looking at the context. He contended that the definition of "Total Turnover" excluded freight and insurance to remove an anomaly in the earlier law as otherwise. Definition of "Export Turnover" excluded freight and insurance while "Total Turnover" did not and with the result, in CIF transactions, while export turnover was taken as FOB value, the total turnover included sale proceeds of exports at CIF value. With a view to remove this anomaly, it was proposed to clarify that total turnover will also not include freight or insurance (See Circular No. 621 dated 19th December 1991 - Chaturvedi and Pithisaria, Vth Edn. p. 3535). He contended that the above position is also explained in the Memorandum to the Finance Bill No. 2 of 1999 (See 190 ITR (st.) p.270 at 300). He accordingly contended that the object of the amendment was to bring on par, the export turnover vis-a-vis total turnover. He contended that Section 80HHC provides for incentives to the assessee for promoting growth of export turnover and, therefore, the said Section must be liberally construed. He contended that the object of the above formula is to ascertain the profits derived from export and, therefore. the turnover should be restricted to such receipts only which have element of profit in it. He contended that having regard to the object of the Section, it is only the actual sale price which is relevant and anything charged by way of statutory levies by the assessee over and above the sale price which the assessee is legally obliged to hand over to the Government, should be excluded because they do not have element of profit. He contended that even according to the accounting principles such levies did not form part of the trading and profit and loss account; that such levies are charged separately in addition to the price and the same are separately credited to their respective amounts and when such amounts are paid to the Government, they are debited to such accounts and the balance is shown as a liability in the Balance Sheet. He accordingly contended that the statutory levies had no effect on the determination of the profits of the business and, therefore, in the context of Section 80HHC, the word "turnover" cannot include excise duty and sales tax. He contended that if the departments argument is accepted, it would defeat the object of the Section as it would artificially reduce the export profits and it would, in turn, result in reducing relief to the exporters. He contended that if the same word viz. "turnover" is used in the numerator and denominator of a formula, then both should bear the same meaning. In other words, ingredients of export turnover should also constitute ingredients of total turnover to enable working out proportionate profit from exports, otherwise the formula cannot work out. He further contended that sales tax and excise duty are State levies which have no relevance to the object of Section 80-HHC. He contended that a small scale industry is exempt from excise duty. Therefore, if the departments argument is accepted, it would lead to an anomalous position because two assessees situated in identical situations would be entitled to different amount of reliefs under the said Section. He accordingly contended that such interpretation should be avoided. It would result in unequal deductions being given to two assessees who are similarly situated.
6.We find merit in the contentions of the assessee. Under section 80HHC, the legislature intends that the profits from exports should not be taxed. For this purpose, a formula has been introduced whereby if the business is of composite nature then the proportionate profit relatable to the export business is to be found out by multiplying the profits of a business by export turnover and dividing the product by total turnover. This formula finds place in section 80-HHC (3) as it stood at the relevant time. Under clause (b) to the explanation of section 80-HHC, export turnover is defined to mean sale proceeds received in India by the assessee in foreign exchange. Under the said definition, export turnover is defined to mean the sale proceeds of any goods which are exported out of India but which will not include freight or insurance. Clause (ba) defines total turnover to exclude freight or insurance. This clause (ba) explains the turnover in a negative manner so as to exclude freight or insurance. Therefore, a combined reading of the above two clauses show that they include anything which has nexus with the sale proceeds. Correspondingly, they show that they exclude everything which has no nexus with the sale proceeds. Further, the meaning of export turnover in clause (b) of the explanation to section 80-HHC, therefore, clearly show that export turnover did not include excise duty and sales tax. Export turnover is the numerator in the above formula whereas total turnover is the denominator. The above formula has been prescribed to arrive at profits from exports. In the circumstances, the above two items, namely, sales tax and excise duty cannot form part of total turnover. In fact, if the denominator was to include the above two items and if the numerator excluded the above two items then the formula would become unworkable. In the circumstances, we are of the view that in order to ascertain the export profits, the above two items cannot be introduced to inflate total turnover artificially in order to reduce the benefit which an assessee is entitle to. Ultimately, the object of section 80HHC is required to be kept in mind in order to encourage exports. The legislature has applied the above formula in order to find out profits derived from the exports. In this connection, section 80-HHC(1) may also be noticed. Under section 80-HHC(1), it is inter alia provided that where an assessee is engaged in business of exports of any goods, there shall be allowed in computing the total of income of the assessee, a deduction of the profits derived by the assessee from the export of such goods. In other words in computing the total income of such an assessee, profits derived by the assessee from the exports are deductible. The above expression, namely, "profits derived from exports" also finds place in section 80-HHC(3) (a). It says that where the export is of goods, the profits derived from such export shall be the amount which bears to the profits of the business the same proportion as the export turnover in respect of such goods bears to the total turnover of the business. In fact, the earlier section 80-HHC(3) consisted of two parts, namely, whether the assessee carried on business as 100% exporter and secondly whether the assessee carried on composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head "profits and gains of business", the same proportion as the export turnover to the total turnover. The emphasis is on the words "profits derived from the exports". Therefore, weightage must be given to such profits. Such profits cannot be reduced artificially by including statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have element of profit in it. It is the only actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even according to the accounting principles, such levies do not form part of profit and loss account. In fact, they are shown as liability in the Balance Sheet. In the circumstances, the above two items cannot be included in the total turnover. We prefer this interpretation as it advances the object sought to be achieved by the legislature. Lastly, we are of the view that sales tax and excise duties are levied under separate enactments which have different objects. We are concerned with section 80-HHC which is a separate Code by itself. Hence, the general definition of the word turnover or the case law dealing with the said definition under Sales Tax Act which is a State levy, cannot be imported in to section 80-HHC of the Income Tax Act. Hence, we do not find any merit in these appeals.
7.Accordingly, all the above three Appeals fail with costs.
