RADIANT TEXTILES PRIVATE LIMITED,PATIALA vs. ACIT, CIRCLE, PATIALA, PATIALA

It is the assertion of Ld. AR that certain components viz. sale of wastage / scrap, duty drawback and forex fluctuation gains as reflected in the financial statements would not form part of assessee’s turnover and therefore, the same are to be excluded from turnover for the purpose of application of correct tax rates. In this regard, detailed written submissions have been filed and reliance has been placed on various judicial decisions to support the same. It has also been stated that though indirect taxes which constitute part of gross turnover u/s 145A, the same would not have much impact on turnover since 92% of turnover is export turnover on which no VAT is applicable. The substantiative written submissions read as under: - Issue 1: Whether Sale of Scrap or wastage can be regarded as part of "turnover" fordetermining the applicability of 25% or 30% corporate tax rate? 10. It is humbly submitted that the term turnover means the receipts arising from the sale of goods or services which constitute 'A"s core business activity. It does not extend to incidental or ancillary receipts which do not form part of the price paid by the final consumer. It is submitted that while, for accounting disclosure purposes, certain ancillary or incidental incomes may appear under the broad head of "Total Turnover" or "Revenue from Operations," in law such items cannot be equated with turnover for the purpose of applying statutory thresholds. The term "turnover" must be confined to receipts which are the sale proceeds of goods or services in which 'A' is engaged, and not to incidental receipts arising independently of the sale transaction. 'A' is engaged in the business of manufacturing and trading of textiles. The sale of scrap/waste (cuttings, trimmings, defective cloth, etc.) is an inevitable by-product of the manufacturing process. Scrap arises unintentionally and is not the object of business. Its sale only represents recovery of residual value from waste and not active trading. It is not revenue generation but is to be reduced from cost of goods produced. Thus, the amount of Rs. 19.29 crores shown under scrap sales in Schedule F is only incidental income, to be considered as reduction from cost of goods manufactured though may have been disclosed in accounting at the credit side of P&L A/c and cannot be considered as part of assessee's turnover. The question as to whether Sale of Scrap or wastage is part of turnover or is to be reduced from cost of goods sold came before the Hon'ble SC in CIT v. Punjab Stainless Steel Industries (2014) 364 ITR 144 (copy appended at page 1-17 of AJC) wherein their Lordships held that turnover must consist of receipts from sale of the commodities in which 'A' is engaged and sale of scrap cannot be considered as assessee's turnover and it is to be reduced from cost of goods sold. The case pertained to the computation of profits u/s 80HHC, which involves the terms "export turnover" and "total turnover." The term "Total Turnover" therein also was to include all types of turnover of 'A' and higher the Total Turnover, the lower was the benefit u/s 80HHC. Therefore, 'A' was pressing that sale of scrap should not be made as part of its total turnover. The Hon'ble Supreme Court agreed on, that issue. Therefore, the key question was whether the sale value of scrap (generated during the manufacture of stainless-steel utensils) should form part of "total turnover." The Hon'ble Apex court, after relying on the definition provided by the ICAI Guidance Note, affirmed that in normal accounting parlance, "turnover" means "total sales" of goods or services dealt in by the company. But Scrap/waste, being dissimilar to the core business product, was expressly held not to form part of "total turnover". The relevant extract from the judgment is reproduced as under: "25. The word "turnover'as per para 5.2 and 5.3 of "Guidance Note on Tax Audit u/s 44AB of the Income Tax Act" as published by ICAI, after due deliberation and consideration reads as under: "5.2 In the "Guidance Note on Terms Used in Financial Statements" published by the ICAI, the expression "Sales Turnover" (Item 15.01) has been defined as under:- "The aggregate amount for which sales are effected or services rendered by an enterprise. The term 'gross turnover' and 'net turnover' (or 'gross sales' and 'net sales') are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts" 5.3 The Guide to Company Audit issued by the ICAI in the year 1980, while discussing "sales", stated as follows: "Total turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company and indicating the quantities of such sales for each class separately. Note (i) The term 'turnover' would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any. Adjustments which do not relate to turnover should not be made e.g. writing off bad debts, royalty etc. Where excise duty is included in turnover, the corresponding amount should be distinctly shown as a debit item in the profit and loss account." The aforestated meaning given by the ICAI clearly denotes that in normal accounting parlance the word "turnover" would mean "total sales" as explained hereinabove. The said sales would definitely not include the scrap material which is either to be deducted from the cost of raw material or is to be shown separately under a different head. We do not see any reason for not accepting the meaning of the term "turnover" given by a body of Accountants, which is having a statutory recognition." It may please be appreciated that the Hon'ble Supreme Court's reasoning was not confined to s. 80HHC alone, but rested on the true and ordinary meaning of the term "turnover." The Hon'ble Court did not base its decision on a specific clause of S.80HHC but on the fundamental meaning of the word "turnover". Scrap represents an inevitable by-product, generated without any conscious business intent, and realized incidentally. If scrap sales arc included in "total turnover," it would artificially inflate the turnover base, misrepresenting the true scale of the textile operations. This is exactly the mischief highlighted by the Supreme Court in Punjab Stainless Steel (supra).Therefore, this precedent is directly applicable to the present case for determining the correct composition of "total turnover." i. Reliance is also placed on CIT vs Universal Precision Screws, ITA1454/2015 (Delhi ITAT) wherein the courts have consistently held that scrap sales are not part of total turnover if it does not arise from core business activity [copy enclosed] : "12. AO as well as the CIT(A) has not excluded the scrap sale from turn over as well as total turnover while computing the deduction u/s 10B of the Act. This issue has also been decided in assessee's favour in its own case for AY 2009-10 by the coordinate bench of Tribunal, which has been affirmed by the Hon'ble Delhi High Court. Operative part of the decision rendered by Hon'ble High Court is extracted as under:- "5. In allowing the Assessee's appeal by the impugned order, the ITAT held that in terms of the judgment of the Supreme Court in CIT v. Punjab Stainless Steel Industries (2014) 364 ITR 144 (SC) sale of scrap is not includable in the total turnover since the Assessee was not engaged in the business of scrap. Consequently, the impugned orders of the CIT(A) and the AO treating the scrap amount as part of the domestic turnover was set aside.

So following the decision rendered by the Co-ordinate bench of Tribunal affirmed by Hon'ble High Court, we are of the considered view that the amount of sale of scrap is not includible in the total turnover or heal turn over as the assessee is not into the business of scraps, so we find no illegality or perversity in the findings returned by the Id. CIT(A),hence ground no.7is determined against the assessee." ii. Therefore, scrap sales cannot, in law or in accounting principle, form part of the "total turnover"

There is no dispute from the Revenue that the excise duty element was only on the intermediary product and that there was no duty on the final product falling under Sub Heading No. 56.07 in terms of Notification No. 61/87 - C.E. dated 01.03.1987. A reading of the order of assessment and that of the Appellate Assistant Commissioner show the reference to the definition of'sale price', as available under the Central Sales Tax Act, to hold that the sale price in respect of the goods at the time of or before the delivery of the goods, would form part of the turnover only to treat the duty drawback a part of the consideration, forgetting for a moment that the receipt had nothing to do with the sale at all. Thus even going by the above definition of sale price, on the facts available, when the receipt of duty drawback has nothing to do with the sale between the parties and. has no relevance to the sale transaction at the time of or before the delivery of the goods, we do not find any justification in the Revenue treating the duty drawback as forming part of the turnover. When the duty drawback was as per the scheme given under the Excise and Customs Rules and that there was no agreement between the purchaser and the seller on the aspect of duty drawback and it never received any consideration and rightly so in the sale effected, the question of roping in those receipts from the Government of India long after the sale does not arise, to be included in the turnover for the purpose of assessment. In considering this issue, the difference in price charged by the assessee in respect of sale to coastal vessels and to the foreign going vessels, has no relevance at all and it is not the decisive factor in considering the question of taxability of the receipt. So long as the assessee was able to show that the receipt was as per the provisions of Central Excise and Customs Act and the Rules made thereunder with reference to export of goods manufactured from out of duty suffered goods, and the transaction thus answer the definition of 'export' as given under the Duty Drawback Rules, the State is not justified in taxing this receipt as part of the turnover" • CIT vs Lakshmi Machine Works, 290 ITR 667 (SC) (copy appended at page 77-89 and 18-35 ofAJC) "18. 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 the Excess Profits tax Act, it existed in the Business ProfiU 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 idles tax also cannot form part of 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".

Forex Fluctuation i. The forex fluctuation of Rs. 4.63 crores is not a pre-determined component of the sale price. It is not consideration paid by the buyer for the goods; it arises from currency movements between invoice and realization. It arises due to the timing difference between the point of invoicing the export customer and the point of actual realization of the payment. Thus, this gain is purely speculative and incidental and therefore, it is in the nature of "Other Income" and not revenue from sale of goods. ii. The essential character of "turnover" has been explained in several judgments to mean only the consideration received from the sale of goods or services in the ordinary course of business. Turnover, by its very nature, is confined to the invoice value of the goods/services actually sold and does not extend to ancillary or incidental receipts. Reliance in this regard is placed on the judicial precedents laid down by Hon'ble Apex Court in Shah Originals vs CIT 459 ITR 385 (SC) (copy appended at page 52-79 of AJC), wherein it was held that exchange rate fluctuations cannot be considered as part of turnover since they are not amounts charged to customers in respect of goods sold out arise due to external market forces, relevant extract of the judgment is reproduced herewith: "8.1 The provisions of a tax statute are interpreted strictly, and the literal meaning of the expression "derived from" ought not to be confused with the words "attributable to". Interpreting literally, it is contended that the words "derived from" mentioned in sub- sections (1) and (3) would be the deciding factor whether the gain from the foreign exchange fluctuation forms a part of the business income of the assessee or not. We may refer to the illustration given by Mr. Arijit Prasad; the crediting of foreign exchange into an EEFC account is like transferring from one account to another, and the gain from foreign exchange appreciation is, in no way, attributable to the assessee's business of export of goods or merchandise outside India. The foreign exchange fluctuation resulting in gain, disallowed under Section 80 HHC, is looked at by tracing the origin of income or the source from which the gain is derived. The gain cannot be given the status of profits from the business of exports unless the gain is said to be derived from the business of exports of goods/merchandise." iii. Even in the context of export-related benefits, the Supreme Court in Liberty India v. CIT (supra) drew a clear distinction between "profits derived from business" and "ancillary receipts incentives or policy-based benefits. The rationale extends equally to forex fluctuation gains: they cannot be said to have been derived from the core manufacturing or trading activity but only represent incidental receipts which do not form part of total turnover. iv. In light of the above, foreign exchange fluctuation cannot be included in turnover. The concept of turnover is limited to the price realized or realizable from the sale of goods/services in the ordinary course of business, whereas forex fluctuation is a post-sale adjustment caused by external currency market factors.

On the issue of sale of scrap or wastage, it has been stated that the sale of scrap is not the core business activity of the assessee and therefore, this turnover would not include this component. The wastage was inevitable by-product of the manufacturing process. Scrap arises unintentionally and it represents recovery of residual value from the waste and not active trading. It is not revenue generation but it is to be reduced from cost of goods produced. However, this argument does not inspire any confidence in us. The sale of scrap is nothing but revenue out of sale of products arising out of manufacturing process of the assessee. The same are inevitable part of assessee’s manufacturing process and it could not be held to be a reduction in cost of production. The decision of Hon’ble Apex Court in the case of Punjab Stainless Steel Industries (supra) is in the context of computation of profits u/s 80HHC which involve determination of export turnover and total turnover in terms of provision of that section only. Therefore, this decision and subsequent decisions of Tribunal following this decision do not render any assistance to the case of the assessee.

On the issue of duty drawback, it is said to be a refund mechanism by the Central Government which is in the nature of statutory incentives to exporters to rebate the duties. In our considered opinion, any duties and taxes paid by the assessee constitute business expenditure and as such, any refund / reimbursement thereof at a later stage is nothing but a credit to assessee’s Profit & Loss Account. The same, by its very nature, has the character of business receipts and nothing more. The decision of Liberty India Ltd. (317 ITR 218) as referred to by Ld. AR is in the context of deduction u/s 80-IA / 80-IB wherein the expression “derived from” was the primary issue that fell for consideration of Hon’ble Apex Court. The Hon’ble Court held that “derived from” require direct / first degree nexus between the profits and the business activity of the industrial undertaking. However, there was no dispute that the impugned receipts were business income for the assessee. This decision as well as subsequent decision following this decision, therefore, does not help the case of the assessee.

The forex fluctuation gains arise from currency conversion movement between issue of invoice and realization thereof. It is nothing but timing difference between the point of invoicing the export customer and the point of actual realization of the payment. The same is clearly incidental to export activities and arise in normal course of business. The same has intimate connection with export activities and accordingly part of assessee’s turnover only. The decision in Shah Originals (459 ITR 385) is in the context of deduction u/s 80HHC only and therefore, not applicable.

The last argument of Ld. AR is that such an adjustment could not be made u/s 143(1) which, at its face, is to be rejected. The application of correct rates of tax certainly constitutes primary adjustment which could be made by CPC while processing the return of income. The issue cannot be said to be highly debatable which is to be settled in scrutiny proceedings only. As per assessee’s return of income for AY 2017-18, its turnover exceeded the threshold limit of Rs.250 Crores and CPC being largely automated process, by relying upon assessee’s return of income for AY 2017-18, could very well make this adjustment at the time of processing of return of income u/s 143(1). There is no bar as such since the application of correct rates of tax constitutes prima- facie adjustment only. This argument stand rejected.

In our considered opinion, the expression used in the relevant provisions is ‘total turnover or gross receipts’ which do not envisage any such deduction as canvassed by Ld. AR. On these facts, in our considered opinion, the orders of lower authorities do not call for any interference on our part. No other ground has been urged in the appeal.

In the result, the appeal stands dismissed. Order pronounced on 14/10/2025 Sd/- Sd/- (RAJPAL YADAV) (MANOJ KUMAR AGGARWAL) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 14/10/2025 आदेश की �ितिलिप अ�ेिषत /Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF ASSISTANT REGISTRAR