The Commissioner of Income Tax vs. M/s.Agarwal Rubber Pvt Limited

THE HON'BLE MR JUSTICE V ESWARAIAH And THE HON’BLE SRI JUSTICE K.G.SHANKAR

I.T.T.A.Nos.585, 586 AND 628 of 2006

DT.24-04-2012 Between: … Appellant And

… Respondents Counsel for the Appellant: Sri

Counsel for respondent: Sri The Court made the following Judgment:

THE HON'BLE MR JUSTICE V ESWARAIAH And THE HON’BLE SRI JUSTICE K.G.SHANKAR

I.T.T.A.Nos.585, 586 AND 628 of 2006

COMMON JUDGMENT: Per Hon’ble Sri Justice V.Eswaraiah)

Sri J.V.Prasad, the learned Standing Counsel for Income Tax appearing for the appellant submits that the issue raised in all these appeals is squarely covered by the Judgment of the Hon’ble Supreme Court in CIT v. Lakshmi Machine Works (SC)[1] against the Revenue. These appeals under Section 260 A of the Income Tax, 1961 are filed against the orders of the Income Tax Appellate Tribunal. The assessment in the case of respondents-assessees under Section 143 (3) was passed reopening the assessment under Section 147 of the Act on the ground that excess deduction under Section 80 HHC was allowed and the Assessing Officer restricted the deductions under Section 80 HHC as against the deductions originally allowed. Aggrieved by the assessment of the said order, the respondents- assessees preferred appeals before the Commissioner of Income Tax (Appeals) who allowed the appeals holding that the initiation of proceedings for reopening of the assessment were bad in law as there has been no omission on the part of the assesses to disclose fully and truly all material facts. As against the said order of the Commissioner of Income Tax (Appeals), the Department filed appeals before the Income Tax Appellate Tribunal, which were dismissed holding that the excise duty and sales tax collections would not form part of the total turnover for

the purpose of computation of deduction under Section 87 HHC and accordingly dismissed the department appeals, against which these appeals are filed. The question that arose for consideration is whether the Tribunal is correct in law in holding that the excess duty sales tax collections do not form part of the total turnover for the purpose of computation under section 80 HHC of the Income Tax Act. The Hon’ble Supreme Court in the aforesaid Judgment in CIT v. Lakshmi Machine Works (SC) considering Section 80 HHC of the Act and the relevant provisions held as follows: “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 per cent 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 they 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 includable 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. In fact, in Civil Appeal No.4409 of 2005, the above proposition has been accepted by the Assessing Officer (See: page no.24 of the paper book}, if so, then excise duty and sales tax also cannot form part of the “total turnover” under Section 80 HHC (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 the amendments made to Section 80HHC from time to time. Before concluding we may state that profits are 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. Our reasoning in this Judgment is confined to the workability of the formula in Section 80HHC (3) of the Act as it stood at the material time. For the above reasons, we se no merit in these appeals filed by the Department and, accordingly, they are dismissed with no order as to costs.“

In view of the aforesaid decision of the Hon’ble Supreme Court in CIT v. Lakshmi Machine Works (SC) (supra), we see no merits in these appeals filed by the Revenue and they are accordingly dismissed. No costs.

______________ V. ESWARAIAH,J

_______________ K.G.SHANKAR,J

Date: 24-04-2012 grk

THE HON'BLE MR JUSTICE V ESWARAIAH And THE HON’BLE SRI JUSTICE K.G.SHANKAR

(The Judgment of the Bench delivered by Hon’ble Sri Justice V.Eswaraiah) I.T.T.A.Nos.585, 586 AND 628 of 2006

DT.24-04-2012

The appeals before the Commissioner of income Tax were filed against the orders of the Assistant Commissioner of Income Tax Circle II,

Hyderabad dated 27-3-2002. The Commissioner of Income Tax order is dated 6-3-93.

[1] (2007) 290 ITR 667 (SC)