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CASE NO.: Appeal (civil)  3204 of 2007

PETITIONER: The Commissioner of Income Tax

RESPONDENT: M/s. Catapharma (India) Pvt. Ltd

DATE OF JUDGMENT: 23/07/2007

BENCH: Dr. ARIJIT PASAYAT & D.K. JAIN

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.    3204            OF 2007            (Arising out of SLP (C)  12461/2007)

Dr. ARIJIT PASAYAT, J.

1.      Leave granted.

2.      Challenge       in this appeal is to the order passed by a  Division Bench of the Bombay High Court relating to the  question whether sales tax and excise duty form part of the  total turnover.  Dispute relates to the Assessment year 1997- 98.

3.      Background facts in a nutshell are as follows: While making assessment under Section 143(3) of the  Income Tax Act, 1961 (in short the ’Act’), assessing officer  included excise duty and sales tax on the total turnover for  computing the deduction under Section 80 HHC (3)(b) of the  Act.  The Commissioner of Income Tax (Appeals), Special  Range\0261, Nasik (in short the ’CIT’ (A), held that while  calculating deduction under Section 80 HHC amounts of  excise duty and sales tax collected by the assessee, are not to  be included in the total turnover for the purpose of computing  deductions under Section 80HHC. Revenue preferred an  appeal before the Income Tax Appellate Tribunal, Pune Bench,  Pune, (in short the ’Tribunal").  The appeal was dismissed  following a decision of the Bombay High Court in CIT v.  Sudarshan Chemical Industries Ltd. [(2000) 245 ITR 769  (Bom.)].  Appeal was preferred by the Revenue before the High  Court which by the impugned order dismissed the appeal  answering the question raised in the appeal in favour of the  assessee and against the revenue.   plain meaning of the word "turnover" in the formula applied  for computation.  It was urged that there was no need to call  for any rule of interpretation or external aid to interpret the  said word. In essence, it was urged that having regard to the  plain words of the Section ’excise duty’ and ’sales tax’ ought to  have been included in the "total turnover". It is to be noted  that a similar plea was raised in Commissioner of Income Tax,  Coimbatore v. M/s. Lakshmi Machine Works [JT 2007(6) SC  236. In para 18 it was noted as follows: "We do not find any merit in the above  contentions advanced on behalf of the  Department. It is important to note that tax  under the Act is upon income, profits and

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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  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 {SEE page 455  of The Law and Practice of Income Tax by  Kanga and Palkhivala]. Therefore, schematic  interpretation for making the formula in  Section 80H HC workable cannot be ruled out.  Similarly, purposeful interpretation of Section  8OHHC 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  8OHHC 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 - total  turnover which constitute 8OHHC 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". That is the reason why we  have quoted hereinabove extensively the  illustration from the Direct Taxes (Income tax)  Ready Reckoner of the relevant word. In the  circumstances, we cannot interpret the words  "total turnover" in the above formula with

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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 8OHHC. 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.1OCCAC in the case of  deduction under Section 8OHHC a report of  the auditor certifying deduction based on  export turnover was sufficient. This is because  the very basis for computing Section 8OHHC  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  8OHHC(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 8OHHC 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 8OHHC(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

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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 A.O [  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  8OHHC(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 8OHHC  would become unworkable. The view which we  have taken is in the light of amendments made  to Section 80HHC from time to time."

5.      We are in respectful agreement with the view expressed.  Appeal is without merit and is dismissed.  There will be no  order as to costs.