Madras H.C : Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that excise duty and sales-tax are not to be included in the turnover while calculating 80HHC deduction ?

High Court Of Madras

CIT vs. Shiva Distilleries Ltd.

Section 37(1), 80HHC

Asst. Year 2000-01

P.D. Dinakaran & Mrs. Chitra Venkataraman, JJ.

Tax Case (Appeal) No. 74 of 2007

13th February, 2007

Counsel Appeared :

J. Nareshkumar, for the Appellant

JUDGMENT

P.D. DINAKARAN, J. :

The above tax case appeal is directed against the order of the Tribunal in ITA No. 1430/Mad/2003, dt. 13th Jan., 2006, raising the following substantial questions of law :

“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the expenditure on replacement of machinery as revenue expenditure and not capital ?

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the scrap and waste material generated during the course of manufacture, royalty received and the guarantee commission for the purpose of calculation of s. 80HHC deduction would have to be excluded from business profit for the purpose of calculation of deduction under s. 80HHC ?

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that excise duty and sales-tax are to be included in the turnover while calculating s. 80HHC deduction ?”

2. As the third question, ex facie, is not happily worded, we reframe the same as under :

“Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that excise duty and sales-tax are not to be included in the turnover while calculating 80HHC deduction ?”

3. The Revenue is the appellant. During the previous year relevant to the assessment year, the assessee replaced certain machinery and claimed the said expenditure as revenue expenditure, but the AO treated the same as capital expenditure. The AO rejected the claim of the assessee for the exclusion of waste and scrap material generated during the course of manufacture, royalty received and guarantee commission for the purpose of calculation of deduction under s. 80HHC of the IT Act, 1961 (in short, ‘the Act’). The AO also included excise duty and sales- tax collection to the total turnover, while calculating deduction under s. 80HHC of the Act.

4. Against the said order, the assessee filed an appeal before the CIT(A), who decided the issue of inclusion of sales-tax and excise duty for the purpose of deduction under s. 80HHC of the Act in favour of the assessee and dismissed the appeal in respect of other issues.

5. On appeal at the instance of the Revenue, the Tribunal, remitted the issue of replacement of machinery to the AO to decide the issue on the basis of materials. So far as scrap and waste materials generated during the course of manufacture, royalty and guarantee commission are concerned, the Tribunal decided the issue in favour of the assessee. The Tribunal also decided the issue of inclusion of excise duty and sales-tax to the total turnover in favour of the assessee. Aggrieved by the same, the Revenue has preferred this appeal raising the questions of law referred above.

6.1. As regards the first question, the issue whether the expenditure on replacement of machinery is capital or revenue is not determined by the treatment given in the books of account or in the balance sheet. The claim has to be determined only by the provisions of the Act and not by the accounting practice of the assessee.

6.2. This Court, in CIT vs. Janakiram Mills Ltd. (2005) 196 CTR (Mad) 551 : (2005) 275 ITR 403 (Mad), held that all plant and machinery put together amount to a complete spinning mill which is capable of manufacturing yarn and hence, each replaced machine could not be considered as an independent one and no intermediate marketable product was produced. In the instant case, to find out the nature of the new machinery, the Tribunal remanded the issue to the AO. In our considered opinion, the Revenue is not, in anyway, aggrieved by the remand of the issue, which is only to find out the fact. Accordingly, we do not find any error in the order of the Tribunal in remanding the matter to the AO. With regard to the second question, it deals with scrap and waste materials generated during the course of manufacture, royalty received and guarantee commission.

7.2. With respect to the scrap and waste materials generated during the course of manufacture, it is useful to refer the decision of this Court in CIT vs. Madras Motors Ltd./M.M. Forgings (2002) 174 CTR (Mad) 221 : (2002) 257 ITR 60 (Mad) where it was held that the turnover from the business of sale of motorcycles, motorcycle spare parts and television sets could not be included in the total turnover of the assessee for the purpose of computation of deduction under s. 80HHC of the Act as the total turnover in s. 80HHC is only the turnover relating to export business of the assessee and not the turnover relating to other business of the assessee.

7.3. Applying the ratio laid down by this Court in CIT vs. Madras Motors/M.M. Forgings Ltd. (supra), we hold that the scrap and waste materials, which would not be relatable to export business of the assessee, have to be excluded from business profit for the purpose of calculation of deduction under s. 80HHC of the Act.

7.4. On the question of includibility of royalty as well as the guarantee commission for the purpose of calculation of deduction under s. 80HHC of the Act, the Bombay High Court in CIT vs. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127 : (2003) 260 ITR 371 (Bom) held that the Expln. (baa) to s. 80HHC of the IT Act, 1961, was inserted by the Finance (No. 2) Act, 1991, w.e.f. 1st April, 1992 and under that Explanation, ‘profits of the business’, for the purposes of s. 80HHC does not include receipts which do not have an element of turnover like rent, commission, interest, etc. This Court in CIT vs. Sundaram Clayton Ltd. (2006) 281 ITR 425 (Mad) also held that the charges of miscellaneous income and commission do not form part of the turnover for the purpose of calculation of deduction under s. 80HHC of the Act. Applying the above ratio to the facts of the case, we are of the view that the guarantee commission as well as royalty, viz., a payment for using a right, have to be excluded from the business profit for the purpose of calculation of deduction under s. 80HHC of the Act.

8. With regard to the 3rd question as reframed, viz., whether the excise duty and sales-tax are not includible in the turnover while calculating the deduction under s. 80HHC, this Court in CIT vs. Wheels India Ltd. (2005) 197 CTR (Mad) 284 : (2005) 275 ITR 319 (Mad) and CIT vs. Sundaram Fasteners Ltd. (2005) 194 CTR (Mad) 339 : (2005) 272 ITR 652 (Mad), which were followed by this Court in CIT vs. India Pistons Ltd. (2006) 203 CTR (Mad) 330 : (2006) 282 ITR 632 (Mad), held that it is highly impossible to accept the contention that the term ‘turnover’ would include the excise duty and sales-tax components which are all indirect taxes and which the assessee has to collect and pay over to the Government and such statutory dues will not have any element of profit of business and therefore, the sales-tax and excise duty are not to be included in the total turnover while computing the deduction under s. 80HHC of the Act.

8.2. In view of the ratio laid down by this Court in the decisions cited supra, we hold that the sales-tax and excise duty are not to be included in the total turnover while computing the deduction under s. 80HHC of the Act. Therefore, finding no substantial questions of law that arise for our consideration, the appeal is dismissed.

[Citation : 293 ITR 108]

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