CIT v. Lakshmi Machine Works

For the A.Y. 1993-94, M/s. Lakshmi Machine Works (the assessee) filed its return of income declaring its taxable income of Rs.50.80 lakhs. The assessee had computed the allowable deduction u/s.80HHC without taking into account in the total turnover the sales tax and excise duty. The assessee was asked to explain why the total turnover should not be recomputed by including sales tax and excise duty. In this connection, the Department placed reliance on the judgement in the case of Chowringhee Sales Bureau P. Ltd. v. CIT, (1973) 87 ITR 542 (SC). The assessee objected to the above inclusion. However, that objection was dismissed by the Assessing Officer on the ground that u/s.80HHC, Explanation (ba), deduction from ‘total turnover’ was restricted only to three items, namely, profit on sale of import licence, duty drawback and CCS. Aggrieved by the above decision, the matter was carried in appeal to the Commissioner of Income-tax (Appeals). The Appellate Authority agreed with the submission made on behalf of the assessee. It was held that sales tax and excise duty were liabilities of the assessee to the Government. They were shown separately from the value of the goods, therefore, they were not to be included in the ‘total turnover’ for working out the deduction u/s.80HHC. Aggrieved by the said decision, the Department carried the matter in appeal to the Tribunal. Following the judgement of the Bombay High Court in the case of CIT v. Sudarshan Chemical Industries Ltd., (2000) 245 ITR 769, the Department’s appeal stood dismissed. On further appeal, the Supreme Court held that the words ‘total turnover’ in S. 80HHC have to be read as part of the formula which sought to segregate the ‘export profits’ from the ‘business profits’. The formula has to be read in entirety. In that formula, the entire business profit is not given deduction. It is the business profit which is proportionately reduced by the fraction/ratio of export turnover/total turnover which constitutes S. 80HHC concession (deduction). Income in the nature of ‘business profits’ is, therefore, apportioned. The above formula fixed a ratio in which ‘business profits’ u/s.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’. In the circumstances, the words ‘total turnover’ in the above formula cannot be interpreted with 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. In all other provisions of the Income-tax Act, profits and gains are required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction u/s.80HHC, a report of the auditor certifying the deduction based on export turnover was sufficient. This is because the very basis for computing S. 80HHC deduction was ‘business profits’ as computed u/s.28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. S. 80HHC(3) is 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 the Excess Profits Tax Act and 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’. The excise duty and sales tax are indirect taxes and are recovered by the assessee on behalf of the Government. Therefore, if they are made retable to exports, the formula u/s.80HHC would become unworkable.