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Gujarat High Court · body

2016 DIGILAW 1546 (GUJ)

Commissioner of Income Tax-I v. Alembic Limited

2016-07-29

G.R.UDHWANI, K.S.JHAVERI

body2016
JUDGMENT : K.S. Jhaveri, J. 1. By way of these appeals, the appellant has challenged order dated 16.07.2008 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench "C", Ahmedabad in ITA No. 1750 & 1751/Ahd/2002. 2. At the time of admitting present appeals, following questions of law were framed:- TAX APPEAL No. 508 of 2009 "Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in upholding the order of Commissioner (Appeals) directing to reduce the amount of excise duty and sales tax while computing the total turnover for the purpose of deduction under section 80-HHC of the Income Tax Act, 1961 even after insertion of the provisions of section 145A(b) of the Act?" TAX APPEAL No. 556 of 2009 "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the CIT(A) directing to reduce the amount of excise duty and sales tax while computing the total turnover for the purpose of deduction u/s. 80HHC of the Act, even after the insertion of the provisions of section 145A(b)? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law allowing the trial run expenses of Rs. 1,24,63,848/- as revenue expenditure incurred without appreciating the fact that the expenses incurred before the commencement of commercial production?" 3. At the time of hearing of present appeals, learned advocate for the appellant submitted that the Tribunal has committed an error in allowing exclusion of Sales Tax and Excise duty from the total turnover for computing deduction under section 80HHC even after insertion of section 145A of the Act. It is also submitted that the Tribunal has committed an error while allowing the trial run expenses of Rs. 1,24,63,848/- as revenue expenditure without appreciating the fact that such expenses are incurred before the commencement of commercial production. Therefore, it is prayed that this appeal may be allowed. 4. Mr. Soparkar, learned advocate for the respondent submitted that the issue involved in these appeals are covered by various decisions. So far as first question involved in present appeals is concerned, he has relied upon the following decisions: (i) Commissioner of Income Tax v. Meghmani Industries Ltd. reported in [2014] 41 taxmann.com 525 (Gujarat) (ii) Tax Appeal No. 530 of 2007 decided on 22/12/2014. So far as first question involved in present appeals is concerned, he has relied upon the following decisions: (i) Commissioner of Income Tax v. Meghmani Industries Ltd. reported in [2014] 41 taxmann.com 525 (Gujarat) (ii) Tax Appeal No. 530 of 2007 decided on 22/12/2014. (iii) Tax Appeal No. 57 of 2006 decided on 13/11/2014. (iv) Tax Appeal No. 1430 of 2005 decided on 26/12/2013. 4.1 As far as second question framed in Tax Appeal No. 556 of 2009 is concerned, he has relied upon the decision of this Court in Tax Appeal No. 1243 of 2006 decided on 13/7/2006. 4.2 He submitted that in view of the observations of this Court in the aforesaid decisions, present appeals may be disposed of. 5. We have heard learned counsel for both the side and also perused the record. We have also gone through the judgment cited by learned advocate for the respondent. In the case of Meghmani Industries Ltd. (supra), this Court has observed as under:- "6.0. Identical question came to be considered by this Court in Tax Appeal No. 884 of 2006 and other allied Tax Appeals and relying upon the decisions of the Hon'ble Supreme Court in the case of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra), the aforesaid question is held against the revenue. In the aforesaid decision in Tax Appeal No. 884 of 2006 and allied appeals in para 3 and 4 the Division Bench has observed and held as under: [3.0] Having heard Shri Manish Bhatt, learned counsel appearing on behalf of the Revenue and Shri Soparkar, learned counsel appearing for assessee in respective appeals and the substantial question of law raised, referred to hereinabove, and the decisions of the Hon'ble Supreme Court in the cases of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra), we are of the opinion that the substantial question of law raised in the present tax appeals is now not res integra and the same is squarely covered against the Revenue by the decisions of the Hon'ble Supreme Court in the cases of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra). In paras 16 to 18 in the case of Lakshmi Machine Works (Supra), the Hon'ble Supreme Court has observed and held as under: 16. In paras 16 to 18 in the case of Lakshmi Machine Works (Supra), the Hon'ble Supreme Court has observed and held as under: 16. The principal reason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words total turnover in the above formula in Section 80HHC one has to give a schematic interpretation to that expression. There is one more reason for giving schematic interpretation. The various amendments to Section 80HHC show that receipts by way of brokerage, commission, interest, rent etc. do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. In fact, Section 80HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, commission etc. which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the above amendment to Section 80HHC commencing from 1.4.92. The said amendment made it clear that though commission and interest emanated from exports, they did not involve any element of turnover and merely for the reason that commission, interest, rent etc. were included in the profit and loss account, they did not become eligible to deduction. We have to give purposeful interpretation to the above section. The said section is entirely based on the formula. The amendments from time to time indicate that they became necessary in order to make the formula workable. Hence, we have to give schematic interpretation to Section 80HHC of the Act. 17. Shri P.P. Malhotra, leaned senior counsel appearing for the Department (appellant), submitted that one has to give plain and unambiguous meaning to the word turnover in the above formula; that there was no need to call for any rule of interpretation or external aid to interpret the said word; that having regard to the plain words of the section, excise duty and sales tax ought to have been included in the total turnover. Learned counsel submitted that the word turnover even in the ordinary sense would include the above two items. Learned counsel urged that the formula should be read strictly. In this connection, he pointed out that the legislature had expressly excluded items of freight and insurance and not sales tax and excise duty from the said definition. It was urged that while construing a taxing statute strict interpretation should be given by the Courts. It was urged that the definition of the words total turnover did not include freight/insurance. He urged that since the legislature had excluded only insurance and freight, it was not open to the courts to exclude excise duty and sales tax from the concept of total turnover in the said formula. He contended that the word turnover referred to the aggregate amount for which the goods were sold and since sales tax and excise duty formed part of the value of the goods, the said two items were includible in the definition of the words total turnover. In this connection, learned counsel placed reliance on the judgment of the Supreme Court in the case of M/s. Chowringhee Sales Bureau (supra). Reliance was also placed on The Law and Practice of Income Tax by Kanga and Palkhivala (eighth edition) at page 123. In support of the contention that a tax or duty is part of the dealers trading/business receipts, even if the tax or duty is charged separately or credited to a separate account. Reliance was also placed on the judgment of the Kings Bench Division in the case of Paprika, Ltd., and Another v. Board of Trade (1944) 1 All E.R. 372, in which it has been held that wherever a sale attracts purchase tax, that tax affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even if the price is expressed as cost x + purchase tax. Reliance was also placed on the judgment of the Court of Appeal in the case of Love v. Norman Wright (Builders), Ltd., (1944) 1 All E.R. 618, in which it has been held that if a seller quotes a price of x + purchase tax, the buyer has to pay the amount of the tax as part of the price and since the tax is charged on the wholesale value of the goods the tax element has to be taken into account. It was urged that one has to give strict interpretation to the word turnover. It was urged that there was no question of giving purposeful interpretation to the word turnover in the said Section 80HHC of the Act. It was urged that the legislature had used the expression total turnover from which it became clear that the said expression referred to the aggregate amount for which the goods were sold and since the above two items formed part of the value of the goods, they were includible in the total turnover. Learned counsel urged that there was no merit in the contention advanced on behalf of the assessee that excise duty was the liability of the assessee to the Government and, therefore, it was not includible in the total turnover. Learned counsel urged that there was no merit in the contention advanced on behalf of the assessee that the components of export turnover and total turnover should be the same in the above formula. Learned counsel submitted that the formula would become unworkable if the components in the export turnover and the components in the total turnover are the same. Learned counsel submitted that there was no merit in the argument advanced on behalf of the assessee that excise duty and sales tax did not form part of trading receipts. Learned counsel submitted that there was no merit in the contention of the assessee that the expression business profits in Section 80HHC did not include receipts which did not emanate for exports and, therefore, such receipts did not constitute an element of turnover. 18. 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 gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the word income includes profits and gains. 18. 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 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. 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 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80HHC 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 80HHC 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. We have to read the words total turnover in Section 80HHC 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 w total turnover which constitute 80HHC 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 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 80HHC. 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. 10CCAC in the case of deduction under Section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing Section 80HHC 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 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. Section 80HHC(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 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% 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 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 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. 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. [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 80HHC(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 amendments made to Section 80HHC from time to time. Even in the subsequent decision in the case of Shiva Tex Yarn Ltd. (Supra), the Hon'ble Supreme Court even with respect to assessment order after section 145A, has followed the decision of the Hon'ble Supreme Court in the case of Lakshmi Machine Works (Supra). [4.0] Applying the ratio of law laid down by the Hon'ble Supreme Court in the case of Lakshmi Machine Works (Supra) to the facts of the cases on hand, the question raised is held against the Revenue and it is held that the learned Tribunal has not committed any error in holding that the excise duty is excise duty is to be excluded for the purpose of computation of deduction u/s. 80HHC. 7.0 Applying ratio laid down by the Hon'ble Supreme Court in the case of Lakshmi Machine Works (Supra) and Shiva Tex Yarn Ltd. (Supra) as well as recent decision of this Court in Tax Appeal No. 884 of 2006 and other allied appeals, to the facts of the case on hand the question raised in the present Tax Appeal is answered against the revenue and it is held that the learned Tribunal has not committed any error in holding that the components of sales tax and central excise do not form part of sale proceeds for the purpose of Section 80HHC of the Act despite insertion of Section 145A of the Act." 6. In view of above observations, the first question posed for our consideration in both these appeals is answered in favour of the assessee and against the revenue. 7. So far as the question as to whether trial run expenses can be allowed as revenue expenditure, this Court while deciding Tax Appeal No. 1243 of 2006 has observed as under:- "5.1 In Gujarat Small Scale Industries Corprn. Ltd. (supra), this Court observed as under:- "6. If the expenditure was incurred before the commencement of the production, the matter might have stood on a different footing. The combined effect of these factors impels one to the conclusion that the expenditure was in the nature of revenue. The assessee-Corporation was carrying on numerous activities for about 10 years and the expenditure incurred was not in connection with the testing of the plant established for the manufacture of the scooters, but was an expenditure incurred in connection with the trial of the scooters. The trial revealed that the scooters had stood up the test satisfactorily and in subsequent years commercial production was commenced. Under the circumstances, the expenditure incurred in testing the scooters must be treated as expenditure of a revenue nature. It is difficult to conceive how it can be said to be an expenditure of a capital nature, for, it has not brought into existence any capital asset or advantage of an enduring nature. Under the circumstances, the expenditure incurred in testing the scooters must be treated as expenditure of a revenue nature. It is difficult to conceive how it can be said to be an expenditure of a capital nature, for, it has not brought into existence any capital asset or advantage of an enduring nature. Counsel for the assessee placed reliance on CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj), in support of his contention that where the assessee-company was already engaged in manufacturing activities and had started a new branch of manufacturing activities, the expenditure incurred could be treated as revenue expenditure and not as capital expenditure. In that case, the assessee-company had established an altogether new unit at a different center, name, Bangalore, and all the expenditure incurred in this connection was treated as revenue expenditure by reason of the fact that it could not be considered to be a new business undertaking. The reasoning which found favour with the court was that the production of both the units was considered the production of the assessee-company itself and that both the lines of business constituted the "same business" of the assessee-company. In the present case, it is not necessary to go that far. The assessee-company was already engaged in manufacturing activities and it had started only a new line of production, namely, production of scooters, and the expenditure incurred was not in connection with the plant or machinery established in order to produce the scooters. It was incurred in connection with the testing of the product and not in connection with the testing of the machinery or plant installed in order to manufacture the product. The decision in CIT v. Saurashtra Cement & Chemical industries Ltd., (Income-tax Reference No. 26 of 1973 decided on August 25, 1975-[1981] 127 ITR 47 (Guj)) will not, therefore, come to the rescue of the Revenue in the facts and circumstances of the present case. In that case, the expenditure was incurred "before" a new plant commenced production. It was in that context that the court took the view that it was an expenditure of a capital nature having regard to the fact that it was a part of the actual cost incurred in order to bring into existence the cement plant which was to produce the cement. It was in that context that the court took the view that it was an expenditure of a capital nature having regard to the fact that it was a part of the actual cost incurred in order to bring into existence the cement plant which was to produce the cement. It may be mentioned that the expenditure incurred was in connection with the electricity charges paid in the course of the trial run for the plant before the plant commenced commercial production. Since it was a new plant and the cost had entered into the cost of the plant and machinery having regard to the fact that it was incurred in order to test the machinery which was to produce the cement, the court understandably took the view that it was added to the actual cost of the plant as laid down by the Supreme Court in Challapalli Sugars Ltd. v. CIT, [1975] 98 ITR 167. The principle laid down in the aforesaid decision is that as per accepted accountancy principle all expenditure incurred in order to bring into existence a capital asset and put it in working condition would form a part of the fixed assets. We may again emphasise that, here, the expenditure was not incurred in connection with the testing of the plant and machinery which was installed in order to produce the scooters. The expenditure was incurred in connection with the testing of the product, namely, the scooters manufactured at the plant. The conclusion is, therefore, inescapable that the expenditure incurred is of the nature of revenue expenditure and the AAC was right in upholding the claim of the assessee. The Tribunal committed an error in reversing the view taken by the AAC. This question must, therefore, be answered in the negative and against the Revenue. 6. Taking into consideration the fact that the expense was incurred by the assessee for trial run with regard to expansion of present unit, to increase its installed capacity of the tile manufacturing plant from 35000 MT to 42000 MT, we find merit in the submissions of Mr. Soparkar. In view of aforesaid decisions, we are of the opinion that the question posed for our consideration is required to be answered in favour of the assessee and against the revenue. Soparkar. In view of aforesaid decisions, we are of the opinion that the question posed for our consideration is required to be answered in favour of the assessee and against the revenue. Accordingly, it is held that the Tribunal has committed an error in treating the trial run expenditure incurred by the appellant in the process of expansion of its existing manufacturing facilities as capital expenditure. This appeal is allowed accordingly." 8. In view of above observations, second question posed for our consideration in Tax Appeal No. 556 of 2009 is also required to be answered in favour of the assessee and against the revenue. Accordingly, both these appeals are dismissed and the impugned orders are confirmed.