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Sunday, May 11, 2014

Section 80HHC of the Income Tax Act - manufacturer and exporter of stainless steel utensils. - Total TURNOVER- whether the selling of scrap comes under total turnover - Apex court held that High Court is in conformity with the normal accounting practice followed by the traders, including the respondent-assessee and it was justified in coming to a conclusion that the proceeds generated from the sale of scrap would not be included in the ‘total turnover’. - and as such dismissed the appeal =Commnr. of Income Tax-VII, New Delhi Appellant Versus Punjab Stainless Steel Industries Respondent= 2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41507

 Section 80HHC  of  the Income Tax Act - manufacturer  and  exporter  of  stainless  steel
utensils. - Total TURNOVER- whether the  selling of scrap comes under total turnover - Apex court held that High Court is in conformity with the normal accounting practice followed by the traders, including the respondent-assessee and it  was justified in coming to a conclusion that the proceeds  generated  from the sale of scrap would not be included in  the ‘total turnover’. - and as such dismissed the appeal =

 The assessee is a  manufacturer  and  exporter  of  stainless  steel
       utensils.  In the process of manufacturing stainless steel utensils,
       some portion of the steel, which can  not  be  used  or  reused  for
       manufacturing utensils, remains unused, which is  treated  as  scrap
       and the respondent-assessee disposes of the said scrap in the  local
       market and the income arising from the said sale is  also  reflected
       in the profit and loss account.  The  respondent-assessee  not  only
       sells utensils in the local market but also  exports  the  utensils.


    7. For the purpose of availing deduction under Section 80HHC of the Act
       for the relevant Assessment Year, the assessee was not including the
       sale proceeds of scrap in the total turnover  but  was  showing  the
       same separately  in the Profit and Loss Account.
    8. According to the Revenue, the sale proceeds from  the  scrap  should
       have been included  in  the  ‘total  turnover’  as  the  respondent-
       assessee was also selling scrap and that was also part of  the  sale
       proceeds.=      

The intention behind enactment of Section 80HHC  of  the  Act  was  to
      encourage export so as to earn more foreign exchange.   For  the  said
      purpose the Government wanted to encourage  businessmen,  traders  and
      manufacturers to increase the export  so  as  to  bring  more  foreign
      exchange in our country.  If the purpose  is  to  bring  more  foreign
      exchange and to  encourage  export,  we  are  of  the  view  that  the
      legislature would surely like to give more benefit to persons who  are
      making an effort to help our nation in the process  of  bringing  more
      foreign exchange.  If a trader or a manufacturer is trying his best to
      increase his exports, even at the cost of  his  business  in  a  local
      market, we are sure that the Government would like to encourage such a
      person.  In our opinion, once the  Government  decides  to  give  some
      benefit to someone who is  helping  the  nation  in  bringing  foreign
      exchange, the  Revenue  should  also  make  all  possible  efforts  to
      encourage such traders or manufacturers by giving such business  units
      more benefits as contemplated under the provisions of law.
  29. For the aforesaid reasons, we are of the view that the view  expressed
      by the High Court is in conformity with the normal accounting practice
      followed by the traders, including the respondent-assessee and it  was
      justified in coming to a conclusion that the proceeds  generated  from
      the sale of scrap would not be included in  the ‘total turnover’.
  30. For the aforesaid reasons, we dismiss the appeal with no order  as  to
      costs. 

2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41507
ANIL R. DAVE, DIPAK MISRA
                                               REPORTABLE

                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL NO. 5592  OF 2008


Commnr. of  Income Tax-VII, New Delhi        Appellant

                                   Versus


Punjab Stainless Steel Industries            Respondent

                                    WITH

         Civil Appeal Nos. 3283  and  4491 of 2009 and  4898 of 2010



                              1 J U D G M E N T




1 ANIL R. DAVE, J.



    1. Being aggrieved by the judgment delivered in ITA  No.  520  of  2006
       dated 19th January, 2007, by the High Court of  Delhi,  this  Appeal
       has been filed by the Commissioner of Income Tax.
    2. The facts giving rise to the present appeal, in a nutshell,  are  as
       under:
           So as to encourage export for the  purpose  of  earning  foreign
        exchange, Section 80 HHC has been enacted in the  Income  Tax  Act,
        1961 (hereinafter referred to as ‘the  Act’).   By  virtue  of  the
        provisions of the said section, subject to certain conditions,  the
        exporter gets certain deduction from the income, which  is  derived
        from the profits from export  of  goods,  while  computing  taxable
        income.
    3. For the purpose of  calculating  the  deduction,  according  to  the
       provisions of Section 80HHC of the Act, one has to take into account
       the profits from the business of the assessee, export  turnover  and
       total turnover. The deduction, subject to several other  conditions,
       incorporated in the Section, is determined as under:
           Profits of the Business  X      Export Turnover
                                                        Total Turnover





    4. Thus, to determine the amount of deduction,  the  assessee  and  the
       Revenue must be aware of the following three ingredients:
                     i) Profits of the business
                    ii) Export turnover
                   iii) Total turnover


    5. In the instant case, the issue is with regard  to  the  term  “Total
       turnover”.
    6. The assessee is a  manufacturer  and  exporter  of  stainless  steel
       utensils.  In the process of manufacturing stainless steel utensils,
       some portion of the steel, which can  not  be  used  or  reused  for
       manufacturing utensils, remains unused, which is  treated  as  scrap
       and the respondent-assessee disposes of the said scrap in the  local
       market and the income arising from the said sale is  also  reflected
       in the profit and loss account.  The  respondent-assessee  not  only
       sells utensils in the local market but also  exports  the  utensils.


    7. For the purpose of availing deduction under Section 80HHC of the Act
       for the relevant Assessment Year, the assessee was not including the
       sale proceeds of scrap in the total turnover  but  was  showing  the
       same separately  in the Profit and Loss Account.
    8. According to the Revenue, the sale proceeds from  the  scrap  should
       have been included  in  the  ‘total  turnover’  as  the  respondent-
       assessee was also selling scrap and that was also part of  the  sale
       proceeds.
    9. The assessee had objected  to  the  aforestated  suggestion  of  the
       Revenue because inclusion of the sale proceeds  of  scrap  into  the
       total  turnover  would  reduce  the  amount  deductible  under   the
       provisions of Section 80HHC of the Act.
   10. One can very well  see that  if the total  turnover  increases,  the
       advantage which the assessee would get  under  Section  80HHC  would
       decrease because the amount deductible  substantially  depends  upon
       the ratio between the export turnover and total  turnover.   If  the
       export turnover is higher, comparatively the amount deductible under
       Section 80HHC would be more; or in other words, if compared to total
       turnover, export turnover is less, the amount  deductible  from  the
       income under Section 80HHC would  be  reduced.   By  virtue  of  the
       impugned judgment delivered by the High Court, the accounting method
       followed by the respondent-assessee has been approved and therefore,
       this appeal is filed by the Revenue.
   11.  The  learned  counsel  appearing  for  the  appellant-Revenue,  had
       vehemently submitted that even the sale of scrap  is  sale  and  the
       proceeds which  the  respondent-assessee  received  from  such  sale
       should be included in the ‘total turnover’.  In  the  circumstances,
       the  total  turnover  must  include  the  amount  received  by   the
       respondent-assessee from the sale of scrap.
   12. It had been  submitted  by  him  that  the  respondent-assessee  was
       getting substantial amount from sale of scrap and the  receipt  from
       the sale of scrap was a regular feature of  its  business.   In  the
       aforestated  circumstances,  according  to   the   learned   counsel
       appearing for the appellant-Revenue, the view expressed by the  High
       Court is incorrect because that would exclude substantial receipt of
       the respondent-assessee  from  the  total  turnover  and  therefore,
       according to him, the  appeal  should  be  allowed  and  the  amount
       deductible should be  re-assessed  after  inclusion  of  the  amount
       received from the sale of scrap into the ‘total turnover’.
   13. On the other hand, the learned counsel appearing for the respondent-
       assessee had submitted that the proceeds of sale of scrap can  never
       be included in the ‘total turnover’ because the  respondent-assessee
       is not dealing in scrap.  According to him, scrap  is  generated  in
       the process of manufacturing and the scrap is nothing  but  the  raw
       material which could not be used in the process of manufacturing and
       therefore, sale  proceeds of such scrap would merely bring down  the
       cost of raw material.  Thus, the sale  proceeds  of  the  scrap  can
       either be deducted from the cost of raw material or can be shown  in
       the profit and loss account but the said amount can never be treated
       as a part of ‘sales’ or ‘turnover’.
   14. The learned counsel had also relied upon the judgment  delivered  in
       the case  of  COMMISSIONER,  INCOME  TAX  THIRUVANANTHAPURAM  v.   K
       RAVINDRANATHAN NAIR   [(2007) 15 SCC 1], which deals with  the  term
       ‘turnover’. According to him, though the said  issue  has  not  been
       directly discussed in the said judgment, from  the  meaning  of  the
       word ‘turnover’ given in the said judgment, it is  very  clear  that
       the term ‘turnover’ would include only  the  sale  proceeds  of  the
       articles manufactured and sold and not other things which  are  sold
       by a business unit.  He had also referred to the definition of  term
       ‘business’ given in the Act.
   15. According to him, had the respondent-assessee been doing business of
       scrap, the sale proceeds of scrap would have been treated as a  part
       of ‘total turnover’ but as the respondent is not dealing  in  scrap,
       the amount received from the sale of scrap can never be treated as a
       part of the sale proceeds and therefore, he had submitted  that  the
       view taken by the High Court is absolutely correct.
   16. We had heard the learned counsel appearing for both  the  sides  and
       also considered the relevant record and the judgments referred to.
   17. To ascertain whether the turnover would also include  sale  proceeds
       from scrap, one has to know the meaning of the term ‘turnover’.  The
       term ‘turnover’ has neither been defined in the  Act  nor  has  been
       explained by any of the CBDT circulars.
   18. In the aforestated circumstances, one has to look at the meaning  of
       the term ‘turnover’ in ordinary accounting or commercial parlance.
   19. Normally, the term ‘turnover’ would show  the  sale  effected  by  a
       business unit.  It may happen that in the course of the business, in
       addition to the normal sales, the business unit may also  sell  some
       other things.  For example, an assessee  who  is  manufacturing  and
       selling  stainless steel utensils, in addition  to  steel  utensils,
       the assessee might also sell some  other  things  like  an  old  air
       conditioner or old furniture or something  which  has  outlived  its
       utility.  When such things are disposed of, the  question  would  be
       whether the sale proceeds of such things would be  included  in  the
       ‘turnover’.  Similarly in the  process  of  manufacturing  utensils,
       there would be some scrap of stainless steel material, which  cannot
       be used for manufacturing utensils.  Such small pieces of  stainless
       steel would be sold as scrap.  Here also, the  question  is  whether
       sale proceeds of such scrap can be included in the term ‘sales’ when
       it is to be reflected in the Profit and Loss Account.
   20. In ordinary accounting parlance, as approved by all accountants  and
       auditors, the term ‘sales’, when reflected in the  Profit  and  Loss
       Account, would indicate sale proceeds from sale of the  articles  or
       things in which the business  unit  is  dealing.   When  some  other
       things like old furniture or a capital asset, in which the  business
       unit is not dealing are sold, the sale proceeds therefrom would  not
       be included in ‘sales’ but it would be shown separately.
   21. In simple words, the word “turnover” would mean only the  amount  of
       sale proceeds received in respect of the goods in which an  assessee
       is dealing in.  For example- If  a manufacturer and seller  of  air-
       conditioners is asked to declare his ‘turnover’, the answer given by
       him would show  the  sale  proceeds  of  air-conditioners  during  a
       particular  accounting  year.   He  would  not  include  the  amount
       received, if any, from the sale of scrap of  metal  pieces  or  sale
       proceeds of old or useless things sold during that accounting  year.
       This  clearly  denotes  that  ordinarily  a  businessman   by   word
       “turnover” would mean the sale proceeds of the goods (the things  in
       which he is dealing) sold by him.
   22. So far as the scrap is concerned,  the sale proceeds from the  scrap
       may either be shown separately in the Profit and Loss Account or may
       be deducted from the amount spent by the manufacturing unit  on  the
       raw material, which is steel in the case of the respondent-assessee,
       as the respondent-assessee is using stainless steel as raw material,
       from which utensils are manufactured.  The raw  material,  which  is
       not capable of being used for manufacturing utensils will have to be
        either sold as scrap or might have to be re-cycled in the  form  of
       sheets of stainless steel, if the manufacturing unit is also  having
       its re-rolling plant.   If it  is  not  having  such  a  plant,  the
       manufacturer would dispose of the scrap  of  steel  to  someone  who
       would re-cycle the said scrap into steel so that the said steel  can
       be re-used.
   23. When such scrap is sold, in our opinion, the sale  proceeds  of  the
       scrap cannot be included in the term ‘turnover’ for the reason  that
       the respondent-unit is engaged primarily in  the  manufacturing  and
       selling of steel utensils and not scrap of  steel.   Therefore,  the
       proceeds of such scrap would not  be  included  in  ‘sales’  in  the
       Profit and Loss Account of the respondent-assessee..
   24. The situation would be different in  the  case  of  the  buyer,  who
       purchases scrap from the respondent-assessee and sells it to someone
       else. The sale proceeds  for  such  a  buyer  would  be  treated  as
       “turnover” for a simple reason that  the buyer of  the  scrap  is  a
       person who is primarily dealing in scrap.  In the case on  hand,  as
       the respondent-assessee is not primarily dealing in scrap but  is  a
       manufacturer of stainless steel utensils, only  sale  proceeds  from
       sale of utensils would be treated as his “turnover”.
   25. So as to be more accurate about the word “turnover”, one can  either
       refer to dictionaries or to materials which are published by  bodies
       of Accountants.  The  Institute of Chartered Accountants of India  (
       hereinafter referred to as the ‘ICAI’) has published  some  material
       under the head “Guidance Note on Tax Audit Under Section 44AB of the
       Income Tax Act”.  The said material has  been  published  so  as  to
       guide the members of the ICAI.  In our opinion,  when  a  recognized
       body  of  Accountants,  after  due  deliberation  and  consideration
       publishes certain material  for its members, one can rely  upon  the
       same.  Para 5 of the said Note deals with “Sales”,  “turnover”   and
       “gross receipts”.  Paras 5.2 and 5.3 of the said Note are reproduced
       hereinbelow, which pertain to the term “turnover”.
           “5.2   In  the  “Guidance  Note  on  Terms  Used  in   Financial
           Statements”  published  by  the  ICAI,  the  expression   “Sales
           Turnover” (Item 15.01) has been defined as under:-


                 “The aggregate amount  for  which  sales  are  effected  or
                 services  rendered  by  an  enterprise.  The  term   `gross
                 turnover’ and `net turnover’ (or  `gross  sales’  and  `net
                 sales’)  are  sometimes  used  to  distinguish  the   sales
                 aggregate before and after deduction of returns  and  trade
                 discounts”.


           5.3 The Guide to Company Audit issued by the ICAI  in  the  year
           1980, while discussing “sales”, stated as follows:


                 “Total turnover, that is, the aggregate  amount  for  which
                 sales are effected by the company,  giving  the  amount  of
                 sales in respect of each class of goods dealt with  by  the
                 company and indicating the quantities  of  such  sales  for
                 each class separately.
                 Note (i) The term ‘turnover’ would  mean  the  total  sales
                 after   deducting   therefrom   goods    returned,    price
                 adjustments, trade discount and cancellation of  bills  for
                 the period of audit,  if  any.  Adjustments  which  do  not
                 relate to turnover should not be made e.g. writing off  bad
                 debts, royalty  etc.  Where  excise  duty  is  included  in
                 turnover, the corresponding  amount  should  be  distinctly
                 shown as a debit item in the profit and loss account.”
                 (emphasis added)


      The aforestated meaning given by the  ICAI  clearly  denotes  that  in
      normal accounting parlance  the  word  “turnover”  would  mean  “total
      sales” as explained hereinabove.  The said sales would definitely  not
      include the scrap material which is either to  be  deducted  from  the
      cost of raw material or is to be shown separately  under  a  different
      head.  We do not see any reason for not accepting the meaning  of  the
      term “turnover” given by a body of  Accountants,  which  is  having  a
      statutory recognition.
  26. If all  accountants, auditors, businessmen,  manufacturers  etc.   are
      normally interpreting the term ‘turnover’  as  sale  proceeds  of  the
      commodity in which the business unit is dealing, we see no  reason  to
      take a different view than the view normally taken by the persons  who
      are concerned with  the said term.
  27. In addition to the  above  factors,   which  we  have  considered  for
      understanding the meaning of the term “turnover”, we should  not  miss
      the purpose with which the said term has been incorporated in  Section
      80 HHC of the Act.
  28. The intention behind enactment of Section 80HHC  of  the  Act  was  to
      encourage export so as to earn more foreign exchange.   For  the  said
      purpose the Government wanted to encourage  businessmen,  traders  and
      manufacturers to increase the export  so  as  to  bring  more  foreign
      exchange in our country.  If the purpose  is  to  bring  more  foreign
      exchange and to  encourage  export,  we  are  of  the  view  that  the
      legislature would surely like to give more benefit to persons who  are
      making an effort to help our nation in the process  of  bringing  more
      foreign exchange.  If a trader or a manufacturer is trying his best to
      increase his exports, even at the cost of  his  business  in  a  local
      market, we are sure that the Government would like to encourage such a
      person.  In our opinion, once the  Government  decides  to  give  some
      benefit to someone who is  helping  the  nation  in  bringing  foreign
      exchange, the  Revenue  should  also  make  all  possible  efforts  to
      encourage such traders or manufacturers by giving such business  units
      more benefits as contemplated under the provisions of law.
  29. For the aforesaid reasons, we are of the view that the view  expressed
      by the High Court is in conformity with the normal accounting practice
      followed by the traders, including the respondent-assessee and it  was
      justified in coming to a conclusion that the proceeds  generated  from
      the sale of scrap would not be included in  the ‘total turnover’.
  30. For the aforesaid reasons, we dismiss the appeal with no order  as  to
      costs.
  31. In view of  the order passed in the Civil Appeal  No.  5592  of  2008,
      Civil Appeal Nos. 3283 of 2009, 4491 of 2009 and 4898 of 2010 are also
      dismissed with no order as to costs as the legal  issues  involved  in
      these appeals are same.





                            .......................................J
                                                                   (ANIL  R.
DAVE)




                            ........................................J
                                              (DIPAK MISRA)
New Delhi
May 5,  2014.



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