COMMR.OF INCOME TAX-XVII,NEW DELHI Vs PUNJAB STAINLESS STEEL INDUSTRIES
Bench: ANIL R. DAVE,DIPAK MISRA
Case number: C.A. No.-005592-005592 / 2008
Diary number: 27671 / 2007
Advocates: B. V. BALARAM DAS Vs
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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
J U D G M E N T
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.
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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
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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.
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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,
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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
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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.
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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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