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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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