INCOME TAX ACT, 1961

Deduction under section 80HHC- Computation of total turnover-Treatment of excise duty, sales tax and conversion charges

Assessee claimed deduction under section 80HHC but AO recomputed the same after holding that sales tax and excise duty were part of the total turnover. AO also included the conversion charges in the total turnover for the purpose of deduction under section 80HHC. Though the assessee claimed the expenditure on replacement of machinery as revenue expenditure, AO disallowed the same by treating it as capital expenditure. CIT(A) as well as Tribunal decided the issue of inclusion of sales tax as well as excise duty and conversion charges for the purpose of deduction under section 80HHC in favour of the assessee and they also held the expenditure on replacement of machinery as revenue expenditure. Held:The madras high court in CIT v. Wheels India Ltd. (2005) 275 ITR 319 and CIT v. Sundaram Fasteners Ltd. (2005) 272 ITR 652, which were followed by this court in CIT v. India Pistons Ltd. (2006) 282 ITR 632, held that it is highly impossible to accept the contention that the term 'turnover' would include the excise duty and sales tax components which were all indirect taxes and which the assessee has to collect and pay over to the Government and such statutory dues will not have any element of profit of business, therefore, the sales tax and excise duty were not to be included in the total turnover, while computing the deduction under section 80HHC. Therefore,the sales tax and excise duty were not to be included in the total turnover, while computing the deduction under section 80HHC. The Bombay High Court in CIT v. Bangalore Clothing Co. (2003) 260 ITR 371 was held that Explanation (baa) to section 80HHC was inserted with effect from April 1, 1992 and under that Explanation, 'profits of the business', for the purposes of section 80HHC does not include receipts which do not have an element of turnover like rent, commission, interest, etc. This court in CIT v. Sundaram Clayton Ltd. (2006) 281 ITR 425 also held that the charges of miscellaneous income and commission do not form part of the turnover for the purpose of calculation of deduction under section 80HHC. Therefore, the conversion charges had to be excluded from the business profit for the purpose of calculation of deduction under section 80HHC. This court, in CIT v. Janakiram Mills Ltd. (2005) 275 ITR 403, held that all plant and machinery put together amount to a complete spinning mill which is capable of manufacturing yam and hence, each replaced machine could not be considered as an independent one and no intermediate marketable product was produced. Therefore, it was found thatTribunal was right in holding that the entire plant and machinery being one common unit, the cost towards replacement of part of the machinery would be revenue expenditure. In the present case, the assessee had only replaced certain machinery without discontinuing their production activities and it was found that there was no acquisition of any new asset, much less capital of any enduring advantage. No claim for depreciation was ever made before any authorities either by the assessee or the revenue to consider the issue of block of assets. Therefore, the appeal of the revenue was dismissed.

Income Tax Act, 1961 Section 80HHC

Case Law Analysis:CIT v. Wheels India Ltd. [2005] 275 ITR 319 / 146 Taxman 442 (Mad.); CIT v. Sundaram Fasteners Ltd. [2005] 272 ITR 652 (Mad.); CIT v. India Pistons Ltd. [2006] 282 ITR 632 (Mad.) [Para 5]; CIT v. Bangalore Clothing Co. [2003] 260 ITR 371 / 127 Taxman 637 (Bom.) [Para 7]; CIT v. Sundaram Clayton Ltd. [2006] 281 ITR 425 (Mad.) [Para 7] and CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403 / 146 Taxman 40 (Mad.) [Para 9] followed