ORDER
P.K. Bansal, Accountant Member.
In this appeal the revenue has taken the following effective grounds of appeal
“The Learned Commissioner (Appeals) has erred in law and on facts of the case in:
(1) directing to allow interest expenses of Rs. 54,16,190 out of disallowance of pre-operative expenses.
(2) directing to exclude sales tax and excise duty, service charges, commission, conveyance charges and miscellaneous receipts from the total turnoverwhile calculating deduction undersection 80HHC.”
2. Ground No. 1 relates to the deletion of the disallowance made in respect of the interest amounting to Rs. 54,16,190 shown by the assessee under the pre-operative expenses in the balance sheet but claimed as deduction under section 36(1)(iii) of the Income Tax Act while computing the net taxable income. The assessing officer was of the view that this expenditure has to be treated as capital expenditure but when the matter went before the Commissioner (Appeals), the Commissioner (Appeals) deleted the addition by observing in para 5.3 as under
“5.3 Following the decision of the Honble I.T.A.T. in the case of Vadilal Dairy International Ltd., the decision of the Honble Gujarat High Court in the case of Alembic Glass Works and also following my orders for the assessment years 1995-96 and 1996-97 in the appellants own case, the assessing officer is directed to allow interest expenditure of Rs. 54,16,190. The disallowance in respect of remaining items made by the assessing officer is upheld. The assessing officer is directed accordingly.”
3. Before us learned Department Representative relied on the order of the assessing officer. The reliance was also placed on the decision of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) and it was contended that the expenditure incurred by the assessee by way of interest was capital expenditure and, therefore, it cannot be allowed under section 36(1)(iii) and also in view of the Explanation added thereto.
4. Learned authorised representative on the other hand relied on the order of Honble Gujarat High Court in the case of Dy. CIT v. Core Healthcare Ltd. (2001) 251 ITR 61. Reliance was also placed on the decision of Ahmedabad Bench in the case of Kayal Syntex Ltd. v. Dy. CIT (ITR Nos. 2547 and 2546 of 2000). It was also contended that the Commissioner (Appeals) has allowed the interest following the decision of Honble ITAT “C” Bench Ahmedabad in the case of Vadilal Dairy International Ltd. v. CIT (IT Appeal No. 500 (Ahd.) of 1997, dated 15-6-1998). It was pointed out that the decision of the Honble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT(1975) 98 ITR 167 (SC), has been considered by the Honble Gujarat High Court in the case of Core Healthcare Ltd. (supra).
5. We have carefully considered the rival submissions and perused the materials on record. We have gone through the orders of the authorities below as well as the case law relied before us. We find that the Honble Gujarat High Court has duly considered the judgment of Honble Supreme Court in the case of Challapalli Sugars Ltd. (supra) at page 73 in the case of Core Healthcare Ltd. (supra). The judgment of the Honble Gujarat High Court is binding on us. Learned DR could not dispute the fact before us that the facts in the case of Core Healthcare Ltd. (supra), the Ahmedabad Bench has also followed the said decision. We, therefore, respectfully following the decision of the Honble Gujarat High Court and that of the Ahmedabad Bench in the case of Kayal Syntex Ltd. (supra) dismiss the Ground No. 1 of the revenues appeal.
6. Ground No. 2 consists of two issues. First issue relate to the direction given by the Commissioner (Appeals) that the sales and excise duty could not form part of the total turnover for the purpose of computing the total turnover while working out deduction allowable to the assessee under section 80HHC.
7. After carefully considering the rival submission, we are of the view that this issue is duly covered by the decision of the Special Bench of this Tribunal in the case of IFBAgro Industries Ltd. v. Dy. CIT(2002) 83 ITD 96 (Cal.).
8. Honble Karnataka High Court in the case of CIT v. Bharat Earth Movers Ltd. (2004) 268 ITR 232 and Honble Madras High Court in the case of CIT v. Wills (India) Ltd. has also taken the same view by following decision of Bombay High Court in the case of CIT v. Sudarshan Chemicals India Ltd. (2000) 245 ITR 769 as well as decision of the Calcutta High Court in the case of CIT v. Chloride India Ltd. (2002) 256 ITR 625.
9. No contrary decision was brought to our notice by the learned Department Representative. We, therefore, dismiss the issue relating to the direction given by the Commissioner (Appeals) that the sales and excise duty should be excluded from the total turnover while computing the deduction under section 80HHC.
10. The second issue in the second ground taken by the revenue relate to the direction given by the Commissioner (Appeals) that the service charges, commission, charges, conveyance charges, miscellaneous receipts should be excluded from the total turnover while working out the deduction under section 80HHC.
11. Learned A.R. in this regard contended that since 90% of the other receipts has been excluded in view of clause (ba) under Explanation given under section 80HHC, therefore, this receipt cannot form part of the total turnover. Reliance in this regard was placed on the following decisions :
(1) CIT v. Kantilal Chhotalal (2000) 246 ITR 439 (Mum.).
(2) CIT v. K. Ravindranathan Nair (2004) 265 ITR 217 (Ker.).
12. The learned Department Representative on the other hand relied on the order of the assessing officer,
13. We have carefully considered the rival submissions and perused the materials on record and gone through the orders of the tax authorities below. We have also gone through the case law relied on by the learned authorised representative before us. From the facts on record we noted that the assessing officer has included the following amount in the total turnover while allowing deduction to the assessee under section 80HHC :
Rs.
Sales Tax
1,70,10,283
Service Charges & Commission
25,58,344
Conversion Charges
12,89,382
Miscellaneous Receipts
12,24,193
Thus, the assessing officer has taken the total turnover at Rs. 1,05,50,24,916 in place of Rs. 1,03,29,42,714 taken by the assessee while computing the deduction under section 80HHC. The assessing officer has worked out the books profit after reducing 90% of the following amount
Rs.
Service Charges
25,58,344
Miscellaneous Receipts
12,24,193
Duty Drawback
3,49,747
Premium of Special Input License
8,33,586
Interest Income
29,06,422
14. The assessee disputed before the Commissioner (Appeals) about the inclusion of the aforesaid sales tax, service and commission charges, conversion charges and miscellaneous receipts items in the total turnover. The Commissioner (Appeals) allowed the appeal of the assessee and direct the assessing officer to exclude the aforesaid items consisting of sales-tax, service charges and commissions, conversion charges and miscellaneous receipts from the total turnover. While giving the aforesaid direction the Commissioner (Appeals), in respect of service charges and commission, conversion charges and miscellaneous receipts observed that the assessing officer has already excluded 90% of the income relating to these items for the purpose of calculating the deduction under section 80HHC and, therefore, he held
“When the assessing officer has excluded the above four items for the purpose of calculating export profit I am of the view that none of the above income should form part of the turnover.”
15. Thus from the facts on record it is apparent that the Commissioner (Appeals) has misunderstood the fact. The correct fact was that the assessing officer has not excluded the 90% of conversion charges amounting to Rs. 12,89,382 while computing the business profit for the purpose of deduction available to the assessee under section 80HHC.
16. The revenue has come in appeal before us. We have already confirmed the order of the Commissioner (Appeals) so far it relates to the exclusion of sales tax is concerned in the preceding paragraph. The issue before us now relates only to the direction of the Commissioner (Appeals) in respect of exclusion of service charges and commissions, conversion charges and miscellaneous receipts.
17. We have gone through the judgment of Mumbai High Court as relied by the learned authorised representative in the case of CIT v. Kantilal Chhotalal (2000) 246 ITR 439. In this case it was held
Section 80HHC of the Income Tax Act, 1961, has undergone various changes from time to time. Clause (baa) of the Explanation to section 80HHC inserted by the Finance (No. 2) Act, 1991, is clarifactory. The memorandum explaining the provisions has discussed this point in detail. In ( 1991) 190 ITR (St.) 300 it has been mentioned that the existing formula distorted the figure of export profits when receipts like interest, commission, etc., are included in the business profits and, therefore, to clarify the meaning of the business profits for the purpose of section 80HHC, the Legislature has excluded the above items from business profits in the formula. Therefore, the amendment was clearly intended to remove the defect in the formula for calculating export profits even before 1-4-1992, In fact, the Legislature has clarified that receipts like interest commissions, etc. have no nexus with the export activity and by including such receipts in the business profits the existing formula became unworkable. Hence, by the amendment, such receipts were excluded. A reading of clauses (b) and (ba) of the Explanation clearly indicate that the Legislature has brought on par the components of export turnover and sale turnover. Both the numerator and denominator show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that proration applies to business profits in order to work out the export profits. Therefore, the numerator and the denominator are required to have a common element which is the sale proceeds. in fact, by the proviso in clause (ba) to the Explanation, it is further provided that the expression “total turnover” shall have effect so as to exclude section 28(iiia), (iiib) and (iiic) which refer to, inter alia, profits on sale of a license granted under the Imports (Central) Order, cash assistance, duty drawback, etc. This exclusion also shows that the Legislature clearly intended to exclude all receipts which have no nexus with sale proceeds from export activity.
Held accordingly, that for the purpose of section 80HHC total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature.”
18. We have gone through the order of the Kerala High Court in the case of CIT v. K. Ravindranathan Nair (2004) 265 ITR 217 (Ker). In this case no doubt the Honble Kerala High Court has held that processing charges received will not form part of the turnover and further held that only sale proceeds of goods or mercantile alone will form part of turnover, from the facts of the case it is not apparent whether the processing charges received were also excluded from the profit of the business for the purpose of allocating these profits in the ratio which the export turnover bears to the total turnover. Any receipts which does not form part of the total turnover once entered to the credit side of the P & L account increases the profit of the business. We are of the view, if any receipt does not form part of the total turnover it should be excluded from the profit of the business also, because only the numerator and the denominator will show the correct picture. The decision of the Mumbai High Court in the case of Kantilal Chhotalal (supra) laid down the same preposition of law.
19. In this case, we find that the assessing officer has excluded 90% of the service charges & commission and also miscellaneous receipts from the business profit, therefore, in our opinion, the Commissioner (Appeals) was correct in law in directing the assessing officer to exclude from total turnover service charges & commissions and miscellaneous receipts. So far as the conversion charges are concerned, the assessing officer has not excluded the 90% of the conversion charges while working out the business profit as per Explanation (baa) of section 80HHC. The profit earned through the conversion charges since already included in the profit for business, therefore, in our opinion, the conversion charges cannot be carved out of total turnover. We find that under Explanation (ba) of section 80HHC, total turnover has been defined with effect from 1-4-1987, which stipulates that total turnover shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station, as defined in the Customs Act, 1962. The definition given is exclusive. The word means has not been used. Therefore, the natural meaning of total turnover has not been taken away. The word exclude is used when only particulars items are excluded from the meaning of the word but natural meaning of the word remains intact and is to be read excluding those items. Therefore, we do not agree with the submissions of the learned Department Representative that total turnover will include every receipt excluding freight or insurance.
Natural meaning of the total turnover remains. Turnover in common parlance means how the funds received in the course of business are turned over by a businessman. Naturally, it will be the receipt which he receives on his account. The receipt, which are received on behalf of the other person like Government cannot be the part of the total turnover. There are two terms generally used in accountants language – gross receipts and turnover. Gross receipt is a wider term than turnover. Gross receipt will include all the receipts made by a businessman in course of business on revenue accountant and it generally represents the total of the income side in the profit and loss account excluding the stock. The turnover generally represents the consideration received on the sale of the goods, merchandise and services, the other receipts, although are the part of the gross receipt but cannot be regarded to be turnover. In Financial Management, the capital turnover ratio is computed to judge how efficiently the capital is utilized. The receipts which do not relate to the goods or merchandise cannot be regarded to be turnover. The Legislature also wanted to restrict the meaning of the turnover to the natural meaning, therefore, the words gross receipt has not been used as the words total sales, turnover or gross receipts are used under section 44AB. Proviso given under Explanation (ba) also makes it apparent that the natural meaning of the total turnover has not been snatched away.
20. The purpose of defining the total turnover under section 80HHC is to allow the deduction to the assessee under section 80HHC(3) and for that purpose the profit relating to export are to be worked out on the basis of the total profit of the business and, i.e., why the business profits are allocated in the ratio as the export turnover bears to the total turnover. Therefore, in our opinion the logical interpretation can be that if any receipt does not form part of the total turnover it should be excluded from the profit of the business. If the receipt is not excluded from the profit of the business, the receipt has to be considered as part of the total turnover. In view of our aforesaid discussion we set aside the order of the Commissioner (Appeals) so far it direct the assessing officer that the conversion charges should be excluded from the total turnover because the conversion charges in the case before us form part of the business profit. We, therefore, modify the direction of the Commissioner (Appeals) and direct the assessing officer to exclude only the service charges & commissions amounting to Rs. 25,58,344 and miscellaneous receipt amount to Rs. 12,24,193 from the total turnover in addition to the sales tax for which we have already directed in the preceding paragraph. Thus, this ground of the appeal of the revenue is partly allowed.
21. In the result the appeal of the revenue is partly allowed.