IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 08/02/2006
CORAM
THE HON'BLE MR.JUSTICE P.D.DINAKARAN
AND
THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA
Tax Case (Appeal) No.39 of 2006
and Tax Case (Appeal) Nos., 49 to 42 of 2006
& TCMP Nos.35 to 37 of 2006
Commissioner of Income Tax
Madras. .. Appellant in all the TCs
-Vs-
M/s.India Pistons Limited,
Husur Garden, Sembium,
Chennai-600 011 .. Respondent in all Tcs
Appeals under Section 260A of the Income Tax Act, 1961 against the
common order of the Income Tax Appellate Tribunal, Madras 'A' Bench dated
15.03.2005 in ITA Nos.247, 1038, 435 & 1157/Mds/99 for the assessment years
1995-96 and 1996-97.
!For Appellant : Ms. Pushya Sitaraman, Sr.S.C.
^For Respondent : ---
:J U D G M E N T
(Delivered by P.D.DINAKARAN, J.)
The above tax case appeals are directed against the common order of
the Income-tax Appellate Tribunal in ITA Nos.247, 1038, 435 & 1157/ Mds/99,
dated 15.03.2005.
2. The Revenue is the appellant. The assessee is a manufacturer of
Pistons for automobiles and other stationary engines. The assessee filed
returns of income for the assessment years 1995-96 and 1996-97, wherein the
assessee claimed inter alia, deduction under Section 80 HHC of the Income Tax
Act (herein after referred to as ‘The Act’) in respect of its income from
exports, deduction in respect of interest on foreign bills (for 1995-96 only),
and deduction of customs duty from closing stock. The assessing officer found
that the assessee had excluded the sales tax and excise duty from the total
turnover for the purpose of computation of deduction under Section 80HHC of
the Act and accordingly he re-computed the total turnover including these
elements. The assessing officer also disallowed the interest on foreign bills
under Section 40(a)(i) as no tax was deducted at source, and included the
value of customs duty into the valuation of closing stock. Hence, the
assessee filed appeals before the Commissioner of Income-tax (Appeals), who
allowed the appeals in favour of the Revenue with regard to the issue
inclusion of sales tax and excise duty in the total turnover for the purpose
of 80HHC and other two issues in favour of the assessee. On appeals, at the
instance of the Revenue as well as by the assessee, the Income Tax Appellate
Tribunal dismissed the appeals filed by the Revenue by following its own
earlier orders in ITA 1044/Mds/98 and allowed the appeals filed by the
assessee.
3. Aggrieved by the same, the Revenue has preferred the above appeals
raising the following substantial questions of law:
“1. Whether in the facts and circumstances of the case, the Tribunal was
right in holding that the interest on foreign bills is a deductible
expenditure?
2. Whether in the facts and circumstances of the case, the Tribunal was right
in holding that the excise duty and sales tax should be excluded from the
total turnover to arrive at the deduction under Section 80HHC?
3. Whether in the facts and circumstances of the case, the Tribunal was right
in holding that customs duty paid is not to be included in the value of
closing stock?”
4.1. With regard to the first question whether in the facts and
circumstances of the case, the Tribunal was right in holding that the interest
on foreign bills is a deductible expenditure, it is not in dispute that the
assessee claimed deduction in respect of Interest on Foreign Bills. The
assessing officer made disallowance by following the earlier assessment
orders. The Commissioner of Income Tax(A) deleted the disallowance made by
the assessing officer. On appeals by the Revenue, the Appellate Tribunal
allowed the issue in favour of the assessee.
4.2. It could be found that the conditions for supply of goods by the
non-resident to the assessee were that the payment of purchase price in
instalments was to be made with the condition that the assessee will
compensate the supplier by means of interest on the unpaid instalments. The
unpaid instalment was not the same as loan and therefore, interest paid could
not be treated as paid on the loan and hence, deduction of tax at source was
not attracted. Since it is not the case of the Revenue that interest was paid
with reference to loan so that the requirement of tax deduction at source
would have been attracted, no disallowance under Section 40(a)(i) can be made.
Section 40(a)(i) contemplates that interest, royalty, fees for technical
services or other sum shall not be deducted in computing the income chargeable
under the head ‘Profits and gains of business or profession”, which reads as
follows:
“40. Notwithstanding anything to the contrary in Sections 30 to 38, the
following amounts shall not be deducted in computing the income chargeable
under the head ‘Profits and gains of business or profession”,-
(a) any interest (not being interest on a loan issued for public
sub-subscription before the 1st day of April, 1938), royalty, fees for
technical services or other sum chargeable under this Act, which is payable-
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company,
* * * * * * * *
That apart, even in the assessment order, the assessing officer mentioned that
this was interest pertains to foreign bills. If that be so, since the amount
was not a loan and the amount of interest paid was not interest on loan,
deduction of tax at source, is not attracted and as such, we find that the
directions of the Commissioner as well as the Tribunal are strictly in
compliance with Section 42(a)(i) of the Act, which requires no interference.
5.1. In respect of question No.2 viz., whether in the facts and
circumstances of the case, the Tribunal was right in holding that the excise
duty and sales tax should be excluded from the total turnover to arrive at the
deduction under Section 80HHC, this Court in COMMISSIONER OF INCOME TAX VS.
WHEELS INDIA LTD. (275 ITR 319) and COMMISSIONER OF INCOME TAX VS. SUNDARAM
FASTENERS LTD.(272 ITR 652) held that it is highly impossible to accept the
contention that the term ‘ turnover’ would include the excise duty and sales
tax components which are 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 and therefore, the Sales tax and excise duty
are not to be included in the total turnover while computing the deduction
under Section 80HHC.
5.2. In view of the ratio laid down by this Court in the decisions
cited supra, we hold that the sales tax and excise duty are not to be included
in the total turnover, while computing the deduction under Section 80HHC.
6.1. As far as the third question, viz., whether in the facts and
circumstances of the case, the Tribunal was right in holding that customs duty
paid is not to be included in the value of closing stock, this Court, in
COMMISSIONER OF INCOME TAX VS. ENGLISH ELECTRIC CO.OF INDIA LTD. (243 ITR
512) held that the liability for payment of excise duty was incurred when the
process of manufacture was complete in relation to an excisable item. All
payments and liability incurred towards duty were exhibited separately. The
assessee’s liability for payment of duty could not be regarded as part of the
assets held by the assessee in the form of higher value assigned to the
closing stock. A liability could not be converted into an asset in that
manner. A liability was an item deductible for the purpose of arriving at the
profits for the year and only when such deduction was given the amount could
be added to the value of the closing stock.
6.2. In view of the ratio laid down by this Court in the decision
cited supra, we hold that the Custom Duty on Closing stock are not to be
included in the total turnover, while computing the income under Section 80HHC
of the Act.
7. In view of the foregoing conclusion, we find no error or
illegality in the order of the Tribunal and the same requires no interference.
Hence, no substantial question of law would arise for consideration of this
Court. Accordingly, the tax case appeals are dismissed. Consequently, TCMP
Nos.35 to 27 of 2006 are also dismissed.
sl
To
1. The Assistant Registrar,Income Tax Appellate Tribunal
Madras Bench “A”.
2. The Secretary, Central Board of Direct Taxes, New Delhi.
3. The Commissioner of Income Tax (Appeals) V, Chennai.
4. The Deputy Commissioner of Income Tax, Special Range I,
Chennai.