Holding

Sales tax and excise duty are not part of "total turnover" for the purpose of computing the deduction under Section 80HHC.

Summary

Mis. Lakshmi Machine Works filed its return for AY 1993-94 claiming a deduction under Section 80HHC of the Income Tax Act, 1961, excluding sales tax and excise duty from its total turnover. The Assessing Officer demanded recomputation of total turnover by adding those taxes, but the appellate authority held they were liabilities to the Government and not part of turnover. The Department appealed, arguing that "turnover" should be given its plain meaning and include sales tax and excise duty. The Supreme Court examined the formula in Section 80HHC, emphasizing that it requires a schematic, purpose‑driven interpretation to exclude items that do not represent turnover. It held that, like commission and interest, sales tax and excise duty have no element of turnover and therefore cannot be included in the denominator of the deduction formula. Consequently, the Court dismissed the Department’s appeal.

Issues considered

Whether sales tax and excise duty are includible in the "total turnover" for computing the deduction under Section 80HHC(3).
How the term "total turnover" should be interpreted – literal meaning versus schematic/purposeful construction.
Whether the exclusion of such taxes is necessary to keep the Section 80HHC formula workable.

Legislation cited

Income Tax Act, 1961s. 143(1)(a), s. 143(2), s. 2(24), s. 28, s. 288, s. 40, s. 40A, s. 43, s. 43B, s. 50, s. 80HHC

Subjects

Income TaxSection 80HHCExport profitsTotal turnoverSales taxExcise dutySchematic interpretationTax deductionExport incentives

Judgment

A COMMISSIONER OF INCOME TAX, COIMBATORE f
v.
MIS. LAKSHMI MACHINE WORKS

APRIL 25, 2007

B (S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]

Income Tax Act, 1961:
""
Section 80HHC-AY 1993-94-Profits retained for export business-
c Deduction in respect of-Schematic interpretation- "Turnover "-Elements
in-Assessee filed its return of its income for AY 1993-94-A notice under S.
I 43(2) was issued in which one of the items was the quantum of deduction
under S. 80HHC-The assessee was asked to explain why the total turnover
should not be recomputed by including sales tax and excise duty-The
D Assessing Officer held that under S. 80HHC(ba) deduction from "total
turnover" was restricted only to three items, namely, profit on sale of import
licence, duty drawback and CCS-However, the appellate authority held
that sales tax and excise duty were liabilities of the assessee to the Government
,,
and were not liable to be included in the "total turnover" for working out
the deduction under S. 80HHC-The Tribunal and the High Court dismissed
E the appeals filed by the Department--Held: in the formula under S. 80HHC
there are three concepts, namely, "'business profit", "export turnover" and
"total turnover"-Jn order to make the formula workable a schematic
interpretation has to be given to S. 80HHC-Therefore, just as commission
received by an assessee is relatable to exports and yet it cannot form part
of "turnover", excise duty and sales tax also cannot form part of the
F
"turnover"-Jncome from rent, commission etc. cannot be considered as part
of business profits and, therefore, they cannot be held as part of the "turnover"
a/so---Sa/es tax and excise duty also do not have any element of "turnover"
which is the position even in the case of rent, commission, interest etc.-They
are recovered by the assessee on behalf of the Government-Hence, sales tax
G and excise duty are not includible in the ''turnover''.
x_ ..-
Words & Phrases:

"Turnover"-Meaning of-In the context of Section 80HHC of the

H 622
COMMR OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS 623
'
\ Income Tax Act, 1961. A
For the assessment year 1993-94, the respondent-assessee filed its
return of income. Intimation under Section 143(1)(a) of the Income Tax Act,
1961 was sent by the appellant accepting the returned income. Later on a
notice was issued under Section 143(2) of the Act in which one of the items
was the quantum of deduction under Section 80HHC of the Act. B

The respondent-assessee had computed the allowable deduction under
•
"
Section 80HHC without taking into account in the total turnover the sales
tax and exci~e duty. The assessee was asked to explain why the total turnover
should not be recomputed by including sales tax and excise duty.
c
The Assessing Officer held that under Section 80HHC(ba) of the Act
deduction from "total turnover" was restricted only to three items, namely,
profit on sale of import licence, duty drawback and CCS. The Assessing
Officer further held that from the profits of business, the assessee was entitled
to deduct the above three items and also brokerage, commission, interest, rent,
D
charges or any other receipt of similar nature.

Ali The appellate authority held that sales tax and excise duty were
liabilities of the assessee to the Government and were not liable to be included
in the "total turnover" for working out the deduction under Section 80HHC.
The Tribunal and the High Court dismissed the appeals filed by the appellant. E
Hence the appeal.

The following question arose before the Court:-

Whether excise duty and sales tax were includible in the "total

• turnover", which was the denominator in the formula contained in Section
80HHC(3)diploma-holder
F

Dismissing the appeal, the Court

HELD: 1.1. Under Section SOHHC of the Income Tax Act, 1961, the
exporters were allowed, in the computation of their total income, a deduction G
. ,.)I of the entire profits derived from exports. During the relevant year, there
existed a dual system for computation of export profits. The first method
operated in cases where the export was of goods manufactured by the tax payer.
In those cases the export profit had to be computed on the basis of the ratio of
"export turnover" to "total turnover". [Para 7) (635-E-F]
H
624 SUPREME COURT REPORTS (2007] 5 S.C.R.

A 1.2. Where the export consisted of goods purchased from third parties
(trading goods) there was a second method of computation in which the export
profits were to be calculated by deducting from the export turnover, direct
and indirect costs attributable to such exports. [Para 8] 635-G]

2.1. All assessable entities were not eligible for deduction under Section
B 80HHC of the Act. According to Section 80HHC only an Indian company or a
non-company assessee who was the resident in India was eligible for deduction
provided he was engaged in the export business of eligible goods.
(Para 10] (636-C]

c namely,2.2."business
In the formula under Section 80HHC there were three concepts,
profit", "export turnover" and "total turnover". The first
step was to find out the business profit. This was to be done in accordance
with the provisions of Sections 28 to 43 of the Act. Under Section 80HHC the
above three export incentives, namely, CCS, duty drawback and profit on sale
of import licence, were includible in the "business profits" and, therefore,
D they were taxable. The Finance Act, 1992 restricted the term "export
turnover" to FOB sale proceeds. However, the said Act excluded CCS, duty
drawback and profit on sale of import entitlement from the term "total
turnover". [Para 12] [639-E]

3. The formula under Section 80HHC was very simple as far as it related
E to the sole business of exports. The formula became complicated in cases of
composite business. In the case of direct exporter there were three categories
of assesses - (i) an assessee who exported goods manufactured by him; (ii)
an assessee who did not export goods manufactured by him but exported goods
manufactured by others; and (iii) an assessee who exported manufactured
F goods as well as trading goods. The formula became complicated in the case
of the third category. It also became complicated in the cases of an assessee
who did not directly export goods but supplied goods to an Export House/
Trading House for the purpose of export (subordinate manufacturer).
[Para 15] [644-E-F)

G 4. The principai reason for enacting the above formula was to disallow
a part of S. 80HHC concession when the entire deduction claimed could not
be regarded as relatable to exports. Therefore, while interpreting the words
"total turnover" in the above formula in Section 80HHC one has to give a
schematic interpretation to that expression. There is one more reason for
giving a schematic interpretation. The various amendments to Section 80HHC
H
COMMR OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS 625

show that receipts by way of brokerage, commission, interest, rent etc. do not A
form part of business profits as they have no nexus with the activity of exports.
If interest or rent was not regarded by the legislature as business profits,
the question of treating the same as part of the total turnover in the above
formula did not arise. In fact, Section 80 HHC had to be amended several times
since the formula on several occasions gave a distorted figure of export profits
when receipts like interest, rent, com mission etc., which did not have the B
element of turnover got included in the profit and loss account and
consequently became entitled to deduction. This was clarified by the
amendment to Section SOHHC commencing from 1.4.92. The said amendment
made it clear that though commission and interest emanated from exports,
they did not involve any element of turnover and merely for the reason that C
commission, interest, rent etc. were included in the profit and loss account
they did not become eligible to deduction. A purposeful interpretation has to
be given to the above Section. The said Section is entirely based on the formula.
The amendments from time to time indicate that they became necessary in
order to make the formula workable. Hence, a schematic interpretation has
to be given to Section HHC of the Act. [Para 16] (644-G-H; 645-A-B-C] D
.'1 5.1.. It is important to note that tax under Act is upon income, profits
and gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the
word "income" includes profits and gains. The charge is not on gross receipts
but on profits and gains properly so-called. Gross receipts or sale proceeds, E
however, include profits. [Para 18] (646-H; 647-A]

Chowringhee Sales Bureau (P) Ltd v. CIT, (1973) 83 ITR 542 SC,
referred to.

)
5.2. However, subject to special requirements to the income tax, profits F
have got to be assessed provided they are real profits. Such profits have to be
ascertained on ordinary principles of commercial trading and accounting.
However, the Income Tax Act has laid down certain rules to be appiied in
deciding how the tax should be assessed and even if the result is to tax as
profits what cannot be construed as profits, still the requirements of the income
tax must be complied with. [Para 18] (647-B] G
- -JI'
Kanga and Palkhiva/a: "The Law and Practice ofIncome Tax" 8th Edn.
· P. 123, referred to.

6.1. Where a deduction is necessary in order to ascertain the profits
H
626 SUPREME COURT REPORTS [2007] 5 S.C .R.

A and gains, such deductions should be allowed. Profits should be computed after /'
deducting the expenses incurred for business though such expenses may not
be admissible expressly under the Act, unless such expenses are expressly
disallowed by the Act. Therefore, schematic interpretation for making the
formula in Section 80HHC workable cannot be ruled out. Similarly, purposeful
interpretation of Section 80HHC which has undergone so many changes
B cannot be ruled out, particularly, when those legislative changes indicate that
the legislature intended to exclude items like commission and interest from
deduction on the ground that they did not possess any element "turnover"
even though commission and interest emanated from exports. The words "total
turnover" in Section 80HHC have to be read as part of the formula which
C sought to segregate the "export profits" from the "business profits".
Therefore, the formula has to be read in entirely. In that formula the entire
business profits is not given deduc:tion. It is the business profit which is
proportionately reduced by the above fraction/ratio of export turnover+ total
turnover which constitute 80HHC concession (deduction). Income in the
nature of "business profits" was, therefore, apportioned. [Para 18) (647-C-F)
D
Kanga and Palkhivala: 'The Law and Practice ofIncome Tax" 8th Edn.
P. 455, referred to. ,a
6.2. One has to give weightage not only to the words "total turnover"
but also to the words "export turnover'', "total export turnover" and "business
E profits". In the circumstances, the words "total turnover" in the above formula
cannot be interpreted with reference to the definition of the word "turnover"
in other laws like Central Sales Tax or as defined in accounting principles.
Goods for export do not incur excise duty liability. As stated above, even
commission and interest formed a part of the profit and loss account; however,
F they were not eligible for deduction under Section 80HHC. They were not
eligible even without the clarification introduced by the legislature by various
amendments because they did not involve any element of turnover.
[Para 18) [647-G-H; 648-A)

CIT'i. Sudarshan Chemicals Industries Ltd. [2000) 245 ITR 769 (Born)
G and Paprika Ltd v. Board of Trade, [1944) 1 All E.R. 372 and Love v. Norman
Wright (Builders) Ltd, [1944) 1 All E.R. 618, referred to. )(

7.1. However, as can be seen from the Income Tax Rules and from the
Form No. 10 CCAC in the case of deduction under Section 80HHC a report
of the auditor certifying deduction based on export turnover was sufficient.
H This is because the very basis for computing Section 80HHC deduction was
COMMR. OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS 627
'\
"business profits" as computed under Section 28, a portion of which had to A
be apportioned in terms of the above ratio of export turnover to total turnover.
Section 80HHC(3) was a beneficial Section. It was intended to provide
incentives to promote exports. The incentive was to exempt profits relatable
to exports. In the case of combined business of an assessee having export
business and domestic business the legislature intended to have a formula to
ascertain export profits by apportioning the total business profits on the basis B
of turnovers. Apportionment of profits on the basis of turnover was accepted
as a method of arriving at export profits. [Para 18) [648-B-D)
1
...
7.2. Just as commission received by an assessee is relatable to exports
and yet it cannot form part of "turnover", excise duty and sales tax also cannot
form part of the "turnover". Similarly, "interest" emanates from exports and
c
yet "interest" does not involve an element of turnover. The object of the
legislature in enacting Section 80HHC of the Act was to confer a benefit on
profits accruing with reference to export turnover. Therefore, "turnover" was
the requirement Commission, rent, interest etc. did not involve any turnover.
Therefore, 90% of such commission, interest etc. was excluded from the D
profits derived from the export Therefore, even without the clarification such
'1 items did not form part of the formula in Section 80HHC(3) for the simple
reason that it did not emanate from the "export turnover", much less any
turnover. [Para 18) (648-D-F)

8.1. Even if the assessee was an exclusive dealer in exports, the said E
commission was not includible as it did not spring from the "turnover". Just
as interest, commission etc. did not emanate from the "turnover", so also
excise duty and sales tax did not emanate from such turnover. Since excise
duty and sales tax did not involve any turnover, such taxes had to be excluded.
> Commission, interest, rent etc. do yield profits, but they do not partake of the
character of turnover and, therefore, they were not includible in the "Total
F
turnover". The above discussion shows that income from rent, commission
etc. cannot be considered as part of business profits and, therefore, they cannot
be held as part of the "turnover" also. [Para 18) (648-F-H]

8.2. Sales tax and excise duty also do not have any element of "turnover" G
which is the position even in the case of rent, commission, interest etc. It is
important to bear in mind that excise duty and sales tax are indirect taxes.
They are recovered by the assessee on behalf of the Government. Therefore,
if they are made relatable to exports, the formula under Section 80HHC would
become unworkable. This view is in the light of amendments made to Section H
628 SUPREME COURT REPORTS [2007] 5 S.C.R.
(
A SOHHC from time to time. [Para 181 [649-A-B)
9. Profits are of three types, namely, book-profits, statutory profits and
actual profits. The amendments to Section 80HHC(3) indicate exclusion of
book profits. For example, commission, interest, etc. do form part of the profit
and loss account but for the purposes of calculation of profits derived from
B local sales and exports, they stand excluded. The difficulty arises because the
formula is based on the Hybrid System of Profits, namely, actual and statutory
profits. Therefore, this judgment should be read in the context of the above
~
parameters. This judgment is confined to the workability of the formula in
"'
Section 80HHC(3) of the Act as it stood at the material time.
c (Para 19) (649-C-D)

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4409 of2005. i

From the Judgment and Order dated 20.12.2004 of the High Court of
Judicature of Madras in Tax Case (Appeal) No. 63 of 2004.
D Civil Appeal Nos. 4411/2005, 5370/2005, 5372/2005, 593912005, 6145/
2005, 3037/2006, 25%12006, 91712006, 91912006, 920/2006, 1494/2006, 1495/2006,
3389/2006, 4572/2006, 5157/2006, 3616/2006, 3911/2006, 3913/2006, 3615/2006,
3169/2006, 4738/2006, 5688/2006, 2907/2006, 3496/2006, 5860/2006, 165/2007,
683/2007, 431/2007, 991/2007, 248/2007, 116212007, 163/2007, 163612007, 1637/
E 2007, 1529/2007, 1530/2007, 153212007, 1533/2007, 1266/2007, 153612007, 2145/
2007, 2146/2007, 214712007, 2148/2007, 2149/2007, and 2150/2007.

P.P. Malhotra, S. Ganesh, T.R. Andhyarujina and Soli Sorabjee, Ranbir
Chandra, Ashok Bhan, Vikram Gulati, Arijit Prasad, O.P. Srivastava, B.V. Balaram
Das, Radha Rangswamy, Ajay Vohra, Bhargava V. Desai, Kavita Jha, Rahul
F Gupta, Reema Sharma, Pramood B. Agarwala Praveena Gautam, Raman Mishra,
Vinay Yaish, Rahul Yadav, Anand Mishra, Ashok Mathur, S. Sukumaran, K.
Rajeev, V.N. Raghupathy, Y. Raja Gopala Rao, Y. Ramesh, Y. Vismai Rao, B.V.
Niren, B.V. Desai, Meera Mathur, K. Rajeev, Shweta Verma, Bina Gupta, Amrita
Swarup Senthil Jagadeesan and T.S. Murthy for the appearing parties.
G The Judgment of the Court was delivered by .....
)(_ .......
KAPADIA, J. I. Leave granted in special leave petitions.

2. All the above civil appeals deal with a common question of law and,
therefore, they are decided together by this judgment. For the sake of
H convenience, the facts in C.A. No.4409 of 2005 are mentioned hereinbelow.
COMMR. OF INCOME TAX, COIMBATOREv. LAKSHMI MACHINE WORKS [KAPADIA,l.] 629
' \
3. For the assessment year 1993-94 Mis. Lakshmi Machine Works A
(assessee) filed its return of income declaring its taxable income of Rs.50.80
lakhs:On 10.6.94 intimation under Section 143(1)(a) of the Income Tax Act,
1961 (for short, 'the Act') was sent by the Department accepting the returned
income. Later on the Department issued notice under Section 143(2) of the
Act. One of the items for issuing the said notice was the quantum of deduction
under Section 80HHC of the Act. The assessee had computed the allowable
B
deduction under Section 80HHC without taking into account in the total
1 turnover the sales tax and excise duty. The assessee was asked to explain why

" the total turnover should not be recomputed by including sales tax and excise
duty. In this connection, the Department placed reliance on the judgment of
this Court in the case of Mis. Chowringhee Sales Bureau (P) Ltd. v. C.I. T. c
West Bengal, (1973) 83 !TR 542(SC). The assessee objected to the above
inclusion. However, that objection was dismissed by the A.O. on the ground
that under Section 80HHC(ba) deduction from "total turnover" was restricted
only to three items, namely, profit on sale of import licence, duty drawback
and CCS. The A.O. further held that from the profits of business, the assessee
was entitled to deduct the above three items and also brokerage, commission, D
interest, rent, charges or any other receipt of similar nature. Before the A.O.,
the assessee contended that items which cannot be regarded as profits, the
question of treating those items as part of "total turnover" did not arise. The
A.O. treated certain miscellaneous receipts and interest receipts as part of
business profits to which the assessee objected. The assessee pointed out E
that under Section 80HHC as it stood in the assessment year 1993-94, a
deduction of I 0% was allowed whereas the balance 90% stood excluded from
_,. the business profits. However, .the assessee's argument for non-inclusion of
sales tax and excise duty was not accepted by the A.O.

> 4. Aggrieved by the above decision, the matter was carried in appeal F
to the C.I.T. (Appeals). The appellate authority agreed with the submissions
made on behalf of the assessee. It was held that sales tax and excise duty
were liabilities of the assessee to the Government. They were shown separately
from the value of the goods, therefore, they were not included in the "total
turnover" for working out the deduction under Section 80HHC.
G
~ _)I,
5. Aggrieved by the said decision, the Department carried the matter in
appeal to the Tribunal. Following the judgment of the Bombay High Court in
the case of Commissioner of Income-Tax v. Sudarshan Chemicals Industries
Ltd and Anr., (2000) 245 !TR 769 (Born.), the Department's appeal stood
dismissed. Hence, this civil appeal. H
630 SUPREME COURT REPORTS (2007] 5 S.C.R.

A 6. The short point which arises for consideration in this civil appeal is: f
whether excise duty and sales tax were includible in the "total turnover",.
which was the denominator in the formula contained in Section 80HHC(3) as
it stood in the material time. For the sake of convenience we quote hereinbelow
Section 80HHC:

B "Deduction in respect of profits retained for export business.

BOHHC. (I) Where an assessee, being an Indian company or a person
(other than a company) resident in India, is engaged in the business
of export out of India of any goods or merchandise to which this
section applies, there shall, in accordance with and subject to the
c provisions of this section, be allowed, in computing the total income
of the assessee, a deduction of the [profits] derived by the assessee
from the export of such goods or merchandise:

Provide_d that if the assessee, being a holder of an Export House
Certificate or a Trading House Certificate (hereafter in this section
D referred to as an Export House or a Trading House, as the case may
be,) issues a certificate referred to in clause (b) of sub-section (4A),
that in respect of the amount of the export turnover specified therein,
the deduction under this sub-section is to be allowed to a supporting
manufacturer, then the amount of deduction in the case of the assessee
E shall be reduced by such amount which bears to the total profits
derived by the assessee from the export of trading goods, the same
proportion as the amount of export turnover specified in the said
certificate bears to the total export turnover of the assessee in respect
of such trading goods.

F (IA) Where the assessee, being a supporting manufacturer, has during
the previous year, sold goods or merchandise to any Export House or
Trading House in respect of which the Export House or Trading
House has issued a certificate under the proviso to sub-section (!),
there shall, in accordance with and subject to the provisioas of this
section, be allowed in computing the total income of the assessee, a
G deduction of the profits derived by the assessee from the sale of
goods or merchandise to the Export House or Trading House in
respect of which the certificate has been issued by the Export House
or Trading House.

(2)(a) This section applies to all goods or merchandise, other than
H
COMMR. OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS [KAPADIA,J.] 631

~\
those specified in clause (b ), if the sale proceeds of such goods or A
merchandise exported out of India are received in, or brought into,
India by the assessee other than the supporting manufacturer in
convertible foreign exchange, within a period of six months from the .
end of the previous year or, where the Chief Commissioner or
Commissioner is satisfied (for reasons to be recorded in writing) that
the assessee is, for reasons beyond his control, unable to do so B
within the said period of six months, within such further period as the
Chief Commissioner or Commissioner may allow in this behalf:
-1
" (b) This section does not apply to the following goods or merchandise,
namely:-
c
- (i) mineral oil; and

(ii) minerals and ores (other than processed minerals and ores
specified in the Twelfth Schedule).

Explanation 1.-The sale proceeds referred to in clause (a) shall be
deemed to have been received in India where such sale proceeds D
are credited to a separate account maintained for the purpose by
the assessee with any bank outside India with the approval of
the Reserve Bank of India.

Explanation 2.-For the removal of doubts, it is hereby declared
that where any goods or merchandise are transferred by an E
assessee to a branch, office, warehouse or any other establishment
of the assessee situate outside India and such goods or
merchandise are sold from such branch, office, warehouse or
establishment, then, such transfer shall be deemed to be export
out of India of such goods and merchandise and the value of F
such goods or merchandise declared in the shipping bill or bill
of export as referred to in sub-section (I) of section 50 of the
Customs Act, 1962 (52 of 1962), shall, for the purposes of this
section, be deemed to be the sale proceeds thereof.

(3) For the purposes of sub-section (1),- G
->< (a) where the export out of India is of goods or merchandise
manufactured or processed by the assessee, the profits derived from
such export shall be the amount which bears to the profits of the
business, the same proportion as the export turnover in respect of
such goods bears to the total turnover of the business carried on by H
632 SUPREME COURT REPORTS (2007) 5 S.C.R..

A the assessee;

(b) where the export out of India is of trading goods, the profits
derived from such export shall be the export turnover in respect of
such trading goods as reduced by the direct costs and indirect costs
attributable to such export;
B
(c) where the export out of India is of goods or merchandis1:
manufactured or processed by the assessee and of trading goods, th1!
profits derived from such export shall,-

(i) in respect. of the goods or merchandise manufactured or
c processed by the assessee, be the amount which bears to the

-
adjusted profits of the business, the same proportion as the
adjusted export turnover in respect of such goods bears to the
adjusted total turnover of the business carried on by the assessee,
and
(ii) in respect of trading goods, be the export turnover in respect
D
of such trading goods as reduced by the direct and indirect costs
attributable to export of such trading goods :
Provided that the profits computed under clause (a) or clause (b)
or clause (c) of this sub-section shall be further increased by the
amount which bears to ninety per cent of any sum referred to in
E clause (iiia) (not being profits on sale of a licence acquired from
any other person), and clauses (iiib) and (iiic) of section 28, the
same proportion as the export turnover bears to the total turnover
of the business carried on by the assessee.
Explanation.-For the purposes of this sub-section,-
F
(a) "adjusted export turnover" means the export turnover as
reduced by the export turnover in respect of trading goods;
(b) "adjusted profits of the business" means the profits of the
business as reduced by the profits derived from the business of
G export out of India of trading goods as computed in the manner
provided in clause (b) of sub-section (3 );
(c) "adjusted total turnover" means the total turnover of the
business as reduced by the export turnover in respect of trading
goods;
H (d) "direct costs" means costs directly attributable to the trading
COMMR. OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS [KAPADIA,}.] 633

goods exported out of India including the purchase price of such A
goods;

(e) "indirect costs" means costs, not being direct costs, allocated
in the ratio of the export turnover in respect of trading goods to
the total turnover;

(f) "trading goods" means goods which are not manufactured or B
processed by the assessee.

(3A) For the purposes of sub-section (IA), profits derived by a
supporting manufacturer from the sale of goods or merchandise shall
be,-
c
(a) in a case where the business carried on by the supporting
manufacturer consists exclusively of sale of goods or merchandise
to one or more Export Houses or Trading Houses, the profits of
the business [***];

(b) in a case where the business carried on by the supporting D
manufacturer does not consist exclusively of sale of goods or
merchandise to one or more Export Houses or Trading Houses,
the amount which bears to the profits of the business [***] the
same proportion as the turnover in respect of sale to the respective
Export House or Trading House bears to the total turnover of the
business carried on by the assessee. E
(4) The deduction under sub-section (I) shall not be admissible unless
the assessee furnishes in the prescribed form, along with the return
of income, the report of an accountant, as defined in the Explanation
below sub-section (2) of section 288, certifying that the deduction has
been correctly claimed in accordance with the provisions of this F
section:

(4A) The deduction under sub-section (IA) shall not be admissible
unless the supporting manufacturer furnishes in the prescribed fonn
along with his return of income,-
G
(a) the report of an accountant, as defined in the Explanation
below sub-section (2) of section 288, certifying that the deduction
has been correctly claimed on the basis of the profits of the
supporting manufacturer in respect of his sale of goods or
merchandise to the Export House or Trading House; and
H
634 SUPREME COURT REPORTS [2007) 5 S.C.R.

A (b) a certificate from the Export House or Trading House containing l
such particulars as may be prescribed and verified in the manner
prescribed that in respect of the export turnover mentioned in the
certificate, the Export House or Trading House has not claimed
the deduction under this section :

B Provided that the certificate specified in clause (b) shall be duly
certified by the auditor auditing the accounts of the Export House
or Trading House under the provisions of this Act or under any
other law.
Explanation.-For the purposes of this section,-
c (a) "convertible foreign exchange" means foreign exchange which
is for the time being treated by the Reserve Bank of India as
convertible foreign exchange for the purposes of the Foreign
Exchange Regulation Act, 1973 (46of1973), and any rules made
-
thereunder;
D (aa) "export out of India" shall not include any transaction by
way of sale or otherwise, in a shop, emporium or any other
establishment situate in India, not involving clearance at any
customs station as defined in the Customs Act, 1962 (52 of 1962);
(b) "export turnover" means the sale proceeds, received in, or
E brought into, India by the assessee in convertible foreign exchange
in accordance with clause (a) of sub-section (2) of any goods or
merchandise to which this section applies and which are exported
out oflndia, but does 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 (52 of 1962);
F
(ba) "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 (52 of
1962):

G Provided that in relation to any assessment year commencing on
or after the 1st day of April, 1991, the expression "total turnover"
shall have effect as if it also excluded any sum referred to in
clauses (iiia), (iiib) and (iiic) of section 28;
(baa) "profits of the business" means the profits of the business
H as computed under the head "Profits ar.d gains of business or
COMMR. OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS [KAPADIA, J.] 635

\ profession" as reduced by- A
(I) ninety per cent of any sum referred to in clauses (iiia), (iiib)
--o>
and (iiic) of section 28 or of any receipts by way of brokerage,
commission, interest, rent, charges or any other receipt of a
similar nature included in such profits; and

(2) the profits of any branch, office, warehouse or any other B
establishment of the assessee situate outside India;
.., (c) "Export House Certificate" or "Trading House Certificate"

" means a valid Export House Certificate or Trading House
Certificate, as the case may be, issued by the Chief Controller of
Imports and Exports, Government of India; c
(d) "supporting manufacturer" means a person being an Indian
company or a person (other than a company) resident in India,
manufacturing (including processing) goods or merchandise and
selling such goods or merchandise to an Export House or a
Trading House for the purposes of export." (emphasis supplied) D
7. A brief analysis of the above Section 80HHC of the Act, as amended
with effect from 1.4.1992, indicates rationalization of provisions relating to tax
concession for export profits. Under Section 80HHC, the exporters were allowed,
in the computation of their total income, a deduction of the entire profits
derived from exports. During the relevant year, there existed a dual system for E
computation of export profits. The first method operated in cases where the
export was of goods manufactured by the tax payer. In those cases the export
profit had to be computed on the basis of the ratio of "export turnover" to
"total turnover". In effect, the formula was as follows:

r 80HHC concession - export profits - total profits x
export turnover

total turnover
F

8. Where the export consisted of goods purchased from third parties
(trading goods) there was a second method of computation in which the
export profits were to be calculated by deducting from the export turnover,
direct and indirect costs attributable to such exports. In that case the formula G
_)(
was as under:
'
9. 80HHC concession= export profits= export turnover (costs attrib11table
to such exports)

By the Finance Act, 1992, one more amendment was made by which the H
636 SUPREME COURT REPORTS (2007] 5 S.C.R.

A legislature declared that commission received on assignment of export orders, f
brokerage, interest, rent and items mentioned in Section 28(iiia), (iiib) and (iiic),
should not be treated in toto as profits of the business relatable to exports
and only 10% thereof should be considered as the profit of the business and
the balance 90% should not be included in the profits. These amendments
B took place with effect from 1.4.92, the date from which the dual system of
computation of export profits came into effect.

10. All assessable entities were not eligible for deduction under Section
80HHC of the Act. According to Section 80HHC only an Indian company or
a non-company assessee who was the resident in India was eligible for
C deduction provided he was engaged in the export business of eligible goods.
Under the Income Tax Rules, 1962, Form No.IOCCAC was prescribed. We
quote hereinbelow Annexures A & B to the said Form lOCCAC:

"FORM NO.IOCCAC
[See rule 18BBA(3)]
D
Report under section *80HHC(4)/80HHC(4A) of the Income-tax
hct, 1961

1.xxx xxx xxx

2. (a) *I/We certify that the deduction to be claimed by the assessee
E
under sub-section (I) of Section 80HHC of the Income-tax Act, 1961,
in respect of the assessment year.is Rs. which has been determined
on the basis of the sale proceeds received by the assessee in
convertible foreign exchange. The said amount has been worked out
on the basis of the details in Annexure A to this Form.
F i
(b) *I/We certify that the deduction to be claimed by the assessee,
as supporting manufacturer, under sub-section (IA) of section 80HHC
of the Income-tax Act, 1961, in respect of the assessment year ........ ..
is Rs .. ., which has been determined on the basis of sales to Export
House/Trading House* mad.! during the year, in respect of which a
G. certificate has been issued by the Export House/Trading House under
the proviso to sub-section (I) of section 80HHC of the Income-tax
Act, 1961. The said amount has been worked out on the basis of the
details in Annexure B to this Form.
3. xxx xxx xxx
H Date ..... Signed
COMMR. OF INCOME TAX, CO IM BATORE v. LAKSHMI MACHJNE WORKS [KAPADIA, J.] 63 7

\
Accountant A
Notes: xxx xxx xx

ANNEXUREA
[See paragraph 2(a) ofForm No. IOCCAC]
Details relating to the claim by the exporter for B
deduction under section 80HHC of the Income-
tax Act, 1961
.,.
-1 I. Name of the assessee
2. Assessment year
3. Total turnover of the business c
4. Total export turnover
5. Total profits of the business
6. Export turnover in respect of trading goods
7. Direct cost of trading goods exported D
8. Indirect cost attributable to trading goods exported
9. Total of 7 + 8
10. Profits from export of trading goods [6 minus 9]
11. Adjusted total turnover (3 minus 6)
E
12. Adjusted export turnover (4 minus 6)
13. Adjusted profits of the business (5 minus 10)
14. Profits derived by assessee from export of goods or merchandise
to which section 80HHC applies, computed under sub-section (3)
of section 80HHC F
15. Export turnover, deduction in respect of which will be claimed by
a supporting manufacturer in accordance with proviso to sub-
section (I) of section 80HHC
16. Profit from the export turnover mentioned in item 15 above,
calculated in accordance with proviso to sub-section ( 1) of section G
', ...;.- 80HHC
!7. Deduction under section 80HHC to which the assessee is entitled
(Item 14 minus Item 16)
18. Remarks, if any
H
638 SUPREME COURT REPORTS [2007] 5 S.C.R.

A ANNEXUREB I
[See paragraph 2(b) ofFonn No.lOCCAC]
Details relating to the claim of the supporting
manufacturer for deduction under section
80HHC of the Income-tax Act, 1961
B SECTION A

I. Name of the assessee
2. Assessment year
3. Total turnover of the business
c 4. The amount of profit under the head "Profits and gains of business
of profession"
5. Total turnover in respect of sale of Export House/Trading House
for which certificate is received from Export House/Trading House
D 6. Profit from the turnover mentioned in item 5 above, computed
under sub-section (3A) of section 80HHC
7. Remarks, if any

SECTIONB

E Details of sale of Export House/Trading House
SL Name and Sale Sale Invoice No. Date of Amount
No. address of Invoice price and date certificate of
the Export No. by which issued by disclaimer
House/Trading and Export the
F House to date House/Trading Export
i
whom goods House has house/
or merchandis1 exported Trading
were sold House
under
clause (b)
G of sub-
section
(4A) of
section
80HHC
H I 2 3 4 5 6 7
t:
COMMR. OF !NCOMETAX, COIMBA TORh LAKSHMI MACHJNE WORKS [KAPADIA, J.] 639
'
' ACTION POINTS A
I. Report is to be filed along with return of income.
2 "Total turtiover" does not include cash compensatory support,
duty drawback and profit on sale of import entitlement licences.
3. "Export turnover" means the sale proceeds (excluding freight and B
insurance) receivable in convertible foreign exchange See Circular
No.564, dated 5-7-1990 .
..,.
.... 4. Report is to be obtained in respect of each year for which
deduction is claimed."

11. Analysing the above formula, as it stood at the relevant time, it is c
clear that the amount of deduction under Section 80HHC had to be computed
as under:

Business profit x export turnover divide total turnover + 90 per cent
of export incentive x export turnover divide total turnover
D
12. Therefore, in the above formula there were three concepts, namely,
"business profit", "export turnover" and "total turnover". The first step was
to find out the business profit. This was to be done in accordance with the
provisions of Section 28 to Section 43 of the Act. Under Section 80HHC the
above three export incentives, namely, CCS, duty drawback and profit on sale
of import licence, were includible in the "business profits" and, therefore, they E
were taxable. The Finance Act, 1992, restricted the term "export turnover" to
FOB sale proceeds. However, the said Act excluded CCS, Duty Drawback and
profit on sale of import entitlement from the term "total turnover".

13. To sum up, the amount of deduction under Section 80HHC is to be
computed as under: F
"I. Profit of the business-To find out "profit of the business", the
first step is to determine income under the head "Profits and
gains of business or profession" [as per section 28(iiia), (iiib),
(iiic) this includes three export incentives. From the income so
arrived at, deduct the following: G
-"<
a. 90 per cent of export incentive.
b. 90 per cent of receipts by way of brokerage, commission,
interest, rent, charges or other receipts of a similar nature; and
_,
H
"I.
640 SUPREME COURT REPORTS [2007] 5 S. C.R.
(
A c. profits of any branch, office, warehouse or any similar
establishment of the assessee situate outside India.
2. Export turnover-Sale proceeds received in, or brought into
India, in convertible foreign exchange within the prescribed time
(or within the extended time limit) minus freight and insurance
B attributable to the transportation of goods/merchandise beyond
the customs station is export turnover for this purpose.
3. Total turnover-From the turnover (as per books of account) the
following should be deducted if these are part of turnover:
a. freight/insurance attributable to the transport of goods or
c merchandise beyond customs station in India; and
b. export incentives.
4. Export incentives-Export incentives are:
a. profits on sale of a licence granted under the Imports (Control)
D Order, 1955 made under the Imports and Expons (Control) Act,
1947 [sec.28(iiia)];
b. cash assistance (by whatever name called) receiv~d or
receivable by any person against exports under any scheme of
the Government of India [sec.28(iiib)];
E c. any duty of customs or excise re-paid or re-payable as drawback
to any person against exports under the Customs and Central
Excise Duties Drawback Rules, 1971 [sec.28(iiic)]."

14. To dmplify the matter we quote hereinbelow paragraph I07. l3-3Pl
F of the Direct Taxes Ready Reckoner by Taxmann for the year 1993-94: 1
"I 07.13-3Pl X Ltd. is engaged in manufacturing and/or processing of
heavy chemical for export. For the year ending March 31, 1993, the:
summarized profit and loss account is as follows:
COMMR. OF INCOME TAX, COIMBATORE v. LAKSHMI MACHINE WORKS [KAPADIA,].] 64}

\
Rs. Rs. A
Expenses 32,60,000 Total turnover (of goods
Net profit 10,30,000 exported) 30,50,000
Freight and insurance
attributable to transport of
goods beyond customs B
station 2,40,000
Export incentive under
..,f Section 28(iiia), (iiib),(iiic) 6,50,000
Brokerage, commission,
rent; interest 2,70,000
Profit of foreign branch 80,000 c
42,90,000 42,90,000

Other information

I. Out of total expenses of Rs.32,60,000 debited to profit and loss D
account, Rs.51,600 is not deductible by virtue of sections 40 and
40A. The balance amount is, however, deductible.
2 On January 13, 1993, Rs.86,920 is paid on account of excise duty
of the previous year 1991-92. Since this amount pertains to the
previous year 1991-92, it has not been debited to the aforesaid E
profit and loss account.
3. The company has received Rs.24,90,000 in convertible foreign
exchange till September 30, 1993. The company's application for
obtaining extension of time under section 80HHC has been
rejected by the Commissioner. F
4. During the previous year 1992-93, the company gets a short-term
gain ofRs.20,000.
5. The company is entitled for deduction under section 80-1.
Compute the net income of the company for the assessment year G
1993-94.

Profits and gains of business of profession: Rs.

Net profit as P & L account 10,30,000
Add: Amount not deductible by virtue of secs. 40 and 40A 51,600 H
642 SUPREME COURT REPORTS [2007] 5 S.C.R.
(
A 10,81,600
Less: Excise duty of 1991-92, deductible by virtue of(-) 86,920
section 43B [see para 49.1 OJ
Business income (under section 28) 9,94,680
Capital gains 20,000
Gross total income 10, 14,680
B Less: Deduction
Under section 80HHC [see Note] 5,48,355
Under section 80"1 [i.e., 25% of Rs.9,94,680] 2,48,670
Net income (rounded off) 2, 17,660
Note: Computation of deduction under section 80HHC
c I. Profit of the business - It will be calculated as follows:
Income under the head "Profits and gains of business or
profession" 9,94,680
Less:
90% of export incentives (i.e., 90% of Rs.6,50,000) (-) 5,85,000
90% of brokerage, commission, rent and interest (i.e.,
D 90% of Rs.2, 70,000) (-)2,43,000
Profit of the foreign branch (-) 80,000 A
Profit of the business 86,680

2. Export turnover It is Rs.24,90,000 being the brought to India
E (within the time limit), in the convertible foreign exchange.
3. Total turnover It is Rs.30,50,000.
4. Export incentive Export incentive is Rs.6,50,000.

Amount of c.leduction is as follows:
F
(Rs.86,680 x Rs.24,90,000 w Rs.30,50,000) + (90% of Rs.6,50,000 x
Rs.24,90,000 w Rs.30,50,000) = Rs.5,48,355

107. I 3-4 ASSESSEE WHOSE EXPORTS GOODS MANUFACTURED/
PROCESSED BY OTHERS HOW TO FIND OUT DEDUCTION - This
category covers those assessees who export goods manufactured/
G ..,-. ...
processed by others:

107. I 3-4~ Conditions In order to get deduction one has to satisfy
conditions specified in paras 107.13-3a.

I 07. I 3-4b Amount of deduction Deduction under section 80HHC will
H be determined as under: (Export turnover' minus direct cost2 minus
COMMR. OF INCOME TAX, COIMBATOREv. LAKSHMI MACHINE WORKS [KAPADIA,J.) 643

indirect cost') + (90 per cent of export incentive 5 x Export turnover w A
~

\
total turnover)

1. Export turnover-Sale proceeds received in, or brought into
India in, convertible foreign exchange within the prescribed time
(or within the extended time limit) minus freight and insurance
attributable to the transportation of goods/merchandise beyond B
the customs station, is export turnover for this purpose~

2. Direct cost Under Explanation (d) to section 80 HHC(3), "direct
-;.
~ costs" comprises the following:

a. the purchase price of the goods, and
c
b. costs directly attributable to the trading goods exported out
of India.

Purchase price - under the accepted princip !es of accounting, purchase
price would mean invoice value, including taxes and duties, as reduced
by (i) value of any purchase returns, (ii) trade discounts and rebates, D
if any, allowed, and (iii) value of any incentives which is passed on
to the seller. Similarly, sales tax set-off available in respect of exports
can also be reduced from purchase costs. However, cash discount
obtained any other rebate or set-off available after the end of the
relevant previous year cannot be reduced from purchase cost If, as
per the terms of the contract, any export incentives are passed on to E
the seller, they would have an effect on purchase price and to that
extent purchase cost would be lower.

Costs directly attributable to trading goods-These costs would
generally embrace, apart from the purchase cost and related costs,
such other costs which have been incurred either in relation to the F
purchase, or in relation to the transportation or storage of the goods
prior to their export, or in relation to the movement of goods from the
exporter's godown, premises or warehouse to the customs station.
The use of the word "directly" signifies that there should be a proximate
connection between the costs and the purchase of the trading goods. G
_.,, In other words, they should not be "overhead costs".
Jo

3. Indirect cost Under Explanation (e) to section 80HHC(3), the
term "indirect costs" means costs (not being direct costs) allocated
in the ratio of the export turnover in respect of the trading goods
to the total turnover. In other words, indirect cost may be H
644 SUPREME COURT REPORTS [2007) 5 S.C.R.

A computed as under: (Total cost minus direct cost) x Export I
turnover in respect of trading goods 1 w Total turnover4.
4. Total turnover From the turnover (as per books of account) the
following should be deducted if these are part of turnover:
a. freight/insurance attributable to the transport of goods or
B merchandise beyond customs station in India; and
b. export incentives.
5. Export incentives-Export incentives are: ,..~
a. profits on sale of a licence granted under the Imports (Control)
c Order, 1955 made under the Imports and Exports (Control) Act,
1947 [sec.28(iiia)];
b. cash assistance (by whatever name called) received or
receivable by any person against exports under any scheme of
the Government of India [sec.28 (iiib)];
D
c. any duty of customs or excise re-paid or re-payable as drawback
to any person against exports under the Customs and Central
Excise Duties Drawback Rules, 1971 [sec.28(iiic)]"

15. The above examples show that the formula under Section 80HHC
was very simple as far as it related to the sole business of exports. The
E
formula became complicated in cases of composite business. In the case of
direct exporter there were three categories of assessees (i) an assessee who
exported goods manufactured by him; (ii) an assessee who did not export
goods manufactured by him but exported goods manufactured by others; and
(iii) an assessee who exported manufactured goods as well as trading goods.
F The formula became complicated in the case of the third category. It also
became complicated in the cases of an assessee who did not directly export
goods but supplied goods to an Export House/Trading House for the purpose
of export (subordinate manufacturer).

16. The principal reason for enacting the above formula was to disallow
G a part of 80HHC concession when the entire deduction claimed could not be
regarded as relatable to exports. Therefore, while interpreting the words "total ..- - ...-
turnover" in the above formula in Section 80HHC one has to give a schematic
interpretation to that expression. There is one more reason for giving schematic
interpretation. The various amendments to Section 80HHC show that receipts
by way of brokerage, commission, interest, rent etc. do not form part of
H
COMMR. OF INCOME TAX, COIMBATOREv. LAKSHMI MACHINE WORKS [KAPADIA,J.] 645

business profits as they have no nexus with the activity of exports. If interest A
or rent was not regarded by the legislature as business profits, the question
of treating the same as part of the total turnover in the above fonnula did not
arise. In fact, Section 80 HHC had to be amended several times since the
fonnula on several occasions gave a distorted figure of export profits when
receipts like interest, rent, commission etc. which did not have the element of
turnover got included in the profit and loss account and consequently became B
entitled to deduction. This was clarified by the above amendment to Section
SOHHC commencing from 1.4.92. The said amendment made it clear that
though commission and interest emanated from exports, they did not involve
any element of turnover and merely for the reason that commission, interest,
rent etc. were included in the profit and loss account, they did not become C
eligible to deduction. We have to give purposeful interpretation to the above
section. The said section is entirely based on the fonnula. The amendments
from time to time indicate that they became necessary in order to make the
fonnula workable. Hence, we have to give schematic interpretation to Section
SOHHC of the Act.
D
17. Shri P.P. Malhotra, leaned senior counsel appearing for the Department
(appellant), submitted that one has to give plain and unambiguous meaning
to the word "turnover" in the above fonnula; that there was no need to call
for any rule of interpretation or external aid to interpret the said word; that
having regard to the plain words of the section, excise duty and sales tax
ought to have been included in the "total turnover". Learned counsel submitted E
that the word "turnover" even in the ordinary sense would include the above
__.. two items. Learned counsel urged that the fonnula should be read strictly. In
this connection, he pointed out that the legislature had expressly excluded
items of freight and insurance and not sales tax and excise duty from the said
definition. It was urged that while construing a taxing statute strict interpretation F
should be given by the Courts. It was urged that the definition of the words
"total turnover" did not include freight/insurance. He urged that since the
legislature had excluded only insurance and freight, it was not open to the
courts to exclude excise duty and sales tax from the concept of "total turnover"
in the said fonnula. He contended that the word "turnover" referred to the
aggregate amount for which the goods were sold and since sales tax and G
excise duty fonned part of the value of the goods, the said two items were
includible in the definition of the words "total turnover". In this connection,
learned counsel placed reliance on the judgment of the Supreme Court in the
case of Mis. Chowringhee Sales Bureau (supra). Reliance was also placed on
"The Law and Practice of Income Tax" by Kanga and Palkhivala (eighth H
646 SUPREME COURT REPORTS (2007] 5 S.C.R.

A edition) at page 123. In support of the contention that a tax or duty is part I
of the dealer's trading/business receipts, even if the tax or duty is charged
separately or credited to a separate account. Reliance was also placed on the
judgment of the King's Bench Division in the case of Paprika, Ltd, and Anr.
v. Board a/Trade [1944] l All E.R. 372, in which it has been held that wherever
a sale attracts purchase tax, that tax affects the price which the seller who is
B liable to pay the tax demands, but it does not cease to be the price which the
buyer has to pay even if the price is expressed as cost x + purchase tax.
Reliance was also placed on the judgment of the Court of Appeal in the case
of Love v. Norman Wright (Builders), Ltd. [1944] l All E.R. 618, in which it
has been held that if a seller quotes a price of 'x' + purchase tax, the buyer
C has to pay the amount of the tax as part of the price and since the tax is
charged on the wholesale value of the goods the tax element has to be taken
into account. It was urged that one has to give strict interpretation to the word
"turnover". It was urged that there was no question of giving purposeful
interpretation to the word "turnover" in the said Section 80HHC of the Act.
It was urged that the legislature had used the expression "total turnover" from
D which it became clear that the said expression referred to the aggregate
amount for which the goods were sold and since the above two items formed
part of the value of the goods, they were includible in the "total turnover".
Learned counsel urged that there was no merit in the contention advanced on
behalf of the assessee that excise duty was the liability of the assessee to the
E Government and, therefore, it was not includible in the total turnover. Learned
counsel urged that there was no merit in the contention advanced on behalf
of the assessee that the components of "export turnover" and "total turnover"
should be the same in the above formula. Learned counsel submitted that the
•
formula would become unworkable if the components in the "export turnover"
and the components in the "total turnover" are the same. Learned counsel
F submitted that there was no merit in the argument advanced on behalf of the
assessee that excise duty and sales tax did not form part of trading receipts.
Learned counsel submitted that there was no merit in the contention of the
assessee that the expression "business profits" in Section 80HHC did not
include receipts which did not emanate for exports and, therefore, such receipts
G did not constitute an element of turnover.
18. We do not find any merit in the above contentions advanced on "- ..
behalf of the Department. It is important to note that tax under the Act is upon
income, profits and gains. It is not a tax on gross receipts. Under Section 2(24)
of the Act the word "income" includes profits and gains. The charge is not
H on gross receipts but on profits and gains. The charge is not on gross receipts
COMMR. OF INCOME TAX, COIMBATOREv. LAKSHMI MACHINE WORKS [KAPADIA,J.] 647

but on profits and gains properly so-called. Gross receipts or sale proceeds, A
however, include profits. According to "The Law and Practice of Income
Tax" by Kanga and Palkhivala, the word "profits" in Section 28 should be
understood in normal and proper sense. However, subject to special
requirements of the income tax, profits have got to be assessed provided they
are real profits. Such profits have to be got to be ascertained on ordinary
principles of commercial trading and accounting. However, the income tax has B
laid down certain rules to be applied in deciding how the tax should be
-i. assessed and even if the result is to tax as profits what cannot be construed
as profits, still the requirements of the income tax must be complied with.
Where a deduction is necessary in order to ascertain the profits and gains,
such deductions should be allowed. Profits should be computed after deducting
the expenses incurred for business though such expenses may not be
c
admissible expressly under the Act, unless such expenses are expressly
disallowed by the Act [SEE: page 455 of "The Law and Practice of Income
Tax" by Kanga and Palkhivala]. Therefore, schematic interpretation for making
the formula in Section 80HHC workable cannot be ruled out. Similarly,
purposeful interpretation of Section 80HHC which has undergone so many D
changes cannot be ruled out, particularly, when those legislative changes
indicate that the legislature intended to exclude items like commission and
interest from deduction on the ground that they did not possess any element
of "turnover" even though commission and interest emanated from exports.
We have to read the words "total turnover" in Section 80HHC as part of the
E
formula which sought to segregate the "export profits" from the "business
profits". Therefore, we have to read the formula in entirety. In that formula
the entire business profits is not given deduction. It is the business profit
which is proportionately reduced by the above fraction/ratio of export turnover
w total turnover which constitute 80HHC concession (deduction). Income in
r the nature of "business profits" was, therefore, apportioned. The above F
formula fixed a ratio in which "business profits" under Section 28 of the Act
had to be apportioned. Therefore, one has to give weightage not only to the
words "total turnover" but also to the words "export turnover", "total export
turnover" and "business profits". That is the reason why we have quoted
hereinabove extensively the illustration from the Direct Taxes (Income tax)
Ready Reckoner of the relevant word. In the circumstances, we cannot interpret
G
-" the words "total turnover" in the above formula with reference to the definition
of the word "turnover" in other laws like Central Sales Tax or as defined in
accounting principles. Goods for export do not incur excise duty liability. As
stated above, even commission and interest formed a part of the profit and
loss account, however, they were not eligible for deduction under Section H
648 SUPREME COURT REPORTS (2007] 5 S.C.R.

A 80HHC. They were not eligible even without the clarification introduced by I
the legislature by various amendments because they did not involve any
clement of turnover. Further, in all other provisions of the income tax, profits
and gains were required to be computed with reference to the books of
accounts of the assessee. However, as can be seen from the Income Tax Rules
and from the above Form No.JOCCAC in the case of deduction under Section
B 80HHC a report of the auditor certifying deduction based on export turnover
was sufficient. This is because the very basis for computing Section 80HHC
deduction was "business profits" as computed under Section 28, a portion
\-
of which had to be apportioned in terms of the above ratio of export turnover ,:_
to total turnover. Section 80HHC(3) was a beneficial section. It was intended
c to provide incentives to promote exports. The incentive was to exempt profits
relatable to exports. In the case of combined business of an assessee having
export business and domestic business the legislature intended to have a
formula to ascertain export profits by apportioning the total business profits
on the basis of turnovers. Apportionment of profits on the basis of turnover
was accepted as a method of arriving at export profits. This method earlier
D existed under Excess Profits Tax Act, it existed in the Business Profits Tax Act.
Therefore, just as commission received by an assessee is relatable to exports
and yet it cannot form part of "turnover", excise duty and sales tax also
cannot form part of the "turnover". Similarly, "interest" emanates from exports
and yet "interest" does not involve an element of turnover. The object of the
E legislature in enacting Section 80HHC of the Act was to confer a benefit on
profits accruing with reference to export turnover. Therefore, "turnover" was
the requirement. Commission, rent, interest etc. did not involve any turnover.
Therefore, 90% of such commission, interest etc. was excluded from the
profits derived from the export. Therefore, even without the clarification such
items did not form part of the formula in Section 80HHC(3) for the simple
F reason that it did not emanate from the "export turnover", much less any
turnover. Even if the assessee was an exclusive dealer in exports, the said
commission was not includible as it did not spring from the "turnover". Just
as interest, commission etc. did not emanate from the "turnover", so also
excise duty and sales tax did not emanate from such turnover. Since excise
duty and sales tax did not involve any such turnover, such taxes had to be
G excluded. Commission, interest, rent etc. do yield profits, but they do not
y,
partake of the character of turnover and, therefore, they were not includible
in the "total turnover". The above discussion shows that income from rent,
commission etc. cannot be considered as part of business profits and, therefore,
they cannot be held as part of the turnover also. In fact, in Civil Appeal
H No.4409 of2005, the above proposition has been accepted by the A.O. [See:
COMMR. OF INCOME TAX, COIMBATORE v. LAKSHMI MACIIlNE WORKS [KAPADIA, J.] 649

page no.24 of the paper book], if so, then excise duty and sales tax also A
cannot fonn part of the "total turnover" under Section 80HHC(3), otherwise
the fonnula becomes unworkable. In our view, sales tax and excise duty also
do not have any element of "turnover" which is the position even in the case
of rent, commission, interest etc. It is important to bear in mind that excise
duty and sales tax are indirect taxes. They are recovered by the assessee on
behalf of the Government. Therefore, if they are made relatable to exports, the B
fonnula under Section 80HHC would become unworkable. The view which we
have taken is in the light of amendments made to Section 80HHC from time
to time.

19. Before concluding we may state that profits are of three types,
namely, book-profits, statutory profits and actual profits. The amendments to C

- Section 80HHC(3) indicate exclusion of book profits. For example, commission,
interest, etc. do form part of the profit and loss account but for the purposes
of calculation of profits derived from local sales and exports, they stand
excluded. The difficulty arises because the fonnula is based on the Hybrid
System of Profits, namely, actual and statutory profits. Therefore, this judgment D
should be read in the context of the above parameters. Our reasoning in this
judgment is confined to the workability of the formula in Section 80HHC(3)
of the Act as it stood at the material time.

20. For the above reasons, we see no merit in these appeals filed by the
Department and, accordingly, they are dismissed with no order as to costs.

V.S.S. Appeal dismissed.

- "