IMPORTANT POINT
Sale proceeds of goods in which the business unit is not primarily dealing in cannot be included in the term ‘turnover’.

JUDGMENT

ANIL R. DAVE, J. –

1. Being aggrieved by the judgment delivered in ITA No. 520 of 2006 dated 19th January, 2007, by the High Court of Delhi, this Appeal has been filed by the Commissioner of Income Tax.

2. The facts giving rise to the present appeal, in a nutshell, are as under:

So as to encourage export for the purpose of earning foreign exchange, Section 80 HHC has been enacted in the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). By virtue of the provisions of the said section, subject to certain conditions, the exporter gets certain deduction from the income, which is derived from the profits from export of goods, while computing taxable income.

3. For the purpose of calculating the deduction, according to the provisions of Section 80HHC of the Act, one has to take into account the profits from the business of the assessee, export turnover and total turnover. The deduction, subject to several other conditions, incorporated in the Section, is determined as under:

Profits of the Business X Export Turnover Total Turnover

4. Thus, to determine the amount of deduction, the assessee and the Revenue must be aware of the following three ingredients:

i) Profits of the business

ii) Export turnover

iii) Total turnover

5. In the instant case, the issue is with regard to the term “Total turnover”.

6. The assessee is a manufacturer and exporter of stainless steel utensils. In the process of manufacturing stainless steel utensils, some portion of the steel, which can not be used or reused for manufacturing utensils, remains unused, which is treated as scrap and the respondent-assessee disposes of the said scrap in the local market and the income arising from the said sale is also reflected in the profit and loss account. The respondent-assessee not only sells utensils in the local market but also exports the utensils.

7. For the purpose of availing deduction under Section 80HHC of the Act for the relevant Assessment Year, the assessee was not including the sale proceeds of scrap in the total turnover but was showing the same separately in the Profit and Loss Account.

8. According to the Revenue, the sale proceeds from the scrap should have been included in the ‘total turnover’ as the respondent-assessee was also selling scrap and that was also part of the sale proceeds.

9. The assessee had objected to the aforestated suggestion of the Revenue because inclusion of the sale proceeds of scrap into the total turnover would reduce the amount deductible under the provisions of Section 80HHC of the Act.

10. One can very well see that if the total turnover increases, the advantage which the assessee would get under Section 80HHC would decrease because the amount deductible substantially depends upon the ratio between the export turnover and total turnover. If the export turnover is higher, comparatively the amount deductible under Section 80HHC would be more; or in other words, if compared to total turnover, export turnover is less, the amount deductible from the income under Section 80HHC would be reduced. By virtue of the impugned judgment delivered by the High Court, the accounting method followed by the respondent-assessee has been approved and therefore, this appeal is filed by the Revenue.

11. The learned counsel appearing for the appellant-Revenue, had vehemently submitted that even the sale of scrap is sale and the proceeds which the respondent-assessee received from such sale should be included in the ‘total turnover’. In the circumstances, the total turnover must include the amount received by the respondent-assessee from the sale of scrap.

12. It had been submitted by him that the respondent-assessee was getting substantial amount from sale of scrap and the receipt from the sale of scrap was a regular feature of its business. In the aforestated circumstances, according to the learned counsel appearing for the appellant-Revenue, the view expressed by the High Court is incorrect because that would exclude substantial receipt of the