For the purpose of calculating the deduction, according to the export related deduction provisions such as Section 10AA,80HHC, etc of the Income Tax Act, one has to take into account the profits from the business of the assessee, export turnover and total turnover.
The deduction is determined as under:
Profits of the Business X Export Turnover/Total Turnover
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
The term ‘turnover’ has neither been defined in the Act nor has been explained by any of the CBDT circulars. In the aforestated circumstances, one has to look at the meaning of the term ‘turnover’ in ordinary accounting or commercial parlance.
Now the dispute is that, whether sale proceed of scrap is constitute as a part of total turnover or not ?
One can very well see that if the total turnover increases, the advantage of deduction would decrease because the amount deductible substantially depends upon the ratio between the export turnover and total turnover.
IN THE SUPREME COURT OF INDIA, Commissioner of Income Tax-VII, New Delhi Versus Punjab Stainless Steel Industries
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.
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.
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.
The learned counsel appearing for the respondent-assessee had submitted that the proceeds of sale of scrap can never be included in the ‘total turnover’ because the respondent-assessee is not dealing in scrap. According to him, scrap is generated in the process of manufacturing and the scrap is nothing but the raw material which could not be used in the process of manufacturing and therefore, sale proceeds of such scrap would merely bring down the cost of raw material. Thus, the sale proceeds of the scrap can either be deducted from the cost of raw material or can be shown in the profit and loss account but the said amount can never be treated as a part of ‘sales’ or ‘turnover’.
The learned counsel had also relied upon the judgment delivered in the case of COMMISSIONER, INCOME TAX THIRUVANANTHAPURAM v. K RAVINDRANATHAN NAIR [(2007) 15 SCC 1], which deals with the term ‘turnover’. According to him, though the said issue has not been directly discussed in the said judgment, from the meaning of the word ‘turnover’ given in the said judgment, it is very clear that the term ‘turnover’ would include only the sale proceeds of the articles manufactured and sold and not other things which are sold by a business unit.
In ordinary accounting parlance, as approved by all accountants and auditors, the term ‘sales’, when reflected in the Profit and Loss Account, would indicate sale proceeds from sale of the articles or things in which the business unit is dealing. When some other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in ‘sales’ but it would be shown separately.
In simple words, the word “turnover” would mean only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in. For example- If a manufacturer and seller of air-conditioners is asked to declare his ‘turnover’, the answer given by him would show the sale proceeds of air-conditioners during a particular accounting year. He would not include the amount received, if any, from the sale of scrap of metal pieces or sale proceeds of old or useless things sold during that accounting year. This clearly denotes that ordinarily a businessman by word “turnover” would mean the sale proceeds of the goods (the things in which he is dealing) sold by him.
Held: When such scrap is sold, the sale proceeds of the scrap cannot be included in the term ‘turnover’ for the reason that the respondent-unit is engaged primarily in the manufacturing and selling of steel utensils and not scrap of steel. Therefore, the proceeds of such scrap would not be included in ‘sales’ in the Profit and Loss Account of the respondent-assessee..