The Commissioner Of Income Tax ... vs M/S Ahuja Radios
2008 Latest Caselaw 1843 Del

           THE HIGH COURT OF DELHI AT NEW DELHI

%                                   Judgment delivered on: 20.10.2008


+             ITA 337/2007, 1127/06, 1054/06 & 289/2007

THE COMMISSIONER OF INCOME
TAX DELHI-X                                              ...   Appellant

                                    - versus -


M/S AHUJA RADIOS                                           ... Respondent

Advocates who appeared in this case:

For the Appellant     : Mrs Prem Lata Bansal.
For the Respondent    : Mr B.B. Ahuja Sr Advocate with
                        Mr D.K. Verma and Mr H.K. Sud.


CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER

1. Whether Reporters of local papers may be allowed to see the judgment ? YES

2. To be referred to the Reporter or not ? YES

3. Whether the judgment should be reported in Digest ? YES

BADAR DURREZ AHMED, J

1. These appeals under Section 260A of the Income Tax Act,

1961 (hereinafter referred to as the "said Act") pertain to the same

assessee but to different assessment years. ITA 337/2002 relates to

assessment year 1993-94, ITA 1127/06 relates to assessment year

1997-98, ITA 1054/06 relates to assessment year 1998-99 and ITA

ITA 337/07,1127/06,1054/06,289/07 Page No.1 of 8 289/2007 relates to the assessment year 2000-01. In all these appeals

the following substantial question of law has been framed for

determination:-

"Whether the Tribunal was correct in law in holding that MODVAT credit has not to be included in the total turnover for the purposes of computing the eligible deduction under Section 80HHC of the Income-tax Act, 1961?"

2. It is not necessary for us to set out the facts in respect of each

of the assessment years. It is sufficient to note that the assessee

claimed deduction under Section 80HHC of the said Act. The claim of

deduction by the assessee was based on a computation of total turnover

which did not include the amount of modvat credit which was availed

by the assessee in respect of excise duty paid on raw materials and

inputs and adjusted against the excise duty payable by the assessee in

respect of its finished products. The assessee is involved in the

manufacture and sale of public address equipments such as amplifiers,

microphones and loud speakers. The Assessing Officer was of the

view that in computing total turnover for the purposes of arriving at the

deduction allowable under Section 80HHC the modvat credit availed

by the assessee had to be included. The Assessing Officer was of the

view that it should be so included because it formed part of the cost of

the final product.

ITA 337/07,1127/06,1054/06,289/07 Page No.2 of 8

3. The Tribunal, in respect of each of the assessment years in

question, has followed its orders in respect of the assessee's own case

for assessment year 1990-91 and 1991-92 and has agreed with the

assessee that modvat credit is not to be included in computing "total

turnover" for the purposes of claiming deduction under Section

80HHC.

4. According to the learned counsel for the revenue/appellant,

the Tribunal erred in law in holding that the modvat credit was to be

excluded from the total turnover for the purposes of computing the

deduction under Section 80HHC. The learned counsel for the revenue

submitted that the definition of total turnover given in Explanation (ba)

at the end of Section 80HHC had not excluded modvat credit from total

turnover whereas it had specifically excluded freight and insurance

attributable to the transfer of goods from the customs stations. Mrs

Bansal, appearing on behalf of the revenue, submitted that only the

specific items of freight and insurance as indicated in the said

Explanation (ba) could be excluded from total turnover. Since modvat

credit was not specifically mentioned as an excluded item, it had to be

included in total turnover for the purposes of Section 80HHC. The

learned counsel for the Assessee submitted to the contrary.

ITA 337/07,1127/06,1054/06,289/07 Page No.3 of 8

5. We may note that when these appeals were admitted and the

question noted above had been framed, the decision of the Supreme

Court in the case of Commissioner of Income-Tax v Lakshmi

Machine Works: [2007] 290 ITR 667 (SC) had not been rendered.

Prior to the said decision of the Supreme Court, there were decisions of

several High Courts including the decision of the Bombay High Court

in CIT v Sudershan Chemicals (Pvt) Ltd.: 245 ITR 765, wherein it

had been held that excise duty and sales tax were not to be included in

"total turnover" for the purposes of Section 80HHC. However, it was

the Supreme Court decision in Lakshmi Machine Works (supra),

which set the issue at rest. The Supreme Court observed that "just as

interest, commission etc. did not emanate from "turnover", so also

excise duty and sales tax do not emanate from such turnover." The

Supreme Court held that "since excise duty and sales tax did not

involve any such turnover such taxes had to be excluded." The

Supreme Court arrived at the above conclusion because, in their view,

sales tax and excise duty did not have any element of "turnover". This

view in Lakshmi Machine Works (supra) has been further reinforced

by a subsequent decision of the Supreme Court in the case of The

Commissioner of Income Tax. v. Cetapharma (India) Private

Limited: 292 ITR 641.

ITA 337/07,1127/06,1054/06,289/07 Page No.4 of 8

6. At this juncture, it would be relevant to note that in Lakshmi

Machine Works (supra), it had been urged on behalf of the revenue

that while construing a taxing statute a strict interpretation should be

given by the Courts. It was contended that the definition of the words

"total turnover" did not include freight/insurance. On this basis, it was

urged that since the legislature had not intended to include freight or

insurance it had specifically mentioned so in Explanation (ba) to

Section 80HHC. It was contended that since only insurance and freight

were to be excluded, it was not open to the Courts to exclude excise

duty and sales tax from the concept of "total turnover" in the formula to

be implied under Section 80HHC. This argument was rejected by the

Supreme Court in Lakshmi Machine Works (supra). The position is,

therefore, clear. Excise duty is not to be included in computing "total

turnover" for the purposes of arriving at the deduction which an

assessee can claim under Section 80HHC.

6. In the present case, the question relates to the inclusion or

exclusion of modvat credit. In Ichalkaranji Machine Centre Pvt. Ltd.

v. Collector of Central Excise, Pune: 2004 (174) ELT 417 (SC) the

Supreme Court indicated the nature of modvat as under:-

"Modvat is basically a duty-collecting procedure, which aims at allowing relief to a manufacturer on the duty element borne by him in respect of the inputs used by him."

ITA 337/07,1127/06,1054/06,289/07 Page No.5 of 8 The Supreme Court also noted that "the object of the modvat scheme

was to reduce cost of final product by taking credit for the duty paid on

the inputs." In Fenner (India) Ltd. v. Deputy Commissioner of

Income Tax: 241 ITR 672, a learned single Judge of the Madras High

Court noted that one of the modes of payment of excise duty is by way

of adjustment of credit given to the manufacturer of the duty paid by it

on excisable goods used as inputs, towards duty payable by the

manufacturer on the finished product. The Court observed that the

credit allowed is, therefore, credit which is to be utilised towards the

payment of duty and that the utilisation of modvat credit results in the

payment of excise duty on the final product to the extent of the credit

utilised. We are in full agreement with these observations, particularly

in view of the nature of the modvat scheme as explained by the

Supreme Court in the case of Ichalkaranji Machine Centre Pvt. Ltd

(supra) where, as noted above, the Supreme Court observed that

modvat was basically a duty-collecting procedure, which aims at

allowing relief to a manufacturer on the duty element borne by him in

respect of the inputs used by him and for which he takes credit for the

same. This credit is to be adjusted against the duty payable by him on

his final products. Thus, the moment the modvat credit taken by the

manufacturer is adjusted against the excise duty payable by him in

respect of his final product, his liability to pay excise duty to that extent

stands discharged. In Eicher Motors Ltd v. Union of India: (1999) 2

ITA 337/07,1127/06,1054/06,289/07 Page No.6 of 8 SCC 361 and in CCE v. Dai Ichi Karkaria Ltd : (1999) 7 SCC 448 the

Supreme Court observed that a credit under the MODVAT Scheme

was "as good as tax paid." In other words, an adjustment of modvat

credit essentially entails the payment of excise duty.

7. We have already noted above that excise duty, in view of the

Supreme Court decision in the case of Lakshmi Machine Works

(supra), is not to be included in computing "total turnover" for the

purposes of Section 80HHC. Since we are of the view that the modvat

credit availed and adjusted against the duty payable by the assessee, is

nothing but excise duty in itself through another "duty collecting

procedure", such modvat credit cannot be included in the total turnover

for the purposes of computing the eligible deduction under Section

80HHC of the said Act. Just as excise duty does not involve any

element of "turnover" (as held by the Supreme Court in Lakshmi

Machine Works (supra)), modvat credit also does not involve any such

element of "turnover".

8. Consequently, we answer the question in the following

manner:-

The Tribunal was correct in law in holding that modvat credit has not to be included in the total turnover for the purposes of computing the eligible deduction under Section 80HHC of the Income Tax Act, 1961.

ITA 337/07,1127/06,1054/06,289/07 Page No.7 of 8 As a result of this, the appeals are dismissed. The parties shall bear

their own costs.

BADAR DURREZ AHMED, J

RAJIV SHAKDHER, J October 20, 2008 J

ITA 337/07,1127/06,1054/06,289/07 Page No.8 of 8