Dear Editor,
I wish to bring to your notice a recent Supreme Court ruling that will be of interest to your readers. On 5 May in Commissioner of Income Tax-VII, New Delhi v Punjab Stainless Steel Industries, a two-judge bench held that the term “total turnover”, as in section 80HHC of the Income Tax Act, 1961, has to be understood in “ordinary accounting and commercial parlance” since it is not defined anywhere in the act. As such, the court held the value of scrap, which is produced in the process of manufacturing, is not to be included in the total turnover while calculating profits retained for export business under section 80HHC. The section provides exporters with certain deductions while computing taxable income.
Holding that “normally, the term ‘turnover’ would show the sale effected by a business unit”, the court said that in ordinary accounting parlance, the term sales, as reflected in a profit and loss account, indicates the proceeds from sale of articles and things in which the business unit deals. When anything else is sold, the same finds mention elsewhere in the profit and loss account.
In making its ruling the court referred to two publications of the Institute of Chartered Accountants of India (Guidance Note on Terms Used in Financial Statements and Guide to Company Audit issued in 1980) which it said can be relied on. The court said that the definition in the latter publication “clearly denotes that in normal accounting parlance the word ‘turnover’ would mean ‘total sales’ …. [and] would definitely not include the scrap material”, which needs to be shown separately in the accounts.
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The ruling details that the assessee, Punjab Stainless Steel Industries, had relied on a 2007 ruling of the Supreme Court in Commissioner, Income Tax, Thiruvananthapuram v K Ravindranathan Nair. However, I believe the court wrongly interpreted the 2007 decision, as in it the court had differentiated between income generated from two unrelated heads of business. The court had clubbed the income generated under the heads of business to hold that processing charges form part of the total turnover.
In the instant case where the assessee was engaged in the process of manufacture, production of scrap was inevitable. In other words, production of scrap is inextricably intertwined with the manufacture of the article sought to be produced. Thus it cannot be held to be an activity different from operations.
Whether scrap can be sold depends on the value that it carries, and where it is marketable the assessee is required to pay excise duty on it.
The court has wrongly relied on the guidance note, which I believe carries no binding value, and thus cannot be inferred to be will of the legislature. Also, accounting practices and guidance notes are set keeping in mind disclosure requirements and to ensure transparency. There is a need to be wary of relying on such practices while interpreting a statute. As I see it, the court should have resorted to the ordinary or commercial parlance only when the literal or contextual interpretation would have led to absurd results or where no clear and unambiguous answer would have been possible.
Lalitendra Gulani
Student – LLB (Hons)
Ram Manohar Lohiya National Law University, Lucknow
Lucknow
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