Significant ruling

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.