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 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.
By virtue of the judgment delivered by the High Court, the accounting method followed by the respondent assessee had been approved and therefore, Revenue filed an appeal before the Supreme Court.
The Supreme Court observed that to ascertain whether the turnover would also include sale proceeds from scrap, one has to know the meaning of the term ‘turnover’. The term ‘turnover’ has neither been defined in the Act nor has been explained by any of the CBDT circulars.
The Supreme Court held that in the aforestated circumstances, one has to look at the meaning of the term ‘turnover’ in ordinary accounting or commercial parlance.
Normally, the term ‘turnover’ would show the sale effected by a business unit. It may happen that in the course of the business, in addition to the normal sales, the business unit may also sell some other things. For example, an assessee who is manufacturing and selling stainless steel utensils, in addition to steel utensils, the assessee might also sell some other things like an old air conditioner or old furniture or something which has outlived its utility. When such things are disposed of, the question would be whether the sale proceeds of such things would be included in the ‘turnover.’ Similarly, in the process of manufacturing utensils, there would be some scrap of stainless steel material, which cannot be used for manufacturing utensils. Such small pieces of stainless steel would be sold as scrap. Here also, the question is whether sale proceeds of such scrap can be included in the term ‘sales’ when it is to be reflected in the Profit and Loss Account.
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.
So far as the scrap is concerned, the sale proceeds from the scrap may either be shown separately in the Profit and Loss Account or may be deducted from the amount spent by the manufacturing unit on the raw material, which is steel in the case of the respondent assessee, as he is using stainless steel as raw material, from which utensils are manufactured. The raw material, which is not capable of being used for manufacturing utensils will have to be either sold as scrap or might have to be re-cycled in the form of sheets of stainless steel, if the manufacturing unit is also having its re-rolling plant. If it is not having such a plant, the manufacturer would dispose of the scrap of steel to someone who would re-cycle the said scrap into steel so that the said steel can be re-used.
When such scrap is sold, in according to the Supreme Court, the sale proceeds of the scrap could not be included in the term ‘turnover’ for the reason that the respondentunit 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.
The situation would be different in the case of the buyer, who purchases scrap from the respondent-assessee and sells it to someone else. The sale proceeds for such a buyer would be treated as “turnover” for a simple reason that the buyer of the scrap is a person who is primarily dealing in scrap. In the case on hand, as the respondent-assessee was not primarily dealing in scrap but is a manufacturer of stainless steel utensils, only sale proceeds from sale of utensils would be treated as his “turnover.”
The Supreme Court referred to the “Guidance Note on Tax Audit U/s. 44AB of the Income Tax Act” published by The Institute of Chartered Accountants of India and observed that the meaning given by the ICAI clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales.” The said sales would definitely not include the scrap material which is either to be deducted from the cost of raw material or is to be shown separately under a different head. The Supreme Court did not find any reason for not accepting the meaning of the term “turnover” given by a body of Accountants, which is having a statutory recognition.
For the aforesaid reasons, the Supreme Court dismissed the appeal.
