ITAT Special Bench, Mumbai
Before D. Manmohan (VP),
R. S. Syal (AM) and N. V. Vasudevan (JM)
ITA No. 5769/Mum./2006
A.Y. : 2002-03. Decided on : 11-8-2009
Counsel for assessee/revenue : Rajan Vora/
G. C. Srivastava and Anil Kumar
S. 80HHC — Entire amount received on sale of DEPB
entitlements does not represent profit chargeable u/s.28(iiid). Computation of
profit on sale of DEPB entitlements requires an artificial cost to be
interpolated.
Per R. S. Syal :
Facts :
The assessee, a manufacturer and exporter of
fabric/garments, filed its return of income declaring total income of
Rs.36,24,230. While computing its total income, the assessee had claimed
deduction of Rs.83,69,303 u/s.80HHC of the Act. The assessee had reduced a sum
of Rs.3,01,93,428 being sale proceeds of DEPB licence from its total purchases
of Rs.16,96,83,882 and had shown net purchases of Rs.13,94,90,454. The profit
on transfer of DEPB licence was only Rs.14,35,097 and profit on transfer of
DFRC licence was Rs.19,902. Before the Assessing Officer (AO) the assessee
justified its action by submitting that the profits on sale of DEPB licence
was an export incentive covered u/s.28(iiia) for the purpose of claiming
deduction u/s.80HHC. The AO held that the net profit after reduction of export
incentive of Rs.3.01 crores was a loss of Rs.1.82 crores. The AO denied the
deduction claimed u/s.80HHC of the Act.
The CIT(A) held that since the assessee did not satisfy the
two conditions mentioned in the third proviso to S. 80HHC(3), it is not
entitled to deduction in respect of amounts received under DEPB and DFRC
schemes. As regards the assessee’s contention that only the profit on transfer
of DEPB and DFRC licences was covered by the provisions of S. 28(iiid) and S.
28(iiie) and not the sale proceeds, the CIT(A) held that the cost of these
entitlements/certificates to the assessee was Rs.Nil and hence, the entire
sale consideration of the licences was profit on transfer. The CIT(A) directed
the AO to treat the entire amount of sale consideration of DEPB and DFRC
licences as profit on transfer for the purpose of working out deduction
u/s.80HHC as per the amended provisions. The CIT(A) did not give any finding
regarding the eligibility of duty drawback for deduction u/s.80HHC.
Aggrieved, the assessee preferred an appeal to the
Tribunal. The President of the Tribunal constituted a Special Bench (SB) and
referred the following question to the SB for its consideration and decision :
“Whether the entire amount received on sale of DEPB
entitlements represents profit chargeable u/s.28(iiid) of the Income-tax Act
or the profit referred to therein requires any artificial cost to be
interpolated ?”
Briefly stated, Explanation (baa) to S. 80HHC defines the
term ‘profits of the business’ to mean the profits under the head ‘profits and
gains’ as reduced by 90% of the sum referred to in S. 28(iiid). The 2nd and
3rd provisos to S. 80HHC(3) provide that the profits computed thereunder shall
be increased by the said 90% amount computed in the proportion of export
turnover to total turnover. S. 28(iiid) refers to “any profit on the transfer
of Duty Entitlement Pass-book Scheme (‘DEPB’). The Special Bench had to
consider whether the entire amount received on sale of DEPB entitlement
represents ‘profits’ chargeable u/s.28(iiid) or the profit referred to therein
requires any artificial cost to be imputed.
Held :
The SB decided the appeal in favour of the assessee and
while so deciding it held that :
(i) the argument of the Revenue that DEPB is a
post-export event and has no relation with the purchase of goods cannot be
accepted. There is a direct relation between DEPB and the customs duty paid
on the purchases. For practical purposes, DEPB is a reimbursement of the
cost of purchase to the extent of customs duty;
(ii) the DEPB benefit (face value) accrues and becomes
assessable to tax when the application for DEPB is filed with the concerned
authority. Subsequent events such as sale of DEPB or making imports for
self-consumption, etc. are irrelevant for determining the accrual of income
on account of DEPB;
(iii) on a harmonious construction of clauses (iiia), (iiib)
and (iiic) of S. 28 it is evident that clauses (iiia) and (iiic) deal with
specific species of incentives, clause (iiib) is a residual clause which
brings within its sweep all forms of export incentives other than those
specifically set out in clauses (iiia) and (iiic);
(iv) the face value of DEPB benefit falls within the
ambit of S. 28(iiib);
(v) S. 28(iiid) which refers to the ‘profits on transfer
of the DEPB’, obviously refers only to the ‘profit’ element and not the
gross sale proceeds of the DEPB. If the Revenue’s argument that the sale
proceeds should be considered is accepted, there would be absurdity because
the face value of the DEPB will then get assessed in the year of the DEPB
and also in the year of its transfer;
(vi) profit on sale of DEPB representing the excess of
sale proceeds of DEPB over its face value is liable to be considered
u/s.28(iiid) at the time of sale;
(vii) only the ‘profit’ (i.e., the sale value less
the face value) is required to be considered for the purposes of S. 80HHC;
(viii) whatever has been said about DEPB also holds good
for DFRC, on both its components, viz. the face value of DFRC and
profit on its transfer, except for the fact that the profit on sale of DFRC
shall be charged to tax u/s.28(iiie);
(ix) Duty drawback shall be chargeable to tax at the time
of accrual of income u/s.28(iiie) when application is filed with the
competent authority after making exports.
