Retrospective tax treatment of export incentives brought cash support, duty drawback and import entitlements into business income.

Retrospective amendments to the Income-tax Act brought cash compensatory support, duty drawback and profit on sale of import entitlements within business income, and profit on sale of imported material was also treated as a business receipt rather than a capital receipt. The statutory insertion of the relevant clauses in section 28 and section 2(24) deemed these export-linked receipts to be profits and gains of business, with retrospective effect from the specified dates. On that basis, the receipts were taxable as income and the contrary capital-receipt contention failed. The reference was answered against the assessee on the substantive taxability issues, while unanswered questions were left undecided because they were not pressed.

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Issues: (i) Whether cash compensatory support was taxable as income and duty drawback, profit on sale of import entitlements, and profit on sale of imported material were capital receipts or income liable to tax; (ii) Whether the receipts covered by the retrospective amendments to the Income-tax Act were to be treated as profits and gains of business.

Issue (i): Whether cash compensatory support was taxable as income and duty drawback, profit on sale of import entitlements, and profit on sale of imported material were capital receipts or income liable to tax.

Analysis: The retrospective insertion of clause (iiib) in section 28 and clause (vb) in section 2(24) of the Income-tax Act, 1961 brought cash compensatory support within the scope of business profits. Likewise, the retrospective insertion of clause (iiia) in section 28 and clause (va) in section 2(24) treated profit on sale of import entitlements as income, and clause (iiic) in section 28 together with clause (vc) in section 2(24) treated duty drawback as business income. On the facts, profit on sale of imported material was also referable to the assessee's business activity and could not be treated as a capital receipt.

Conclusion: These receipts were taxable as income and the contention that they were capital receipts failed, in favour of the Revenue.

Issue (ii): Whether the receipts covered by the retrospective amendments to the Income-tax Act were to be treated as profits and gains of business.

Analysis: The statutory amendments were given retrospective effect from the specified dates, with the consequence that the relevant export-related receipts were statutorily deemed to be profits and gains of business and therefore includible in income.

Conclusion: The amended provisions applied retrospectively and the receipts fell to be assessed as business income, in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee on the substantive taxability issues, while the remaining questions were not adjudicated because they were not pressed.

Ratio Decidendi: Where Parliament retrospectively brings a receipt within section 28 and section 2(24) of the Income-tax Act, 1961, that receipt is to be treated as business income for the relevant assessment year.

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