2010 (12) TMI 808 - AT - Income Tax

Court rules DEPB receipts as business profit under Income Tax Act, excludes 90% from Section 80HHC deduction

FC. Sondhi and Co. India (P) Ltd. and Ors. Versus Addl. CIT and Ors.

The High Court clarified that the entire amount received on the transfer of Duty Entitlement Pass Book (DEPB) constitutes profit under Section 28(iiid) of ... Deduction u/s 80HHC - Whether profit on transfer of the DEPB which is to be taken under consideration or whole of the DEPB receipts - AO reduced 90 per cent of export incentive - Tribunal has relied to a considerable extent on a Speech made by the then Finance Minister on the floor of Parliament in support of its conclusion that only the premium realized by an exporter on the sale of the DEPB credit would fall within the purview of cl. (iiid) of s. 28 and not the face value of the DEPB - The submission that prior to the insertion of cl. (iiid) in s. 28, the face value of the DEPB credit realized on the transfer of such credit constituted export profits, but not the amount realized in excess of the face value of the DEPB is similarly without any basis - Held that: the entirety of the sale consideration would fall within the purview of s. 28(iiid) - Appeal is dismissed Issues Involved:1. Interpretation of 'profit on transfer' under Section 28(iiid) of the IT Act.2. Computation of deduction under Section 80HHC with reference to DEPB and DFRC.3. Whether the entire DEPB receipts or only the profit on transfer should be considered for deduction.4. Jurisdiction and binding nature of High Court decisions on ITAT.Detailed Analysis:1. Interpretation of 'profit on transfer' under Section 28(iiid) of the IT Act:The core issue revolves around the interpretation of the term 'profit on transfer' as used in Section 28(iiid) of the IT Act. The assessee argued that 'profit' should be construed as the difference between the sale consideration of the DEPB receipts and their face value. Conversely, the Revenue contended that the entire DEPB receipts should be considered as profit.The Tribunal initially sided with the assessee, directing the AO to compute the deduction based on the difference between the sale consideration and the face value of DEPB. However, the High Court, agreeing with the Bombay High Court's decision in CIT vs. Kalpataru Colours and Chemicals, clarified that the entire amount received on the transfer of DEPB constitutes profit under Section 28(iiid).2. Computation of deduction under Section 80HHC with reference to DEPB and DFRC:The Tribunal had to decide whether the entire DEPB receipts should be considered for the computation of deduction under Section 80HHC or only the profit element. The assessee's position was that only the profit on transfer should be reduced from the profits of the business, while the Revenue reduced 90% of the entire DEPB receipts.The High Court's decision, aligning with the Bombay High Court, mandated that the entire amount received on transfer of DEPB should be considered as business profit under Section 28(iiid), and 90% of this should be excluded while computing the deduction under Section 80HHC.3. Whether the entire DEPB receipts or only the profit on transfer should be considered for deduction:The Tribunal initially restored the matter to the AO for fresh computation based on the difference between the sale consideration and the face value of DEPB. However, the High Court's ruling clarified that the entire DEPB receipts should be treated as profit, thus rejecting the bifurcation of face value and premium.The High Court emphasized that DEPB is an export incentive intended to neutralize customs duty and should be treated as business income in its entirety. The Tribunal, following the High Court's direction, ruled against the assessee, stating that the entire DEPB receipts should be considered for deduction purposes.4. Jurisdiction and binding nature of High Court decisions on ITAT:The Tribunal acknowledged that the decision of the Bombay High Court in CIT vs. Kalpataru Colours and Chemicals is binding, as endorsed by the Punjab and Haryana High Court. Despite the assessee's contention that the Bombay High Court's decision is not binding within Punjab and Haryana, the Tribunal noted that the jurisdictional High Court had agreed with the Bombay High Court's view.The Tribunal also dismissed the argument that the pendency of an SLP before the Supreme Court against the Bombay High Court's decision should affect the binding nature of the decision, noting that the Supreme Court had not stayed the High Court's ruling.Conclusion:The Tribunal, following the High Court's directive, ruled in favor of the Revenue, holding that the entire DEPB receipts should be considered as business profit under Section 28(iiid) and that 90% of these receipts should be excluded while computing the deduction under Section 80HHC. This decision applied uniformly across all related appeals, affirming the comprehensive treatment of DEPB receipts as business income.