2012 (2) TMI 100 - SC - Income Tax

Face value of DEPB taxed as cash under s.28(iiib); profit on transfer taxed under s.28(iiid); recompute s.80HHC deduction

The SC held that the face value of a DEPB is cash assistance taxable under s.28(iiib), while profit on transfer is the excess of sale price over face ... Interpretation of Section 80HHC in relation to DEPB - profits derived from exports - Face Value of DEPB Chargeable to Tax - Whether entire amount received on sale of the Duty Entitlement Pass Book (DEPB) represents profit on transfer of DEPB for the purpose of the computation of deduction u/s 80HHC – Held that:- It will be clear from the provisions of Section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income tax under the head “Profits and Gains of Business or Profession”. DEPB is a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it is receivable once exports are made and an application is made by the exporter for DEPB. We have, therefore, no doubt that DEPB is “cash assistance” receivable by a person against exports under the scheme of the Government of India and falls under clause (iiib) of Section 28 and is chargeable to income tax under the head “Profits and Gains of Business or Profession” even before it is transferred by the assessee. Under clause (iiid) of Section 28, any profit on transfer of DEPB is chargeable to income tax under the head “Profits and Gains of Business or Profession” as an item separate from cash assistance under clause (iiib). The word “profit” means the gross proceeds of a business transaction less the costs of the transaction. We are, thus, of the considered opinion that while the face value of the DEPB will fall under clause (iiib) of Section 28 of the Act, the difference between the sale value and the face value of the DEPB will fall under clause (iiid) of Section 28 of the Act and the High Court was not right in taking the view in the impugned judgment that the entire sale proceeds of the DEPB realized on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB. The discussion on profits derived from exports show that where an assessee has an export turnover exceeding Rs.10 crores and has made profits on transfer of DEPB under clause (d) of Section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of Section 80HHC, but he would get the benefit of exclusion of a smaller figure from “profits of the business” under explanation (baa) to Section 80HHC of the Act and there is nothing in explanation (baa) to Section 80HHC to show that this benefit of exclusion of a smaller figure from “profits of the business” will not be available to an assessee having an export turnover exceeding Rs.10 crores. In other words, where the export turnover of an assessee exceeds Rs.10 crores, he does not get the benefit of addition of ninety per cent of export incentive under clause (iiid) of Section 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in computation of a bigger export profit. The High Court, therefore, was not right in coming to the conclusion that as the assessee did not have the export turnover exceeding Rs.10 crores and as the assessee did not fulfill the conditions set out in the third proviso to Section 80HHC (iii), the assessee was not entitled to a deduction under Section 80HHC on the amount received on transfer of DEPB and with a view to get over this difficulty the assessee was contending that the profits on transfer of DEPB under Section 28 (iiid) would not include the face value of the DEPB. It is a well-settled principle of statutory interpretation of a taxing statute that a subject will be liable to tax and will be entitled to exemption from tax according to the strict language of the taxing statute and if as per the words used in explanation (baa) to Section 80HHC read with the words used in clauses (iiid) and (iiie) of Section 28, the assessee was entitled to a deduction under Section 80HHC on export profits, the benefit of such deduction cannot be denied to the assessee. The impugned judgment and orders of the Bombay High Court are accordingly set-aside. The appeals are allowed to the extent indicated in this judgment. The Assessing Officer is directed to compute the deduction under Section 80HHC in the case of the appellants in accordance with this judgment. There shall be no order as to costs. Issues Involved:1. Whether the entire amount received on the sale of Duty Entitlement Pass Book (DEPB) represents profits chargeable under Section 28(iiid) of the Income Tax Act, 1961.2. Whether the face value of the DEPB is chargeable to tax under Section 28(iiib) at the time of accrual of income.3. The correct interpretation of Section 80HHC of the Income Tax Act in relation to DEPB.Issue-wise Detailed Analysis:1. Entire Amount Received on Sale of DEPB as Profits Chargeable under Section 28(iiid):The Bombay High Court held that the entire amount received by an assessee on the sale of DEPB represents profit on transfer of DEPB under Section 28(iiid) of the Income Tax Act. However, the Supreme Court disagreed, stating that the word 'profit' implies the gross proceeds of a business transaction less the costs of the transaction. The Court noted that DEPB has a cost element because it is acquired by paying customs duty on the import content of the export product. Therefore, the profit on transfer of DEPB would be the sale value of the DEPB less its face value, which represents the cost of the DEPB. The Supreme Court concluded that while the face value of the DEPB falls under clause (iiib) of Section 28, the difference between the sale value and the face value of the DEPB falls under clause (iiid) of Section 28.2. Face Value of DEPB Chargeable to Tax under Section 28(iiib):The Supreme Court held that DEPB is 'cash assistance' receivable by a person against exports under the scheme of the Government of India and falls under clause (iiib) of Section 28. This means that DEPB is chargeable to income tax under the head 'Profits and Gains of Business or Profession' even before it is transferred by the assessee. The Court emphasized that DEPB accrues to the exporter as soon as an application for DEPB is filed, and it is thus taxable under Section 28(iiib) at the time of accrual.3. Interpretation of Section 80HHC in Relation to DEPB:The High Court had held that the assessee, having an export turnover exceeding Rs.10 crores and not fulfilling the conditions set out in the third proviso to Section 80HHC(3), was not entitled to a deduction under Section 80HHC on the amount received on transfer of DEPB. The Supreme Court clarified that under Section 80HHC, ninety percent of the DEPB, which is 'cash assistance' against exports and covered under clause (iiib) of Section 28, will get excluded from the 'profits of the business' of the assessee if such DEPB has accrued during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value, the difference between the sale value and the face value will represent the profit on transfer of DEPB covered under clause (iiid) of Section 28, and ninety percent of such profit will get excluded from 'profits of the business.'The Court further explained that if the DEPB accrues in one previous year and is transferred in a subsequent year, only ninety percent of the profit on transfer of DEPB covered under clause (iiid) will get excluded from 'profits of the business.' This results in a higher figure of 'profits of the business,' which ultimately results in the computation of a bigger export profit. The Supreme Court concluded that the High Court's interpretation was incorrect and that the assessee was entitled to a deduction under Section 80HHC on export profits as per the strict language of the taxing statute.Conclusion:The Supreme Court set aside the impugned judgment and orders of the Bombay High Court, directing the Assessing Officer to compute the deduction under Section 80HHC in accordance with the Supreme Court's judgment. The appeals were allowed to the extent indicated, with no order as to costs.