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 value taxable under s.28(iiid). The Bombay HC erred in treating the entire sale proceeds as profit on transfer. The SC directed that deduction under s.80HHC be computed accordingly, noting exporters with turnover over Rs.10 crore lose certain proviso benefits but remain entitled to exclusions under explanation (baa). The HC judgment was set aside, appeals allowed to the extent indicated, and the AO directed to recompute deductions; no costs.

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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.

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