2008 (3) TMI 349 - AT - Income Tax

Tribunal Allows Deduction on DEPB Sale Profit under Section 80HHC

The Tribunal upheld the CIT(A)'s revised computation of eligible profits for the assessee claiming deduction u/s 80HHC, allowing deduction on profit from ... Taxability of profits on sale of import entitlements - inclusive definition of 'income' under s. 2(24) - profit (commercial parlance) v. gross receipt - treatment of DEPB credits for computation of business profits - prohibition of double deduction - operation of fifth proviso to s. 80HHC(3)Taxability of profits on sale of import entitlements - inclusive definition of 'income' under s. 2(24) - Profit on sale of DEPB import entitlement is assessable as income under s. 28 and falls within the scope of 'profits and gains' for the purposes of tax. - HELD THAT: - The Tribunal rejected the assessee's contention that sale proceeds of DEPB entitlement are not 'income' because they are not specifically listed in s. 2(24). The definition in s. 2(24) is inclusive and does not exhaust the concept of income; receipts that in their plain and natural meaning amount to income are taxable unless exempt. Prior decisions establish that receipts from sale of import entitlements were held to be revenue in nature and assessable under s. 28. Where an assessee carries on an activity, receipts incidental to that activity (including benefits like DEPB) are business income. Consequently, the sale of DEPB entitlement, intimately connected with the export business, is taxable as business income under s. 28. [Paras 5]Profit on sale of DEPB entitlement is taxable as business income under s. 28 and cannot be excluded from total income.Profit (commercial parlance) v. gross receipt - treatment of DEPB credits for computation of business profits - For the purpose of exclusion under the Explanation (baa) to s. 80HHC, it is the profit on sale of entitlement (sale proceeds less cost incurred) that is relevant; where no cost is shown, the entire receipt may be treated as profit. - HELD THAT: - The Tribunal agreed with the coordinate bench that the statutory exclusion contemplates exclusion of 90% of 'profit' on sale of entitlement, not necessarily the gross receipt. 'Profit' must be understood in commercial/accounting sense - sale proceeds minus expenditure incurred in acquiring the entitlement. If no expenditure is incurred (or proved), the entire sale proceeds will constitute profit. The Tribunal emphasised that absent statutory provision for notional deductions, only actual or provable expenditure can be allowed; mercantile or cash accounting principles determine cost. The Tribunal further noted that statutory allowance of a notional 10% (by way of the 90% exclusion) addresses unseen costs where applicable. [Paras 6, 8, 11]The exclusion under Explanation (baa) applies to profit on sale of DEPB, computed as sale proceeds less any demonstrable cost; if no cost is shown, the whole receipt may be regarded as profit.Prohibition of double deduction - treatment of DEPB credits for computation of business profits - The value of DEPB credit cannot be treated as an expenditure incurred by the exporter for acquiring the entitlement so as to reduce profit; allowing such a notional deduction would amount to impermissible double relief. - HELD THAT: - Exim Policy and DEPB scheme show that DEPB is an optional notional credit to neutralise customs duty on import content and may be sold without any actual duty payment by the seller. Where an exporter has already treated actual duties or costs in its accounts, permitting a further notional deduction in relation to sale of the credit would effectively grant double deduction for the same outgoing. Absent proof of actual expenditure incurred to obtain the DEPB, its value cannot be treated as cost. The Tribunal relied on the principle that the statute should not be read to permit two deductions for the same business outgoing unless clearly expressed. [Paras 9, 10, 11]DEPB credit value is not an allowable expenditure for reducing taxable profit absent proof of actual cost; double deduction is not permissible.Operation of fifth proviso to s. 80HHC(3) - The fifth proviso to s. 80HHC(3) (as interpreted by the Tribunal) permits deduction to be computed with reference to receipts under either cls. (iiia) to (iiic) or cls. (iiid) and (iiie) of s. 28, and does not entitle the assessee to combine all items for the proviso calculation; deduction is to be allowed with reference to one group only. - HELD THAT: - The Tribunal followed the earlier decision in Mehta Manufacturers, holding that the proviso allows computation of deduction with reference to either the first group of clauses or the second group, but not by aggregating all items across both groups. The assessee's reliance on ministerial speech and CBDT circular did not persuade the Tribunal to depart from the interpretation in the coordinate decision. Consequently, the CIT(A)'s limited allowance (adjustment with reference to sale of DEPB entitlement) was sustained. [Paras 15]Deduction under the fifth proviso to s. 80HHC(3) must be computed with reference to one group of specified items and cannot be aggregated across groups; the Tribunal's approach in Mehta Manufacturers is followed.Departmental appeal and administrative grounds - The Revenue's ground challenging the CIT(A)'s direction on considering entire sale proceeds for proportionate increase was dismissed as misconceived and without effective argument. - HELD THAT: - The Tribunal found the departmental ground to be unfounded and observed that the Departmental Representative could not show how Revenue was prejudiced by the CIT(A)'s finding. The ground appeared to have been raised without proper application of mind and was therefore rejected. [Paras 17]Departmental appeal ground is dismissed as misconceived; Revenue's challenge is rejected.Final Conclusion: The Tribunal held that sale of DEPB entitlement is taxable as business income under s. 28; the exclusion under Explanation (baa) to s. 80HHC applies to the profit on sale (sale proceeds less any proved cost), with the entire receipt treated as profit where no cost is shown; DEPB value cannot be treated as an expenditure to avoid double deduction; the fifth proviso to s. 80HHC(3) permits computation with reference to one group of specified receipts only; accordingly the assessee's appeals and crossobjection are dismissed and the departmental ground is rejected. Issues Involved:1. Computation of deduction u/s 80HHC with reference to export incentives including DEPB.2. Whether profit on the sale of DEPB entitlement constitutes income chargeable to tax.3. Determination of profit on the sale of DEPB entitlement.4. Whether the entire sale proceeds of DEPB should be considered for proportionate increase of profits derived from exports.Summary:Issue 1: Computation of Deduction u/s 80HHC with Reference to Export Incentives Including DEPBThe assessee, engaged in the manufacturing and export of textile goods, claimed a deduction u/s 80HHC. The AO excluded 90% of export incentives (DEPB) while computing 'profits of business', resulting in a negative profit and denial of deduction u/s 80HHC. The CIT(A) confirmed the AO's order. However, subsequent amendments to s. 80HHC allowed the assessee to claim deduction on the profit from the sale of DEPB entitlement, leading to a revised computation of eligible profits.Issue 2: Whether Profit on the Sale of DEPB Entitlement Constitutes Income Chargeable to TaxThe assessee contended that profit on the sale of DEPB entitlement should not be considered income as it is not included in the definition of income u/s 2(24). The Tribunal rejected this contention, citing Supreme Court judgments that the definition of 'income' is inclusive and not exhaustive. The profit on the sale of DEPB entitlement falls within the ambit of 'profits and gains' and is chargeable to tax.Issue 3: Determination of Profit on the Sale of DEPB EntitlementThe assessee argued that only the profit, not the entire receipt from the sale of DEPB entitlement, should be taxed. The Tribunal agreed that profit should be determined after deducting any expenditure incurred. However, in this case, the assessee failed to prove any specific expenditure incurred in obtaining DEPB credit. The Tribunal held that the entire sale proceeds of DEPB entitlement should be considered as profit since no specific expenditure was incurred.Issue 4: Whether the Entire Sale Proceeds of DEPB Should Be Considered for Proportionate Increase of Profits Derived from ExportsThe Revenue's appeal contended that the entire sale proceeds of DEPB should be considered for proportionate increase of profits derived from exports. The Tribunal found this ground misconceived and prejudicial to the interests of Revenue, dismissing it as the Departmental Representative could not substantiate the argument.Conclusion:The Tribunal dismissed the appeal and cross-objection of the assessee, upheld the CIT(A)'s revised computation of eligible profits, and rejected the Revenue's appeal as misconceived. The profit on the sale of DEPB entitlement is chargeable to tax, and the entire sale proceeds should be considered as profit in the absence of specific expenditure incurred.