Duty entitlement pass book credit falls under sec 28 of the Act where premium received on transfer will represent profit

IN THE HIGH COURT OF DELHI AT New Delhi

% Date of Decision: 26th March, 2012.

+ ITA 1191/2011

PAL ENTERPRISES ..... Appellant

Through Mr. Santosh K. Aggarwal, Adv.

Versus

CIT ..... Respondent

Through Mr. Kamal Sawhney, sr. standing counsel

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA

HON'BLE MR. JUSTICE R.V. EASWAR

SANJIV KHANNA,J: (ORAL)

Having heard counsel for the parties, we frame the following substantial question of law:

“Whether the Income Tax Appellate Tribunal has erred in holding that duty entitlement pass book credit was cash assistance within the meaning of clause (iiib) to Section 28 of the Income Tax Act, 1961 and the entire amount including the premium received on transfer of DEPB was “profit” under clause (iiid) of Section 28 of the aforesaid Act and accordingly exemption under Explanation (baa) to Section 80HHC should be calculated?”

2. The appellant-assessee is a partnership firm engaged in the business of manufacture and export of leather garments. During the assessment year in question i.e. 2002-03, it had earned incentive i.e. duty drawback of Rs.9,77,618/- and credit under Duty Entitlement Pass Book Scheme (DEPB) of Rs.5,72,00,818/- totaling Rs.5,81,77,436/- on the exports made by them.

3. The DEPB was transferred by the assessee to others and profit of Rs.20,75,382/- was earned by way of premium.

4. The assessee had claimed deduction of Rs.2,77,48,947/- under Section 80HHC of the Income Tax Act, 1961 („Act‟, for short) after accounting for these export incentives and other income.

5. The return filed by the assessee was not taken for scrutiny and was processed u/s 143(1) and accordingly, the claim under Section 80HHC was allowed. Thereafter, vide notice stated 25.03.2009 under Section 148 of the Act, the assessment was taken up for scrutiny and an assessment order was passed. The Assessing Officer treated the gross amount of DEPB (i.e. premium received on transfer plus the credit to the DEPB) as profit of business under Clause (iiid) of Section 28 of the Act and excluded the same from eligible profits. He held that there was loss after deducting 100% of these receipts from the eligible profits. He further held that the assessee did not satisfy the two conditions prescribed in the third proviso to Section 80HHC (3) of the Act, which it was required to, because its turnover exceeded Rs.10 crore.  

6. The Commissioner of Income Tax (Appeals), however, following the decision of the Special Bench of the Mumbai High Court in Topman Export Vs. ITO (2009) 33 SOT 337 (Mum)(SB) held that Section 28(iiid) will only cover profit on transfer of DEPB credit. He directed the Assessing Officer to accordingly make the computation under Section 80HHC of the Act. However, he held that the conditions of the third proviso to Section 80HHC (3) of the Act were not fulfilled and therefore only conditional benefit in computation would be granted.

7. Two cross appeals filed by the Revenue as well as the assessee have been disposed of by the impugned order dated 29.3.2011. The Tribunal has followed the decision of the Bombay High Court in the case of CIT Vs. Kalpataru Colours & Chemicals (2010) 328 ITR 451 (Bom.). It has been held that DEPB in entirety, including the credit, would amount to profits of business under Section 28(iiid) of the Act and therefore, the order of the Commissioner of Income Tax (Appeals) granting relief was incorrect. The matter has been restored back to the Assessing Officer to examine whether any deduction was to be granted in view of the said judgment.

8. The decision of Bombay High Court in the case of Kalpataru Colours & Chemicals (supra) has been set aside and reversed by the Supreme Court in their decision dated 8.02.2012 in the case of

Topman Exports Vs. Commissioner of Income Tax, Mumbai (C.A. No.1699/2012) and other cases. In this decision, it has been held that the DEPB credit falls under Clause (iiib) of Section 28 of the Act whereas the premium received thereon on transfer will represent profits chargeable under Section Clause (iiid) and the deduction under Section 80HHC has to be computed accordingly. It was held that only 90% of the “profits” can be excluded by applying Explanation (baa) below Section 80HHC.

9. In view of the aforesaid position, we answer question of law mentioned above in the negative i.e. in favour of the assessee and against the Revenue. There will be no order as to costs.

10. We clarify that we have not dealt with or examined the applicability of third proviso to Section 80 HHC (3) as the said aspect has been referred back to the Assessing Officer by the Tribunal. The said aspect will be examined by the Assessing officer, while giving appeal effect.

SANJIV KHANNA, J.

R.V.EASWAR, J.