TMI Blog2009 (8) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... Since the necessary facts for the determination of the quantum of deduction under section 80HHC, are not available on record - AO is directed to compute the amount of relief. Disallowance of expences - Held that:- Disallowance so made on account of telephone expenses is reasonable and does not warrant any further interference. Insofar as the disallowance of motor car expenses and interest on car loan is concerned AO has made disallowance at 20 per cent of such expenses which are on higher side. Thus order to restrict it to 10 per cent of these expenses Regarding Interest income and deduction under section 80HHC - Business income Vs. Interest income - Held that:- It as an undisputed fact that the said interest was earned from the ‘temporary deployment of business funds’, as contended by the assessee before the authorities below - If the funds of the business are parked for safe keeping or with a view to earn interest income de hors the main business activity, the interest resulting therefrom cannot assume the character of business income and hence will resultantly fall under the residual head of income, viz. ‘Income from other sources’ - Held that: the interest income has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.82 crores. By considering Explanation (baa) to section 80HHC dealing with the computation of profit of the business, he held that it provided for the reduction by 90 per cent of the incentives referred to any clauses (iiia), (iiib) and (iiic ) of section 28 of the Act, from which it was clear that the incentives were to be considered as business income. He further noted the judgment of the Hon ble Supreme Court in the IPCA Laboratories v. Dy. CIT [2004] 266 ITR 5211 and that of the Hon ble Bombay High Court in the case of Rohan Dyes Intermediates Ltd. v. CIT [2004] 270 ITR 3502 for coming to the conclusion that the assessee was not entitled to any deduction under section 80HHC of the Act. In the meantime, the Taxation Laws (Amendment) Act, 2005 came into being and it was contended before the ld. CIT(A) that the DEPB receipts and DFRC receipts were covered under the provisions of sections 28(iiid), 28(iiie ) and hence, the assessee was entitled to deduction under section 80HHC, It was further contended that the assessee s export turnover exceeded Rs. 10 crores and as per the third proviso to section 80HHC(3), the following two conditions needed to satisfied : (i)he had an op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the benefit of deduction under section 80HHC on these incentives. 4.failed to appreciate that the DEPB received under various schemes i.e., the Duty remission Scheme of the Import Export Policy has been evolved by the Government to compensate for the extra price payable for imports and thus, it is nothing but reimbursement of cost, which goes to reduce the cost of purchases and cannot be treated as incentive and thereby, treating it as not eligible for deduction under section 80HHC." M/s. Kalpataru Colours Chemicals 6. The facts of this case are that the assessee, a trader and exporter of dyes, chemicals and intermediates, furnished its return declaring total income of Rs. 1,06,93,090 after claiming deduction under section 80HHC amounting to Rs. 78,01,124 with the following working : Export turnover of traded goods 12,82,18,240 Less : Direct Cost 11,34,50,241 Indirect cost 2,01,25,233 Less : Freight 38,85,171 Insurance 38,251 39,23,422 1,62,01,81 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that face value of the DEPB entitlement would go to reduce the cost of exports and therefore, while computing the direct and indirect cost, the value of DEPB entitlements should be reduced and profit should be reworked out. The Assessing Officer did not accept the assessee s contention as the two conditions provided under the third proviso of section 80HHC(3) were not fulfilled. As this resulted in a loss in the computation made by the Assessing Officer of the business profits, he held that no deduction was permissible under section 80HHC. The assessee assailed the issue before the ld. CIT(A) raising several grounds. The ld. CIT(A) held that the sale proceeds on DEPB licence was provided under section 28(iiid) as was rightly interpreted by the Assessing Officer. However, he did not accept the assessee s contention that the direct cost would stand reduced by the face value of the DEPB licence. He, therefore, upheld the action of the Assessing Officer in denial of deduction under section 80HHC. The assessee is in appeal against the denial of deduction under this section through several grounds. 9. Before us Shri Rajan Vora, the ld. counsel for the assessee opened his argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or get covered under DEPB/DFRC Schemes. He stated that the exporter was entitled to drawback of the duty at a specified percentage, which was lower than the standardized rate fixed by the Government under DEPB. Such lower rate of duty drawback was stated to be with a view to prevent the immediate outflow of funds from the Government in the shape of duty drawback, as against the DEPB scheme entitling the exporter either to import goods against it or transfer it to somebody else as such, to be utilized by the buyer for the import of the specified goods. 11. Shri Vora contended that section 28(iiia) to (iiic ) were inserted to disclose the intention of the Legislature that the export incentives were chargeable to tax and not capital receipt. He also referred to the order passed by the Ahmedabad Bench of Tribunal in Asstt. CIT v. Pratibha Syntex Ltd. [1999] 106 Taxman 32 (Mag.) in which it was held that cash assistance referred to in clause (iiib) of section 28 did not mean only the receipt of cash assistance directly from the Government, but also included duty payable to the Government of India but not paid under any Scheme and other incentives specifically including DEPB. He state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minated by the revenue as against those utilizing the same for the purposes of import. 13. He fairly conceded that in the following cases the Tribunal has decided the issue in favour of the revenue on the same line of reasoning as has been given by the authorities below in the present cases : 1.Ramratna International Ltd. v. Asstt. CIT [IT Appeal No. 6468 (Mum.) of 2006, dated 17-4-2008]; 2.Eastman Industries Ltd. v. Dy. CIT [2007] 110 TTJ (Delhi) 798. 3.Rama Exports v. Asstt. CIT [IT Appeal No. 5360 (Mum.) of 2006, dated 19-12-2007]. 4.Yasmin Silk Mills v. ITO [IT Appeal No. 3354 (Mum.) of 2006, dated 5-3-2008]. 14. It was contended by him that in these cases the Tribunal failed to consider the controversy in correct perspective, which led to the decision against the assessee. He referred to various parts of these orders to demonstrate, what he considers, the fallacy in the view taken in favour of the Department. 15. Shri Vora further stated that whereas duty drawback schemes entitle the exporter to the refund of the duty suffered by him in the cost of purchases, either directly or indirectly, the MODVAT scheme is similarly applicable when the duty paid purchases ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e premium over and above that was the subject-matter of consideration under section 28(iiid). He further referred to some decisions to buttress his submission that the word profit as employed in this clause could not be considered as the sale consideration itself. He also submitted that the whole of the present controversy on the interpretation of section 28(iiid) was in the context of computing the correct amount of deduction under section 80HHC, which was a beneficial provision. In his opinion, such beneficial provisions needed to be interpreted liberally so as to advance the object. He further contended that if two views are possible on a point, then the view favourable to the assessee should be adopted. 18. Sh. Subhash Aggarwal, appearing for M/s. Hero Exports stated that his client was trader exporter who had received the following export incentives : Rs. ( i ) Duty drawback for current year 12,22,14,353 ( ii ) Supplementary claims of duty Drawback 19,29,576 ( iii ) Credit on DEPB (Face value) 1,51,77,609 ( iv ) Profit on DEPB 1,97,349 ( v ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point of accrual of such incentive is the making of exports and not the making of imports to be utilized as the input for the goods exported. It was stated that this incentive was available regardless of the fact whether or not any import was made by the assessee. He further stated that if the exporter uses only the indigenous goods, still the benefit of duty drawback or DEPB is available. As regards the standard rate of DEPB fixed for each industry, he submitted that it was on the basis of empirical study of such industry and had no correlation with the actual import or the payment of custom duty. Under such circumstances it was stated that the assessee was not entitled to set off the value of DEPB against the purchase price of goods. 22. He objected to the observations made by some of the ld. ARs by which it was argued that since the definition of income under section 2(24) was not amended to include section 28(iiid) and (iiie) and hence, the same be excluded from the scope of income itself. In his opinion the term income has been defined in this provision in an inclusive manner and every item which bears the characteristics of income, is liable to be included in it notwithst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section are clear and unambiguous, there is no scope for looking into the intention of the Legislature beyond the actual words. 25.He also stated that the matching concept is not applicable in this case as has been argued on behalf of the assessee. It was submitted on behalf of the revenue that only when some income has been earned that the question of its adjustment towards the source will arise and it was not the other way round by which the purchase cost already incurred could be matched with the export proceeds and the export incentives. He further contended that the matching concept was in-built in the scheme of section 80HHC itself, inasmuch as it provides for reduction of 90 per cent of the incentives, thereby implying that 10 per cent of the incentive value is presumed to have been spent in earning them. Answering to the argument raised on behalf of the assessee that MODVAT scheme was similar to that of DEPB and hence, it should also be reduced from the cost of purchases, he stated that it was not so. In his opinion whereas the scheme of MODVAT concerns itself with the value addition and allows deduction for the duty paid by the former manufacturer which already stands in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stom duty. On the other hand, the Duty Remission Scheme enables post-export replenishment/remission of duty on inputs used in the export product. Duty remission schemes consist of (a) DFRC (Duty Free Replenishment Certificate) and (b) DEPB (Duty Entitlement Passbook Scheme) and (c) Duty Drawback Scheme. The DFRC scheme was introduced from 1-4-2000 replacing Transferable Advance Licensing Scheme. This scheme is available to merchant exporters (who trade in goods, that is, purchase the goods and then sell them as such in foreign countries) as well as to the manufacturer exporters (who purchase raw material and then convert into finished products before making exports). However it covers only items which are covered under standard input-output norms notified by the DGFT. The DEPB Scheme as notified on 1-4-1997 consisted of (a) pre-export DEPB and (b) post-export DEPB. The pre-export DEPB Scheme was abolished with effect from 1-4-2000. Under the post-export DEPB scheme, which is relevant and applicable during the period under consideration, an exporter is given a Duty Entitlement Pass Book at a predetermined rate on the FOB value of exports. The DEPB allows import of any items except t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the fixation of DEPB rates. It states that all applications for fixation of DEPB rates shall be routed through the concerned Export Promotion Council (EPC) which shall verify the value of export sales of international price on imports covered under SION. For the standardization of norms an application may be made by the manufacturer exporter or the merchant exporter which shall be made to the Advanced Licensing Committee (ALC). Para 7.10 further provides for the modification of the existing SION for which an application may be filed by the manufacturer exporter or merchant exporter. Our attention was further drawn towards the relevant literature indicating that an exporter may also apply for the enhancement in the SION if the burden of duty suffered is more than the standard rate so fixed. The learned A.R. submitted that in the case of M/s. Jindal Drugs Limited, the amount of DEPB originally fixed was enhanced by the authorities after satisfying them that the duty paid on the imported input was higher than that of the standard rate so fixed. 28. It has also been brought to our notice that an exporter has the option of either availing the DEPB scheme or get duty drawback as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls on the ground when we make in-depth scrutiny of the scheme of DEPB. It is true that the DEPB is issued with reference to the FOB value of exports and that too after the making of exports, but the objective of DEPB, as set out by the Government of India itself in Exim Policy, is only to neutralize incidence of custom duty on the import component of the export product . Considering the FOB value of exports for fixing the standard rate as per SION is only a measure adopted to quantify such benefit on some pragmatic basis for each industry so as to overcome the difficulty in identifying the element of custom duty included in the import component of the export product in each and every case individually. It is further clear that any exporter individually or through the respective associations etc., can move the competent authority for the enhancement of the standard rate so fixed by the Government, if the load of actual custom duty on the import component is higher than the standard rate fixed by the Government. In such a situation the competent authority will revise upward such standard rate, as has been done in the case of M/s. Jindal Drugs Limited, an intervener before us. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Act. We are reminded of the classic judgment rendered by the Hon ble Supreme Court in the case of E.D. Sassoon Co. Ltd. v. CIT [1954] 26 ITR 27. In this case, it was held that income becomes chargeable to tax when the right to receive is acquired. At the same time, it is equally true that where the right to receive income is inchoate no income can be said to have accrued as has been held in the case of CIT v. Hindustan Housing Land Development Trust Ltd. [1986] 161 ITR 5241 (SC). If, however, the right to receive the income gets vested unconditionally in assessee, the income will accrue notwithstanding the fact that some controversy may arise later on by which the payer may claim the amount back. In that case the dispute will be about the refunding of the amount and will not have any effect on the accrual of income at the earlier stage. From the above discussion, we note that the fundamental principle of the accrual of income is that the income accrues and becomes chargeable to tax when the assessee finally acquires right to receive it irrespective of the fact whether it is received or not. 34. Let us apply this test to the facts of the instant cases. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of accrual of DEPB is the date when application for DEPB is filed with the concerned authority. That being the position, the income would accrue at that stage and become chargeable to tax accordingly. The fact that the assessee sells the DEPB entitlement in this year or later year and hence, the income be considered to have accrued in entirety on the date of such sale is totally irrelevant insofar as the original amount, being the face value of the DEPB, is concerned. Similarly when the exporter utilizes DEPB entitlement for own import, the time of accrual of income will not be when the subsequent import is made and the face value of DEPB gets adjusted against the duty payable but when application was originally filed for the DEPB. The subsequent events, viz, the sale of DEPB as such or making imports for self consumption or direct sale of such imported goods, are not significant in determining the accrual of income on account of the face value of DEPB, which results on making application for the DEPB, after making the exports. 35. At this stage it will be pertinent to note section 28, which has bearing on the issue. Relevant part of the section material for our purpose is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and included the amount in the total income of the assessee. The Tribunal held that the sale of import license for a consideration was liable to tax as business income. The Hon ble High Court upheld this view by observing that the import entitlements were obtained by the assessee in the course of its business so that the value of the same constituted profits and gains of the business of the assessee within the meaning of clause (iv) to section 28 . Similar view was earlier taken in the case of Agra Chain Manufacturing Co. v. CIT [1978] 114 ITR 840 (All.) holding that profit arising on the sale of import entitlements by an assessee engaged in the business of exports, would be assessable as profits from business. It will not be out of place to mention that the Hon ble Bombay High Court rendered its judgment in the case of Metal Rolling Works (P.) Ltd. (supra) in the year 1982 and at that time clauses (iiia) to (iiic) of section 28 were not on the statute and thus it was held that the import entitlements were in the nature of the value of any benefit arising from business falling in clause (iv) of section 28. On the other hand, a contrary view was expressed in some other cases hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to profit on sale of import entitlement licences will apply from 1-4-1962; cash assistance from 1st April, 1967, and drawback of duty from 1-4-1972, and will, accordingly, apply in relation to the assessment years 1962-63, 1967-68 and 1972-73, respectively, and subsequent years." 38. The insertion of clauses ( iiia) to (iiic) of section 28 by the Finance Act, 1990 has elucidated the position that all the export incentives are revenue receipts and accordingly chargeable to tax under the head Profits and gains of business or profession . When the Hon ble Bombay High Court decided the case of Metal Rolling Works (P.) Ltd. (supra) holding the inclusion of export incentives under section 28(iv), at that time clauses (iiia) to (iiic ) to section 28 were not in the Act. Subsequently when these clauses were introduced by the Finance Act, 1990, all the export incentives came to be recognized as falling under any of these three clauses to section 28. 39. By considering the concept of accrual of income in terms of the judgment of the Hon ble Supreme Court in the case of Punjab Bone Mills (supra), we have held that the DEPB income accrues to the exporter after export is made a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Government of India . On the perusal of the language of this clause, the following features can be noticed : (i)Cash assistance (by whatever named called) (ii)Received or receivable (iii)By any person against exports (iv)Under any scheme of the Government of India. 40. Not only the cash assistance actually received but the accrual aspect is also covered in its scope because of the use of word receivable . If the intention of the Legislature had been to include only the cash given to the exporters in the form of assistance within the purview of this clause , then there was no need to supplement it with the word receivable . The next important feature to be noted is the use of the phrase by whatever name called . It implies that the assistance referred to herein may be described by any name and it need not be cabined into the words cash assistance . This interpretation becomes more vivid when we note the words under any scheme of the Government of India at the end of the clause. It leaves no room for doubt that any scheme is covered within this clause. On harmonious construction of these three clauses to section 28, it becomes evident that whereas clauses (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r alia, surrendered both self-acquired import license and those purchased from the open market and received premium on the surrender of the same under the composition scheme of the Government to pay cash amount towards unutilized import license. It was held that the compensation received from the Government on the surrender of such import licenses would fall under section 28(iiib). The revenue challenged this order before the Hon ble High Court but did not think it appropriate to assail this issue, thereby impliedly accepting this interpretation of section 28(iiib). The judgment of the Hon ble Bombay High Court in this case is reported at CIT v. Pink Star [2000] 245 ITR 7571. The Ahmedabad Bench of the Tribunal in Pratibha Syntex (supra) has also held that all the export incentives which are not specifically covered under clause (iiia) or (iiic), will find their place in clause (iiib) to section 28. In view of the foregoing discussion we do not have any doubt in our mind that the face value of DEPB which is an export incentive, though not specifically covered under clause (iiia) or (iiic), would fall within the ambit of clause (iiib) of section 28. It would be at the stage of makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 28(iiid), as against the case of the assessee that only the premium or the profit element on the transfer of DEPB be considered. To put the controversy in simple words, if, for example, the assessee received DEPB worth the face value of Rs. 100 and then sold it for Rs. 110, the assessee is contending that only a sum of Rs. 10 is to be included under clause (iiid), whereas, the revenue s contention is that the entire amount of Rs. 110 be considered. 44. Thus we have to interpret the word profit as fielded in section 28(iiid). As noted supra section 28 has clauses (i) to (vi). On a careful circumspection of the language of clauses (iiib) and (iiic), it is noted that the reference is to the gross sum of cash assistance and duty drawback etc. On the contrary clauses (iiia), (iiid) and (iiie ) use the word "profit" on sale/transfer of licence/DEPB/DFRC. From here, it can be easily inferred that the employment of the words "any profit of transfer" in clauses (iiid ) and (iiie) of section 28 in contradistinction to the omission of such word profit in clauses (iiib) and (iiic) is not without any object. 45. The principle rule of interpretation is that meaning is to be given to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so purchased or constructed, the differential amount shall be charged under section 45; as against section 54E which provides deduction in respect of long-term capital assets by providing that if the cost of the new asset, is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45. If we carefully peruse the language of section 54 in juxtaposition to section 54E it can be seen that whereas the former section provides deduction with reference to the investment of the amount of capital gain, the later section grants deduction with reference to the extent of investment of the net consideration and not the capital gain. Thus, it can be visualized that the Legislature is not unmindful of the distinction between sale consideration and profit and has used the appropriate expression to exhibit its intendment. Reverting to the language of clause (iiid) of section 28 we observe that it refers to any profit on the transfer of DEPB. The words used in the provision indicate that only the profit element on the transfer of DEPB is to be considered under this clause and not the sale proceeds itself. Thus in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace value of DEPB, at the time of making application, results into the accrual of income as includible under section 28(iiib) and the corresponding amount represents the value of DEPB, such value, which is in the nature of an asset, shall constitute its cost when DEPB is made the subject matter of sale at a later date. The following accounting entry shall be passed in this situation. Cash/Bank Dr. Rs. 110 To DEPB Rs. 100 To Profit on sale of DEPB Rs. 10 [At the time of sale, the income of Rs. 10 shall arise to the assessee under section 28(iiid) as income of Rs. 100 had already accrued under section 28(iiib) at time of application] 49. The absurdity in the result can be seen from the consequences following the reasoning of the Department, that the entire sale proceeds shall be taxable under section 28(iiid) at the time of sale. In such a situation there will be double taxation of the face value of DEPB, firstly, when application for DEPB is made resulting into accrual of income under section 28(iiib) to the extent of its face value at Rs. 100 and subsequently when DEPB is sold for Rs. 110, the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout paying duty. But you can also sell the credit to another importer. If you actually import, it is part of export-import. If you sell it to another importer and make a profit on that the premium, it is not export profit. It is simple business profit because the income you earn is not in foreign exchange, it is in Indian rupees. It does not arise out of export activity or import activity. It arises because you are trading in a "License", which has a premium in the market. So, the department took the view that it does not fall under section 28 read with section 80HHC. I am not going into the sub-sections. Therefore, this is not to be counted as exempted export profit. This must be added back as taxable profit. The assessee took a different view....... In appeal, the ITAT has observed that the same falls under section 28(iv) if not under section 28(iiib) or (iiic). It falls under section 28(iv). Then, the Tribunal gave a judgment, which I find as a lawyer difficult to understand. But with great respect to the Tribunal which is entitled to take a view, the Tribunal gave a judgment that although it falls under section 28(iv), it does not fall under section 80HHC Explanation (baa). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interpretation, as such, may not be directly relevant in such a situation. But if the language of section admits of doubt or some ambiguity can be traced from it, then certainly recourse can be taken to the external aids, such as speech delivered by the Finance Minister at the time of introducing the Bill in the Parliament. Presently we are confronted with a situation in which the language of clause (iiid) of section 28 does not admit of any doubt and refers to the profit on the transfer of DEPB. At the same time the Finance Minister s speech in the Parliament also accords with the language of the statutory provision. There is hardly any scope for the difference between the language of section and the speech of Finance Minister. Rather it appears that the doubt has been needlessly created by the revenue authorities in ignoring the words "any profit" on the transfer of DEPB and substituting them with "the sale proceeds" on the transfer of DEPB. It is clear that the sale proceeds cannot be confused with profit inasmuch as the profit can only be an incremental amount and not the whole. We, therefore, hold that the word profit in section 28(iiid) refers to the excess of sale proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India by the assessee in convertible foreign exchange. He stated that the intention behind the insertion of this section was to encourage exports that will eventually enhance the foreign exchange reserves of the Nation. As the export incentives are only in Indian currency and do not result into the receipt of convertible foreign exchange, he stated that no deduction should be allowed on them. 57. We have heard the rival submissions and perused the relevant material on record in the light of precedents cited before us. Section 80HHC entitles an exporter, may be manufacturer or merchant or mixture of both, to deduction in respect of profits retained for export business. Section 80HHC was inserted by the Finance Act, 1983 with effect from 1-4-1983 providing for deduction of an amount equal to 1 per cent of the export turnover of such goods or merchandize during the previous year and a deduction of an amount equal to 5 per cent of the amount by which the export turnover of such goods or merchandize during the previous year exceeding the export turnover of such goods or merchandize during the immediately preceding previous year. The Finance Act, 1985 substituted the original section. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods : Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c ) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : Provided also that in the case of an assessee having export tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be. The same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Explanation. For the purposes of this sub-section, (a)"adjusted export turnover" means the export turnover as reduced by the export turnover in respect of trading goods; (b)"adjusted profits of the business" means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (b) of sub-section (3); (c)"adjusted total turnover" means the total turnover of the business as reduced by the export turnover in respect of trading goods; (d)"direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods; (e)"indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover; (f)"trading goods" means goods which are not manufactured [or processed] by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c). Sub-section (3) has five provisos. Here it may be pertinent to mention that when clauses (iiia) to (iiic) were inserted to section 28 by the Finance Act, 1990 clarifying that the export incentives are revenue receipt and hence taxable, first proviso to section 80HHC(3) was also given effect to. Then the Taxation Laws (Amendment) Act, 2005 inserted clauses (iiid) and (iiie) to section 28 with retrospective effect and along with that the second to fifth provisos were also inserted to section 80HHC(3) and those too with retrospective effect. 59. The ld. DR has contended that the employment of expression derived from in sub-section (1) indicates that only the income directly flowing from the export should be considered for the purposes of deduction. It has also been argued before us that section 80HHC is code in itself and, hence, no provision other than this section should be viewed for considering the amount of deduction under this section. 60. It is relevant to note that section 80HHC is not only a substantive provision allowing deduction on the profits derived from export of eligible goods, but also contains the complete procedure for the determination of the profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e understood as something which has direct or immediate nexus with the assessee s industrial undertaking. On the contrary, where the words "attributable to" have been used, the Courts have held that if the income is related to the industrial undertaking, even though not directly emanating therefrom, it would still fall within the scope of this expression. In the case of Ashok Leyland Ltd. v. CIT [1997] 224 ITR 122 3 the Hon ble Supreme Court held that the assessee engaged in manufacturing and sale of trucks in collaboration with a foreign company importing spare parts and selling it to the purchasers of the trucks when such purchaser found it difficult to get them in the initial years of production, profits and gains from the sale of such spare parts was attributable to the priority industry carried on by the assessee as the same was intimately connected with the main activity of priority industry. 62. Thus it can be noted that in the context of section 80HH, where the similar expression derived from is used, the Hon ble Supreme Court in Sterling Steel s case (supra) has held that sale consideration of import entitlements cannot be held as profits and gains derived from the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... centives as referred to section 28(iiia) to (iiic) in the proportion of the export turnover to the total turnover are to be added to the proportionate profit of business as worked out in Explanation (baa ). Similar is the position for a merchant exporter, whose computation of profits derived from exports is governed by clause (b) of section 80HHC(3), in which case such profits shall be first computed without export incentives as per section 28(iiia) to (iiie), but the mandate of the first proviso, which is again applicable here also, will require the inclusion to the extent of 90 per cent of the amounts referred to in section 28(iiia) to (iiic ) in the proportion of export turnover to the total turnover. It means the export incentives, though strictly going by the meaning of the expression derived from are not to form part of the profits derived from such exports under sub-section (1) but by virtue of sub-section (3) read with Explanation, are to be included in the eligible amount. Thus it becomes apparent the entire mechanism for computation of profits derived from exports under section 80HHC has been specifically provided for in the section itself and there is no need to be gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he export turnover are to be segregated from the direct costs and then bifurcated in the ratio of export turnover to total turnover for the purpose of determination of the indirect costs of the trading goods exported and only that part is to be considered for clause (b) of section 80HHC(3). On subtracting both the direct and indirect costs from export turnover, we get "the profits derived from such export". 65. Here, it is important to mention that a controversy was continuing towards the claim for reduction of the indirect costs as are not attributable to the goods exported. In other words, the exporters were raising a claim that usually there are certain incomes like interest, miscellaneous income and export incentives etc., which are credited to the P L account and some expenditure is also always incurred for earning of such items of income. If no reduction is made from the indirect costs, towards the expenditure incurred for such incomes, then there will artificial inflation of indirect costs and the consequent deflation of the profits derived from export. It was claimed that the expenditure incurred for these items of income should be reduced from the total "indirect costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is then reduced by 90 per cent of the sums referred to in section 28(iiia) to ( iiie) or receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in such profits. Thus in order to compute "profits of the business" we have to firstly determine the profit under the head "Profits and gains of business or profession". If any item of income does not fall under this head or in other words it falls under other head, say "Income from other sources", that will stand excluded at the very outset and hence will not be reckoned for computation of profits derived from export and will be automatically shunted out for the purposes of deduction under section 80HHC. It is on the basis of the definition of "profits of the business" as referred to in Explanation (baa ) with the starting point of profits as computed under the head "Profits and gains of business or profession" that the learned A.R. has argued that any income falling under this head will qualify for deduction. If we bring this contention to the logical conclusion, it would mean that any Business income whether or not connected with exports, shall qualify for deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as well as exports. Even though the element of income as relatable to the domestic sales forms part of the profits of the business as computed under the head "Profits and gains of business or profession", but, that part will stand eliminated when the total profit is proportionately restricted to in the ratio of export turnover to total turnover. That means only the profit from the export business will come up for consideration for the purpose of granting deduction under this section. However, in the case of merchant exporter where clause (b) of section 80HHC(3) applies, the profit derived from export shall be the export turnover as reduced by the direct cost and indirect cost attributable to such export. Neither the domestic sales nor the cost of goods sold in the Indian market will be taken into consideration. Thus it is noted that whether it is the case of a manufacturer or the merchant exporter, the net result remains the same that only the profit as relatable to the export business qualify for deduction under this section and it is not the total income of the assessee falling under the head "Profits and gains of business or profession". 68. We further wish to make it clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered under section 28, which have been referred to in the five provisos to sub-section (3) to section 80HHC. It is only with reference to the former component of income from export business, being the profit from the realization of export proceeds, that sub-section (2) has its application as is apparent from the language of sub-section extending to "the sale proceeds of such goods or merchandise exported out of India". It does not talk of the later component of items referred to in section 28. It is rightly so because if sub-section (2) is read as extending to the entire gamut of profits from export business including those as referred to in section 28, then the five provisos to section 80HHC(3) will be rendered as meaningless since the incentives referred to therein are always in Indian currency and under no circumstances can be received in convertible foreign exchange. 70.The ld. DR has conceded that the word profit referred to in clause (iiid) to section 28 indicates that the sale price cannot be considered as profit and hence some expenses incurred like fees for application of DEPB, professional charges in respect thereof and miscellaneous expenses can be legitimately de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope for granting any further deduction towards such expenses while working out the profits on transfer of DEPB under section 28(iiid). 71.We, therefore, hold that the contentions raised on behalf of the Intervener as well as by the revenue on this issue do not merit acceptance inasmuch as the profit derived from the export of goods as referred to in sub-section (1) can neither be strictly restricted to the element of profit embedded in the export proceeds as contended by the learned Departmental Representative, nor it can rope in any independent income falling under the head "Profits and gains of business or profession" de hors export business. 72. Reverting to the main question posted before this Special Bench for consideration as to whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28(iiid) or some artificial cost is to be interpolated, we find that the relevance of this question is only in the context of the computation of deduction under section 80HHC. We have held above that sub-section (3) dealing with the computation of the profits derived from export of goods or merchandize is a complete code in itself. Thus th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered in the framework of section 80-IB, lose their relevance in the present context of section 80HHC and hence need not be examined. 73. If the intention of the Legislature had been to allow the reduction of the face value of DEPB from the cost of purchases, as has been contended before us, then there was no need to have clauses (iiia) to (iiie) of section 28 and also the first to fifth provisos to section 80HHC(3) along with the necessary ingredients of Explanation below section 80HHC(4C). We have held that the face value of DEPB under the scheme of the Income-tax Act, 1961 falls under section 28(iiib) and the profit element on the sale of DEPB, that is, the excess of sale proceeds over the face value of DEPB falls under section 28(iiid). Profits of business as per Explanation (baa) provides for the exclusion of ninety per cent of any sum referred to in section 28(iiia) to (iiie). Then first proviso to sub-section (3) states that the profits computed under clause (a) or ( b) or (c) shall be further increased by the amount which bears to the ninety per cent of any sum referred to in section 28(iiia), (iiib) and (iiic). It means that the ninety per cent of the face value of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f clauses (iiia) to (iiic) of section 28 along with section 80HHC(3) is that all the export incentives including the DEPB and DFRC etc. be considered as separate business income and not to reduce them from the cost of purchases. 75. We will now endeavour to evaluate the stand point of the Assessing Officer from another angle that the entire amount of sale proceeds is covered under clause (iiid) and not only the profit element. Continuing with the above example, where we supposed that the exporter made export turnover of Rs. 1,000 and he earned Rs. 200 from the export transaction in addition to Rs. 100 towards the face value of DEPB. The amount of profits derived from export shall come at Rs. 300 as per clause (baa) of Explanation below 80HHC(4C) read with sub-section (3) including the first proviso. Further suppose that the said DEPB is held as such at the close of the year and is then sold in the succeeding year for Rs. 110. If we agree with the view point of the Department that at the time of sale of DEPB, the entire amount of Rs. 110 is includible in section 28(iiid) then it would mean that in order to give effect to sub-section (3), firstly the sum of Rs. 110 will require inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds over the face value, is covered under section 28(iiid). Rationale behind section 28(iiid ) and (iiie) 78. It is noticed above that export incentive is provided by way of the face value of DEPB. It is this value, which has relation with the export business. The subsequent sale of DEPB is a step divorced from export. The relation between the act of exporting goods and DEPB exists only upto the stage of its acquisition and not thereafter. Once the DEPB is acquired pursuant to exports, the subsequent events of its utilization for self consumption or making imports for resale or the sale of DEPB as such, are independent transactions unrelated to export. Section 80HHC provides deduction in respect of income from export business. Considering the text of section 80HHC and the manner of computation of deduction it has been noticed above that though the face value of DEPB is profit from export business, but the profit on sale of DEPB is not covered within the scheme of this section inasmuch as the DEPB has only a local market from the point of view of its sale. When DEPB is sold, the sale proceeds will form part of total turnover but not export turnover for the reason that the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases under consideration it is an admitted position that the two conditions as so specified in third and fourth provisos are not capable of compliance and hence the further increase as suggested in these two provisos cannot be made to the computation of deduction under section 80HHC. Thus, it is apparent that the statutory discrimination is between the exporters having export turnover not exceeding Rs. 10 crores and those having exceeding Rs. 10 crores. Whereas the benefit of deduction in respect of the profit of sale of DEPB realized from the Indian market is also available to small exporters having export turnover, it is not so in the case of the large exporters having export turnover exceeding Rs. 10 crores. This appears to be the only reason for inserting clauses (iiid) and (iiie) to section 28 by the Taxation Laws (Amendment) Act, 2005 simultaneous with the insertion of section 3rd and 4th provisos. Non-inclusion of section 28(iiid) in definition of income under section 2(24) 80. It was argued by the learned A.R. that profit on the transfer of DEPB as referred to in section 28(iiid) cannot be considered as income on the ground that section 2(24) has not been amended to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted by the learned A.R., then the receipts by way of rent from property, would stand excluded for the reason that it is not specifically included in the definition clause. This contention does not hold any water for the obvious reason that the income from house property has been specifically included in Chapter IV-C of the Act. 82. The Hon ble Supreme Court in the case of CIT v. G.R. Karthikeyan [1993] 201 ITR 8661 has held that "even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to widen its net. This Court has repeatedly said that the word "income" is of widest amplitude and that it must be given its natural and grammatical meaning." Similar view has been reiterated recently by the Hon ble Madras High Court in the case of CIT v. K. Thangamani [2009] 309 ITR 152 by holding that "section 2(24) gives an inclusive definition to the word "income". The expression "income" is very wide and the object of the I.T. Act being one to tax income it has to be given an extended meaning." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion comes of computing profit on the transfer of DEPB and we reduce the face value of DEPB, it does not amount to granting any separate deduction against the overall income. Determination of profit on transfer of DEPB is a separate computation distinct from the computation of total income. By making this computation under section 28(iiid) what we intend to do is to give effect to the deduction under section 80HHC. It is not as if some separate deduction is claimed when face value of DEPB is reduced from the sale proceeds for the purpose of section 28(iiid). This view can be appreciated from a different perspective also. An assessee may have four units including one unit which is eligible for deduction under section 80-IC or 80-ID or 80-IE and composite set of books of account is maintained for all the units. When a combined Trading, Profit and loss account is drawn, the resultant figure of profit will include income from all the four units. Now while giving effect to the computation of deduction under section 80-IC or 80-ID or 80-IE, which is available in respect of one unit only, what we need to do is to determine the income earned by this eligible unit. In order to compute the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the premium in the open market on the raw material consumed, is fallacious on the ground that it is an incentive having intrinsic value, which is a tradable commodity in the open market. The amount of incentive under DEPB is an income which has no relation with the premium in the open market for a particular raw material. As it can be used for the import of any commodity, the benefit which flows from it is that the exporter or any party purchasing it from the exporter, gets benefit in the payment of import duty to the extent of the face value of DEPB on making import of any item. 87. The ld. DR, relying on another order in favour of the Revenue contended that if only the profit realized on transfer of DEPB is considered then only the amount actually realized/received on account of sale of DEPB would be liable to be included in "business income" of the assessee for the year under consideration as against the total income received as well as receivable included in its business income and in that case, even if the exclusion as per Explanation (baa) is restricted to the amount actually received, there will be hardly any effect on the quantum of deduction permissible to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade only when the decision is taken on the amount and the timing of taxability of the face value of DEPB and the profit on its sale. On this issue we hold that the face value of DEPB is chargeable to tax under section 28(iiib) at the time of accrual of income, that is, when the application for DEPB is filed with the competent authority pursuant to exports and profit on sale of DEPB representing the excess of sale proceeds of DEPB over its face value is liable to be considered under section 28(iiid) at the time of its sale. Whatever is said about DEPB, shall also hold good for DFRC, on both its components, viz., the face value of DFRC and profit on its transfer, except for the fact that the profit on sale of DFRC shall be charged to tax under section 28(iiie). There is no dispute about the duty drawback, which shall be chargeable to tax at the time of accrual of income under section 28(iiic) when application is filed with the competent authority after making exports. Since the necessary facts for the determination of the quantum of deduction under section 80HHC, as discussed above, are not available on record, we, therefore, set aside the impugned orders and direct the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced with the view point canvassed on behalf of the assessee. From the statement of facts filed before the ld. CIT(A), it is found that the assessee paid interest of Rs. 23,21,999 to banks and at the same time earned interest of Rs. 8,09,529 on loans given to various parties and Rs. 26,000 from bank. It is beyond our comprehension as to how the interest income, in the present circumstances, can be considered as falling under the Profits and gains of business or profession and thus becoming eligible for deduction under section 80HHC. 94. According to section 56 interest income is chargeable to tax under the head "Income from other sources" if it is not chargeable to tax under the head "Profits and gains of business or profession". On the other hand section 28(i) states that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year shall be chargeable under the head Profits and gains of business or profession . Section 2(13) defines "Business" which "includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture." Thus in order to cover any activity under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of income and there is no amount deductible against this income. The natural consequence which, therefore, follows is that once a particular income does not fall under the head "Profits and gains of business or profession, that goes out of reckoning for the purposes of deduction under section 80HHC, be it the case of the manufacturer or trader or hybrid exporter. 96. The Hon ble Delhi High Court in CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 4751 has elaborately dealt with the issue of interest income vis-a-vis its eligibility for falling under the head Business income . After taking into consideration the order passed by the Special Bench of the Tribunal in Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 (Delhi), it has been held as under: "Turning to the submissions in the present case, as regards the first of the categories, viz., the parking of the surplus funds there should be no difficulty at all. In view of the large number of the decisions of the Hon ble Supreme Court in the context of section 56 and section 57 and those of the Kerala High Court in the context of section 80HHC itself, we are unable to accept the contention of the assessee based on Snam Proghett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case does not assist the assessee for the reason that the parking of funds in that case was made for a business purpose, as the assessee was to purchase machinery for its business with these funds, and the same was, in fact, purchased. Here is a case of simple deployment of funds. No specific business purpose for the temporary deployment of funds has been brought on record either before the authorities below or the Tribunal, leave aside any relation with export business. We, therefore, approve the view taken by the ld. CIT(A) on this issue and dismiss this ground of appeal. 99. Before parting with these appeals, we place on record our appreciation for the enlightening arguments put forth by both the sides, which have assisted us in the disposal of the issues raised in these appeals. We want to make it clear that all the cases relied on by both the sides have been duly taken into consideration while deciding the matter. The reference to some of the cases in the order is avoided either due to their irrelevance or to relieve the order from the burden of the repetitive ratio decidendi laid down in such decisions. 100. In the result both the appeals are partly allowed for stati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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