TMI Blog2023 (5) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the decision of Riviera Home Furnishing [ 2015 (11) TMI 1139 - DELHI HIGH COURT ] and Moser Baer India Ltd. [ 2018 (5) TMI 581 - ITAT DELHI ] wherein it is held that the above receipts form part of the profit of business of the undertaking and thus eligible for deduction under section 10B of the Act. We set aside the orders of the Ld. CIT(A)/AO and direct the Ld. AO to amend the assessment order suitably. Decided in favour of the assessee. Contention of the assessee that the amount as realized on transfer of DEPB represents gross realization and the issue of deduction of the said benefit under DEPB needs to be decided in the light of the judgment of the Hon ble Supreme Court in Topman Exports [ 2012 (2) TMI 100 - SUPREME COURT ] We agree with the above contention of the assessee and restore the matter back to the file of the Ld. AO to decide the issue afresh keeping in view the judgment of the Hon ble Supreme Court in Topman Exports (supra) after allowing opportunity of hearing to the assessee. - ITA No. 4115/Del/07 - - - Dated:- 6-4-2023 - Shri G.S. Pannu, Hon ble President And Ms. Astha Chandra, Judicial Member For the Assessee : Shri Neeraj Jain, Advoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an exporter of basmati rice as also non-basmati rice. For AY 2004-05 it filed its return on 30.10.2004 declaring income of Rs. 55,93,622/- which was processed on 25.05.2005 under section 143(1) of the Income Tax Act, 1961 (the Act ). Later on, the case was picked up for scrutiny and assessment was completed under section 143(3) of the Act on 27.12.2006 on total income of Rs. 1,11,57,590/- including therein, inter alia, disallowance of Rs. 19,24,528/- being interest income, disallowance of subsidy receipt of Rs. 81,000/- and disallowance of insurance claims of Rs. 19,50,000/- in computing deduction under section 10B of the Act as also denial of benefit claimed by the assessee under Duty Entitlement Pass Book (DEPB) scheme amounting to Rs. 21,67,878/- in computing deduction under section 80HHC and both the grounds of appeal before the Tribunal relate thereto. 4. The facts relating to Ground No. 1 are that the Ld. Assessing Officer ( AO ) found from the bifurcated Trading, Profit Loss account filed before him by the assessee that the profit of basmati exports included interest income of Rs. 19,24,528/-. On query, the assessee contended that interest income directly related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed under section 80HHC(3)(c) has further been increased by an amount equivalent to 90% of the DEPB Licence Credits. 4.3 Vide Order Sheet entry dated 15.09.2006, the Ld. AO asked the assessee to prove with evidence that (a) the assessee had an option to choose either the duty draw back or DEPB scheme, being the Duty Remission scheme; and (b) the date of draw back credit attributable to the customs duty was higher than the rate of credit allowable under DEPB scheme, being Duty Remission scheme; in order to avail the benefit of the newly inserted 3rd proviso to section 80HHC(3). Since compliance was not made, the Ld. AO rejected the claim of the assessee. 4.3.1 The Ld. AO further noticed that the profits of non-basmati rice included Rs. 18,03,761/- earned as interest income after netting of interest. Following the decision in CIT vs. V.P. Gopinath 248 ITR 449 (SC), he rejected the assessee s claim of netting of interest. Finally in para 5.7, the Ld. AO recorded following finding holding that deduction allowable under section 80HHC is nil. 5.7 The assessee company has declared a profit of Rs.21.19 lacs on the trading of non basmati exports. Therefore, after adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of interest from margin money does not ipso-facto make such income to be non-business income assessable under the head income from other sources . The assessee also submitted that interest on loan provided to employees is also inextricably linked to the business of the assessee and constitutes business income. 5.2.1 Referring to section 56(2)(id) it was contended by the assessee that if the interest income earned by the assessee is in the nature of business income, then the same cannot be assessed as income from other sources . Explanation (baa) of section 80HHC also suggests that interest income may constitute business income. Several decisions were relied upon. 5.3 An alternate plea was also taken that if interest income is held to be income from other sources , then interest expenses on money s borrowed for earning such income be allowed as deduction under section 57(iii) of the Act. Order dated 22.04.2004 of Delhi Bench of the Tribunal in assessee s own case in ITA No. 2478/D/00 (90 ITD 301) for AY 1997-98 was cited. 5.4 As to the exclusion of other income , namely subsidy of Rs. 81,000/- received from Agricultural Processed Food Products Export Development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein to cover, profit on transfer of DEPB credit. Simultaneous amendments have been made in section 80-HHC by inserting three more provisos after first proviso to sub-section (3) of section 80-HHC of the Act. By virtue of the aforesaid amendment in section 28(iiid), the profit arising on transfer of DEPB scheme has been specifically made part of profits of the business. The amount so qualified as part of profits of the business under section 28(iiid) has been qualified for deduction under section 80HHC of the Act in respect of the exporters whose export turnover does not exceed Rs.10 crore. However, for exporters having export turnover exceeding Rs.10 crore, profits arising from transfer of DEPB credit will be eligible for deduction under section 80HHC of the Act, if the following two conditions are satisfied by the exporter: (i) assessee had an option to choose either the Duty Drawback or DEPB Scheme; and (ii) rate of drawback credit was higher than the rate of credit allowable under Duty Entitlement Pass Book Scheme, 5.2.1 It is submitted that DEPB credits are granted under the Foreign Trade (Development Regulation) Act, 1992. DEPB credits are granted under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that even where the export turnover exceeds Rs. 10 crore during the previous year, the requirement of meeting the conditions stipulated under the third proviso to sub-section (3) of that section for claiming deduction arises only in a situation where the receipt itself fails within the ambit of section 28(iiid) of the Act. Clause (iiid) of Section 28 of the Act introduced vide Taxation Laws (Second Amendment) Act, 2005, includes the following income under the head of profits and gains of business of profession chargeable to income-tax: (iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme being Duty Remission Scheme, under the export and import policy formulation and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992; 5.2.3 A plain reading of section 28(iiid) of the Act indicates that the eligible income that is brought within the ambit of this provision is the profit made by an assessee transferor, on transfer of the DEPB credit. What is covered in section 28(iiid) of the Act is only profit on transfer of DEPB credit. It does not, however, envelope the entire consideration/ sales proceeds received by the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in the market at that time. If the demand is more than the supply, then the assessee may be able to receive high profits , and vice - versa. It would, it will be kindly appreciated, be absurd to say that if DEPB credit, of say Rs.100, has been transferred at Rs.80, there is in fact a profit of Rs.80. In this example, the transferor has essentially suffered a loss since whereas he was entitled to duty remission of Rs.100 the realization on account of such benefit has been short by Rs.20. It is respectfully reiterated and will kindly be appreciated that DEPB credit is not a gratuitous grant/ incentive given by the Government but is merely recoupment/ reimbursement of the import duty component embedded initially paid by the exporter in respect of raw material in goods/ inputs used for exports. 5.2.7 There is another facet to the aforesaid! The exporter has an option to either avail or utilise DEPB credit for further imports or to sell it in the open market. Where DEPB credit received by the assessee is not transferred to another person but is utilized by the assessee himself, there is no transfer of DEPB credit. Section 28(iiid) of the Act clearly does not cover self utiliza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. At times there were two or three schemes running simultaneously and an exporter had option to choose any of these. But, primarily all the schemes were made to give benefits/incentives to the exporters in the face of adverse competition which may result in losses due to export. In these circumstances, whatever incentive or benefit is given under any scheme is itself profit which has been made chargeable under specific provisions of section 28 (iiia) to (iiie). Otherwise also, it is to be noted that there is no cost incurred by- an exporter to get the benefits/incentives under these schemes. Therefore, even if one talks of profit on transfer of DEPB, the whole of it is profit since cost for getting the same is nil. It is also to be noted that prior to DEPB when advance licenses were issued to exporters, the language used in clause 28(iiia) was similar, i.e. profit on sale of license. But at that time also, the whole value of license was excluded to the extent of 90%. Without prejudice to this view, it is note-worthy that the appellant itself has excluded 90% of DEPB incentives from profits as per clause (baa) of Explanation to section 80HHC. I find from the appellant s own computa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export of articles or things etc. computed in accordance with sub-section (4) thereof. 9.1 In the written submission filed before us by the Ld. AR it is contended that the scope of the expression profits and gains derived by an undertaking from the export in section 10B(1) is statutory defined in sub section (4) thereof to mean the profits of the business of the undertaking apportioned in the ratio of export turnover to total turnover of the undertaking. The statutory mandate of section 10B(4) is that the profits of the eligible Export Oriented Unit (EOU) as assessed under the head profits and gains of business or profession are required to be apportioned in the ratio of export turnover to total turnover of that unit to arrive at the amount admissible under section 10B of the Act. 9.2 According to the assessee section 10B envisages deduction not only with respect to profits and gains of the business of the undertaking but also deduction in respect of income having a close and direct nexus with the profits and gains of the business of the eligible undertaking. All incomes that arise essentially during the course of running of the eligible business would be eligible for ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As regards the exclusion of subsidy received of Rs. 81,000/- and insurance claim of Rs. 19,50,000/- from the profits for computing deduction under section 10B of the Act, the Ld. AR relied on the decision of Hon ble Delhi High Court in Riviera Home Furnishing vs. ACIT 237 taxman 520 (Delhi) wherein the court held that freight subsidy received by the assessee in respect of business carried on was part of profit of business of undertaking and thus, eligible for deduction under section 10B of the Act. 9.7 As regards the insurance claim of Rs. 19,50,000/- received on account of damage caused to the rice produce of the assessee during the course of transportation, the Ld. AR placed reliance on the decision of Delhi Bench of the Tribunal in Moser Baer India Ltd. vs. DCIT 170 ITD 522 wherein it was held that where insurance claims have direct nexus with industrial undertaking, they are eligible for deduction under section 10B of the Act. 9.8 In so far as the alternate claim of the assessee (Ground No.1.3 and 1.4) the Ld. AR submitted that the issue is covered by the decision of the Tribunal in assessee s own case for AY 1997-98 wherein interest expenses on the borrowed funds utilise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee: 10.1 Sub-section (1) of section 10B is a general provision and identifies the income which is exempt. Sub-section (4) of section 10B lays down the formula for computing what is eligible for deduction under sub-section (1). As per the formula stipulated in sub-section (4), the profits of the business of the undertaking have to be apportioned in the ratio of export turnover to the total turnover to arrive at the quantum of admissible deduction. In Maral Overseas Ltd. vs. Addl. CIT 146 TTJ 129 (Indore) the Special Bench of the Tribunal held that once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking and be eligible for deduction under section 10B of the Act. 11. The Ld. AO rightly noted in the first sentence in para 4.4 of the assessment order that the relevant words in sub-section (1) are profits and gains derived by a hundred percent export oriented undertaking from the export of articles or things ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsection (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. 15. The Hon ble Delhi High Court in Hritnik Exports Pvt. Ltd. (supra) went on to observe further that the mode of determining the eligible deduction under section 10B is similar to the provisions of section 80HHC in as much as both the sections mandate determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the profits of the business which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10B of the Act is a complete code providing the mechanism for computing the profits of the business eligible for deduction under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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