2011 (8) TMI 1106 - HC - Income Tax

Summary

Issues Involved:
1. Extent of DEPB benefit eligibility for deduction under section 80HHC of the Income Tax Act, 1961.
2. Interpretation of section 28(iiid) and its correlation with section 80HHC.
3. Definition and treatment of DEPB credit and its face value.
4. Legislative intent and amendments related to section 28(iiid) and explanation (baa) to section 80HHC.

Detailed Analysis:

1. Extent of DEPB Benefit Eligibility for Deduction Under Section 80HHC:
The central controversy revolves around the extent to which the benefit of DEPB upon sale of credit by the assessee is eligible for deduction under section 80HHC. The Assessing Officer excluded 90% of the DEPB credit amount from the deduction calculation. The CIT (Appeals) upheld this, considering the entire amount received from DEPB credit transfer under section 28(iiid). The Tribunal, however, opined that only the profit (difference between sale price and face value) should be excluded. The High Court concluded that the entire sale consideration of DEPB credit should be considered under section 28(iiid), not just the profit margin.

2. Interpretation of Section 28(iiid) and Its Correlation with Section 80HHC:
Section 28(iiid) was introduced to cover profits from the transfer of DEPB credits. The Tribunal interpreted that only the profit margin (sale price minus face value) should be considered, while the High Court held that the entire sale consideration is the profit under section 28(iiid). This interpretation aligns with the legislative intent to cover the entire amount received from DEPB credit transfer as profit, thereby excluding 90% of it for section 80HHC deduction calculations.

3. Definition and Treatment of DEPB Credit and Its Face Value:
DEPB credits are part of the duty remission scheme to neutralize customs duty on imported inputs used in export products. The High Court held that DEPB credits have no acquisition cost to the assessee. The face value of DEPB credit cannot be considered its cost in the hands of the assessee. The entire sale consideration from DEPB credit transfer should be treated as profit under section 28(iiid).

4. Legislative Intent and Amendments Related to Section 28(iiid) and Explanation (baa) to Section 80HHC:
The legislative history and Finance Minister's speech clarified that section 28(iiid) was introduced to neutralize Tribunal decisions that did not consider DEPB credit sales as part of business profits. The amendments aimed to include the entire sale consideration of DEPB credits under section 28(iiid) and exclude 90% of it from business profits for section 80HHC deductions. This interpretation prevents anomalous situations where retained DEPB credits are taxed differently from transferred ones.

Conclusion:
The High Court reversed the Tribunal's decision, holding that the entire sale consideration of DEPB credits should be included under section 28(iiid). Consequently, 90% of this amount should be excluded from business profits for section 80HHC deductions. The court granted a certificate for appeal to the Supreme Court, recognizing the substantial question of law and its general importance.