2011 (1) TMI 749 - HC - Income Tax

DEPB scheme - Whether profit means the difference between the sale price of DEPB and the face value of DEPB ignoring the fact that the entire amount represents the profit in the hands of assessee - after noticing the judgment of the Bombay High Court in CIT v. Kalpataru Colours & Chemicals (2010 -TMI - 76895 - BOMBAY HIGH COURT), the matter was remanded to the Tribunal for fresh decision in accordance with law - Decided against the assessee

Summary

Issues:
1. Interpretation of profit under Sections 28(iiid) and 28(iiie) of the Income Tax Act, 1961.
2. Calculation of profit on transfer of DEPB entitlement.
3. Deduction of face value of DEPB for calculating profit under Sections 28(iiid) and 28(iiie).
4. Requirement of artificial cost for determining deduction under Section 80HHC.
5. Computation of deduction under Section 80HHC in accordance with the amendment.
6. Exclusion of 90% amount of DEPB while calculating "Profits of the Business."
7. Consideration of the whole amount of DEPB as profit due to zero cost to the assessee.
8. Exclusion of 90% of profit on transfer of export incentives while computing profits under Section 80HHC(3)(a).
9. Impact of the decision of the Special Bench of Mumbai Tribunal on the issue of deduction under Section 80HHC on DEPB.

Analysis:
1. The appeal raised substantial questions of law regarding the interpretation of profit under Sections 28(iiid) and 28(iiie) of the Income Tax Act, 1961. The main issue was whether the entire sale consideration, including the face value of DEPB and premium amount received, represents profit chargeable under the mentioned sections. The ITAT's interpretation and application of the term "profit" were under scrutiny.

2. Another issue was the calculation of profit on the transfer of DEPB entitlement. The ITAT's decision not to consider the premium amount as part of the profit on the transfer of DEPB was challenged. The question arose whether the profit should be determined based on the total amount received, inclusive of the premium.

3. The deduction of the face value of DEPB for calculating profit under Sections 28(iiid) and 28(iiie) was also contested. The ITAT's approach of deducting the face value from the sale price to calculate profit was questioned, especially concerning whether the face value should be considered as the cost incurred by the assessee to acquire the DEPB.

4. The issue of whether any artificial cost needed to be interpolated for determining the deduction under Section 80HHC was raised. The ITAT's decision to deduct the face value of DEPB/DFRC from the sale proceeds for the purpose of deduction under Section 80HHC was challenged, questioning the necessity of such interpolation.

5. The computation of deduction under Section 80HHC in accordance with the amendment made by the Taxation Laws (Amendment) Act, 2005, with retrospective effect from 01.04.1998, was also a point of contention. The correct application of the amended provisions was crucial in determining the allowable deduction.

6. The exclusion of 90% of the amount of DEPB while working "Profits of the Business" was disputed. The justification for excluding this amount and its impact on the overall profit calculation under section 80HHC was a significant issue in the appeal.

7. The question of whether the whole amount of consideration of DEPB received by the assessee should be considered as profit due to zero cost incurred by the assessee was also raised. The ITAT's decision on this matter was challenged for its implications on the profit calculation.

8. Another issue was the exclusion of 90% of the profit on the transfer of export incentives while computing profits under Section 80HHC(3)(a). The failure to fulfill certain conditions as per the Third or Fourth proviso inserted by the Taxation Laws (Amendment) Act, 2005, and its impact on the profit calculation was a point of contention.

9. The impact of the decision of the Special Bench of Mumbai Tribunal on the issue of deduction under Section 80HHC on DEPB was highlighted. The reversal of the Mumbai Tribunal's decision by the Mumbai High Court and its implications on the present case were crucial for determining the correct approach to the deduction under Section 80HHC.