2012 (4) TMI 52 - HC - Income Tax

Nature of DEPB credit and premium received on transfer of DEPB impact on eligible profits for section 80HHC alleged non-satisfaction of conditions prescribed in the third proviso to Section 80HHC(3) - Held that - DEPB credit falls under Clause (iiib) of Section 28, whereas the premium received thereon on transfer will represent profits chargeable u/s Clause (iiid) and the deduction u/s 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 Decided in favor of assessee. Applicability of third proviso to Section 80 HHC(3) is not examined and have been referred back to the Assessing Officer.

Summary

Issues:
Interpretation of Section 28 of the Income Tax Act, 1961 regarding duty entitlement pass book credit as cash assistance and premium received on transfer of DEPB as profit under Section 80HHC.

Analysis:
1. The appellant, a partnership firm engaged in the export business, earned duty drawback and credit under the Duty Entitlement Pass Book Scheme (DEPB) during the assessment year 2002-03.
2. The DEPB was transferred by the appellant, resulting in a profit earned through premium.
3. The appellant claimed a deduction under Section 80HHC of the Income Tax Act, 1961, after considering these export incentives and other income.
4. The Assessing Officer, during scrutiny, treated the gross amount of DEPB, including the premium received, as business profit under Section 28(iiid) of the Act, leading to a loss deduction from eligible profits due to non-fulfillment of conditions under Section 80HHC.
5. The Commissioner of Income Tax (Appeals) referred to a Mumbai High Court decision, stating that profit on the transfer of DEPB credit falls under Section 28(iiid) only, directing the computation under Section 80HHC with conditional benefits.
6. The Tribunal, following a Bombay High Court decision, considered the entire DEPB, including the credit, as business profits under Section 28(iiid), overturning the relief granted by the Commissioner of Income Tax (Appeals) and remanding the matter to the Assessing Officer.
7. The Supreme Court reversed the Bombay High Court decision, clarifying that DEPB credit falls under Section 28(iiib), while the premium received represents profits chargeable under Section 28(iiid), with a deduction under Section 80HHC to be computed accordingly.
8. Consequently, the substantial question of law was answered in favor of the assessee, with no order as to costs, and the aspect of the third proviso to Section 80HHC(3) was left for examination by the Assessing Officer.