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2007 (12) TMI 236 - AT - Income TaxComputing deduction under s. 80HHC - DEPB income as eligible for deduction under s. 80HHC? - HELD THAT - We find that as per cl. (iiid) only the profits on sale/transfer of DEPB can be taken into consideration. The language of ss. 28(iv) and 28(iiid) is very clear. Therefore, the value of license falls within sec. 28(iv) and only the profit on transfer of license falls within 28(iiid). In view of the judgment of the Special Bench in the case of Surendra Engineering 2002 (12) TMI 199 - ITAT BOMBAY-H and in view of the recent judgment of the Supreme Court in Hero Export v. CIT 2007 (11) TMI 13 - SUPREME COURT , we hold that part of the direct cost is attributable to the value of DEPB license. To find out the direct cost relatable to trading export, one has to reduce that part of the direct cost attributable to earning of DEPB from the value of total direct cost. However, this aspect has not been examined by the AO or by the CIT(A). Therefore, we restore this issue to the file of the AO to ascertain the value of DEPB license on the date of receipt and reduce the same from total direct cost. We clarify that any difference in realization of DEPB license will be treated under s. 28(iiid) of the Act. Thereafter the AO is directed to recompute the deduction under s. 80HHC. We order accordingly. In the result, the appeal filed by the assessee is partly allowed for statistical purpose.
Issues Involved:
1. Whether DEPB/DFRC income forms part of business income for computing deduction under section 80HHC of the Act. 2. Attribution of direct and indirect costs in relation to DEPB income. 3. Initiation of penalty under section 271(1)(c). 4. Levy of interest under sections 234C and 234D. Issue-Wise Detailed Analysis: 1. DEPB/DFRC Income and Section 80HHC Deduction: The primary issue is whether DEPB/DFRC income should be considered as part of business income for the purpose of computing deduction under section 80HHC. The assessee, engaged in the export of generic pharmaceuticals, claimed a deduction under section 80HHC amounting to Rs. 76,80,735, inclusive of DEPB income of Rs. 1,21,91,643. The AO disallowed this, referencing the Supreme Court decision in Ipca Laboratory Ltd. v. Dy. CIT, which led to a loss and thus disqualified the deduction. The CIT(A) upheld this decision, stating the assessee did not meet additional conditions under the Taxation Laws (Amendment) Act, 2005. The Tribunal noted that DEPB income falls under section 28(iv) and only the profit on sale/transfer of DEPB is covered under section 28(iiid). The Tribunal directed the AO to ascertain the DEPB license value on receipt and reduce it from the total direct cost, with any difference in realization treated under section 28(iiid). 2. Attribution of Direct and Indirect Costs: The assessee argued that direct costs should be reduced by the DEPB value, as DEPB is directly attributable to the export of goods. The Tribunal, referencing the Supreme Court's decision in Hero Export v. CIT and the Special Bench's decision in Surendra Engineering, affirmed that part of the direct cost is attributable to the DEPB license value. The Tribunal instructed the AO to recompute the deduction under section 80HHC after reducing the DEPB value from the total direct cost. The Tribunal emphasized that the principle of attribution is inherent in section 80HHC(3)(b), and the direct cost should be adjusted accordingly. 3. Initiation of Penalty under Section 271(1)(c): The Tribunal found this ground premature and did not require adjudication. Hence, this ground was dismissed. 4. Levy of Interest under Sections 234C and 234D: The Tribunal noted that the levy of interest under sections 234C and 234D is consequential. The AO was directed to adjudicate these issues afresh by passing a speaking order. Conclusion: The appeal was partly allowed for statistical purposes. The Tribunal directed the AO to recompute the deduction under section 80HHC after considering the DEPB value and to re-examine the related costs. The penalty issue was dismissed as premature, and the interest levy issues were remanded for fresh adjudication.
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