The ACIT, Circle-1, Ahmedabad V. Ambuja Intermediates Ltd., Ahmedabad

ITA 3042/AHD/2004

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1801 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-12-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 13-10-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOVIND SINGHAL
• Assessee Lawyers: A C AMIN
• Keywords: Capital asset; Business income; Cost of acquisition; Competent authority; Set aside; Capital Gains
• Section: 80HHC; 80HH; 54; 28

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH AAHMEDABAD BEFORE S/SHRI T.K. SHARMA, JM AND D.C.AGRAWAL, A.M. ASSTT. CIT, CIR.1, AHMEDABAD. V/S . AMBUJA INTERMEDIATES LTD., 901/A, NARNARAYAN COMPLEX, SWASTIK CROSS ROAD, OFF C.G. ROAD, NAVRANGPURA, AHMEDABAD. PAN NO.AACCA 1236B (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI GOVIND SINGHAL, SR.DR RESPONDENT BY:- SHRI A. C. AMIN, AR O R D E R PER T.K. SHARMA, JUDICIAL MEMBER . THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST T HE ORDER OF CIT(A) DATED 29/07/2004 FOR ASSESSMENT YEAR 2001-02, WHERE IN FOLLOWING GROUNDS HAVE BEEN RAISED :- 1. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTI NG TO EXCLUDE EXCISE DUTY AND SALES TAX FOR COMPUTATION OF DEDUCT ION U/S 80 HHC. ITA NO.3042/AHD/2004 ASST. YEAR: 2001-02 2 2. THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTI NG TO INCLUDE THE AMOUNT OFF DEPB LICENSE FOR WORKING OF DEDUCTIO N U/S 80 HHC, 2. GROUND NO. 1 IS AGAINST DIRECTION OF CIT(A) TO E XCLUDE EXCISE DUTY AND SALES TAX FOR COMPUTATION OF DEDUCTION U/S 80 H HC. 3. AT THE TIME OF HEARING, BOTH THE SIDES CONCEDED THAT NOW THIS ISSUE IS COVERED BY THE JUDGEMENT OF HONBLE SUPREME COUR T IN THE CASE OF CIT VS. LAXMI MACHINE WORKS LTD. 290 ITR 667 (SUPREME C OURT) WHEREIN IT WAS HELD THAT EXCISE DUTY AND SALES-TAX ARE NOT PAR T OF TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80 HHC . THE VIEW TAKEN BY THE LD. CIT(A) IS IN CONFORMITY WITH THE VIEW TA KEN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. LAXMI MACHINE WORKS LTD.(SUPRA). WE, THEREFORE, DECLINE TO INTERFERE. THIS GROUND OF APPEAL IS REJECTED. 4. SO FAR AS GROUND NO.2 IS CONCERNED, IT RELATES T O DIRECTION TO INCLUDE THE AMOUNT OFF DEPB LICENSE FOR WORKING OF DEDUCTIO N U/S 80 HHC, 5. WE HAVE HEARD THE LEARNED AR AND LEARNED DR. IS SUE IS NOW FULLY COVERED BY THE DECISION OF ITAT, SPECIAL BENCH IN T OPMAN EXPORTS VS. ITO (2009) 125 TTJ, MUMBAI, SPECIAL BENCH, AHMEDABA D IN ITA NO. 17/A/2007 AND ITA NO. 619/AHMEDABAD/2007 FOR THE AS SESSMENT YEARS 2004-2005 AND 2003-2004 AND MATTER WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR COMPUTING DEDUCTION UNDER SEC TION 80HHC IN ACCORDANCE WITH THE JUDGMENT IN THE TOPMAN EXPORTS CASE. FOR THE SAKE OF CONVENIENCE, WE REPRODUCE OPERATIVE PART OF THE JUDGMENT AS UNDER: 3 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABL E ON RECORD. IN OUR CONSIDERED VIEW, THE ISSUE IS SQUARELY COVERED BY THE DECISION OF ITAT MUMBAI SPECIAL BENCH IN THE CASE OF M/S.TOP MAN EXPORTS (SUPRA). FOR THE SAKE OF CONVENIENCE, WE REPRODUCE THE OPERATIVE PART OF THE JUDGEMENT AS UNDER:- 43. THE MAJOR CONTROVERSY BEFORE US IS TO INTERPR ET SECTION 28 (IIID) IN WHICH THE EXPRESSION 'ANY PROFIT ON THE T RANSFER DUTY ENTITLEMENT PASS BOOK SCHEME' HAS BEEN USED. FROM T HE FACTS OF THE CASES UNDER CONSIDERATION IT IS NOTED THAT THE AO TREATED THE ENTIRE SALE PROCEEDS AS COVERED UNDER SECTION 28(II ID), AS AGAINST THE CASE OF THE ASSESSEE THAT ONLY THE PREMIUM OR T HE PROFIT ELEMENT ON THE TRANSFER OF DEPB BE CONSIDERED. TO P UT THE CONTROVERSY IN SIMPLE WORDS, IF, FOR EXAMPLE, THE A SSESSEE RECEIVED DEPB WORTH THE FACE VALUE OF RS.100/- AND THEN SOLD IT FOR RS.110/-, THE ASSESSEE IS CONTENDING THAT ONLY A SUM OF RS.10/- IS TO BE INCLUDED UNDER CLAUSE (IIID), WHER EAS, THE REVENUE'S CONTENTION IS THAT THE ENTIRE AMOUNT OF R S.110/- BE CONSIDERED. 44. THUS WE HAVE TO INTERPRET THE WORD 'PROFIT' AS FIELDED IN SECTION 28(IIID). AS NOTED SUPRA SECTION 28 HAS CLA USES (I) TO (VI). ON A CAREFUL CIRCUMSPECTION OF THE LANGUAGE OF CLAU SE (IIIB) AND (IIIE), IT IS NOTED THAT THE REFERENCE IS TO THE GR OSS SUM OF CASH ASSISTANCE AND DUTY DRAWBACK ETC. ON THE CONTRARY C LAUSES (IIIA), (IIID) AND (IIIE) USE THE WORD 'PROFIT' ON SALE/TRA NSFER OF LICENCE/DEPB/DFRC. FROM HERE, IT CAN BE EASILY INFE RRED THAT THE EMPLOYMENT OF THE WORDS 'ANY PROFIT OF TRANSFER' IN CLAUSES (IIID) AND (IIIE) OF SECTION 28 IN CONTRADISTINCTION TO TH E OMISSION OF SUCH WORD PROFIT IN CLAUSES (IIIB AND IIIE) IS NOT WITHO UT ANY OBJECT. 45. THE PRINCIPLE RULE OF INTERPRETATION IS THAT ME ANING IS TO BE GIVEN TO EACH AND EVERY WORD IN THE LANGUAGE OF SEC TION. NO WORD CAN BE CLAIMED AS SUPERFLUOUS. EACH COMMA, FULL STO P OR EVERY SIGN OF PUNCTUATION HAS SIGNIFICANCE. IN OUR CONSID ERED OPINION THE NEED FOR INTERPRETATION WITH THE AID OF SOME EX TERNAL AIDS OF CONSTRUCTION OF A SECTION ARISES ONLY WHEN THERE IS SOME AMBIGUITY IN THE LANGUAGE OF SECTION AND THE INTENT ION OF THE LEGISLATURE IS NOT PROPERLY CONVEYED WITH THE WORDS SO USED. IT HAS BEEN HELD BY THE HON'BLE SUPREME COURT IN NUMER OUS JUDGMENTS INCLUDING THE CASE OF FEDERATION OF ANDHR A PRADESH CHAMBERS OF COMMERCE & INDUSTRY & ORS ETC. VS STATE OF ANDHRA PRADESH & ORS. ETC. ETC. (2001) 165 CTR (SC) 672 (2 001) 247 ITR 36 (SC) THAT THE TAXING STATUTE HAS TO BE STRICTLY CONSTRUED AND NOTHING CAN BE READ IN IT. IDENTICAL VIEW HAS BEEN TAKEN IN THE CASE OF PADMASUNDARA RAO (DECD.) & ORS. VS. STATE O F TAMIL NADU & ORS (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) 4 HOLDING THAT 'WHILE INTERPRETING A STATUTE LEGISLAT IVE INTENTION MUST BE FOUND IN THE WORDS USED BY THE LEGISLATURE' . IN THE LIKE MANNER IT HAS BEEN REITERATED IN THE CASE OF COMMR. OF AGRL, IT VS. PLANTATION CORPORATION OF KERALA LTD. (2000) 16 4 CTR (SC) 502 : (2001) 247 ITR 155 (SC) THAT : 'SO LONG AS THERE IS NO AMBIGUITY IN THE STATUTORY LANGUAGE, RESORT TO ANY INTERPRETA TIVE PROCESS TO UNFOLD THE LEGISLATIVE INTENT BECOMES IMPERMISSIBLE '. 46. COMING BACK TO THE ISSUE UNDER CONSIDERATION WE NOTE THAT THE LANGUAGE OF CLAUSE (IIID) AND (IIIE) OF SECTION 28 IS CRYSTAL CLEAR WHICH TALKS OF 'ANY PROFIT ON THE TRANSFER OF DEPB/ DFRC. THE REFERENCE IS NOT TO THE SALE PROCEEDS BUT TO THE PR OFIT ON THE TRANSFER OF DEPB/DFRC. A LINE OF DEMARCATION NEEDS TO BE DRAWN BETWEEN THE PROVISIONS IN WHICH GROSS AMOUNT IS CON SIDERED AND THE PROVISIONS IN WHICH ONLY THE PROFIT DEMERIT HAS BEEN THE SUBJECT MATTER OF CONSIDERATION. WE NEED NOT WANDER HERE AND THERE IN SEARCH OF SUCH DISTINCTION, WHICH IS HIGHL IGHTED FROM SECTION 28 ITSELF . APART FROM CLAUSES (IIIB) AND ( IIIC) TO SECTION 28, CLAUSES (IV) AND (VI) ALSO REFER TO THE INCLUSION O F THE GROSS AMOUNT, AND NOT THE PROFIT ELEMENT THEREON, FURTHER THE LEG ISLATURE IS NOT OBLIVIOUS TO SUCH DISTINCTION BETWEEN THE GROSS AMO UNT AND THE PROFIT ELEMENT INASMUCH AS IT HAS USED THE APPROPRI ATE WORDS WHEREVER IT INTENDED SO. IT IS AMPLY DEMONSTRATED F ROM THE LANGUAGE OF SECTION 54 WHICH GRANTS DEDUCTION FROM THE CAPITAL GAINS BY PROVIDING THAT IT THE AMOUNT OF CAPITAL GA IN' IS GREATER THAN THE COST OF THE RESIDENTIAL HOUSE SO PURCHASED OR CONSTRUCTED, THE DIFFERENTIAL AMOUNT SHALL BE CHARG ED UNDER SECTION 45; AS AGAINST SECTION 54E WHICH PROVIDES D EDUCTION IN RESPECT OF LONG TERM CAPITAL ASSETS BY PROVIDING TH AT IF THE COST OF THE NEW ASSET, IS NOT LESS THAN THE NET CONSIDERATI ON' IN RESPECT OF THE ORIGINAL ASSET, THE WHOLE OF SUCH CAPITAL GAIN SHALL NOT BE CHARGED UNDER SECTION 45. IF WE CAREFULLY PERUSE TH E LANGUAGE OF SECTION 54 IN JUXTAPOSITION TO SECTION 54E IT CAN B E SEEN THAT WHEREAS THE FORMER SECTION PROVIDES DEDUCTION WITH REFERENCE TO THE INVESTMENT OF THE AMOUNT OF CAPITAL GAIN, THE L ATER SECTION GRANTS DEDUCTION WITH REFERENCE TO THE EXTENT OF IN VESTMENT OF THE NET CONSIDERATION AND NOT THE CAPITAL GAIN. THUS, I T CAN BE VISUALIZED THAT THE LEGISLATURE IS NOT UNMINDFUL OF THE DISTINCTION BETWEEN 'SALE CONSIDERATION AND 'PROFIT' AND HAS US ED THE APPROPRIATE EXPRESSION TO EXHIBIT ITS INTENDMENT. R EVERTING TO THE LANGUAGE OF (IIID) OF SECTION 28 WE OBSERVE THAT IT REFERS TO ANY PROFIT ON THE TRANSFER OF DEPB. THE WORDS USED IN T HE PROVISION INDICATE THAT ONLY THE PROFIT ELEMENT ON THE TRANSF ER OF DEPB IS TO BE CONSIDERED UNDER THIS CLAUSE AND NOT THE SALE PR OCEEDS ITSELF. THUS IN ORDER TO FEE COVERED WITH THE SCOPE OF THIS CLAUSE, TWO THINGS ARE ESSENTIAL. FIRST, THERE SHOULD BE TRANSF ER OF THE DEPB AND SECOND, SUCH TRANSFER SHOULD RESULT INTO ANY PR OFIT. UNLESS BOTH THE CONDITIONS ARE CUMULATIVELY SATISFIED, THE TRANSACTION CANNOT FORM PART OF SECTION 28 (IIID). 5 47. THIS LEAVES US WITH THE DETERMINATION OF THE M EANING OF THE WORD 'PROFIT'. IN COMMON DIALECT THE WORD PROFIT' R EFERS TO EXCESS OF SALE PROCEEDS OVER THE COST OF GOODS. THE WORD PROF IT' HAS ANOTHER SHADE ALSO, WHICH INVOLVES A COMPARISON BETWEEN THE STATE OF BUSINESS AT TWO SPECIFIC DATES AND THE EXCESS OF TH E VALUE OF ASSET ON ONE DATE OVER THE OTHER, CONSTITUTES PROFI T. THEIR LORDSHIPS OF THE HON'BLE SUPREME COURT IN E.D. SASS OON & COMPANY (SUPRA) HAS LAID DOWN TO THIS EFFECT. 'THE WORD 'PROFITS' HAS IN MY OPINION A WELL DEFINE D LEGAL MEANING, AND THIS MEANING CONSIDERS WITH THE FUNDAM ENTAL CONCEPTION OF PROFITS IN GENERAL PARLANCE ALTHOUGH IN MERCANTILE PHRASEOLOGY THE WORD MAY AT LIME BEAR MEANINGS INDI CATED BY THE SPECIAL CONTEXT WHICH DEVIATE IN SOME RESPECTS FROM THIS FUNDAMENTAL SIGNIFICATION. 'PROFITS' IMPLIES A COMP ARISON BETWEEN THE STATE OF A BUSINESS AT TWO SPECIFIC DATES USUAL LY SEPARATED BY AN INTERVAL YEAR. THE FUNDAMENTAL MEANING IS THE AM OUNT OF GAIN MADE BY THE BUSINESS DURING THE YEAR. THIS CAN ONLY BE ASCERTAINED BY A COMPARISON OF THE ASSETS OF THE BU SINESS AT THE TWO DATES'. 48. GOING BY THE CONCEPT OF COMPARISON OF THE ASSET S OF BUSINESS ON TWO DATES, IT CAN BE SEEN THAT AT THE S TAGE OF RECEIPT OF DEPB ON ITS ACCRUAL THE FACE VALUE OF RS.100/- C ONSTITUTED AN ASSET IN THE HANDS OF THE EXPORTER WHICH COULD BE U TILIZED BY HIM IN ANY OF THE WAYS OPEN TO HIM. IF THE EXPORTER CHO OSES TO SELL THE DEPB FOR RS. 110 AT A SUBSEQUENT DATE, THEN THE PRE VAILING MARKET RATE AT THE TIME OF SALE, THAT IS RS. 110 SH ALL REPRESENT THE VALUE OF ASSET ON SUCH DATE OF SALE. ACCORDINGLY, T HE DIFFERENCE OF RS 10 BETWEEN THE VALUE OF TWO DATES, VIZ, ON THE D ATE OF ITS SALE (RS.110/-) AND THE DATE WHEN IT WAS ACQUIRED ON ACC RUAL (RS.100/-), WILL CONSTITUTE PROFIT. EVEN GOING BY T HE MEANING OF 'PROFIT' AS COMMONLY UNDERSTOOD REPRESENTING EXCESS OF SALE PROCEEDS OVER COST, WE FIND THAT SIMILAR RESULT WIL L FOLLOW. NO DOUBT THE EXPORTER DOES NOT DIRECTLY PURCHASE THE D EPB FROM THE MARKET BY INCURRING ANY COST, BUT WHEN WE SEE THE S CHEME OF SECTION 28 IN WHICH THE FACE VALUE OF DEPB, AT THE TIME OF MAKING APPLICATION, RESULTS INTO THE ACCRUAL OF INCOME AS INCLUDIBLE U/S 28(IIIB) AND THE CORRESPONDING AMOUNT REPRESENTS TH E VALUE OF DEPB, SUCH VALUE, WHICH IS IN THE NATURE OF AN ASSE T, SHALL CONSTITUTE ITS COST WHEN DEPB IS MADE THE SUBJECT M ATTER OF SALE AT A LATER DATE. THE FOLLOWING ACCOUNTING ENTRY SHA LL BE PASSED IN THIS SITUATION. CASH/BANK DR RS. 110 TO DEPB RS. 100 TO PROFIT ON SALE OF DEPB RS. 10 6 [AT THE TIME OF SALE, THE INCOME OF RS. 10 SHALL AR ISE TO THE ASSESSEE U/S 28(IIID) AS INCOME OF RS. 100 HAD ALRE ADY ACCRUED U/S 28(IIIB) AT TIME OF APPLICATION] 49. THE ABSURDITY IN THE RESULT CAN BE SEEN FROM TH E CONSEQUENCES FOLLOWING THE REASONING OF THE DEPARTM ENT, THAT THE ENTIRE SALE PROCEEDS SHALL BE TAXABLE U/S 28(IIID) AT THE TIME OF SALE. IN SUCH A SITUATION THERE WILL BE DOUBLE TAXA TION OF THE FACE VALUE OF DEPB, FIRSTLY, WHEN APPLICATION FOR DEPB I S MADE RESULTING IN TO ACCRUAL OF INCOME U/S 28(IIIB) IF T HE EXTENT OF US FACE VALUE AT RS. 100 AND SUBSEQUENTLY WHEN DEPB IS SOLD FOR RS. 110, THE ENTIRE SALE CONSIDERATION OF RS. 110 S HALL STAND INCLUDED U/S 28(IIID) RESULTING INTO TOTAL INCOME O F RS. 210 ON ACCOUNT OF THE TRANSACTION OF DEPB, AS AGAINST, THE REAL INCOME ONLY TO THE TUNE OF RS.110. .. .. 53. FROM THE ABOVE IT CAN BE NOTED THAT DEPB CREDIT SALE IS DIFFERENT FROM THE PREMIUM ON THE DEPB AND SUCH PRO FIT OR THE PREMIUM, IS NOT EXPORT PROFIT SINCE IT DOES NOT ARI SE OUT OF EXPORT ACTIVITY OR IMPORT ACTIVITY AND ARISES BECAUSE OF T RADING IN A 'LICENSE' WHICH HAS A PREMIUM IN THE MARKER SUCH PR EMIUM OR PROFIT CANNOT TO BE COUNTED AS EXEMPTED EXPORT PROF IT AND SHOULD BE ADDED BACK AS TAXABLE PROFIT. THE SPEECH OF THE FINANCE MINISTER, AS EXTRACTED ABOVE, DIVULGES THE INTENTIO N OF THE SCOPE OF SECTION 28(IIID) AS COVERING ONLY THE PREMIUM ON SA LE OF DEPB AND NOT THE FACE VALUE. . . 72. REVERTING TO THE MAIN QUESTION POSTED BEFORE TH IS SPECIAL BENCH FOR CONSIDERATION AS TO WHETHER THE ENTIRE AM OUNT RECEIVED ON SALE OF DEPB ENTITLEMENTS REPRESENTS PROFIT CHAR GEABLE U/S 28 (IIID) OR SOME ARTIFICIAL COST IS TO BE INTERPOLATE D, WE FIND THAT THE RELEVANCE OF THIS QUESTION IS ONLY IN THE CONTEXT O F THE COMPUTATION OF DEDUCTION U/S 80HHC. WE HAVE HELD ABOVE THAT SUB -SECTION (3) DEALING WITH THE COMPUTATION OF THE PROFITS DERIVED FROM EXPORT OF GOODS OR MERCHANDIZE IS A COMPLETE CODE IN ITSELF, THUS THE COMPUTATION OF ELIGIBLE PROFITS IS TO BE MADE FIRML Y AS PER THIS SUB- SECTION WITH THE AID OF EXPLANATION AS INTERPRETED BY THE HON'BLE SUPREME COURT IN THE CASE OF HERO EXPORTS (SUPRA) A ND K. RAVINDRANATHAN (SUPRA). THE AO HAS DENIED THE DEDUC TION U/S 80HHC BY HOLDING THAT THE ENTIRE SALE PROCEEDS OF D EPB FALL UNDER SECTION 28(IIID) AND SINCE IN THAT VIEW OF TH E MATTER, THERE IS NO POSITIVE INCOME, THE DEDUCTION IS IMPERMISSIBLE. ON THE CONTRARY THE VIEW POINT OF THE ASSESSEE IS THAT THE FACE VALUE OF DEPB SHOULD BE REDUCED FROM THE COST OF PURCHASES A S IT IS GIVEN BY THE GOVERNMENT OF INDIA ONLY TO NEUTRALIZE THE I NCIDENCE OF CUSTOM DUTY. ON THE IMPORT CONTENT OF THE EXPORTS. WE HAVE 7 EXAMINED THE FORMAT OF DEPB SCHEME AND COME TO THE CONCLUSION THAT THE FACE VALUE OF DEPB IS NOTHING BUT PARTIAL REIMBURSEMENT OF THE PURCHASE PRICE OF GOODS. OUR THIS VIEW IS BA SED ON THE UNDERSTANDING OF THE SCHEME OF DEPB IN COMMERCIAL S ENSE AND IN THE TIGHT OF THE FOREIGN TRADE POLICY OF THE GOVERN MENT OF INDIA. BUT WHEN WE COME TO THE COMPUTATION OF DEDUCTION AN D THE PLACEMENT OF THE FACE VALUE OF DEPB IN THE SCHEME O F SECTION 80HHC, THE GENERAL VIEW BASED ON THE FOREIGN TRADE POLICY ABOUT THE REDUCTION OF SUCH AMOUNT FROM THE PURCHASE COST , FAILS. WE HAVE SEEN ABOVE THE SUB-SECTION (3) OF SECTION 80HH C IS COMPLETE CODE IN ITSELF IN SO FAR AS THE COMPUTATION OF THE ELIGIBLE PROFITS DERIVED FROM EXPORT ARE CONCERNED. THE MANDATE OF S UB-SECTION (3) HAS TO BE RELIGIOUSLY FOLLOWED FOR DETERMINING THE AMOUNT OF ELIGIBLE PROFITS FOR DEDUCTION AND AS SUCH THE GENE RAL VIEW ABOUT THE UNDERSTANDING OF THE NATURE OF DEPB WILL BE SUB DUED AND THE ONE BASED ON THE PRESCRIPTION OF THIS PROVISION WIL L COME TO FORE. IN THAT VIEW OF THE MATTER WE HOLD THAT THE FACE VALUE OF DEPB CANNOT BE REDUCED FROM THE COST OF PURCHASES AND HA S TO BE CONSIDERED AS A SEPARATE SPECIES OF' BUSINESS 'INCO ME'. THUS ALL THE CONTENTIONS PUT FORWARD ON BEHALF OF THE ASSESS ES AND THE INTERVENERS ABOUT THE REDUCTION OF THE FACE VALUE O F DEPB HAVE BECOME ACADEMIC IN THE CONTEXT OF SECTION 80HHC. SI MILARLY THE COMPARISON OF DEPB WITH MODVAT, WHICH IS AN OFF-SHO OT OF THE BASIC CONTENTION OF REDUCTION OF THE DEPB VALUE FRO M THE PURCHASES AND ALSO THE ARGUMENTS BY THE LD. AR TOWA RDS THE REDUCTION OF THE FACE VALUE OF DEPB FROM THE PURCHA SE COST ON THE STRENGTH OF CERTAIN DECISIONS RENDERED IN THE FRAME WORK OF SECTION 80IB, LOSE THEIR RELEVANCE IN THE PRESENT CONTEXT O F SECTION 80HHC AND HENCE NEED NOT BE EXAMINED. 73. IF THE INTENTION OF THE LEGISLATURE HAD BEEN TO ALLOW THE REDUCTION OF THE FACE VALUE OF DEPB FROM THE COST O F PURCHASES, AS HAS BEEN, CONTENDED BEFORE US, THEN THERE WAS NO NE ED TO HAVE CLAUSES (IIIA) TO (IIIE) OF SECTION 28 AND ALSO THE FIRST TO FIFTH PROVISOS TO SECTION 80HHC(3) ALONG WITH THE NECESSA RY INGREDIENTS OF EXPLANATION BELOW SECTION 80HHC(4C). WE HAVE HELD THAT THE FACE VALUE OF DEPB UNDER THE SCHEME O F THE INCOME- TAX ACT, 1961 FALLS UNDER SECTION 28(IIIB) AND THE PROFIT ELEMENT T ON THE SALE OF DEPB, THAT IS THE EXCESS OF SALE PRO CEEDS OVER THE FACE VALUE OF DEPB FALLS U/S 28(IIID). 'PROFITS OF BUSINESS' AS PER EXPLANATION (BAA) PROVIDES FOR THE EXCLUSION OF NIN ETY PER CENT OF ANY SUM REFERRED TO IN SECTION 28(IIIA TO IIIE). TH EN FIRST PROVISO TO SUB-SECTION (3) STATES THAT THE PROFITS COMPUTED UN DER CLAUSES (A) OR (B) OR (C) SHALL BE FURTHER INCREASED BY THE AMO UNT WHICH BEARS TO THE NINETY PER CENT OF ANY SUM REFERRED TO IN SE CTION 28(IIIA, IIIB AND IIIE). IT MEANS THAT THE NINETY CENT OF THE FACE VALUE OF DEPB WHICH WAS REDUCED WHILE COMPUTING THE 'PROFITS OF THE BUS INESS' SHALL 8 STAND INCLUDED WHEN EFFECT IS GIVEN TO FIRST PROVIS O. IF WE GO WITH THIS ARGUMENT THAT THE FACT VALUE OF DEPB IS TO BE REDUCED FROM THE COST OF PURCHASE THEN IN THE CASE OF MERCHANT E XPORTER WITH TURNOVER OF LESS THAN RS.10 CRORES, AN ANOMALOUS SI TUATION WILL CROP UP INASMUCH AS THE AMOUNT OF ELIGIBLE PROFIT W ILL FAR EXCEED THE ACTUAL PROFIT AS DEMONSTRATED BELOW. EXPORT TURNOVER RS. 1,000 COST OF GOODS SOLD - DIRECT COSTS (WITHOUT DEPB) - NO INDIRECT COSTS RS. 800 FACE VALUE OF DEPB RS 100 74. GOING BY SUB-SECTION (3)(B) THE PROFITS DERIVED FROM SUCH EXPORT SHALL BE EXPORT TURNOVER MINUS THE DIRECT AN D INDIRECT COSTS ATTRIBUTABLE TO SUCH EXPORT. GOING BY THE CONTENTIO N OF THE LD. AR, THE DIRECT COST WILL COME AL RS.700 (800 - 100) AS AGAINST THE EXPORT TURNOVER AT RS.1,000 RESULTING INTO PROFITS DERIVED FROM EXPORT AS PER CLAUSE (B) OF SUB-SECTION (3) COMING, TO RS.300 I.E. RS.1,000 MINUS RS.700. WHEN WE FURTHER GIVE EFFECT TO THE FIRST PROVISO TO SUB-SECTION (3), THE PROFIT OF RS.300 AS COMPUTED ABOVE WOULD REQUIRE TO BE FURTHER INCREASED BY THE NINETY PER CENT OF THE FACE VALUE OF DEPB. THE AMOUNT OF RS.90 (I.E. 90% O F RS.100 I.E FACE VALUE OF DEPB COULD, THEREFORE, BE ADDED AND T HE PROFIT AS DETERMINED IN CLAUSE (B) OF 80HHC(3) WILL COME AT R S.390. AS AGAINST THAT WE FIND THE REAL PROFIT FROM EXPORT AF TER GIVING EFFECT TO THE DEPB BENEFIT IS ONLY RS.300 [1000 700 (800 - 100)]. THUS IT CAN BE EASILY ASCERTAINED THAT WHEREAS THE TOTAL BU SINESS FROM EXPORT IS RS.300 BUT IF WE ACCEPT THE CONTENTION TH AT THE FACE VALUE OF DEPB BE REDUCED FROM THE COST OF PURCHASES THEN THE AMOUNT OF PROFITS DERIVED FROM EXPORT AS PER SECTIO N 80HHC(3)(B) WILL COME AT RS.390. OBVIOUSLY THIS CALCULATION DEF IES ALL LOGICS AND IS INCAPABLE OF ACCEPTANCE DUE TO AWKWARD SITUA TION CREATED BY DETERMINING THE PROFITS DERIVED FROM EXPORT AT A FIGURE HIGHER THAN THE ACTUAL BUSINESS PROFIT, THE FORMER AMOUNT, IN NO CASE CAN BE HIGHER THAN THE LATER. WE FIND THAT THE LOGIC BE HIND INTRODUCING CLAUSES (IIIA) TO (IIIE) TO SECTION 28 IS TO DE LIN K THE EXPORT INCENTIVES FROM THE BUSINESS PROFITS WHILE CONTINUI NG THEM TO BE GOVERNED BY CHAPTER IV-D AT THE SAME TIME. THE NATU RAL OUTCOME FOLLOWING THE PRESCRIPTION OF CLAUSES (IIIA) TO (II IC) OF SECTION 28 ALONG WITH SECTION 80HHC(3) IS THAT ALL THE EXPORT INCENTIVES INCLUDING THE DEPB AND DFRC ETC. BE CONSIDERED AS S EPARATE BUSINESS INCOME AND NOT TO REDUCE THEM FROM THE COS T OF PURCHASES. 75. WE WILL NOW ENDEAVOR TO EVALUATE THE STAND POIN T OF THE AO FROM ANOTHER ANGLE THAT THE ENTIRE AMOUNT OF SALE P ROCEEDS IS COVERED UNDER CLAUSE (IIID) AND; NOT ONLY THE PROFI T ELEMENT. CONTINUING WITH THE ABOVE EXAMPLE, WHERE WE SUPPOSE D THAT THE 9 EXPORTER MADE EXPORT TURNOVER OF RS. 1000/- AND HE EARNED RS.200/- FROM THE EXPORT TRANSACTION IN ADDITION TO RS.100/- TOWARDS THE FACE VALUE OF DEPB. THE AMOUNT OF PROFI TS DERIVED FROM EXPORTS SHALL COME AT RS.300 AS PER CLAUSE (BA A) OF EXPLANATION BELOW 80HHC(4C) READ WITH SUB-SECTION ( 3) INCLUDING THE FIRST PROVISO. FURTHER SUPPOSE THAT THE SAID DE PB IS HELD AS SUCH AT THE CLOSE OF THE YEAR AND IS THEN SOLD IN T HE SUCCEEDING YEAR FOR RS. 110. IF WE AGREE WITH THE VIEW POINT O F THE DEPARTMENT THAT AT THE TIME OF SALE OF DEPB, THE EN TIRE AMOUNT OF RS . 110/- IS INCLUDIBLE IN SECTION 28 (IIID) THEN IT WOULD MEAN THAT IN ORDER TO GIVE EFFECT TO SUB-SECTION (3), FIRSTLY THE SUM OF RS.100/- WILL REQUIRE INCLUSION IN THE PROFITS AND GAINS OF BUSINESS OR PROFESSION' IN THE YEAR OF SALE, BECAUS E THE QUESTION OF 90% EXCLUSION SHALL ARISE ONLY IF 100% IS INCLUD ED IN THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION'. THAT OBVIOUSLY CANNOT BE T HE DONE BECAUSE THE SUM OF RS.100/- HAD ALREADY BEEN INCLUD ED IN THE PROFITS AND GAINS OF BUSINESS OR PROFESSION' FOR TH E LAST YEAR WHEN SUCH INCOME ACCRUED TO THE ASSESSEE U/S 28(IIIB). T HE FURTHER INCLUSION OF RS.110/- IN SUCCEEDING YEAR AT THE TIM E OF SALE IN THE 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' WOULD LEAD TO OBVIOUS INCONGRUITY AND AN IMPOSSIBLE SITUATION BEC AUSE THE INCLUSION OF FACE VALUE OF RS.100/- IN THE PROFITS OF THE SECOND YEAR ALSO WILL AMOUNT TO DOUBLE TAXATION OF RS.100/ - FIRSTLY IN THE YEAR ONE WHEN THE INCOME ON ACCOUNT OF THE FACE VAL UE OF DEPB ACCRUED U/S 28(IIIB) AND THERE IN THE YEAR TWO AT T HE TIME OF SALE U/S 28(IIID). . . 79. THE SECOND PROVISO TO SECTION 80HHC PROVIDES T HAT IN THE CASE OF AN ASSESSEE HAVING EXPORT TURNOVER NOT EXCE EDING RS. 10 CRORES DURING THE PREVIOUS YEAR, THE PROFITS COMPUT ED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (E) OF THIS SUB- SECTION OR AFTER GIVING EFFECT TO THE FIRST PROVISO, AS THE CASE MAY BE, SHALL BE FURTHER INCREASED BY THE AMOUNT WHICH BEARS TO NINE TY PER CENT OF ANY SUM REFERRED TO IN CLAUSE (IIID) OR CLAUSE (III C) OF SECTION 28, THE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE . IN OTHER WORDS, IN THE CASE OF AN ASSESSEE WITH EXPORT TURNO VER NOT EXCEEDING RS. 10 CRORES, EVEN THE PROFIT ELEMENT OF RS.10/- IN THE ABOVE EXAMPLE ON THE SALE OF DEPB FOR RS.110/- WILL ALSO BE CONSIDERED AS ELIGIBLE FOR DEDUCTION DESPITE THE FA CT THAT IT IS OUT OF THE TRADING OF DEPB ENTITLEMENT IN INDIA ONLY. B UT FOR THIS PROVISO NO PROFIT ON SALE OF DEPB OR DFRC COULD HAV E BEEN CONSIDERED FOR DEDUCTION UNDER THIS SECTION. IN CON TRAST TO IT THE THIRD AND FOURTH PROVISOS ARE APPLICABLE TO THE CAS E OF THE ASSESSEE HAVING EXPORT TURNOVER EXCEEDING RUPEES TE N CRORES IN WHICH CASE THE PROFIT COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR 10 CLAUSE (C) OF SUB SECTION (3) OR AFTER GIVING EFFEC T TO THE FIRST PROVISO, SHALL BE FURTHER INCREASED BY THE AMOUNT W HICH BEARS 90% OF ANY SUM REFERRED TO IN SECTION 28(IIID) OR ( IIIE) IN PROPORTION TO THE EXPORT TURNOVER TO THE TOTAL TURNOVER ONLY I F THE FURTHER TWO CONDITIONS STIPULATED THEREIN ARE FULFILLED AND ALS O THE ASSESSEE HAS SUFFERED EVIDENCE TO PROVE THE FULFILLMENT OF S UCH CONDITIONS. IT IS THIS CATEGORY OF EXPORTERS WHICH HAS BEEN STA TUTORILY DISCRIMINATED VIS A VIS THE SMALL EXPORTERS HAVING TURNOVER NOT EXCEEDING RS. 10 CRORES. THEY SHALL NOT BE ENTITLED TO INCREASE IN THE QUANTUM OF DEDUCTION BY PROFIT AT TRANSFER OF D EPB/DFRS WHICH IS OTHERWISE AVAILABLE TO SMALL EXPORTERS, UN LESS THE TWO CONDITIONS AS SET OUT IN THESE PROVISOS ARE FULFILL ED. IN THE CASES UNDER CONSIDERATION IT IS AN ADMITTED POSITION THAT THE TWO CONDITIONS AS SO SPECIFIED IN THIRD AND, FOURTH PRO VISOS ARE NOT CAPABLE OF COMPLIANCE AND HENCE THE FURTHER INCREAS E AS SUGGESTED IN THESE TWO PROVISOS CANNOT BE MADE TO T HE COMPUTATION OF DEDUCTION U/S.80HHC. THUS, IT IS APP ARENT THAT THE STATUTORY DISCRIMINATION IS BETWEEN THE EXPORTE RS HAVING EXPORT TURNOVER NOT EXCEEDING RS. 10 CRORES AND THO SE HAVING EXCEEDING RS. 10 CRORES. WHEREAS THE BENEFIT OF DED UCTION IN RESPECT OF THE PROFIT OF SALE OF DEPB REALIZED FROM THE INDIAN MARKET IS ALSO AVAILABLE TO SMALL EXPORTERS HAVING EXPORT TURNOVER, IT IS NOT SO IN THE CASE OF THE LARGE EXP ORTERS HAVING EXPORT TURNOVER EXCEEDING RS. 10 CRORES. THIS APPEA RS TO BE THE ONLY REASON FOR INSERTING CLAUSES (IIID) AND (IIIE) TO SECTION 28 BY THE TAXATION, LAWS (AMENDMENT ACT, 2005), SIMULTANE OUS WITH THE INSERTION OF SECTION 3RD AND 4TH PROVISOS. .. .. 89. THE QUESTION RAISED BEFORE THE SPECIAL BENCH H AS TWO PARTS. IN SO FAR AS THE FIRST PART: 'WHETHER THE ENTIRE AM OUNT RECEIVED ON SALE OF DEPB ENTITLEMENTS REPRESENTS PROFIT CHARGEA BLE UNDER SECTION 28(IIID) OF THE INCOME TAX ACT, IS CONCERNE D, WE ANSWER IT IN NEGATIVE AND THE SECOND PART OF THE QUESTION OR THE PROFIT REFERRED TO THEREIN REQUIRES ANY ARTIFICIAL COST TO BE INTERPOLATED IS REPLIED IN AFFIRMATIVE TO THE EXTENT THAT THE FACE VALUE OF DEPB SHALL BE DEDUCTED FROM THE SALE PROCEEDS. AS REGARD S THE GROUNDS BASED IN THESE APPEALS AGAINST THE DENIAL OF DEDUCT ION U/S 80HHC, IN FULL OR PART, WE FIND THAT THE COMPUTATIO N OF PROFITS DERIVED FROM EXPORTS AND THE RESULTANT AMOUNT OF DE DUCTION UNDER THIS SECTION CAN BE MADE ONLY WHEN THE DECISI ON IS TAKEN ON THE AMOUNT AND THE TIMING OF TAXABILITY OF THE F ACE VALUE OF DEPB AND THE PROFIT ON ITS SALE. ON THIS ISSUE WE H OLD THAT THE FACE VALUE OF DEPB IS CHARGEABLE TO TAX U/S 28(IIIB ) AT THE TIME OF ACCRUAL OF INCOME, THAT IS, WHEN THE APPLICATION FO R DEPB IS FILED WITH THE COMPETENT AUTHORITY PURSUANT TO EXPORTS AN D PROFIT ON SALE OF DEPB REPRESENTING THE EXCESS OF SALE PROCEE DS OF DEPB OVER ITS FACE VALUE IS LIABLE TO BE CONSIDERED U/S 28(IIID) AT THE TIME OF ITS SALE. WHATEVER IS SAID ABOUT DEPB SHALL ALSO HOLD GOOD 11 FOR DFRC, ON BOTH ITS COMPONENTS, VIZ THE FACE VALU E OF DFRC AND PROFIT ON ITS TRANSFER, EXCEPT FOR THE FACT THAT TH E PROFIT ON SALE OF DFRC SHALL BE CHARGED TO TAX U/S 28(IIIE). THERE IS NO DISPUTE ABOUT THE DUTY DRAWBACK, WHICH SHALL BE CHARGEABLE TO TAX AT TIME OF ACCRUAL OF INCOME U/S 28(IIIC) WHEN APPLICA TION IS FILED WITH THE COMPETENT AUTHORITY AFTER MAKING EXPORTS. SINCE THE NECESSARY FACTS FOR THE DETERMINATION OF THE QUANTU M OF DEDUCTION U/S 80HHC, AS DISCUSSED ABOVE, ARE NOT AVAILABLE ON RECORD, WE, THEREFORE, SET ASIDE THE IMPUGNED ORDERS AND DIRECT THE AO TO COMPUTE THE AMOUNT OF RELIEF IN ACCORDANCE WITH THE VIEW EXPRESSED BY US HERE IN ABOVE. 12. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT OF TH E TRIBUNAL, WE HOLD THAT PROFIT ELEMENT ON DEPB LICENCE WILL B E COVERED BY SECTION 28(IIID) AND, ACCORDINGLY, BY THIRD PROVISO TO SECTION 80HHC(3) OF THE I.T. ACT, 1961 AS THE TURNOVER OF T HE ASSESSEE EXCEEDS RS.10 CRORES THIS AMOUNT SHALL BE EXCLUDE D FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.80HHC OF THE I. T. ACT, 1961, IF CONDITION LAID DOWN IN THAT PROVISO ARE NOT SATI SFIED . THE FACE VALUE OF THE DEPB LICENCE WILL BE COVERED U/S.28(II IB) OF THE I.T. ACT, 1961 AND, THEREFORE, 90% THEREOF WOULD BE ADDE D TO THE EXPORT PROFITS AS PER FIRST PROVISO TO SECTION 80HHC(3) OF THE I.T. ACT, 1961. 13. IN ORDER TO COMPUTE DEDUCTION U/S.80HHC OF THE I.T. ACT, 1961 IN ACCORDANCE WITH THE DECISION OF ITAT SPECI AL BENCH IN THE CASE OF M/S.TOPMAN EXPORTS(SUPRA), WE RESTORE THE M ATTER TO THE FILE OF ASSESSING OFFICER. 6. RESPECTFULLY FOLLOWING ABOVE DECISION, WE RESTOR E THE ISSUE OF CLAIM OF DEDUCTION UNDER SECTION 80HHC IN RESPECT O F DEPB ENTITLEMENTS TO THE FILE OF THE ASSESSING OFFICER F OR CALCULATING DEDUCTION UNDER THAT SECTION IN ACCORDANCE WITH THE JUDGMENT IN TOPMAN EXPORTS CASE (SUPRA). THIS GROUND IS ACCORDING ALLOWED, BU T FOR STATISTICAL PURPOSES. 12 7. IN THE RESULT, APPEAL OF REVENUE IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 18 12 /2009 SD/- SD/- (D.C.AGRAWAL) (T.K.SHARMA) ACCOUNTANT MEMBER J UDICIAL MEMBER AHMEDABAD, DATED : 18/12/2009 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD