Pal Enterprises vs Cit

$~32
*                IN THE HIGH COURT OF DELHI AT NEW DELHI

%                                                 Date of Decision: 26th March, 2012
                                               Corrected by order dated 9th May, 2012

+          ITA 1191/2011

           PAL ENTERPRISES                                         ..... Appellant
                         Through:                 Mr. Santosh K. Aggarwal, Adv.
                    Versus

           CIT                                                       ..... Respondent
                                     Through:

CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR

SANJIV KHANNA, J: (ORAL)

           Having heard counsel for the parties, we frame the following
substantial question of law:
                    *
                     "Whether the Income Tax Appellate Tribunal
                    was right in holding that duty entitlement pass
                    book credit was not cash assistance within the
                    meaning of clause (iiib) to Section 28 of the
                    Income Tax Act, 1961 and the entire amount
                    including the premium received on transfer of
                    DEPB was "profit" under clause (iiid) of
                    Section 28 of the aforesaid Act and accordingly
                    exemption under Explanation (baa) to Section
                    80HHC should be calculated?"

*
    Corrected vide order dated 9th May, 2012


ITA 1191/2011                                                         Page 1 of 4
 2.         The appellant-assessee is a partnership firm engaged in the business
of manufacture and export of leather garments. During the assessment
year in question i.e. 2002-03, it had earned incentive i.e. duty drawback of
`9,77,618/- and credit under Duty Entitlement Pass Book Scheme
(DEPB) of `5,72,00,818/- totaling `5,81,77,436/- on the exports made by
them.

3.         The DEPB was transferred by the assessee to others and profit of
`20,75,382/- was earned by way of premium.

4.         The assessee had claimed deduction of `2,77,48,947/- under
Section 80HHC of the Income Tax Act, 1961 („Act‟, for short) after
accounting for these export incentives and other income.

5.         The return filed by the assessee was not taken for scrutiny and was
processed u/s 143(1) and accordingly, the claim under Section 80HHC
was allowed. Thereafter, vide notice †dated 25.03.2009 under Section 148
of the Act, the assessment was taken up for scrutiny and an assessment
order was passed. The Assessing Officer treated the gross amount of
DEPB (i.e. premium received on transfer plus the credit to the DEPB) as
profit of business under Clause (iiid) of Section 28 of the Act and
excluded the same from eligible profits. He held that there was loss after
deducting 100% of these receipts from the eligible profits. He further
held that the assessee did not satisfy the two conditions prescribed in the

†
    Corrected vide order dated 9th May, 2012



ITA 1191/2011                                                  Page 2 of 4
 third proviso to Section 80HHC (3) of the Act, which it was required to,
because its turnover exceeded Rs.10 crore.

6.     The Commissioner of Income Tax (Appeals), however, following
the decision of the Special Bench of the Mumbai High Court in Topman
Export Vs. ITO (2009) 33 SOT 337 (Mum)(SB) held that Section 28(iiid)
will only cover profit on transfer of DEPB credit.        He directed the
Assessing Officer to accordingly make the computation under Section
80HHC of the Act. However, he held that the conditions of the third
proviso to Section 80HHC (3) of the Act were not fulfilled and therefore
only conditional benefit in computation would be granted.

7.     Two cross appeals filed by the Revenue as well as the assessee
have been disposed of by the impugned order dated 29.3.2011. The
Tribunal has followed the decision of the Bombay High Court in the case
of CIT Vs. Kalpataru Colours & Chemicals (2010) 328 ITR 451 (Bom.).
It has been held that DEPB in entirety, including the credit, would amount
to profits of business under Section 28(iiid) of the Act and therefore, the
order of the Commissioner of Income Tax (Appeals) granting relief was
incorrect. The matter has been restored back to the Assessing Officer to
examine whether any deduction was to be granted in view of the said
judgment.

8.     The decision of Bombay High Court in the case of Kalpataru
Colours & Chemicals (supra) has been set aside and reversed by the
Supreme Court in their decision dated 8.02.2012 in the case of Topman
Exports     Vs.   Commissioner    of   Income     Tax,   Mumbai           (C.A.

ITA 1191/2011                                               Page 3 of 4
 No.1699/2012) and other cases. In this decision, it has been held that the
DEPB credit falls under Clause (iiib) of Section 28 of the Act whereas the
premium received thereon on transfer will represent profits chargeable
under Section Clause (iiid) and the deduction under Section 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.

9.     In view of the aforesaid position, we answer question of law
mentioned above in the negative i.e. in favour of the assessee and against
the Revenue. There will be no order as to costs.

10.    We clarify that we have not dealt with or examined the applicability
of third proviso to Section 80 HHC (3) as the said aspect has been referred
back to the Assessing Officer by the Tribunal. The said aspect will be
examined by the Assessing officer, while giving appeal effect.


                                                   SANJIV KHANNA, J.

R.V.EASWAR, J. MARCH 26, 2012 hs SANJIV KHANNA, J.

R.V.EASWAR, J. MAY 09, 2012 hs ITA 1191/2011 Page 4 of 4 ITA 1191/2011 Page 5 of 4