Delhi High Court
Pal Enterprises vs Cit on 26 March, 2012
Author: Sanjiv Khanna
$~5
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 26th March, 2012.
+ ITA 1191/2011
PAL ENTERPRISES ..... Appellant
Through Mr. Santosh K. Aggarwal, Adv.
versus
CIT ..... Respondent
Through Mr. Kamal Sawhney, sr. standing
counsel
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 has erred
in holding that duty entitlement pass book credit was
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?"
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.
ITA 1191/2010 Page 1 of 4
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 stated 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 third proviso to Section
80HHC (3) of the Act, which it was required to, because its turnover
exceeded Rs.10 crore.
ITA 1191/2010 Page 2 of 4
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
ITA 1191/2010 Page 3 of 4
Topman Exports Vs. Commissioner of Income Tax, Mumbai (C.A.
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/vld
