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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
ORDER
Per Shri A.T.Varkey, JM
This is an appeal preferred by the assessee against the order of Ld. CIT(A)-2, Kolkata dated 31.12.2014 for AY 2002-03. 1. For convenience we take up firstly the second issue i.e. ground no.
2. For this, the assessee has raised following ground of appeal:
2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in confirming the exclusion of profit on sale of DEPB licneces of Rs.59,75,746/- and gain on fluctuation in rate of exchange of Rs.12,15,952/- by the Assessing Officer from the profit of business computed under the head "profits and gains of business or profession" for determining the amount of deduction u/s 33AB of the Act by an erroneous appreciation of the ratio of the Hon'ble Supreme Court in the case of Liberty India Vs. CIT (319 ITR 218) and thereby dismissing the appellant's claim of inclusion of such income in business income computed prior to the application of rule 8 of the Income Tax Rules, 1962 (the Rules).”
The brief facts of this issue are that the assessee’s main business activity is cultivation of tea, manufacturing of tea, instant tea and blended tea. During the assessment proceedings, the AO noted that the gain on foreign exchange from exports of tea of Rs.12,15,952/- and profit on sale of DEPB licence of Rs.59,75,746/- were included in the business income and the assessee claimed enhanced deduction u/s. 33AB of the Act.
2 Goodricke Group Ltd., AY- 2002-03 According to AO, the quantum of deduction u/s. 33AB of the Act is to be computed with reference to the income from cultivation and manufacture of tea only and excludes all incidental income arising from such business and accordingly, he excluded the said receipts while quantifying the amount of deduction u/s. 33AB of the Act. On appeal, the Ld. CIT(A) was of the view that tea development allowance must be in relation to the income of the business of growing and manufacturing of tea. He also observed that the Hon’ble Supreme Court in the case of Liberty India Vs. CIT 317 ITR 218 held that DEPB/duty drawback are incentives which flow from the schemes framed by the Central Govt. and hence they belong to the category of ancillary profits of such undertakings. According to him, these cannot be held to be “derived from” the business of the assessee. Therefore, he confirmed the action of the AO and dismissed the ground of appeal of assessee. Aggrieved, assessee is in appeal before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the issue raised is against the action of the Ld. CIT(A) in confirming the action of the AO in excluding the profit on sale of DEPB license of Rs. 59,75,746/- and foreign exchange gain of Rs.12,15,952/- from the profits of the business for growing and manufacturing tea for computing the amount of deduction u/s. 33AB of the Act thereby the assessee’s claim of inclusion of such income in business income to be computed before application of Rule 8 of the Rules was turned down. Hence, this appeal. We note that Rule 8(1) of the Rules deals with the income from manufacturing of tea. Rule 8.1 is reproduced as under:
“Rule 8.1 – Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. Rule 8.2 - In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned [and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provision of clause (30 ) of section 10, is not includible in the total income.] 4. From a bare breading of Rule 8D it becomes clear that the income which is derived from the sale of tea grown and manufactured by a similar shall be treated as if it were the income derived from business and 40% of such income shall be deemed to be income
3 Goodricke Group Ltd., AY- 2002-03 chargeable under the Income-tax Act. From a reading of Rule 8D(1) it is clear that income shall be computed as if it were income derived from the business which means income needs to be computed as per Chapter IV (computation of total income), and head of income will be “profits and gains of business or profession” wherein section 28 prescribes how income from profits and gains of business or profession is to be computed. As per section 28 income from profits and gains of business or profession shall be computed in accordance with the provisions contained in sections 30 to 43D. We note that as per the Taxation Law Amendment Act, 2005, new provisions were inserted with retrospective effect (in short w.r.e.f) of which we are concerned with sec. 28(iiid) w.r.ef. AY 1998-99 according to which any profit on the transfer of the DEPB license shall be charged under the head “profits and gains from business or profession”. Therefore, the necessary corollary is that the profit from sale of DEPB license are to be treated as income derived from the sale of tea grown and manufactured and has to be treated as income chargeable under the Income-tax Act within the purview of the head of ‘profits and gains of business and profession’. Since in this case, the assessee has shown a profit on sale of DEPB license to the tune of Rs. 59,75,746/- which has to be treated as chargeable to Income-tax Act u/s. 28(iiid) and, therefore, the said amount is to be included in the composite income before deduction u/s. 33AD. And for holding so, we rely on the order of the Hon’ble Gauhati High Court in Mcleod Russell India Vs. CIT 260 CTR 337 (Gau). We also note the Hon’ble Calcutta High Court in assessee’s own case framed the questions as under on this issue:
4(b) Whether the finding and/or direction of the Commissioner of Income-tax (Appeals) that deduction under section 33AB was to be allowed after determining 40 per cent of the composite income under rule 8 was without and/or in excess of jurisdiction and the Tribunal was justified in law in not setting aside the said finding or direction? 4(c) Whether and in any event and on a true and proper interpretation of the provisions of section 33AB of the Act and rule 8 of the Rules, the Tribunal was justified in law in holding that deduction under section 33AB was to be calculated on 40 per cent of the income determined under rule 8?
And answered the same at para 11, 12 and 13 as under in favour of assessee:
“11. As regards the third question formulated by the Division Bench mentioned above, it will be profitable to refer to the provision contained in section 33AB of the Act without the proviso to the same as those are unnecessary for our purpose and the said provisions are quoted below:
4 Goodricke Group Ltd., AY- 2002-03 "33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India has, before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier, deposited with the National bank- any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with the bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Tea Board, the assessee shall, subject to the provisions of this section, be allowed a deduction, (such deduction being allowed before the loss, if any, brought forward form earlier years is set off under section 72 of- (a) a sum equal to the amount or the aggregate of the amounts so deposited ; or (b) a sum equal to twenty per cent. of the profits of such business (computed under the head "Profits and gains of business or profession" before making any deduction under this section), Whichever is less:”
12. We are of the opinion that in a case where the assessee is involved in the business of growing and manufacturing tea, on the question of deduction in terms of section 33AB of the Act, the answer to the same depends upon the interpretation of the phrase "a sum equal to twenty per cent. of the profits of such business (computed under the head "Profits and gains of business or profession" before making any deduction under this section), whichever is less :" as indicated above. Thus, of the two amounts, i.e., the amount deposited in the nationalised bank in terms of the first part of section 33AB(1) and the aforesaid sum, whichever is less, should be deducted first. After such deduction and other available deductions under the Act, the profit or loss from such business will be determined. After such profit or loss is determined, rule 8 of the Income-tax Rules, 1962 would be applicable to find out the amount of tax payable on the said determined amount of profit or loss from business.
We find that the Tribunal below erroneously held that the deduction under section 33AB of the Act would be made after the taxable amount will determine under rule 8 of the Rules. The question of application of rule 8 does not come so long the profit or loss from the business of growing and manufacturing tea is determined after deduction of all permissible deductions under the Act. We thus, answer the third question in the negative and against the Revenue.” In view of the above, we are of the considered view that profits from sale of DEPB license should be included as business income computed prior to the application of Rule 8 of the Rules and the deduction u/s. 33AB of the Act should be made from the composite income i.e. before applying Rule 8 of the Rules.
Coming to the gain received because of fluctuation of foreign exchange to the tune of Rs.12,15,952/- it is noted that the assessee made gain of Rs.12,15,952/- from its export of tea, which assessee claimed to be included as business income computed prior to the application of Rule 8 of the Rules, which was not accepted by the AO/CIT(A). We note that similar issue, though in the context of 80HHC and 80IA deduction was before the Hon’ble Gujarat High Court in CIT Vs. Alps Chemicals Ltd. 367 ITR 594 (Guj) wherein the Hon’ble High
5 Goodricke Group Ltd., AY- 2002-03 Court while adjudicating the issue of gain or loss due to foreign exchange fluctuation though was in the context of 80HHC deduction took note of the fact that the issue was covered by the judgment of its own decision in Tax Appeal No. 1468 of 2006— reported in CIT v. Priyanka Gems [2014] 367 ITR 575 (Guj)) and connected appeals. The Hon’ble High Court took note of the contention of the Ld. Counsel for the Revenue that section 80-IA of the Act would stand on a different footing since the requirement is that the profit must have been derived from the eligible business, however, took note of the fact that the Hon’ble High Court in fact has examined this issue from all angles and held as under (page 589 of 367 ITR) :
"Under the circumstances, we have no hesitation in upholding the view of the Tribunal. Quite apart, the issue is substantially covered by the decision of CIT v. Amba Impex [2006] 282 ITR 144 (Guj). Consistent and at times independent trend of the judicial pronounce ments of courts across the country need not be disturbed. Even inde pendently, we are of the view that the foreign exchange gain arising out of the fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee. As noted, once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately. Under the account ing principles, therefore, the assessee, on the basis of accrual, would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates. If during the same year of the export, the remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or neg ative, would be duly adjusted. May be the accounting standards require that the same may be recorded in separate foreign exchange fluctuation account. Nevertheless any deviation either positive or negative must have direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Current price of the goods so exported would also be pre- decided in the foreign exchange currency. The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. This fluctuation and possibility of increase or decrease, in our opinion, can have no bearing on the source of such receipt. Primarily and essentially, the receipt would be on account of the export made. If this is so, any fluctuation thereof also must be said to have arisen out of the export business. Mere period of time and the vagaries of rate fluctuation in international currencies cannot divest the income from the character of the income from the assessee's export business. In that view of the matter, the Revenue's contention that such income cannot be said to have been derived from the export business must fail. If this is the position when the remittance is made during the same year of the export, we fail to see what material change can it bring about if within the time permitted under sub-section (2) of section 80HHC, the remittance is made but in the process accounting year has changed. To our mind mere change in the accounting year can have no real impact on the nature of the receipt. The conclusion of the Assessing Officer that since the year during which such sale proceeds were received by the assessee export was not made, would not in any manner change the situation. The assessee being engaged in the business of export and having made the export, mere fact of the remittance being made after 31st of March of the year when export was made, would not change the situation in so far as, relation of such income to the assessee's export business is concerned. Clause (baa) to the Explanation to section 80HHC provides for exclusion of certain incomes for computation of export profit under section 80HHC. Sub-clause (1) of clause (baa) thereof pertains to 90 per cent. of the sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature
6 Goodricke Group Ltd., AY- 2002-03 included in such profits. The term 'foreign exchange difference' is not specified in any of the categories specifically mentioned in the said clause. The Revenue, however, contended that the same must be included by necessary implication as part of other receipts. The Legislature, however, has used the term 'any other receipt of similar nature'. This expression 'similar nature' would have considerable bearing on the ultimate conclusion that we arrive in this respect. What is to be excluded under the said sub-clause (1) of clause (baa) is any other receipt of a nature similar to the brokerage, commission, interest, rent or charges. The receipt by way of foreign exchange fluctuation not being similar to any of these receipts men tioned above, application of clause (baa) must be excluded. Sub-rule (1) of rule 115 only provides for adopting the rate of exchange for calculation of value of rupee of any income accruing or arising in case of an assessee and provides that the same shall be telegraphic transfer of buying rate of such currency on the specified date. The term 'specified date' has been defined in Explanation 2 to the said sub-rule (1). Rule 115 of the Income-tax Rules, 1962, thus has application for a specific purpose and has no bearing while judging whether the foreign exchange rate fluctuation gain can form part of the deduction under section 80HHC of the Act. In case of CIT v. Chowgule and Co. Ltd. reported in [1996] 218 ITR 384 (SC), the court held that rule 115 does not lay down that all foreign currencies received by the assessee will be converted into Indian rupees only on the last date of the accounting period. Rule only fixed the rate of conversion of foreign currency. If there is no foreign currency to convert on the last date of accounting period, then no question of invoking rule 115 will arise . . . In case of CIT v. Sterling Foods reported in [1999] 237 ITR 579 (SC), the court held that the facts were that the assessee was engaged in the processing of prawns and sea food and exporting it. In the process the assessee earned import entitlements granted by the Government of India under Export Promotion Scheme. The assessee could use such import entitlements itself or sell the same to others. The assessee sold such entitlements and earned income and included such income for relief under section 80HHC of the Act. The court held that such income cannot be said to have been derived from the assessee's industrial undertaking. In the present case, however, we find that the source of the income of the assessee was the export. On the basis of accrual, income was already reflected in the assessee's account on the date of the export on the prevailing rate of exchange. Further income was earned merely on account of foreign exchange fluctuation. Such income, therefore, was directly related to the asses see's export business and cannot be said to have been removed beyond the first degree. In case of CIT v. Shah Originals reported in [2010] 327 ITR 19 (Bom), the Bombay High Court considered a case where the assessee, an exporter, was given an option to keep a specified percentage of the receipts on account of the export in its Exchange Earners Foreign Currency (EEFC) account. The assessee realized the full amount on account of the export but kept the portion thereof in EEFC account. The assessee received higher amount in Indian rupees on such amount so set apart due to the fluctuation in the foreign exchange rate. Conscious of the fact that the assessee had received the entire proceeds of the export transaction and thereafter, gained due to the foreign fluctuation on the account kept by the assessee in the EEFC account, the court held that such gain cannot be said to have been derived from the assessee's export business. Thus the significant and distinguishing feature of this case is that the assessee had received the entire proceeds of the export sale. The foreign exchange fluctuation gain arose subsequent to the assessee receiving the sale consideration. It was in this background, the Court held and observed as under (page 24 of 327 ITR) :
'The assessee admittedly in the present case received the entire proceeds of the export transaction. The Reserve Bank of India, has granted of facility to certain categories of exporters to maintain a certain proportion of the export proceeds in an EEFC account. The 7 Goodricke Group Ltd., AY- 2002-03 proceeds of the account are to be utilized for bona fide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC account but, this is a facility which is made available by the Reserve Bank. The transaction of export is complete in all respects upon the repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC account. The exchange fluctuation that arises, it must be emphasized, is after the export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation, is a matter of his option. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub-section (1) of section 80HHC. Both the Assessing Officer and the Commissioner of Income-tax (Appeals) have made a distinction, which merits emphasis. The exchange fluctuation, as both those authorities noted, arose subsequent to the transaction of export. In other words, the exchange fluctuation was not on account of a delayed realization of export proceeds. The deposit of the receipts in the EEFC account and the exchange fluctuation which has arisen therefrom cannot be regarded as being part of the profits derived by the assessee from the export of goods or merchandise'."
In the result, appeal is allowed in part to the extent the Tribunal's decision relates to section 80-IA of the Act.”
Therefore, we note that the Hon’ble Gujarat High Court in Alps Chemicals Pvt. Ltd., (supra) though in the context of sec. 80HHC and 80IA deduction has observed that the foreign exchange gain arising out of fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee. It has been noted by the Hon’ble High Court that once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately. Under the accounting principles, therefore, the assessee on the basis of accrual would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates. If during the same year of the export, the remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or negative would be duly adjusted….. Nevertheless, any deviation either positive or negative must have direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Current price of the goods so exported would also be pre-decided in the foreign exchange currency. The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. This fluctuation and possibility of increase or decrease, in the Hon’ble High court’s opinion, can have no bearing on the source of such receipt. Primarily and essentially, according to 8 Goodricke Group Ltd., AY- 2002-03 Hon’ble High Court, the receipt would be on account of the export made. If this is so, according to Hon’ble High Court any fluctuation thereof also must be said to have arisen out of the export business. Mere period of time and the vagaries of rate fluctuation in international currencies cannot divest the income from the character of the income from the assessee's export business. In that view of the matter, the Revenue's contention that such income cannot be said to have been derived from the export business must fail. Therefore, in the light of the aforesaid order of the Hon’ble Gujarat High Court in respect of gain from foreign exchange as well as the order of Hon’ble Gauhati High Court in respect to income under clause (iii) of sec. 28 of the Act, we are of the considered view that profits from sale of DEPB license and gain from foreign exchange should be included as business income computed prior to the application of Rule 8 of the Rules and the deduction u/s. 33AB of the Act should be made from the composite income i.e. before applying Rule 8 of the Rules
Ground no. 3 of assessee’s appeal is against the order of Ld. CIT(A) ) in confirming the exclusion of gain on fluctuation in rate of exchange of Rs.12,15,952/- and profit on sale of DEPB licences of Rs.59,75,746/- from the computation of composite income and inclusion of such income after applying rule 8 of the Rules. For this, the assessee has raised following ground of appeal:
“3. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the exclusion of gain on fluctuation in rate of exchange of Rs.12,15,952/- and profit on sale of DEPB licenses of Rs.59,75,746/- from the computation or composite income and Inclusion of such income after applying rule 8 of the Rules by an erroneous interpretation of the said rule. 3.1. That the Ld. CIT(A) ought to have held that the income computed "as if it were income derived from business" as referred to in rule 8(1) of the Rules was the income derived from the sale of tea grown and manufactured and accordingly the Ld. CIT(A) erred in law in confirming the amount of gain on foreign exchange and profit on sale of DEPB licences included by the Assessing Officer in the income computed after applying rule 8 of the rules and thereby dismissing ground no. 14 taken in appeal.”
Briefly stated facts are that during the year the assessee company credited to its P&L Account the sale proceeds of DEPB license and gain on foreign exchange amounting to Rs.59,75,746/- and Rs.12,15,952/- respectively. The AO excluded the said income from the computation of composite business income and brought the same to tax by stating that the computation of taxable income of a company engaged in tea cultivation is governed by Rule 8 and the profits and gains of business or profession is determined only after the application
9 Goodricke Group Ltd., AY- 2002-03 of Rule 8. Hence, deduction was computed and the same was allowed after determination of the profits and gains of business or profession after application of Rule 8. On appeal, the ld. CIT(A) held as under: “Heard rival submissions and also perused the records. The word used in Rule 8 is income “derived from” the sale of tea grown and manufactured in India. The interpretation of the word “derived from” is much narrower than the expression “attributable to”. The Hon’ble Supreme Court of India in the case of Liberty India Vs. CIT 317 ITR 218 has held that by using the expression “derived from” the Parliament intended to cover sources not beyond the first degree. DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Govt. and hence belong to category of ancillary profits of such undertakings. These are not derived from industrial undertaking. Other supportive decisions on this account are: i) CIT Vs. Sterling Foods (SC) 237 ITR 579, ii) Fenner (India) Ltd. Vs. CIT (Mad) 239 ITR 480, iii) CIT Vs. Viswanathan & Co. (Mad) 26 ITR 737, iv) CIT Vs. J. B. Exports Ltd. (Del) 286 ITR 603, v) A.M. Moosa, Bharat Sea Foods Vs. CIT (Ker) 224 ITR 735. 12.3. Therefore, neither gain on exchange amounting to Rs.12,15,952/- nor on sale of DEPB licence of Rs.59,75,746/- can be stated to be income “derived from” the sale of tea grown and manufactured in India. The action of the AO in excluding such income from the composite income of the appellant is upheld and ground no. 14 of the appeal is dismissed. ”
Aggrieved, assessee is before us.
We have heard rival submissions and gone through facts and circumstances of the case. We note that the assessee is aggrieved by the action of the authorities below in excluding the gain on fluctuation in the rate of foreign exchange and profit on sale of DEPB licence from the computation of composite income and inclusion of the same after applying rule 8(1) of the Rules. We note that the assessee while computing the composite income included gain on fluctuation in rate of foreign exchange amounting to Rs.12,15,952/- and profit on sale of DEPB license of Rs.59,75,746/- as part of business income computed under the head “Profits and Gains of Business or Profession.” We have already held while disposing of ground no. 2 that profit from sale of DEPB license is an income included in sub clause iii(d) of clause (iii) of section 28 of the Act as income chargeable to tax under the head “Profits and Gains of Business or Profession” and, therefore, as per the order of Hon’ble Guwahati High Court in Mcleod Russel India Ltd. Vs. CIT 260 CTR 337 (Gau) this amount has to be included in composite income before applying Rule 8(1) of the Rules. Similarly, the gain on fluctuation in the rate of foreign exchange, which is also from the export of the 10 Goodricke Group Ltd., AY- 2002-03 tea which is also an income from the activity of the assessee company from the sale of tea grown and manufactured by the assessee. Rule 8 of the Rules specifies specifically that income shall be computed as if it were income derived from business and 40% of such income shall be deemed to be the income which is liable to tax. Therefore, as per the Hon’ble Gujarat High Court in CIT Vs. Alps Chemicals Pvt. Ltd., 367 ITR 594 (Gujrat) supra though in the context of sec. 80HHC and 80IA deduction has observed that the foreign exchange gain arising out of fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee. It has been noted by the Hon’ble High Court that once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately. Under the accounting principles, therefore, the assessee on the basis of accrual would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates. If during the same year of the export, the remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or negative would be duly adjusted….. Nevertheless, any deviation either positive or negative must have direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Current price of the goods so exported would also be pre-decided in the foreign exchange currency. The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. This fluctuation and possibility of increase or decrease, in the Hon’ble High court’s opinion, can have no bearing on the source of such receipt. Primarily and essentially, according to Hon’ble High Court, the receipt would be on account of the export made. If this is so, according to Hon’ble High Court any fluctuation thereof also must be said to have arisen out of the export business. Mere period of time and the vagaries of rate fluctuation in international currencies cannot divest the income from the character of the income from the assessee's export business. In that view of the matter, the Revenue's contention that such income cannot be said to have been derived from the export business must fail. Therefore, in the light of the aforesaid order of the Hon’ble Gujarat High Court in respect of gain from foreign exchange as well as the order of Hon’ble Gauhati High Court in respect to income under clause (iii) of sec. 28 of the Act, we are of the considered opinion that both the receipts i.e. gain from foreign exchange
11 Goodricke Group Ltd., AY- 2002-03 from export of tea and profit from sale of DEPB license have to be included in the composite income of the assessee before applying Rule 8 of the Rules.
12. Lastly, ground no. 1 and 1.1 is arising out of the order of Ld. CIT(A) is in relation to the rejection of proportionate increase in export profit computed under proviso to section 80HHC(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) on the amount of profits on transfer of DEPB license in the present set of facts and circumstances of the case. For this, the assessee has raised following grounds: “1. That on the facts and in the circumstances of the case and in view of cash system of accounting consistently followed by the appellant in respect of Government dues, the Ld. CIT(A) erred in confirming the Assessing Officer's decision rejecting the claim of proportionate increased deduction u/s 80HHC of the Income Tax Act, 1961 (the Act) on the income referred to in Clauses (iiic) and (iiid) of section 28 included in the profit on sale of DEPB licences by citing the decision of the Hon'ble Supreme Court in the case of Topman Exports Vs. CIT (342 ITR 49). 1.1. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in not directing the Assessing Officer to allow the increased deduction u/s 80HHC of the Act in accordance with the first and third provisos to the said section in respect of the income as referred to in clauses (iiic) and (iiid) of section 28 of the Act and included in profit on sale of DEPB licences even though the claim for such increased deduction was made on profit on sale of DEPB licence under section 28 of the Act.”
Briefly stated facts as observed by the AO are that during the year the assessee claimed deduction u/s. 80HHC of the Act from composite income i.e. prior to application of Rule 8 as per the decision of Hon’ble Calcutta High Court in the case of Warren Tea Ltd. This contention of the assessee was not acceptable to the AO and according to him, since sec. 80HHC(4B) lays down specifically that any income not chargeable to tax under the Income Tax Act shall be excluded while computing the total income and hence Sec. 80HHC of the Act is not allowable prior to application of Rule 8 since it includes a component of agricultural income which is an exempted income. AO also stated that the case of Warren Tea Ltd. has no relevance since it has already been reversed by the Division bench of Hon’ble Calcutta High Court vide order dated 15.01.2004. Hence, the AO allowed the assessee’s claim u/s. 80HHC of the Act on the total income computed after the application of Rule 8.
In respect of claim of deduction on profit out of sale of DEPB License, the AO observed that the assessee has credited an amount of Rs.59,75,746/- on account of profit on 12 Goodricke Group Ltd., AY- 2002-03 sale of import license and has also claimed deduction u/s. 80HHC of the Act on the same. According to AO, sec. 80HHC of the Act provides for deduction from the total income in respect of profits derived from the export of goods or merchandise which are realized in convertible foreign exchange and not in respect of incidental income arising through a Govt. scheme. He also noted that the scheme of computation of the deduction provided u/s. 80HHC(3) of the Act does not cover profit on sale of license and according to him, such profits are not eligible for deduction u/s. 80HHC of the Act. Therefore, the AO rejected the proportionate increased deduction by relying on the circular issued by the CBDT in F. No. 153/93/2004-TPL dated 08.09.2004 and disallowed the assessee’s claim of deduction u/s. 80HHC of the Act on sale of DEPB license. On appeal, the Ld. CIT(A) while agreeing with the view of the AO reliance was placed on the judgment of Hon’ble Supreme Court in the case of i) Topman Exports Vs. CIT 343 ITR 49 and (ii) ACG Associated Capsules Pvt. Ltd. Vs. CIT 343 ITR 89 and confirmed the rejection of assessee’s claim of deduction u/s. 80HHC of the Act on sale of DEPB license. Aggrieved, assessee is before us.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that assessee’s claim that deduction u/s. 80HHC should be computed before the application of Rule 8, is unsustainable because, the issue is no longer res integra. We note that in assessee’s own case, the Tribunal has held that sec. 80HHC deduction has to be made after the application of Rule 8 income, which decision has attained finality at the level of Hon’ble High Court in assessee’s own case in Goodricke Group Ltd. Vs. CIT (2016) 6 ITR-OL-0374 (Cal). So, we uphold the decision of AO to that extent.
Proceeding further as to the question whether profit on sale of DEPB license is covered u/s. 28(iiid) and eligible for deduction u/s. 80HHC(3) of the Act, we note that the Taxation Law Amendment Act, 2005 has inserted section 28(iiid) w.r.e.f from asst. year 1998-99, according to which the following income shall be charged under the head Profit & Gains from Business or Profession :
"any profit on the transfer of the Duty Entitlement Pass Book Scheme being Duty Remission Scheme, under the export and import policy formulated and announced u/s 5 of the Foreign Trade (Development and Regulation) Act, 1922”
13 Goodricke Group Ltd., AY- 2002-03 17. Further a new proviso to section 80HHC(3) has been inserted for allowing the deduction for profit on account of sale of DEPB licence. For this purpose the exporters have been classified in 2 categories - (1) Assessees having export turnover upto Rs. 10 crores.
(2) Assessees having export turnover exceeding Rs. 10 crores.
The assesses having export turnover upto Rs. 10 crorer have no difficulty and will get deduction of 90% of export incentive on account of profits on transfer of DEPB licenses but assessees having export turnover exceeding Rs. 10 crores will get this deduction if the assessee has necessary and sufficient evidence to prove that - (a) he had an option to choose either the duty drawback or the DEPB Scheme or the Duty Free Replenishment Certificate as the case may be, being Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the DEPB Scheme or the Duty Free Replenishment Scheme as the case may, be being Duty Remission Scheme.
So, from a perusal of the above insertion of the Taxation Law Amendment Act, 2005 w.r.e.f. AY 1998-99 any profit on transfer of DEPB license is chargeable under the head “Profit & Gains for Business or Profession” u/s. 28(iiid) of the Act and we note that sub- section (3) to sec. 80HHC provides formula for the computation of export profits. According to the said formula, the profit derived from the export is the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business. The profits of business is defined in clause (baa) of explanation u/s. 80HHC which as far as it related to this appeal means the profits of the business as computed under the head ‘profits and gains of business or profession’ as reduced by 90% of export benefit referred to it clauses (iiia) to (iiie) of section 28. As per the second and third proviso to section 80HHC(3) the export profit so computed shall be further increased in this case by an amount which bears 90% of the profit on sale of DEPB, the same proportion as the export turnover bears to the total turnover of the business. In view of the insertion of clause (iiid) to section 28 and simultaneous insertion of third proviso to section 14 Goodricke Group Ltd., AY- 2002-03 80HHC with retrospective effect from 01.04.1998, there was no justification in rejecting the appellant’s such enhanced claim. Therefore, benefit has to be given to the assessee as per second/third proviso to sec. 80HHC(3) of the Act. In case if the assessee falls in 2nd proviso, there is no difficulty in availing the deduction, however, in case if the assessee falls in the third proviso i.e. if the turnover is exceeding Rs. 10 cr. will get this deduction, if the assessee has necessary and sufficient evidence to prove clause (a) and (b) given in para 18 supra. With this aforesaid observation, we direct the AO to grant deduction in accordance to law.
In the result, appeal of the assessee is allowed.