Facts of the Case

Eastman Industries Limited, engaged in the business of export of cycle parts and light engineering goods, filed its return for Assessment Year 2003-04 declaring income after claiming deduction under Section 80HHC amounting to Rs. 2,61,70,949/-.

The Assessing Officer, by order dated 14 February 2006, excluded 90% of the DEPB credit from the gross amount while computing eligible profits under Section 80HHC. The order of the Assessing Officer was affirmed by the Commissioner of Income Tax (Appeals).

Subsequently, the Income Tax Appellate Tribunal held that the entire value of the DEPB credit should be excluded while computing eligible profits under Section 80HHC. Aggrieved by the Tribunal’s order, the assessee preferred an appeal before the Delhi High Court.

The appeal also involved an application for condonation of delay of 785 days in re-filing. The Court condoned the delay subject to payment of costs of Rs. 50,000/- to the Income Tax Department.

Issues Involved

  1. Whether the Income Tax Appellate Tribunal was justified in holding that the entire amount of DEPB credit had to be excluded from eligible business profits for the purpose of deduction under Section 80HHC of the Income Tax Act, 1961.
  2. Whether the computation of deduction under Section 80HHC in respect of DEPB credit should be governed by the principles laid down by the Supreme Court in Topman Exports vs CIT.

Petitioner’s Arguments

The assessee contended that the Tribunal erred in excluding the entire DEPB credit from eligible business profits while computing deduction under Section 80HHC.

It was argued that only the profit element arising on transfer of DEPB credit could be considered under Section 28(iiid), whereas the face value of the DEPB entitlement constituted cash assistance covered under Section 28(iiib).

The assessee further relied upon the judgment of the Supreme Court in Topman Exports vs CIT wherein the distinction between face value and profit on transfer of DEPB credit was clearly recognized.

Respondent’s Arguments

The Revenue supported the findings of the Tribunal and maintained that the entire DEPB credit was liable to be excluded while computing eligible profits under Section 80HHC.

The Revenue relied upon the interpretation adopted by the lower authorities while assessing the deduction claimed by the assessee.

Court Findings / Court Order

The Delhi High Court observed that the substantial question of law raised in the appeal stood covered by the judgment of the Supreme Court in Topman Exports vs CIT, Civil Appeal No. 1699/2012 decided on 08 February 2012.

The Court clarified that:

  • The face value of DEPB credit is to be treated as cash assistance under Section 28(iiib) of the Income Tax Act.
  • Deduction under Section 80HHC read with the proviso to Section 80HHC(3) is to be computed accordingly.
  • The premium received on transfer/sale of DEPB credit is to be considered separately under Section 28(iiid).
  • Such premium is to be included for the purposes of computation under Explanation (baa) to Section 80HHC in the year of receipt.

Accordingly, the High Court answered the substantial question of law in favour of the assessee and against the Revenue. The Assessing Officer was directed to recompute deduction under Section 80HHC in accordance with the law laid down in Topman Exports vs CIT.

The appeal was disposed of with no order as to costs.

Important Clarification

This judgment reiterates and applies the ratio laid down by the Supreme Court in Topman Exports vs CIT regarding treatment of DEPB credit under Section 80HHC.

The Court distinguished between:

  • Face value of DEPB credit; and
  • Profit/premium earned on transfer of DEPB credit.

The ruling confirms that only the profit component on transfer is taxable under Section 28(iiid), while the face value remains covered under Section 28(iiib) as cash assistance.

The judgment is significant for exporters claiming deduction under Section 80HHC and dealing with DEPB incentives.

Sections Involved

  • Section 80HHC of the Income Tax Act, 1961
  • Section 28(iiib) of the Income Tax Act, 1961
  • Section 28(iiid) of the Income Tax Act, 1961
  • Explanation (baa) to Section 80HHC
  • Proviso to Section 80HHC(3)

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2012:DHC:9800-DB/SKN06032012ITA6712011_102245.pdf

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