Result : Impugned judgment set aside. Appeal partly allowed.

Headnote:(a) Income Tax Act, 1961 – Section 28(iiib) – DEPB – It has direct nexus with the cost of the imports made by an exporter for manufacturing the export products. (Para 10)
        (2004) 266 ITR 521 (SC) – Referred
        (b) Income Tax Act, 1961 – Section 28(iiib) – DPEB – Any cash assistance against exports – By itself chargeable to income tax under “Profits and Gains of Business or Profession” – DEPB included. (Para 12)
        (c) Income Tax Act, 1961 – Section 28(iiid) – Profit – Transfer of DEPB – Any amount realized by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of DEPB – While face value of the DEPB will fall under clause (iiib) of Section 28 of the Act, the difference between the sale value and the face value of the DEPB will fall under clause (iiid). (Paras 13, 15 and 16)
        (1954) 26 ITR 27 (SC) – Relied upon
        ITA(L) 2887 of 2009 – Overruled
        (e) Income Tax Act, 1961 – Section HHC(1B) – An assessee engaged in the business of export out of India shall be allowed, in computing his total income, a deduction to the extent of profits referred to in sub-section (1B), derived by him from the export of such goods or merchandise. (Paras 19)
        (f) Income Tax Act, 1961 – Section 80HHC(3a) r/w Explanation (baa) – “Profits of the business” – Formula for computation discussed – Means profits of the business as computed under the head “Profits and Gains of Business or Profession” as reduced by 90% of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts – Thus 90% of the DEPB being “cash assistance” against exports covered under clause (iiib) of Section 28, will get excluded if accrued during previous year – If the DEPB is transferred in the same year, the difference between sale value of the DEPB and its face value will represent the profit on transfer of DEPB and 90% of such profit will get excluded from “profits of the business” – But, where the DEPB accrues to the assessee in the first previous year and it is transferred in the second previous year, only ninety per cent of the profits on transfer of DEPB including the face value of the DEPB will get excluded from the “profits of the business”, and not 90% of the entire sale value (Para 20)
        (2007) 295 ITR 228 (SC) – Relied upon
       Facts of the case:
        In these cases the Court was called upon to interpret section 28 of the I.T. Act, 1961.
       Finding of the Court:
        Impugned judgment is not tenable.

JUDGMENT

A. K. Patnaik, J.

Delay condoned. Leave granted in Special Leave Petitions.

2. These are appeals by way of special leave under Article 136 of the Constitution against the judgment and orders of the Bombay High Court holding that the entire amount received by an assessee on sale of the Duty Entitlement Pass Book (for short ‘the DEPB’) represents profit on transfer of DEPB under Section 28(iiid) of the Income Tax Act, 1961 (for short ‘the Act’) for the purpose of the computation of deduction in respect of profits retained for export business under Section 80HHC of the Act.

3. For appreciating the controversy between the parties, we will state the facts of only the lead case of M/s Topman Exports (hereinafter referred to as ‘the assessee’). The assessee is a manufacturer and exporter of fabrics and garments. During the previous year relevant to the assessment year 2002-2003, the assessee sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to the assessee on export of its products. The assessee filed a return for the assessment year 2002-2003 claiming a deduction of Rs.83,69,303/- under Section 80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentives was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction under Section 80HHC of the Act as has been held by this Court in IPCA Laboratories Ltd. v. Deputy C.I.T.1 (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) and contended that the profits on the transfer of DEPB and DFRC were not the sale proceeds of DEPB and DFRC amounting to Rs.2,06,84,841/- and Rs.1,65,616/- respectively, but the difference between the sale value and face value of DEPB and DFRC amounting to Rs.14,35,097/- and Rs.19,902/- respectively and if these figures of profits on transfer of DEPB and DFRC are taken, the income of assessee would be positive and the assessee would be entitled to the deduction under Section 80HHC of the Act. The Commissioner of Income Tax (Appeals) rejected this contention of the assessee and held that the assessee had received an amount of Rs.2,06,84,841/- on sale of DEPB and an amount of Rs.1,65,612/- on sale of DFRC and the costs of acquisition of the DEPB and DFRC are to be taken as nil and hence the entire sale proceeds of DEPB and DFRC realized by the assessee are to be treated as profits on transfer of DEPB and DFRC for working out the deduction under section 80HHC of the Act and directed the Assessing Officer to work out the deduction under Section 80HHC of the Act accordingly.

4. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal (for short ‘the Tribunal’). A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the custom duty component in the cost of imports used in the manufacture of the export product. The Tribunal further held that DEPB accrues to the exporter soon after export is made and application is filed for DEPB and DEPB is a “cash assistance” receivable by the assessee and is covered under clause (iiib) of Section 28 of the Act, whereas profit on the transfer of DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of Section 28 of the Act. The Tribunal compared the language of Section 28(iiib) of the Act in which the expression “cash assistance” is used, with the language of Section 28(iiia), (iiid) and (iiie) of the Act in which the expression “profit” is used and held that the words “profit on transfer” in Section 28 (iiid) and (iiie) of the Act would not represent the entire sale value of DEPB but the sale value of DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of