Case Note & Summary
The appeal by the Revenue under the Income Tax Act, 1961, raised four substantial questions of law concerning the treatment of profits from the sale of Duty Entitlement Pass Book (DEPB) entitlements and the computation of deduction under Section 80HHC. The first three questions pertained to whether the entire amount received on sale of DEPB entitlements is chargeable under Section 28(iiid) as profits, or only the excess over face value. The parties agreed that these questions were covered by the Division Bench judgment in CIT v. Kalpataru Colours and Chemicals, which held in favor of the Revenue. Consequently, the Court answered those questions in favor of the Revenue and against the assessee. The fourth question concerned the exclusion of freight and insurance costs from direct costs for computing deduction under Section 80HHC. The assessee, a trader exporter, claimed that such costs should be excluded. The Court examined Section 80HHC(3)(b), which provides that for trading goods, profits from export are computed by reducing export turnover by direct and indirect costs attributable to such export. Explanation (d) defines direct costs as costs directly attributable to the trading goods exported. The Court held that freight and insurance are directly attributable to the export of goods and thus form part of direct costs. Therefore, the Tribunal erred in excluding these costs. The appeal was allowed, and the questions were answered in favor of the Revenue.
Headnote
A) Income Tax - DEPB Sale Profits - Section 28(iiid) - Entire amount received on sale of DEPB entitlements is profit chargeable under Section 28(iiid) - The Court held that the profit element is the entire sale proceeds, not merely the excess over face value, following the decision in CIT v. Kalpataru Colours and Chemicals (Paras 1-2).
B) Income Tax - Export Deduction - Section 80HHC - Direct Costs - Freight and insurance costs are part of direct costs attributable to export and cannot be excluded - For a trader exporter, export turnover is reduced by direct and indirect costs, and freight and insurance are directly attributable to the trading goods exported (Paras 3-5).
Issue of Consideration
Whether the entire amount received on sale of DEPB entitlements is chargeable under Section 28(iiid) of the Income Tax Act, 1961, and whether freight and insurance costs should be excluded from direct costs for computing deduction under Section 80HHC.
Final Decision
The appeal is allowed. The first three questions are answered in favor of the Revenue and against the Assessee in terms of the judgment in CIT v. Kalpataru Colours and Chemicals. The fourth question is answered in favor of the Revenue, holding that freight and insurance costs are part of direct costs and cannot be excluded for computing deduction under Section 80HHC.
Law Points
- Section 28(iiid) of the Income Tax Act
- 1961
- Entire amount on sale of DEPB is profit
- Section 80HHC
- Direct costs include freight and insurance
- Trader exporter
- Export turnover reduced by direct and indirect costs
Case Details
2010 LawText (BOM) (07) 95
Income Tax Appeal (L) No.801 of 2010
Dr. D.Y. Chandrachud, J.P. Devadhar
Mr. Vimal Gupta with Mr. A.S. Shivsharan for the Appellant, Mr. Paras S. Savla with Mr. Rahul Hakani and Ms. Renu Chaudhari for the Respondent
Commissioner of Income Tax-20
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Nature of Litigation
Income Tax Appeal by the Revenue against the order of the Income Tax Appellate Tribunal.
Remedy Sought
The Revenue sought to set aside the Tribunal's order and to hold that the entire amount received on sale of DEPB entitlements is chargeable under Section 28(iiid) and that freight and insurance costs should not be excluded from direct costs for computing deduction under Section 80HHC.
Filing Reason
The Revenue challenged the Tribunal's interpretation of Section 28(iiid) and Section 80HHC of the Income Tax Act, 1961.
Previous Decisions
The Income Tax Appellate Tribunal had held that only the profit element (excess over face value) of DEPB sale is covered under Section 28(iiid) and that freight and insurance costs should be excluded from direct costs for computing deduction under Section 80HHC.
Issues
Whether the entire amount received on sale of DEPB entitlements is chargeable under Section 28(iiid) of the Income Tax Act, 1961, or only the profit element (excess over face value).
Whether freight and insurance costs should be excluded from direct costs for computing deduction under Section 80HHC of the Income Tax Act, 1961.
Submissions/Arguments
The Revenue argued that the entire amount received on sale of DEPB is profit chargeable under Section 28(iiid) and that freight and insurance are direct costs attributable to export and should not be excluded.
The Assessee argued that only the profit element (excess over face value) is chargeable under Section 28(iiid) and that freight and insurance should be excluded from direct costs for computing deduction under Section 80HHC.
Ratio Decidendi
The entire amount received on sale of DEPB entitlements is profit chargeable under Section 28(iiid) of the Income Tax Act, 1961. For computing deduction under Section 80HHC, direct costs include freight and insurance costs as they are directly attributable to the export of trading goods.
Judgment Excerpts
Counsel appearing on behalf of the Revenue and the Assessee are agreed in stating that the first three questions stand covered in favour of the Revenue and against the assessee by the judgment delivered in C.I.T. vs. Kalpataru Colours and Chemicals.
Under clause (b) of subsection (3), the export turnover has to be reduced by the direct and indirect costs attributable to export in order to arrive at profits derived from export.
Freight and insurance are directly attributable to the export of goods and thus form part of direct costs.
Procedural History
The Revenue filed an appeal before the High Court against the order of the Income Tax Appellate Tribunal. The Tribunal had decided certain issues in favor of the assessee. The High Court heard the appeal and delivered judgment on 7 July 2010.
Acts & Sections
- Income Tax Act, 1961: 28(iiid), 80HHC, 80HHC(1), 80HHC(3), 80HHC(3)(b), Explanation (d) to Section 80HHC(3)
