Saraf Seasoning Udyog vs Income Tax Officer

N.P. Gupta, J.—These two appeals have been filed by the assessee, seeking to challenge, the judgment of the Tribunal dt. 10th Feb., 2006, deciding two appeals, relating to asst. yrs. 2003-04 and 2004-05.

Appeals were admitted on 11th Sept., 2006, by framing the following substantial question of law:

Whether in the facts and circumstances of the case and considering the fact that Clause (iiid) was inserted in Section 28 of the IT Act. 1961 retrospectively w.e.f. 1st April, 1998 vide Taxation Laws (Amendment) Act, 2005, the Tribunal was justified in holding that the income derived by the assessee from the sale of DEPB licenses was not the profit and gains from the industrial undertaking which was held to be eligible for claiming deduction u/s 80IB of the Act, 1961 otherwise?

The controversy, lies in a very narrow compass, inasmuch as, the AO noticed, during the assessment proceedings, in respect of the assessee, that the assessee has shown income from sale of import entitlements (income from sale of DEPB licenses), in its P&L a/c, and claimed deduction, in respect of that amount u/s 80IB, as profits and gains, derived from the industrial undertaking.

The AO, in the light of the judgment of the Hon''ble Supreme Court, in the case of Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore, issued show-cause notice, as to why deduction in respect of this amount be not disallowed, by treating it as income from other sources. The assessee, contested the notice, and submitted, that the licence has been received, in respect of the sales effected, therefore, consideration/income on the sale of DEPB licenses, has been treated as income/profit, derived from industrial undertaking, and as such, within the meaning of Section 28, the income is to be considered, as export income, and not income from other sources. It was also contended, that since 100 per cent deduction is admissible u/s 80IB, the assessee is entitled to the same deduction on the income earned from sale of DEPB licenses. The AO, vide order dt. 30th March, 2005, disallowed the deduction.

This was challenged in appeal, and the learned CIT(A) upheld the disallowance, again relying on the judgment in Sterling Foods'' case (supra). The learned Tribunal, also, in turn, dismissed the appeal, relying upon the same judgment in Sterling Foods'' case (supra), and in addition, also held, that in view of the judgment of Hon''ble Supreme Court, in Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, , the income to be eligible for exemption, should be the income derived from, and not attributable to the undertaking.

It is contended, by learned Counsel for the appellant, that after passing of the assessment order, the provisions of IT Act have undergone change, inasmuch as, Taxation Laws (Second Amendment) Bill was introduced in Lok Sabha on 6th Dec, 2005, and was passed as Taxation Laws (Second Amendment) Act, 2005, and was brought into force on 31st Oct., 2005. By Section 3 thereof, Section 28 of the IT Act was amended by inserting Clause (iiid), after existing Clause (iiic), w.e.f. 1st April, 1998, which Clause (iiid), reads as under:

(iiid) 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, 1992 (22 of 1992).

Likewise, Section (iiie) was also added w.e.f. 1st April, 2001.

In the present case, we are concerned, only with the provisions of Clause (iiid).

Thus, a look at Clause (iiid), as newly introduced, makes it clear, that by ''legal fiction, introduced in 2005, with retrospective effect from 1st April, 1998, that any profit on the transfer of Duty Free Replenishment Certificate, being Duty Remission Scheme, under the export and import policy, formulated and announced u/s 5 of the Foreign Trade Act, became chargeable to tax, under the head profits and gains of business or profession. Obviously, it is to be chargeable as profits and gains of the business, or profession of the assessee.

Section 80IB, which provides for exemption, also reads as under:

80-IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. - (1) Where the gross total income of-an assessee includes any profits and gains derived from any business referred to in Sub-sections (3) to (11), (11A) and (1IB) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.

....

(4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent, of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent, where the assessee is a company) or the profits and gains derived from such industrial undertaking....

Thus, according to this section, the profits and gains derived from specific industrial undertaking, is exempt for specific period. Admittedly, the assessee industry does not fall within any of the exceptions provided in the various provisions, so as to render it ineligible to the exemption.

In our view, on a combined reading of Section 80IB(4) and Section 28(iiid), as introduced, does make clear, that the profit derived on transfer of DEPB licenses, does very much fall within four corners of profits and gains, derived from such industrial undertaking, being assessee, and is capable of being taxed only u/s 28, subject to exemption, as provided in Section 80IB, and/or other eligible provisions.

So far as judgment of Hon''ble Supreme Court in Sterling Foods'' case (supra) is concerned, that judgment reported in CIT v. Sterling Foods (supra) is of the year 1999, at which time, the newly added provision of Clause (iiid) did not exist, which has been inserted, as noticed above, in the year 2005, w.e.f. 1st April, 1998. Likewise, the judgment in Pandian Chemicals Ltd.''s case (supra) is also of the year 2003. Thus, the introduction of Clause (iiid) of amendment in 2005, w.e.f. 1st April, 1998, has changed the whole scenario, as considered by Hon''ble Supreme Court, in the above two judgments.

Learned Counsel for the appellant, relied upon a recent judgment of Hon''ble Supreme Court in B. Desraj v. CIT (2008) 301 ITR 439 . This is a judgment rendered on 1st May, 2005 [sic-2008], and deals with identical amendment, introduced by introduction of Clause 28(iiib), having material bearing on Section 80HHC. It was held by Hon''ble the Supreme Court, that Department was liable to allow deduction to the assessee. Then, a judgment of this Court, in Commissioner of Income Tax Vs. Sharda Gum and Chemicals, has also been cited, which also takes into consideration, the amendment in Section 28, introducing Clause (iiia), (iiib) & (iiic), having effect on the provisions of Section 80 HHC, and holding the assessee to be entitled to exemption.

In our view, in view of the above, the question, as framed, is required to be, and is, answered in favour of the assessee, and against the Revenue, in the manner, that the Tribunal was not justified in holding, that the income derived by the assessee from the sale of DEPB licenses, was not profit and gain from industrial undertaking, which was held to be eligible to claim deduction u/s 80IB of the IT Act, 1961 otherwise.

Consequently, the appeal is allowed, impugned orders are set aside, and the appellant is held entitled to deduction u/s 80IB, for both the years. The parties shall bear their own costs of this appeal.