S.H Kapadia, J.:— The assessee is an exporter of diamonds. While making the assessment, the Assessing Officer allowed deduction under section 80HHC of Rs. 63,78,088 as against the claim for Rs. 88,40,538. This was mainly on the ground that in the computation of profit of the business, the licence premium was taken by the Assessing Officer as nil whereas the assessee claimed the deduction under the said head at Rs. 21,34,030. Similarly, the Assessing Officer treated the premium on import licence in the assessment order as local turnover whereas the assessee claimed that it was an export incentive and, therefore, was not entitled to be treated as turnover. Being aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) who gave certain directions for verifications. Being aggrieved, the assessee preferred further appeal before the Tribunal which allowed the claim of the assessee, inter alia, directing the Assessing Officer to recompute the deductions under section 80HHC. The Tribunal directed the Assessing Officer not to treat an amount of Rs. 51,93,829 as part of the total turnover. The Tribunal also directed the profits of the business to be reduced by 90 per cent, of the net premium of Rs. 15,47,005 in view of clause (baa) of the Explanation to section 80HHC. Being aggrieved by the above directions of the Tribunal, the Department has come in appeal under section 260A of the Income-tax Act, 1961.

2. In this appeal, we are concerned with the assessment year 1994-95.

3. The assessee-firm carried on the business of purchase, process and export in diamonds. During the assessment year 1994-95, there was no local turnover. The assessee claimed deduction under section 80HHC of Rs. 88,40,538. The assessee reduced 90 per cent, of Rs. 21,34,030 towards licence premium as per the provisions of the above clause (baa) of the Explanation to the said section.

4. The short point which arises for consideration in this appeal, on facts, is: whether the premium received by the assessee on surrender of import licences should be included in the total turnover or not and whether the profits of the business should be increased by 90 per cent, of the net premium received from the Government of India. The assessee had received licences from the Joint Chief Controller of Imports against its own exports. These licences were required to be surrendered to the Government of India when the Government introduced full convertibility of the rupee. The assessee was granted licence under the Imports (Control) Order of 1955 on exports effected by it. The assessee earned this incentive on ful- filling the export obligations. The licences issued to the assessee could have enabled the assessee to import rough diamonds at a lower cost. However, with the introduction of full convertibility of the rupee, the exporters, who had completed their exports but who had not completed their imports, stood to lose if the goods were to be imported under the licences which they held. In order to compensate such exporters, a circular was issued by the Central Government (Ministry of Commerce) on May 5, 1993, whereby the Government offered to pay cash amount equivalent to eight per cent, of unutilised import licence. The above sum of Rs. 15,47,005 represents this eight per cent, of unutilised import licence. Besides this, the assessee also purchased import licences in respect of rough diamonds from the open market at a cost of Rs. 30,59,799. These were surrendered to the Government for a premium of Rs. 36,46,824.

5. In the light of the above facts, the question which arises for determination, therefore, is: whether the total premium received by the assessee from the Government of India of Rs. 51,93,829 could be treated as total turnover for calculating the deduction under section 80HHC?

6. Mr. Deodhar, learned counsel appearing on behalf of the Department, submitted that having regard to the plain words of the section, the said premium ought to have been included in the total turnover. He contended that clause (ba) of the Explanation excludes only two items from the total turnover. He contended that the proviso to clause (ba) of the Explanation is also not attracted to the facts of this case. He contended that the assessee had sold the licences to the Government and, therefore, the said premium cannot constitute export incentives and, therefore, the proviso is not applicable.

7. Mr. Jhaveri, learned counsel for the assessee-firm, submitted that the assessee received, as premium, Rs. 15,42,005 on surrender of licences received by it on the basis of its own exports. He contended that similarly the assessee purchased the licences by paying premium for the purposes of importing rough diamonds which were to be exported after getting them polished. He contended that due to change in the policy of the Government which brought in full convertibility and since the assessee had with them, unutilised quota of import licence, the Government of India offered a premium of Rs. 51,93,829. The assessee had purchased the second category of licences from the market by paying a premium of Rs. 30,59,799. Accordingly, the assessee received a net licence premium of Rs. 21,34,030. Hence, it was an export incentive within the meaning of section 28(iiia), (iiib) and (iiic) and, accordingly, the assessee reduced 90 per cent, of Rs. 21,34,030 as provided in clause (baa) of the Explanation to section 80HHC.

8. At the outset, it may be mentioned that the only point argued before us by learned counsel for the Department in this case was whether the above premium received on the import licences did not constitute export incentives. In other words, whether Rs. 151,93,829 received as premium ought to be included in the total turnover or not for computing deduction under section 80HHC. Clause (ba) of the Explanation defines total turnover not to include freight or insurance. However, a proviso is added to the said clause. It states that in relation to any assessment year, commencing after April 1, 1991, the expression “total turnover” shall also exclude profits on sale of a licence granted under the Imports (Control) Order (see clause (iiia)); cash assistance received against exports under any Government scheme (see clause (iiib)); and any duty of customs or excise repaid as drawback against exports under the Duties Customs and Central Excise Drawback Rules. In other words, clauses (iiia), (iiib) and (iiic) pertain to export incentives. The question is whether the above licence premium could be termed as “export incentives”. The Government circular clearly indicates that for economic reasons, full ‘convertibility was introduced. The result of the introduction of full convertibility was exchange fluctuation. On the day when full convertibility was introduced, the assessee had unutilised import quota. The exporters had completed their exports, but they had not completed their imports. Before the full convertibility, the exporters were entitled to import raw material under duty-free licence on the ground that the exporter had completed their export obligations in time. However, when full convertibility came to be introduced, such of the exporters who had failed to utilise duty-free licences were stranded. They suffered losses. In order to compensate such exporters, the Government paid the above premium. The said premium was in the form of cash amount equal to eight per cent, of the unutilised import licences. In other words, the incentives which were otherwise receivable by such exporters in the form of import of raw materials came to be substituted by cash incentives equal to eight per cent, of unutilised import licences. This fact has been lost sight of by the Department. Hence, we are of the view that the premium received from the Government on import licences, constituted export incentives. Hence, the premium stood excluded by virtue of the proviso to clause (baa) of the Explanation to section 80HHC. As learned counsel for the Department has only argued the above question, we are not required to go into the other points decided by the Tribunal. However, we wish to clarify that the Tribunal has made a dichotomy in its judgment between import licences obtained by the assessee on its own exports and the import licences purchased by the assessee by paying premium from the open market. The Tribunal has held that Rs. 15,47,005 received as premium is the premium paid in respect of the licence earned by the assessee on the assessee fulfilling export obligations. Similarly, the Tribunal has held that the second part of the premium received of Rs. 36,46,824 was on surrender of licences purchased by the assessee from the open market. Accordingly, the Tribunal has held that the first category of premium will fall under clause (iiib). However, with regard to the second part of the premium of Rs. 36,46,824, the Tribunal has held that although the said amount cannot be added to the total turnover, it was mainly concerned with ascertaining export profits under section 80HHC. Under the proviso to section 80HHC(3), the profits of the business were required to be increased by an amount which bears to 90 per cent, of the sums referred to in clauses (iiia), (iiib) and (iiic) of section 28 the same ratio as the export turnover to the total turnover. Accordingly, the Tribunal has held that the amount of Rs. 36,46,824 shall not form-part of the total turnover, but has directed the Assessing Officer to reduce 90 per cent, of Rs. 15,47,005 and not 90 per cent, of Rs. 21,34,030 from the profits of business as per clause (baa). Correspondingly having determined the profits under section 80HHC(3)(a), the Tribunal has directed the Assessing Officer to increase the profits by 90 per cent, of the export incentives on pro-rata basis on the ground that profits on sale of a licence acquired from another person cannot be used to augment the export profits. In this case, the assessee got a premium from the Government of Rs. 36,46,824 on licences acquired from other persons at a cost of Rs. 30,59,799. The Tribunal has held that the intention of the Legislature was only to grant deduction to the exporter on the incentives earned by the exporter and not on the incentives earned by the trader. In this case, the Tribunal has held that the assessee had a dual capacity. The assessee was an exporter as well as a trader who purchased the licence from the open market. Accordingly, the Tribunal has partly accepted the case of the Department that acquisition of the second category of licence from the open market has no connection with the export performance of the assessee and, hence, the assessee cannot claim deduction under section 80HHC(3)(a). Accordingly, the Tribunal has held that only export profits derived from the first category of licences shall be taken into account for increasing 90 per cent: Accordingly, the export profits stood increased by 90 per cent, of Rs. 15,47,005 and not by 90 per cent, of Rs. 21,34,030. This finding of the Tribunal has not been challenged by the assessee. Hence, the above finding stands confirmed. This clarification was required to be given by us because no arguments were submitted by the Department on this aspect of the matter. This clarification was also required to be given by us so that the Assessing Officer could work out the calculations in terms of the directions given by the Tribunal. In the circumstances, the appeal stands dismissed with costs.