ORDER

R.S. Syal, Accountant Member. - The Hon'ble President of the Tribunal has constituted this Special Bench and referred the following question for our consideration and decision :—

"Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28 (iiid) of the Income-tax Act or the profit referred to therein requires any artificial cost to be interpolated?"

2. Apart from answering this question, we have also to dispose of both these appeals in entirety.

M/s. Topman Exports

3. Briefly stated the facts of this case are that the assessee, a manufacturer and exporter of fabric/garments, furnished its return declaring total income of Rs. 36,24,230 after claiming deduction of Rs. 83,69,303 under section 80HHC of Income-tax Act, 1961 (hereinafter referred 'Act'). During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had shown purchase of Rs. 13,94,90,454. On the perusal of the details of purchases furnished by the assessee, it was noticed that total amount of purchases was at Rs. 16,96,83,882, out of which the assessee had reduced an amount of Rs. 3,01,93,428 on account of sale of DEPB licenses and drawback. It was opined by the Assessing Officer that the assessee was not entitled to reduce the amount of sale proceeds of DEPB license from purchases as it had no connection with that. The assessee explained its position by submitting that the profit on sale of DEPB licenses was an export incentive covered under clause (iiia) of section 28 for the purposes of claiming deduction under section 80HHC. The Assessing Officer did not accept the submission advanced on behalf of the assessee as in his opinion the net profit after reduction of export incentives of Rs. 3.01 crores was a loss of Rs. 1.82 crores. By considering Explanation (baa) to section 80HHC dealing with the computation of profit of the business, he held that it provided for the reduction by 90 per cent of the incentives referred to any clauses (iiia), (iiib) and (iiic) of section 28 of the Act, from which it was clear that the incentives were to be considered as business income. He further noted the judgment of the Hon'ble Supreme Court in the IPCA Laboratories v. Dy. CIT [2004] 266 ITR 521 and that of the Hon'ble Bombay High Court in the case of Rohan Dyes & Intermediates Ltd. v. CIT [2004] 270 ITR 350 for coming to the conclusion that the assessee was not entitled to any deduction under section 80HHC of the Act. In the meantime, the Taxation Laws (Amendment) Act, 2005 came into being and it was contended before the ld. CIT (A) that the DEPB receipts and DFRC receipts were covered under the provisions of sections 28 (iiid), 28 (iiie) and hence, the assessee was entitled to deduction under section 80HHC, It was further contended that the assessee's export turnover exceeded Rs. 10 crores and as per the third proviso to section 80HHC (3), the following two conditions needed to satisfied :—

(i) he had an option to choose either duty drawback or duty entitlement pass book schemes; and
(ii) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under duty entitlement pass book scheme.

4. It was fairly admitted before the ld. first appellate authority that the assessee was not in a position to prove that the above two conditions were satisfied in its case. However, it was pleaded that only the profit received on the transfer of DEPB license amounting to Rs. 14,35,097 (Rs. 2,06,84,841 - Rs. 1,92,49,744) and on transfer of DFRC license amounting to Rs. 19,902 (Rs. 1,65,616 - Rs. 1,45,714) could be considered as not eligible for deduction. The ld. CIT (A) observed that the above referred two conditions of third proviso to section 80HHC (3) were admittedly not satisfied and hence, the assessee was not entitled to deduction in respect of amounts received under DEPB and DFRC schemes. As regards the assessee's contention that only the profit received on the transfer of DEPB and DFRC licenses was covered under the newly inserted provisions of sections 28 (iiid) and 28 (iiie) and not the sale proceeds, the ld. CIT (A) held that the cost of these entitlements/certificates to the assessee was at Rs. Nil and hence, the entire sale consideration of the licenses was profit on transfer. He, therefore, directed the Assessing Officer to treat the entire amount of Rs. 2,06,84,841 and Rs. 1,65,616 as profit on the transfer of DEPB and DFRC licenses for working out the deduction under section 80HHC as per the amended provisions.

5. The assessee is aggrieved against the denial of deduction under section 80HHC with the following grounds :—

"On the facts and in the circumstance of the case, the Learned Commissioner of Income-tax (A) - XIV, Mumbai :—

1. erred in confirming the action of the Assessing Officer in not granting deduction under section 80HHC of Rs. 83,69,303.
2. erred in not giving any finding as regards eligibility of duty drawback for deduction under section 80HHC.
3. erred in confirming the action of the Assessing Officer in not accepting the contention of the appellant that sale proceeds of DEPB of Rs. 2,06,84,841 and DFRC of Rs. 1,65,616 is to be reduced from the purchases of Rs. 16,96,83,882 as it is nothing but reimbursement and therefore, not justified in reducing these incentives from the profits and disallowing the benefit of deduction under section 80HHC on these incentives.
4. failed to appreciate that the DEPB received under various schemes i.e., the Duty remission Scheme of the Import Export Policy has been evolved by the Government to compensate for the extra price payable for imports and thus, it is nothing but reimbursement of cost, which goes to reduce the cost of purchases and cannot be treated as incentive and thereby, treating it as not eligible for deduction under section 80HHC."

M/s. Kalpataru Colours & Chemicals

6. The facts of this case are that the assessee, a trader and exporter of dyes, chemicals and intermediates, furnished its return declaring total income of Rs. 1,06,93,090 after claiming deduction under section 80HHC amounting to Rs. 78,01,124 with the following working :—

Export turnover of traded goods

	12,82,18,240
Less: Direct Cost	11,34,50,241
Indirect cost	2,01,25,233
Less : Freight	38,85,171
Insurance	38,251
	39,23,422
		1,62,01,811	12,96,52,052
			(14,33,812)
Add : 90 per cent of premium on DEPB
licenses and	1,70,36,059
Duty drawback i.e., 1,89,28,954 (100 per
cent exporter 50 per cent of Rs. 1,56,02,247	78,01,124

7. On being called upon to explain as to why the deduction should be allowed in respect of DEPB licenses and duty drawback under the amended provisions of the Taxation Laws (Amendment) Act, 2005, the assessee submitted that the duty drawback was covered under section 28 (iiic) and the amount of DEPB licenses was entitled to deduction as per the newly inserted section 28 (iiid). It was explained that in the books of account, the assessee had accounted the value of profits expected to realize on sale of DEPB license to which it was entitled to in respect of exports made during the year in addition to the sale proceeds of licenses which they had received in respect of export of the year. It was further explained that the difference between the actual sale price realized of the DEPB licenses and that shown as receivable in respect of earlier year's export was also accounted for. The breakup of Rs. 1,87,81,094 shown in the profit and loss account was stated to be as under :—

(a)	Sale proceeds of DEPB licence issued in respect of	51,00,00
	exports of the year (face value Rs. 52,88,352)
(b)	Licence value receivable in respect of DEPB licence
	in respect of exports of the year (face value)	1,21,60,759
		1,72,60,760
(c)	Difference between sale proceeds realized and
	licence value accounted in respect of exports of
	earlier years (Profit)	15,20,334
		1,87,81,094

8. It was claimed that the question of bringing to tax the DEPB would arise only at the point of its transfer. The licence value of Rs. 1.21 crores and odd was stated to be in respect of licence expected and not licence transferred. As regards the sale proceeds of the entitlements worth Rs. 1.57 crores, the assessee stated that their face value was Rs. 1.75 crores and hence, there was no profit on the sale of DEPB entitlement. It was still further submitted that face value of the DEPB entitlement would go to reduce the cost of exports and therefore, while computing the direct and indirect cost, the value of DEPB entitlements should be reduced and profit should be reworked out. The Assessing Officer did not accept the assessee's contention as the two conditions provided under the third proviso of section 80HHC (3) were not fulfilled. As this resulted in a loss in the computation made by the Assessing Officer of the business profits, he held that no deduction was permissible under section 80HHC. The assessee assailed the issue before the ld. CIT (A) raising several grounds. The ld. CIT (A) held that the sale proceeds on DEPB licence was provided under section 28 (iiid) as was rightly interpreted by the Assessing Officer. However, he did not accept the assessee's contention that the direct cost would stand reduced by the face value of the DEPB licence. He, therefore, upheld the action of the Assessing Officer in denial of deduction under section 80HHC. The assessee is in appeal against the denial of deduction under this section through several grounds.

9. Before us Shri Rajan Vora, the ld. counsel for the assessee opened his arguments by contending the authorities below have grossly erred in considering the sale proceeds as covered under section 28 (iiid), which only provides for "any profit on the transfer of the Duty Entitlement Pass Book Scheme.......". While referring to the language of section 28 (iiia) to (iiie), he stated that there are two types of situations contemplated under section 28, firstly the clauses (iiib) and (iiic) which refer to the gross amount of cash assistance and duty of customs, excise repaid or repayable as drawback and secondly, clauses (iiia), (iiid) and (iiie) which refer to profit on sale/transfer of licenses/DEPB Scheme/DFRC. It was therefore, urged that the ld. CIT (A) misdirected himself in reading (iiid) of section 28 as the sale proceeds of DEPB against the clear language of 'any profit on transfer of' DEPB. While taking us through the related parts of the relevant Foreign Trade Policy and Hand-Book of Procedures along with Export and Import Policy, he emphasized that the objective of the DEPB was to neutralize the incidence of customs duty on the import content of the export product. In his opinion since the face value of the DEPB represented the reimbursement of the custom duty on the input content of the export, hence that part would go to reduce the cost of purchases and only the premium part of the DEPB sale proceeds would be covered under section 28 (iiid). It was also contended that the Duty drawback is specifically relatable to the cost of goods and in the context of section 80-IB, it has been held by several courts that the amount of duty drawback was to be considered as derived from industrial undertaking eligible for deduction. He referred to the case of CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 284 (Guj.) . He also invited our attention towards the judgment of Hon'ble Rajasthan High Court in Saraf Seasoning Udyog v. ITO [2008] 174 Taxman 594 in which the sale of DEPB licenses has been held to be derived from industrial undertaking by considering the provisions of section 28 (iiid). In the light of these judgments, it was contended that only on the premium on sale of DEPB was liable to be considered under section 28 (iiid) and the face value of the entitlement would go to reduce the cost of purchases.

10. He further explained that during the period under consideration, the assessee had the option of either availing duty drawback or get covered under DEPB/DFRC Schemes. He stated that the exporter was entitled to drawback of the duty at a specified percentage, which was lower than the standardized rate fixed by the Government under DEPB. Such lower rate of duty drawback was stated to be with a view to prevent the immediate outflow of funds from the Government in the shape of duty drawback, as against the DEPB scheme entitling the exporter either to import goods against it or transfer it to somebody else as such, to be utilized by the buyer for the import of the specified goods.

11. Shri Vora contended that section 28 (iiia) to (iiic) were inserted to disclose the intention of the Legislature that the export incentives were chargeable to tax and not capital receipt. He also referred to the order passed by the Ahmedabad Bench of Tribunal in Asstt. CIT v. Pratibha Syntex Ltd. [1999] 106 Taxman 32 (Mag.) in which it was held that cash assistance referred to in clause (iiib) of section 28 did not mean only the receipt of cash assistance directly from the Government, but also included duty payable to the Government of India but not paid under any Scheme and other incentives specifically including DEPB. He stated that DEPB Scheme was launched in the year 1997 and with a view to dispel any doubt on the taxability of the profits on the transfer of DEPB, clauses (iiid) and (iiie) were inserted to section 28 by the Taxation Laws (Amendment) Act, 2005 with retrospective effect from the date of launching of this scheme. Shri Vora submitted that Hon'ble Finance Minister, during his speech in the Parliament, at the time of presenting the Taxation Laws (Amendment) Bill, 2005, categorically stated that if the DEPB entitlement is sold on premium, then such premium would not be an export profit eligible for deduction under section 80HHC and it must be added as taxable profit. In the light of his speech, which has been extracted by the Rajkot Bench of the Tribunal in its order dated 16-1-2008 in the case of Economic Traders v. Asstt. CIT [IT Appeal No. 70/71/Rjkt of 2007] and others, he stated that only the profit element, being the premium on sale of Duty drawback entitlement, was to be included under section 28 (iiid) and not the entire sale proceeds. In order to support his point of view he relied on the following orders passed by various Benches of the Tribunal for the same proposition :—

1. Glenmark Laboratories Ltd. v . Dy. CIT [2008] 116 TTJ 131 (Mum.) ;
2. Vijay Silk House (Surat) Ltd. v. Dy. CIT [IT Appeal No. 6147 (Mum.) of 2006, dated 31-12-2007]; and
3. Amar International v. Asstt. CIT [IT Appeal No. 613 (Mum.) of 2006 dated 27-12-2007];
4. KRBL Ltd. v. Dy. CIT [IT Appeal No. 3577 etc. (Delhi) of 2006 dated 30-5-2008];
5. Sankalp International v. Asstt. CIT [2008] 118 TTJ 703 (Jp.) .

12. In the light of these orders, it was stated that the Tribunal has taken a correct view that only the premium on the sale of DEPB could be covered within the purview of section 28 (iiid) and not the entire sale proceeds. It was further explained that on the receipt of DEPB entitlement, the exporter gets the option either to sell it to some outside party or utilize it in his own business by making imports without payment of duty to that extent or could import the goods and then sell it in the local market. He stated that in the case of exporters, who, instead of, selling DEPB entitlement, import the goods for their own consumption, get the benefit of deduction and the Department accepts the position. He stated that only those exporters selling the DEPB entitlement are being discriminated by the revenue as against those utilizing the same for the purposes of import.

13. He fairly conceded that in the following cases the Tribunal has decided the issue in favour of the revenue on the same line of reasoning as has been given by the authorities below in the present cases :—

1. Ramratna International Ltd. v. Asstt. CIT [IT Appeal No. 6468 (Mum.) of 2006, dated 17-4-2008];
2. Eastman Industries Ltd. v. Dy. CIT [2007] 110 TTJ 798 (Delhi) .
3. Rama Exports v. Asstt. CIT [IT Appeal No. 5360 (Mum.) of 2006, dated 19-12-2007].
4. Yasmin Silk Mills v. ITO [IT Appeal No. 3354 (Mum.) of 2006, dated 5-3-2008].

14. It was contended by him that in these cases the Tribunal failed to consider the controversy in correct perspective, which led to the decision against the assessee. He referred to various parts of these orders to demonstrate, what he considers, the fallacy in the view taken in favour of the Department.

15. Shri Vora further stated that whereas duty drawback schemes entitle the exporter to the refund of the duty suffered by him in the cost of purchases, either directly or indirectly, the MODVAT scheme is similarly applicable when the duty paid purchases are made and then at the time of the manufacture of the final product containing such duty paid purchases, the manufacturer gets benefit of the duty already paid against the total duty due on the finished product. It was explained that the scheme of MODVAT is applicable on the goods manufactured and sold in India as against the DEPB scheme applicable in respect of export turnover. Referring to the judgment of Hon'ble Bombay High Court in CIT v. Indo Nippon Chemicals Co. Ltd. [2000] 245 ITR 384 , he contended that in this case it has been held that the MODVAT credit was related only to the raw materials consumed and there was no understatement of profits when the assessee showed its closing stock of his raw material net of MODVAT credit. It was pointed out this judgment has been affirmed by the Hon'ble Supreme Court in CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 .

16. It was further stated that the word 'profit' as used in section 28 (iiid) was clear indicator of the intention of the statute that the sale proceeds were not to be considered as covered within it. He elaborated the distinction between the sale consideration and profit by submitting that the sale consideration is not a 'profit' but a 'receipt'. In the alternative it was claimed that if the view of the assessee on section 28 (iiid) was not found to be acceptable, then also the profit would be required to be computed by taking the market value of the DEPB on the date of acquisition as its cost price for computing the profit on sale of DEPB. While referring to the Matching principle as laid down by the various courts, the ld. AR stated that the purchase cost be considered as matching with the export proceeds on one hand and the DEPB factor on the other.

17. Sh. Ajay Vohra, representing two manufacturer exporters, relied on the submissions made prior to him on behalf of the assessee. He claimed that the scope of clauses (iiid) and (iiie) of section 28 was confined only to include the profit on the transfer of DEPB and DFRC and not the sale proceeds. He contended that the face value of DEPB, as was apparent from the EXIM Policy itself, was towards allowing credit for the custom duty included in the input cost of the goods exported and hence, was to be reduced from the cost of purchases. He submitted that the face value of DEPB shall reduce the cost of purchases and only the profit or the premium over and above that was the subject-matter of consideration under section 28 (iiid). He further referred to some decisions to buttress his submission that the word 'profit' as employed in this clause could not be considered as the sale consideration itself. He also submitted that the whole of the present controversy on the interpretation of section 28 (iiid) was in the context of computing the correct amount of deduction under section 80HHC, which was a beneficial provision. In his opinion, such beneficial provisions needed to be interpreted liberally so as to advance the object. He further contended that if two views are possible on a point, then the view favourable to the assessee should be adopted.

18. Sh. Subhash Aggarwal, appearing for M/s. Hero Exports stated that his client was trader exporter who had received the following export incentives :—

		Rs.
(i)	Duty drawback for current year	12,22,14,353
(ii)	Supplementary claims of duty Drawback	19,29,576
(iii)	Credit on DEPB (Face value)	1,51,77,609
(iv)	Profit on DEPB	1,97,349
(v)	DFRC	10,14,124
		14,05,33,011

19. He stated that according to the EXIM Policy, the amount of DEPB was a recompense towards the duty paid on the input cost and to that extent the value of DEPB license was attributable to the direct cost. He further reiterated the submissions made by his predecessor counsel and forcefully stated that only the premium part on the sale of DEPB was liable to be considered as covered under clause (iiid) of section 28 and not the entire sale proceeds.

20. S/Shri J.D. Mistry, Yogesh Thar, I.P. Rathi, Nimesh Vora, Baljit Singh, Sanjay Parikh, Sanjay C. Shah, Soumen Adak, appearing for the respective interveners advanced almost similar submissions as made by their predecessors, which we need not repeat. However it is important to mention that the ld. AR for one of the interveners contended that profit on sale of DEPB or DFRC was not at all taxable under the provisions of the Act for the reason that with the insertion of section 28 (iiid) and (iiie), no corres-ponding amendment was made to the definition of income under section 2 (24), which was clear indicator of the fact that even though these clauses were inserted to section 28, but they were not with a view to bring any income in the tax net. It was also explained that when clauses (iiia) to (iiic) were introduced to section 28 by the Finance Act, 1990, there was carried out a corresponding amendment to section 2 (24) by way of insertion of clauses (va), (vb) and (vc), which indicated that the Legislature intended to include only the incentives referred in clauses (iiia) to (iiic) to section 28 in the ambit of income and not those mentioned in clauses (iiid) and (iiie) to section 28.

21. Per contra, Sh. G.C. Srivastava, the ld. Senior Departmental representative along with Sh. Anil Kumar initiated his submissions by stating that so many arguments have been advanced by all the ld. ARs that the objective of the DEPB was to neutralize the incidence of import duty on the input cost, which is not correct. He submitted, with reference to, Foreign Trade Policy, a copy of which is available in Paper book that the main objective of this incentive was to boost up the exports. It was stated that the DEPB entitlement is a post-export incentive, which is linked to the FOB value of exports and not with the import content. He further submitted that the point of accrual of such incentive is the making of exports and not the making of imports to be utilized as the input for the goods exported. It was stated that this incentive was available regardless of the fact whether or not any import was made by the assessee. He further stated that if the exporter uses only the indigenous goods, still the benefit of duty drawback or DEPB is available. As regards the standard rate of DEPB fixed for each industry, he submitted that it was on the basis of empirical study of such industry and had no correlation with the actual import or the payment of custom duty. Under such circumstances it was stated that the assessee was not entitled to set off the value of DEPB against the purchase price of goods.

22. He objected to the observations made by some of the ld. ARs by which it was argued that since the definition of income under section 2 (24) was not amended to include section 28 (iiid) and (iiie) and hence, the same be excluded from the scope of income itself. In his opinion the term 'income' has been defined in this provision in an inclusive manner and every item which bears the characteristics of income, is liable to be included in it notwithstanding the fact that it has not been specifically included in it. As regards the use of the word 'profit' in section 28 (iiid), he stated that ordinarily profit represents the difference between the sale price and cost price. In his opinion if no cost is incurred and something is sold, the entire sale consideration will be the profit. He further laid stress on the point that it was not permissible to have reduction for any notional cost against the sale proceeds of DEPB. He submitted that the cost of DEPB could be professional charges and application fee etc., for making the claim of DEPB as has been held by the Tribunal in one of the cases. In his opinion there was no reason in allowing the face value of DEPB as deduction from the sale proceeds with a view to determine the profit on its sale.

23. Turning to section 80HHC, which is the bone of contention in these appeals, it was urged that the Legislature has intentionally used the expression 'derived from' with reference to income in section 80HHC for allowing deduction from the export profits. In his opinion no income except the sale proceeds in convertible foreign exchange were eligible for consideration in computing the profits from exports. It was still further stated that the insertion of first proviso to section 80HHC (3) entitled the exporter to deduction on the export incentives as referred to in section 28 (iiia) to (iiic) which was an exception carved out. He stated that but for this the exporter cannot take the benefit of deduction against any income even though falling under the head 'Profits and gains of business or profession'. In his opinion the computation of business profits as per Chapter IV-D is the determination of business profit, whereas the deduction is restricted only to the profits derived from export of goods or merchandise. He stated that though the DEPB may constitute business profit, but its sale proceeds cannot be included in the profits eligible for deduction under this section because it is not derived from the exports.

24. It was further stated by the ld. Sr. DR that the reliance on the speech of the Finance Minister at the time of moving the Bill in the Parliament was not permissible. Relying on the judgment of the Hon'ble Punjab & Haryana High Court in Coca Cola India Inc. v. Asstt. CIT [2009] 309 ITR 194 , he stated that it has been made clear that when the words of the section are clear and unambiguous, there is no scope for looking into the intention of the Legislature beyond the actual words.

25. He also stated that the matching concept is not applicable in this case as has been argued on behalf of the assessee. It was submitted on behalf of the revenue that only when some income has been earned that the question of its adjustment towards the source will arise and it was not the other way round by which the purchase cost already incurred could be matched with the export proceeds and the export incentives. He further contended that the matching concept was in-built in the scheme of section 80HHC itself, inasmuch as it provides for reduction of 90 per cent of the incentives, thereby implying that 10 per cent of the incentive value is presumed to have been spent in earning them. Answering to the argument raised on behalf of the assessee that MODVAT scheme was similar to that of DEPB and hence, it should also be reduced from the cost of purchases, he stated that it was not so. In his opinion whereas the scheme of MODVAT concerns itself with the value addition and allows deduction for the duty paid by the former manufacturer which already stands included in the price of the goods purchased by the later, the DEPB scheme is concerned only with the grant of some export incentive irrespective of the fact that whether the earlier party from whom the raw material was purchased had paid the duty or not. In the light of the above arguments it was urged that the impugned orders did not suffer from any infirmity and hence should be upheld.

26. We have heard the submissions advanced by all the ARs on behalf of the assessees and interveners (hereinafter called the 'ld. AR') and the ld. DR in the light of material placed before us and precedents relied upon. On perusal of the question framed for our consideration it is clear that we have to decide as to whether the sale proceeds of DEPB are subject-matter of coverage under section 28 (iiid) or only profit element thereof. This question is offshoot of the computation of the amount of deduction under section 80HHC. We will shortly notice that except for determining the quantum of deduction under this section, there is no other object for inserting clause (iiid) and clause (iiie) to section 28 dealing with the profit on transfer of DEPB and DFRC, by the Taxation Laws (Amendment) Act, 2005 with retrospective effect along with the simultaneous amendment carried out to section 80HHC (3) by way of insertion of second to fifth proviso and those too with retrospective effect.

Concept and Nature of DEPB

27. Before we delve upon the real controversy, it will be of interest to have an insight into the concept of Duty Entitlement Pass Book Scheme. The exporters are encouraged by way of various schemes launched by the Government of India from time to time so that they can withstand the stiff competition from other exporting countries and quote competitive rates enabling them to stand in the export market, which ultimately enriches the national kitty of foreign currency. The major incentive is in the shape of the duty exemption schemes which enable duty-free import of inputs required for export production. Duty Exemption Scheme consists of (a) Advance Authorisation Scheme and (b) Duty-Free Import Authorisation Scheme (DFIA). Advance licence is granted for import of inputs without payment of custom duty. As it is evident from the scheme itself, it is a pre-export incentive so that the exporter may make the import of the inputs required for the export without payment of any custom duty. On the other hand, the Duty Remission Scheme enables post-export replenishment/remission of duty on inputs used in the export product. Duty remission schemes consist of (a) DFRC (Duty Free Replenishment Certificate) and (b) DEPB (Duty Entitlement Passbook Scheme) and (c) Duty Drawback Scheme. The DFRC scheme was introduced from 1-4-2000 replacing Transferable Advance Licensing Scheme. This scheme is available to merchant exporters (who trade in goods, that is, purchase the goods and then sell them as such in foreign countries) as well as to the manufacturer exporters (who purchase raw material and then convert into finished products before making exports). However it covers only items which are covered under standard input-output norms notified by the DGFT. The DEPB Scheme as notified on 1-4-1997 consisted of (a) pre-export DEPB and (b) post-export DEPB. The pre-export DEPB Scheme was abolished with effect from 1-4-2000. Under the post-export DEPB scheme, which is relevant and applicable during the period under consideration, an exporter is given a Duty Entitlement Pass Book at a predetermined rate on the FOB value of exports. The DEPB allows import of any items except the items which are otherwise restricted for imports. As per Para 4.3 of the EXIM Policy 'The objective of DEPB is to neutralize the incidence of Customs duty on the import content of the export product. The neutralization shall be provided by way of grant of duty credit against the export product.' According to para 4-3-1: 'Under the DEPB scheme, an exporter may apply for credit, at a specified percentage of FOB value of exports made in freely convertible currency or the payment made from the Foreign Currency Account of the SEZ unit in case of supply by DTA to SEZ unit'. The validity period of DEPB for import shall be as prescribed in the Handbook of Procedures, which is one year. Para 4.3.4, which has some bearing on the issue under consideration talks of the transferability of the DEPB. It states that: 'The DEPB and/or the items imported against it are freely transferable. The transfer of DEPB shall however be for import at the port specified in the DEPB, which shall be the port from where the exports have been made.' The policy relating to DEPB Scheme is given in Chapter-4 of the Policy. It states that the duty credit under the scheme shall be calculated by taking into account the deemed import content of the said export product as per SION (Standard Input Output Norm) and the basic custom duty payable on such deemed imports. As per para 4.43: An application for grant of credit under DEPB may be made to the Regional Authority concerned in the form given in 'AAyat Niryaat Form' along with the documents prescribed therein. As per para 4.44 in cases where the applicant applies for DEPB after realization or shipments are made against confirmed irrevocable letter of credit or bill of exchange is unconditionally availed and the same is confirmed by the exporter's bank, the DEPB shall be issued with transferable endorsement. In other cases, the DEPB shall be initially issued with non-transferable endorsement. Upon realization of export proceeds, such DEPBs can be endorsed as transferable, if the applicant so desires. As per para 4.46, the application for obtaining credit shall be filed within a period of twelve months from the date of exports or within six months from the date of realization or within three months from the date of printing/release of shipping bill, whichever is later, in respect of shipments for which the claim have been filed. Para 7.53 deals with the fixation of DEPB rates. It states that all applications for fixation of DEPB rates shall be routed through the concerned Export Promotion Council (EPC) which shall verify the value of export sales of international price on imports covered under SION. For the standardization of norms an application may be made by the manufacturer exporter or the merchant exporter which shall be made to the Advanced Licensing Committee (ALC). Para 7.10 further provides for the modification of the existing SION for which an application may be filed by the manufacturer exporter or merchant exporter. Our attention was further drawn towards the relevant literature indicating that an exporter may also apply for the enhancement in the SION if the burden of duty suffered is more than the standard rate so fixed. The learned A.R. submitted that in the case of M/s. Jindal Drugs Limited, the amount of DEPB originally fixed was enhanced by the authorities after satisfying them that the duty paid on the imported input was higher than that of the standard rate so fixed.

28. It has also been brought to our notice that an exporter has the option of either availing the DEPB scheme or get duty drawback as per rules. The duty drawback in relation to any goods manufactured in India and exported means the rebate of duty chargeable on any imported materials or excisable materials used in the manufacture of such goods. Rule 6 of Custom and Central Excise Duty Drawback Rules, 1995 deals with the goods where the amount or rate of duty drawback has not been determined. It states that where no amount or rate of duty drawback has been determined in respect of any case, any manufacturer or exporter of such goods may, within 60 days from the date relevant for applicability of the amount or rate of duty drawback in terms of sub-rule (3) of rule 5, apply in writing to the Central Government for the determination of the amount or a rate of drawback stating all the relevant facts. Exporter is further entitled to supplementary claims for drawback under Rule 15 of Customs and Central Excise Rules of Drawback Rules, 1995 where the drawback received falls short of rate finally fixed by the Government. In such a case, application has to be moved for supplementary claim of duty drawback.

29. From the above discussion, it can be noticed that an exporter has been given an option of either availing duty drawback or getting covered under the DEPB scheme. The duty drawback scheme is an alternative to DEPB scheme and both cannot be concurrently availed of in respect of one export. The actual payment of custom duty by the exporter himself is not a pre-condition for entitlement of either of these schemes. If the goods are purchased by the exporter from someone, there is a presumption that first of the previous buyers in the chain, must have paid the import duty, which eventually forms part of the cost of purchase to the exporter. Thus the objective of the DEPB or duty drawback, as per the Foreign Trade Policy formulated by the Government of India, is to neutralize the incidence of custom duty on the import content of the export product.

30. The learned Departmental Representative has argued that DEPB is post export event which has no relation with purchase of goods. It has further been argued that the DEPB is allowed at a specific percentage on the FOB value of exports which indicates that the purchase cost or the duty component in the raw material input has no relation with the entitlement to DEPB. This argument though looks attractive at the first blush but on closer examination it falls on the ground when we make in-depth scrutiny of the scheme of DEPB. It is true that the DEPB is issued with reference to the FOB value of exports and that too after the making of exports, but the objective of DEPB, as set out by the Government of India itself in Exim Policy, is only 'to neutralize incidence of custom duty on the import component of the export product'. Considering the FOB value of exports for fixing the standard rate as per SION is only a measure adopted to quantify such benefit on some pragmatic basis for each industry so as to overcome the difficulty in identifying the element of custom duty included in the import component of the export product in each and every case individually. It is further clear that any exporter individually or through the respective associations etc., can move the competent authority for the enhancement of the standard rate so fixed by the Government, if the load of actual custom duty on the import component is higher than the standard rate fixed by the Government. In such a situation the competent authority will revise upward such standard rate, as has been done in the case of M/s. Jindal Drugs Limited, an intervener before us. In the case of duty drawback also the exporters have been given an option to move the competent authority if the custom duty in the import content is higher than the standard rate so fixed. Thus, it can be seen that in the case of duty drawback or DEPB, as the case may be, there is a direct relation between entitlement under the respective scheme and the inherent custom duty component in the cost of purchases, which are ultimately used for exports. DEPB cannot be viewed as independent of the custom duty embedded into the purchase price of goods. For all practical purposes the DEPB is, in a sense, reimbursement of the part of the cost of purchases to the extent it is represented by the custom duty, which is intrinsically an important content of the purchase price.

31. As both the duty drawback and DEPB are post-export schemes, it is only when the exports are made that an application can be moved within the specified time, pursuant to which the exporter becomes entitled to the duty-drawback or DEPB, as the case may be. The timing of allowing the DEPB does not and cannot change the true character of receipt. We, therefore, conclude that though DEPB is post-export incentive, but its objective is to counterbalance the effect of custom duty included in the cost of purchases , incurred directly or indirectly by the exporter. It cannot be seen as an incentive detached from cost of goods purchased.

32. Be that as it may we will see infra that the understanding of DEPB scheme in commercial sense, as reducing the cost of purchases, does not fit in the scheme of Income-tax Act, more specifically in section 80HHC.

When DEPB income accrues

33. Before we venture to decide the accrual of income on account of DEPB, it is essential to note that both the appellants before us are following the mercantile system of accounting. Under this method of accounting, expenses become deductible when the liability to pay arises irrespective of the date of actual payment. Similarly income is recognized and becomes chargeable to tax when the right to receive such income is finally acquired by the assessee. The date of actual receipt of the income is not a decisive criteria, which event may take place before or after such accrual. As soon as the right to receive income is finally acquired by the assessee, the income accrues and has to be accounted for and offered for taxation as per the provisions of the Act. We are reminded of the classic judgment rendered by the Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 . In this case, it was held that income becomes chargeable to tax when the right to receive is acquired. At the same time, it is equally true that where the right to receive income is inchoate no income can be said to have accrued as has been held in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524 (SC) . If, however, the right to receive the income gets vested unconditionally in assessee, the income will accrue notwithstanding the fact that some controversy may arise later on by which the payer may claim the amount back. In that case the dispute will be about the refunding of the amount and will not have any effect on the accrual of income at the earlier stage. From the above discussion, we note that the fundamental principle of the accrual of income is that the income accrues and becomes chargeable to tax when the assessee finally acquires right to receive it irrespective of the fact whether it is received or not.

34. Let us apply this test to the facts of the instant cases. It has been noted above from the relevant clauses of Foreign Trade Policy that there is a requirement to make application with the concerned authority after making exports, for the grant of DEPB or duty drawback, as the case may be. It is only when an exporter makes application after effecting exports, that he acquires the right to such DEPB/duty drawback. The mere fact that he has exported the goods or merchandise will not entitle him to the DEPB/duty drawback unless an application is specifically made in this regard. Thus it is clear that it is only on the making of an application for DEPB that he acquires the right to receive the DEPB and income accrues at that stage. The Ahmedabad Bench of the Tribunal in a well reasoned order in United Builders v. Asstt. Commissioner Of Income-Tax, New Delhi [2002] 81 ITD 553 has held that the value of advance licence benefit receivable by the assessee has to be treated as income accruing to it in the year in which the exports are actually made and is chargeable to tax accordingly in that year alone. The Hon'ble Punjab & Haryana High Court in the case of Commissioner Of Income-Tax v. Punjab Bone Mills. [1998] 232 ITR 795 considered a case in which the assessee, following the mercantile system of accounting, accounted for cash incentives for exports on receipt basis. The Assessing Officer treated this amount as income on accrual basis. It was argued on behalf of the assessee that accrual of income would occur only when the amount was sanctioned and not when application, claiming cash incentives, was filed by the assessee on the making of the exports. The Tribunal took the view that the cash incentives accrued to the assessee on the date on which application for the claim was made to the competent authority. Approving the view of the Tribunal, the Hon'ble High Court held that the right to receive export incentive accrued to the assessee on the filing of claim. It was held that the export by itself would not give rise to income and neither the date of receipt of cash incentive was relevant. This judgment stands approved by the Hon'ble Supreme Court in the case of Commissioner Of Income-Tax v. Punjab Bone Mills. [2001] 251 ITR 780 . In the light of this judgment and by considering the general principles of the accrual of income, it becomes explicitly clear that the assessees in question became entitled to DEPB at the time they filed applications for such incentive, of course, after making the exports. Thus the time of accrual of DEPB is the date when application for DEPB is filed with the concerned authority. That being the position, the income would accrue at that stage and become chargeable to tax accordingly. The fact that the assessee sells the DEPB entitlement in this year or later year and hence, the income be considered to have accrued in entirety on the date of such sale is totally irrelevant insofar as the original amount, being the face value of the DEPB, is concerned. Similarly when the exporter utilizes DEPB entitlement for own import, the time of accrual of income will not be when the subsequent import is made and the face value of DEPB gets adjusted against the duty payable but when application was originally filed for the DEPB. The subsequent events, viz, the sale of DEPB as such or making imports for self consumption or direct sale of such imported goods, are not significant in determining the accrual of income on account of the face value of DEPB, which results on making application for the DEPB, after making the exports.

35. At this stage it will be pertinent to note section 28, which has bearing on the issue. Relevant part of the section material for our purpose is as under :—

"28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",—

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
(ii) ******
(iii) income derived by a trade, professional or similar association from specific services preformed for its members;
(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) ;
(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;
(iiid) any profit on the transfer of the Duty Entitlement pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922) ;
(iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922) ;
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
(v) ******
(va) ******
(vi) ******"

36. Clauses (iiia) to (iiic) to section 28 were inserted by the Finance Act, 1990 with retrospective effect. In the like manner clauses (iiid) and (iiie) to section 28 were inserted by the Taxation Laws (Amendment) Act, 2005 with retrospective effect. Prior to the insertion of clauses (iiia) to (iiic) to section 28, two views were prevailing as to the taxability or otherwise of the export incentives. The Hon'ble jurisdictional High Court in the case of Metal Rolling Works (P.) Ltd. v. CIT [1983] 142 ITR 170 (Bom.) considered a case in which an exporter secured some import entitlements which were sold and it was claimed that the amount so received was capital receipt or in the alternative an item of income in the nature of casual and non-recurring receipt and hence exempt from tax. The ITO rejected these contentions and included the amount in the total income of the assessee. The Tribunal held that the sale of import license for a consideration was liable to tax as business income. The Hon'ble High Court upheld this view by observing that the import entitlements were obtained by the assessee in the course of its business so that the value of the same constituted profits and gains of the business of the assessee within the meaning of clause (iv) to section 28 . Similar view was earlier taken in the case of Agra Chain Mfg. Co. v. Commissioner Of Income-Tax [1978] 114 ITR 840 (All.) holding that profit arising on the sale of import entitlements by an assessee engaged in the business of exports, would be assessable as profits from business. It will not be out of place to mention that the Hon'ble Bombay High Court rendered its judgment in the case of Metal Rolling Works (P.) Ltd. (supra) in the year 1982 and at that time clauses (iiia) to (iiic) of section 28 were not on the statute and thus it was held that the import entitlements were in the nature of the value of any benefit arising from business falling in clause (iv) of section 28. On the other hand, a contrary view was expressed in some other cases holding that the import entitlements were capital in nature and hence not liable to tax. In still some other cases, it was held that import entitlements resulted into casual and non-recurring income and hence exempt from taxation. In view of the apparent cleavage of opinion between different High Courts on the question of taxability or otherwise of export incentives, the Legislature clarified its intention through the Finance Act, 1990 by inserting clauses (iiia) to (iiic) to section 28 with retrospective effect making them chargeable to tax under the head 'Profits and gains of business or profession'.

37. Circular No. 572 dated 3-8-1990 has clarified the position in para 27 as under :—

"27.1 Modification of provisions relating to exemption of income from exports.—At present exporters are given incentives by way of Cash Compensatory Support (CCS), drawback of duty and import entitlement licences. The taxation of CCS has been a subject matter of litigation. The Calcutta High Court in the case of Jeevan Lal (1929) Ltd. [1983] 142 ITR 448 held that the CCS received by an exporter was a revenue receipt and was subject to income-tax. The Special Bench of the Income-tax Appellate Tribunal has, however, in a case, distinguished the aforesaid decision and come to the conclusion that the CCS was a capital receipt and hence not subject to tax. The department's view all along has been that CCS or any other subsidy received by an exporter as an export incentive is a revenue receipt and hence taxable.

27.2 Similarly, the Department's view as regards drawback of duty and profit on sale of import entitlement licences has been that these are revenue receipts and hence liable to tax. There are many court decisions supporting this view.

27.3 To put an end to litigation which may arise regarding the taxability of these incentives received by exporters, new clauses (iiia), (iiib) and (iiic) have been inserted in section 28 of the Income-tax Act to provide that profit on sale of import entitlement licences, CCS and drawback of duty, respectively, shall be chargeable to income-tax under the head "Profits and gains of business or profession". These have, further, been included in the definition of the term "income" in clause (24) of section 2.

27.4 These amendments will take effect retrospectively from the dates from which these incentives were introduced. Thus, amendment with regard to profit on sale of import entitlement licences will apply from 1-4-1962; cash assistance from 1st April, 1967, and drawback of duty from 1-4-1972, and will, accordingly, apply in relation to the assessment years 1962-63, 1967-68 and 1972-73, respectively, and subsequent years."

38. The insertion of clauses (iiia) to (iiic) of section 28 by the Finance Act, 1990 has elucidated the position that all the export incentives are revenue receipts and accordingly chargeable to tax under the head 'Profits and gains of business or profession'. When the Hon'ble Bombay High Court decided the case of Metal Rolling Works (P.) Ltd. (supra) holding the inclusion of export incentives under section 28 (iv), at that time clauses (iiia) to (iiic) to section 28 were not in the Act. Subsequently when these clauses were introduced by the Finance Act, 1990, all the export incentives came to be recognized as falling under any of these three clauses to section 28.

39. By considering the concept of accrual of income in terms of the judgment of the Hon'ble Supreme Court in the case of Punjab Bone Mills (supra), we have held that the DEPB income accrues to the exporter after export is made and application is filed for DEPB. In other words, the face value of DEPB shall accrue to the assessee as its income at that time only irrespective of the fact that whether the DEPB is sold or is utilized for self consumption or some goods are imported and sold as such later on. Now we need to determine as to under which clause of section 28 shall the face value of DEPB fall. Section 28 (iiia) talks of profits on sale of a licence granted under the Imports (Control) Order, 1955. It is a specific clause providing for the inclusion of profit on sale of a licence granted under the Imports (Control) Order, 1955 under it. Clause (iiic) to section 28 deals with any duty of customs or excise repaid or repayable as duty drawback to any person against exports under the Customs & Central Excise Duties Drawback Rules, 1971. This is again a specific provision dealing with the Duty Drawback Rules, 1971, which were subsequently replaced with the Customs & Central Excise Duty Drawback Rules, 1995 vide notification dated 26-5-1995. In the absence of any corresponding change made in the clause (iiic) to section 28 the Assessing Officers started denying the claim of deduction under section 80HHC on the ground that this clause of section 28 refers only to the Custom and Central Excise Duty Drawback Rules, 1971 and not to 1995 Rules. The matter was brought to the notice of the Central Board of Direct Taxes. Vide Circular No. 5/2006 dated 15-5-2006 the position has been clarified that the benefit of deduction under section 80HHC cannot be denied to an assessee claiming refund of the duty drawback under the Duty Drawback Rules, 1995. Thus, it can be seen that even though clause (iiic) of section 28 refers to the Duty Drawback Rules, 1971, the CBDT, after their substitution with the Duty Drawback Rules, 1995, clarified that such drawback under the later rules, will continue to be governed by section 28 (iiic) notwithstanding the fact that the necessary change was not carried out to section 28 (iiic). Here it is important to mention that as against clauses (iiia) and (iiic) of section 28, which deal with specific items of export incentives, the language of clause (iiib) is couched in general words and does not refer to any specific scheme of export incentives. It talks of: 'cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India'. On the perusal of the language of this clause, the following features can be noticed :—

(i) Cash assistance (by whatever named called)
(ii) Received or receivable
(iii) By any person against exports
(iv) Under any scheme of the Government of India.

40. Not only the cash assistance actually received but the accrual aspect is also covered in its scope because of the use of word 'receivable'. If the intention of the Legislature had been to include only the cash given to the exporters in the form of assistance within the purview of this clause , then there was no need to supplement it with the word 'receivable'. The next important feature to be noted is the use of the phrase 'by whatever name called'. It implies that the assistance referred to herein may be described by any name and it need not be cabined into the words 'cash assistance'. This interpretation becomes more vivid when we note the words 'under any scheme of the Government of India' at the end of the clause. It leaves no room for doubt that 'any scheme' is covered within this clause. On harmonious construction of these three clauses to section 28, it becomes evident that whereas clauses (iiia) and (iiic) deal with the specific species of incentives, clause (iiib), a residual clause, which will bring within its sweep all forms of export incentives other than those specifically set out in clauses (iiia) and (iiic). The face value of DEPB, which is also an export incentive, not specifically covered under clause (iiia) or (iiic), will thus naturally find its place under the umbrella of section 28 (iiib). It is further important to note that clauses (iiid) and (iiie) were inserted to section 28 by the Taxation Laws (Amendment) Act, 2005, though with a retrospective effect. Clause (iiid) talks of 'any profit on the transfer of the Duty Entitlement Pass Book' and clause (iiie) refers to 'any profit on the transfer of the Duty Free Replenishment Certificate'. These clauses deal with the transactions relating to the transfer of such incentives, taking place at a distance in the point of time from the date of accrual of export incentives by way of face value of DEPB or DFRC. Further these clauses have reference to the sale or transfer of DEPB/DFRC and do not comprehend a situation in which the DEPB is used by the exporter. It does not mean that the face value of DEPB was not contemplated as income until sold. If we proceed to include the face value of DEPB under clause (iiid), it would mean that upto the year 2005, the Legislature did not intend to include the face value of the DEPB, if not sold, under the 'business income' of the assessee, which interpretation is not capable of acceptance because of the position as clarified by the Finance Act, 1990, at the time of introducing clauses (iiia) to (iiic) to section 28, when it was made patent that all the export incentives are chargeable to tax under the head 'Profits and gains of business or profession'. It, therefore, implies that by the Finance Act, 1990, all the specific existing schemes of incentives were made chargeable to tax under the head 'Business income' under clauses (iiia) and (iiic) to section 28 with retrospective effect from the dates of the introduction of such schemes and the other non-specific existing incentives as well as the new export incentives schemes likely to be launched by the Government of India in future were intended to be included under section 28 (iiib). The Mumbai Bench of the Tribunal in Pink Star v. Dy. CIT [2000] 72 ITD 137 considered a case in which the assessee, inter alia, surrendered both self-acquired import license and those purchased from the open market and received premium on the surrender of the same under the composition scheme of the Government to pay cash amount towards unutilized import license. It was held that the compensation received from the Government on the surrender of such import licenses would fall under section 28 (iiib). The revenue challenged this order before the Hon'ble High Court but did not think it appropriate to assail this issue, thereby impliedly accepting this interpretation of section 28 (iiib). The judgment of the Hon'ble Bombay High Court in this case is reported at Commissioner Of Income-Tax v. Pink Star [2000] 245 ITR 757 . The Ahmedabad Bench of the Tribunal in Pratibha Syntex (supra) has also held that all the export incentives which are not specifically covered under clause (iiia) or (iiic), will find their place in clause (iiib) to section 28. In view of the foregoing discussion we do not have any doubt in our mind that the face value of DEPB which is an export incentive, though not specifically covered under clause (iiia) or (iiic), would fall within the ambit of clause (iiib) of section 28. It would be at the stage of making application for DEPB that the accrual of income shall take place and will need to be recognized in the accounts irrespective of the fact whether the DEPB is sold immediately or retained in stock up to its validity period of one year for self-utilization or for making imports for re-sale or its resale as such at a later date.

41. The accrual of income shall be recorded in accounts through the following accounting entries :—

When the exporter, after effecting export, makes application for the DEPB worth the face value of Rs. 100.

DEPB Receivable	Dr.	Rs.100
To DEPB Income [under section 28 (iiib) ]	Rs. 100

[At this stage income to the extent of Rs. 100 will accrue, which will be taxable under section 28 (iiib)]

When DEPB certificate is allotted

DEPB	Dr.	Rs.100
To DEPB Receivable		Rs. 100

[It is simply conversion of DEPB Receivable into receipt of DEPB Certificate]

42. At a later date the goods may be imported and credit availed against the DEPB by way of adjustment of custom duty. Suppose the exporter makes import of goods worth Rs. 1000 on which the amount of custom duty payable is Rs. 100. In such a case the assessee will be paying Rs. 1000 only towards purchase price of the goods without paying any custom duty as the duty payable shall stand adjusted against the DEPB certificate in possession, but the total purchase shall be recorded at inclusive of custom duty, which would otherwise have been payable, but for the utilization of DEPB in hand. The following accounting entry shall be passed at that time.

Purchases (1000+100)	Dr.	Rs. 1100
To Bank		Rs. 1000
To DEPB		Rs. 100

[At the time of utilization of DEPB, no income will arise by way of non-payment of custom duty and the purchase will be recorded at the cost price of the goods inclusive of custom duty. At this stage it is only the adjustment of DEPB, which has already accrued as income to the assessee]

Meaning of word 'Profit' under section 28 (iiid)

43. The major controversy before us is to interpret section 28 (iiid) in which the expression "any profit on the transfer Duty Entitlement Pass Book Scheme" has been used. From the facts of the cases under consideration it is noted that the Assessing Officer treated the entire sale proceeds as covered under section 28 (iiid), as against the case of the assessee that only the premium or the profit element on the transfer of DEPB be considered. To put the controversy in simple words, if, for example, the assessee received DEPB worth the face value of Rs. 100 and then sold it for Rs. 110, the assessee is contending that only a sum of Rs. 10 is to be included under clause (iiid), whereas, the revenue's contention is that the entire amount of Rs. 110 be considered.

44. Thus we have to interpret the word 'profit' as fielded in section 28 (iiid). As noted supra section 28 has clauses (i) to (vi). On a careful circumspection of the language of clauses (iiib) and (iiic), it is noted that the reference is to the gross sum of cash assistance and duty drawback etc. On the contrary clauses (iiia), (iiid) and (iiie) use the word "profit" on sale/transfer of licence/DEPB/DFRC. From here, it can be easily inferred that the employment of the words "any profit of transfer" in clauses (iiid) and (iiie) of section 28 in contradistinction to the omission of such word 'profit' in clauses (iiib) and (iiic) is not without any object.

45. The principle rule of interpretation is that meaning is to be given to each and every word in the language of section. No word can be claimed as superfluous. Each comma, full stop or every sign of punctuation has significance. In our considered opinion the need for interpretation with the aid of some external aids of construction of a section arises only when there is some ambiguity in the language of section and the intention of the Legislature is not properly conveyed with the words so used. It has been held by the Hon'ble Supreme Court in numerous judgments including the case of Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of Andhra Pradesh [2001] 247 ITR 36 that the taxing statute has to be strictly construed and nothing can be read in it. Identical view has been taken in the case of Padmasundara Rao (Decd.) v. State of Tamil Nadu [2002] 255 ITR 147 (SC) holding that "while interpreting a statute Legislative intention must be found in the words used by the Legislature". In the like manner it has been reiterated in the case of Commissioner of Agricultural Income-tax v. Plantation Corporation of Kerala Ltd. [2001] 247 ITR 155 (SC) that: "So long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the Legislative intent becomes impermissible".

46. Coming back to the issue under consideration we note that the language of clauses (iiid) and (iiie) of section 28 is crystal clear which talks of "any profit on the transfer of" DEPB/DFRC. The reference is not to the sale proceeds but to the profit on the transfer of DEPB/DFRC. A line of demarcation needs to be drawn between the provisions in which gross amount is considered and the provisions in which only the profit element has been the subject matter of consideration. We need not wander here and there in search of such distinction, which is highlighted from section 28 itself. Apart from clauses (iiib) and (iiic) to section 28, clauses (iv) and (vi) also refer to the inclusion of the gross amount and not the profit element thereon. Further the Legislature is not oblivious to such distinction between the gross amount and the profit element inasmuch as it has used the appropriate words wherever it intended so. It is amply demonstrated from the language of section 54 which grants deduction from the capital gains by providing that if the 'amount of capital gain' is greater than the cost of the residential house so purchased or constructed, the differential amount shall be charged under section 45; as against section 54E which provides deduction in respect of long-term capital assets by providing that if the cost of the new asset, is not less than 'the net consideration' in respect of the original asset, the whole of such capital gain shall not be charged under section 45. If we carefully peruse the language of section 54 in juxtaposition to section 54E it can be seen that whereas the former section provides deduction with reference to the investment of the amount of capital gain, the later section grants deduction with reference to the extent of investment of the net consideration and not the capital gain. Thus, it can be visualized that the Legislature is not unmindful of the distinction between 'sale consideration' and 'profit' and has used the appropriate expression to exhibit its intendment. Reverting to the language of clause (iiid) of section 28 we observe that it refers to any profit on the transfer of DEPB. The words used in the provision indicate that only the profit element on the transfer of DEPB is to be considered under this clause and not the sale proceeds itself. Thus in order to be covered with the scope of this clause, two things are essential. First, there should be transfer of the DEPB and second, such transfer should result into any profit. Unless both the conditions are cumulatively satisfied, the transaction cannot form part of section 28 (iiid).

47. This leaves us with the determination of the meaning of the word 'profit'. In common dialect the word 'profit' refers to excess of sale proceeds over the cost of goods. The word 'profit' has another shade also, which involves a comparison between the state of business at two specific dates and the excess of the value of asset on one date over the other, constitutes profit. Their Lordships of the Hon'ble Supreme Court in E.D. Sassoon & Co. Ltd.'s case (supra) has laid down to this effect.

"The word 'profits' has in my opinion a well defined legal meaning, and this meaning considers with the fundamental conception of profits in general parlance although in mercantile phraseology the word may at time bear meanings indicated by the special context which deviate in some respects from this fundamental signification. 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates."

48. Going by the concept of comparison of the assets of business on two dates, it can be seen that at the stage of receipt of DEPB on its accrual, the face value of Rs. 100 constituted an asset in the hands of the exporter which could be utilized by him in any of the ways open to him. If the exporter chooses to sell the DEPB for Rs. 110 at a subsequent date, then the prevailing market rate at the time of sale, that is, Rs. 110 shall represent the value of asset on such date of sale. Accordingly, the difference of Rs. 10 between the value of two dates, viz., on the date of its sale (Rs. 110) and the date when it was acquired on accrual (Rs. 100), will constitute profit. Even going by the meaning of 'profit' as commonly understood representing excess of sale proceeds over cost, we find that similar result will follow. No doubt the exporter does not directly purchase the DEPB from the market by incurring any cost, but when we see the scheme of section 28, in which the face value of DEPB, at the time of making application, results into the accrual of income as includible under section 28 (iiib) and the corresponding amount represents the value of DEPB, such value, which is in the nature of an asset, shall constitute its cost when DEPB is made the subject matter of sale at a later date. The following accounting entry shall be passed in this situation.

Cash/Bank	Dr.	Rs. 110
To DEPB		Rs. 100
To Profit on sale of DEPB		Rs. 10

[At the time of sale, the income of Rs. 10 shall arise to the assessee under section 28 (iiid) as income of Rs. 100 had already accrued under section 28 (iiib) at time of application]

49. The absurdity in the result can be seen from the consequences following the reasoning of the Department, that the entire sale proceeds shall be taxable under section 28 (iiid) at the time of sale. In such a situation there will be double taxation of the face value of DEPB, firstly, when application for DEPB is made resulting into accrual of income under section 28 (iiib) to the extent of its face value at Rs. 100 and subsequently when DEPB is sold for Rs. 110, the entire sale consideration of Rs. 110 shall stand included under section 28 (iiid) resulting into total income of Rs. 210 on account of the transaction of DEPB, as against the real income only to the tune of Rs. 110.

50. At this juncture, we are reminded of the Heydon's Rule also known as the 'Mischief Rule' which deals with ascertaining the intention of the Legislature by looking into the mischief that was sought to be remedied by the Legislation. This rule basically comprises four things to be considered:

(a) what was the common law before the making of the Act;
(b) what was the mischief and defect for which the common law did not provide;
(c) what remedy the Parliament has appointed to cure the defect; and
(d) the true reasons of the remedy.

51. This rule contemplates in considering the position prevailing anterior to the amendment, which was intended to be rectified by way of amendment or insertion of a section and then considering the amendment as overruling the hitherto legal position. If a particular provision is enacted in order to get rid of the existing law, as it is or as interpreted by the Courts, the new amendment would be construed as superseding the earlier prevalent view which was considered by the Legislature as mischievous. The mischief rule has been repeatedly approved by several Courts in the country including the Hon'ble Apex Court in the case of CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 .

52. Now we will move to determine the mischief, if any, sought to be remedied by the insertion of clause (iiid) to section 28. The Finance Minister, at the time of moving the Taxation Laws Amendment Bill, 2005 in the Parliament, made the following speech :—

"We are now dealing with only the period 1-4-1998 to 31-3-2005. That is a period of about seven years. This problem did not arise before 1-4-1998. This problem does not arise before 1-4-1998. This problem does not arise after 1-4-2005. In this period of seven years, the relevant sections - I am not getting into an exposition of the law - are section 28 and section 80HHC. These are the two sections which are relevant. Now, the department's interpretation is that DEPB credit sale - I will explain what it is - is not export profit. What is a DEPB credit sale? A DEPB credit sale is, that on your DEPB Passbook, if you have certain credits in your favour, you can import items against the credit without paying duty. But you can also sell the credit to another importer. If you actually import, it is part of export-import. If you sell it to another importer and make a profit on that the premium, it is not export profit. It is simple business profit because the income you earn is not in foreign exchange, it is in Indian rupees. It does not arise out of export activity or import activity. It arises because you are trading in a "License", which has a premium in the market. So, the department took the view that it does not fall under section 28 read with section 80HHC. I am not going into the sub-sections. Therefore, this is not to be counted as exempted export profit. This must be added back as taxable profit. The assessee took a different view....... In appeal, the ITAT has observed that the same falls under section 28 (iv) if not under section 28 (iiib) or (iiic). It falls under section 28 (iv). Then, the Tribunal gave a judgment, which I find as a lawyer difficult to understand. But with great respect to the Tribunal which is entitled to take a view, the Tribunal gave a judgment that although it falls under section 28 (iv), it does not fall under section 80HHC 'Explanation' (baa)...."

53. From the above it can be noted that DEPB credit sale is different from the premium on the DEPB and such profit or the premium, is not export profit. Since it does not arise out of export activity or import activity and arises because of trading in a "License", which has a premium in the market, such premium or profit cannot to be counted as exempted export profit and should be added back as taxable profit. The speech of the Finance Minister, as extracted above, divulges the intention of the scope of section 28 (iiid) as covering only the premium on sale of DEPB and not the face value.

54. It has been contended on behalf of the revenue that the Finance Minister's speech cannot control the clear language of section. To that extent we are in agreement with the view expressed by the ld. Departmental Representative that the speech of the Finance Minister cannot have an overriding effect over the clear language of section. It has been held by the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 that the speech made by the Finance Minister while moving the amendment is extremely relevant as it explains the reason for the introduction of the Bill and can certainly be referred for the purpose of ascertaining the mischief sought to be remedied by the Legislature and the object and purpose for which the Legislation is enacted. Similar view has been expressed in the case of Kerala State Industrial Development Corpn. Ltd. v. CIT [2003] 259 ITR 51 (SC) by holding that the Finance Minister's speech can be relied upon to throw light on the object and purposes of the particular provision introduced by the Finance Bill. Recently the Hon'ble Supreme Court in the case of R & B Falcon (A) Pty. Ltd. v. CIT [2008] 301 ITR 309 has held that in a certain situation a representation made by an authority like Minister presenting the Bill before the Parliament may also be found bound thereby. We are fully conscious of the primary rule of interpretation that the words used in a section express the real intention of the Legislature. It is not for the Courts or for that purpose the Tribunal, which is an inferior authority in the judicial hierarchy, to suo motu add or subtract some words to/from the language of section in the process of unearthing the real intention, which is otherwise clear and capable of assigning only one meaning. External aids of interpretation, as such, may not be directly relevant in such a situation. But if the language of section admits of doubt or some ambiguity can be traced from it, then certainly recourse can be taken to the external aids, such as speech delivered by the Finance Minister at the time of introducing the Bill in the Parliament. Presently we are confronted with a situation in which the language of clause (iiid) of section 28 does not admit of any doubt and refers to the profit on the transfer of DEPB. At the same time the Finance Minister's speech in the Parliament also accords with the language of the statutory provision. There is hardly any scope for the difference between the language of section and the speech of Finance Minister. Rather it appears that the doubt has been needlessly created by the revenue authorities in ignoring the words "any profit" on the transfer of DEPB and substituting them with "the sale proceeds" on the transfer of DEPB. It is clear that the sale proceeds cannot be confused with profit inasmuch as the profit can only be an incremental amount and not the whole. We, therefore, hold that the word 'profit' in section 28 (iiid) refers to the excess of sale proceeds over the face value of DEPB.

DEPB in scheme of section 80HHC

55. The learned counsel for one of the interveners contended that Explanation (baa) below section 80HHC (4C) defines "profits of the business" and it begins with the profits of the business as computed under the head "Profits and gains of business or profession". Thereafter certain reductions are provided for. In his opinion since the starting point for the computation of "Profits of the business" under section 80HHC is the income under the head "Profits and gains of business or profession", it implied that any income chargeable to tax under the head of "Business income" shall be included for the purpose of deduction, whether or not it is related to exports. Going further he stated that since all the export incentives are classified under section 28, which is the first section of Chapter IV-D, it meant that the amount of all the incentives is liable to be considered for the purposes of deduction under section 80HHC and there is no need for branching out such amount from the main computation.

56. In the opposition, the learned Departmental Representative vigorously stressed upon the words "derived from" as used in sub-section (1) of section 80HHC. He submitted that this expression is narrower in scope than 'attributable to'. The usage of this phrase by the Legislature for allowing deduction clarified its intention that unless there is direct nexus of the income with the export activity, no deduction can be allowed. Relying on certain decisions in the context of the interpretation of the expression 'derived from', he submitted that there should be direct nexus of the income with export of goods or merchandise so as to qualify for deduction. He further stated that the income should directly result from the export of goods and it cannot bring within its sweep any income other than the one which is directly 'derived from' export of goods. By referring to certain judgments he emphasized that the export incentives cannot be held as derived from the export of goods or merchandize and, hence, the amount of incentives is not at all eligible for deduction. The next associated contention put forth on behalf of the revenue was that the denial of deduction on the export benefits was evident from the language of sub-section (2) of section 80HHC, which states that the income is received in or brought into India by the assessee in convertible foreign exchange. He stated that the intention behind the insertion of this section was to encourage exports that will eventually enhance the foreign exchange reserves of the Nation. As the export incentives are only in Indian currency and do not result into the receipt of convertible foreign exchange, he stated that no deduction should be allowed on them.

57. We have heard the rival submissions and perused the relevant material on record in the light of precedents cited before us. Section 80HHC entitles an exporter, may be manufacturer or merchant or mixture of both, to deduction in respect of profits retained for export business. Section 80HHC was inserted by the Finance Act, 1983 with effect from 1-4-1983 providing for deduction of an amount equal to 1 per cent of the export turnover of such goods or merchandize during the previous year and a deduction of an amount equal to 5 per cent of the amount by which the export turnover of such goods or merchandize during the previous year exceeding the export turnover of such goods or merchandize during the immediately preceding previous year. The Finance Act, 1985 substituted the original section. This section has undergone several changes over the period. Before we consider some of the aspects of the issue before us, it will be fruitful to take note of the relevant parts of section 80HHC, which are as under :—

"80HHC. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, 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 to the extent of profits, referred to in sub-section (1B),] derived by the assessee from the export of such goods or merchandise :—

(1A) ******

(1B) ******

(2) (a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are [received in, or brought into, India] by the assessee [ (other than the supporting manufacturer) in convertible foreign exchange] within a period of six months from the end of the previous year or, [within such further period as the competent authority may allow in this behalf].

Explanation.******

(3) For the purposes of sub-section (1),—

(a) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;
(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee and of trading goods, the profits derived from such export shall,—

(i) in respect of the goods or merchandise manufactured [or processed] by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and
(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods :

Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee :

Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee :

Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,—

(a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme, and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme:

Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,—

(a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme.

Explanation.—For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government:

Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of,—

(a) any sum referred to in clause ( iiia) or clause ( iiib) or clause ( iiic), as the case may be, or
(b) any sum referred to in clause ( iiid) or clause ( iiie), as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be.

The same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.

Explanation.—For the purposes of this sub-section, —

(a) "adjusted export turnover" means the export turnover as reduced by the export turnover in respect of trading goods;
(b) "adjusted profits of the business" means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause ( b) of sub-section (3) ;
(c) "adjusted total turnover" means the total turnover of the business as reduced by the export turnover in respect of trading goods;
(d) "direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods;
(e) "indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover;
(f) "trading goods" means goods which are not manufactured [or processed] by the assessee.

(3A)........

(4)........

(4A)........

(4B)........

(4C)........

Explanation.—For the purposes of this section, —

(a) ..........
(aa) ..........
(b) "export turnover" means the sale proceeds [received in, or brought into, India] by the assessee in convertible foreign exchange [in accordance with clause ( a) of sub-section (2) ] of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) ;
(ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) :
Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in clauses ( iiia), ( iiib) [, ( iiic), ( iiid) and ( iiie) of section 28;]
(baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by —

(1) ninety per cent of any sum referred to in clauses ( iiia), ( iiib), ( iiic), ( iiid) and ( iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;]"

58. Sub-section (1) provides that where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandize to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction to the extent of profits referred to in sub-section (1B) derived by the assessee from the export of such goods or merchandize. Sub-section (3) of section 80HHC has three clauses (a), (b) and (c) which separately deal with the determination of the profits derived from exports in the case of goods manufactured under clause (a), goods traded as per clause (b) and goods manufactured as well as of traded goods, in accordance with clause (c). Sub-section (3) has five provisos. Here it may be pertinent to mention that when clauses (iiia) to (iiic) were inserted to section 28 by the Finance Act, 1990 clarifying that the export incentives are revenue receipt and hence taxable, first proviso to section 80HHC (3) was also given effect to. Then the Taxation Laws (Amendment) Act, 2005 inserted clauses (iiid) and (iiie) to section 28 with retrospective effect and along with that the second to fifth provisos were also inserted to section 80HHC (3) and those too with retrospective effect.

59. The ld. DR has contended that the employment of expression 'derived from' in sub-section (1) indicates that only the income directly flowing from the export should be considered for the purposes of deduction. It has also been argued before us that section 80HHC is code in itself and, hence, no provision other than this section should be viewed for considering the amount of deduction under this section.

60. It is relevant to note that section 80HHC is not only a substantive provision allowing deduction on the profits derived from export of eligible goods, but also contains the complete procedure for the determination of the profits of business. Strictly speaking it cannot be said that section 80HHC, in entirety, is a code in itself. However insofar as the manner of computation of the 'profits derived from export of goods' under sub-section (3) is concerned, the same is a code providing the complete mechanism for such determination. But once the profits derived from the export are computed, the character of code is shed and this section becomes subject to the other provisions of the Act, such as sections 80A and 80AB restricting the quantum of deduction.

61. Sub-section (1) of section 80HHC uses the expression "profits—derived by an assessee" from the export of such goods or merchandise. Ordinarily the phrase 'derived from' has a restricted meaning. In order to be covered within this expression, there should be a direct nexus between the two ends preceded and succeeded by this expression. Where the nexus is not direct but only incidental or remote, then that goes beyond the scope of this phrase. In contrast to the expression 'derived from', some provisions encompass the expression "attributable to" which has a wider scope and brings within its purview not only the items having direct nexus of one with the other but also having indirect nexus. In the case of Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore [1999] 237 ITR 579 (SC) it has been held that the sale consideration of import entitlements would not be held to constitute profits and gains derived from assessee's industrial undertaking for the purpose of computing deduction under section 80HH as the source of import entitlements was the export promotion scheme of the Central Government and not the industrial undertaking. Similarly in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) their Lordships did not accept the argument on behalf of the assessee that the interest earned by the industrial undertaking on deposits with the Electricity Board qualified for relief under section 80HH for the reason that section 80HH contains the words 'derived from'. It was observed that though electricity may be required for the purposes of industrial undertaking but the deposit required for the purpose of supply of electricity was a step away from the business of the industrial undertaking and hence, the interest on the deposits could not be said to flow directly from the industrial undertaking itself. It was emphasized that the words "derived from" must be understood as something which has direct or immediate nexus with the assessee's industrial undertaking. On the contrary, where the words "attributable to" have been used, the Courts have held that if the income is related to the industrial undertaking, even though not directly emanating therefrom, it would still fall within the scope of this expression. In the case of Ashok Leyland Ltd. v. CIT [1997] 224 ITR 122 the Hon'ble Supreme Court held that the assessee engaged in manufacturing and sale of trucks in collaboration with a foreign company importing spare parts and selling it to the purchasers of the trucks when such purchaser found it difficult to get them in the initial years of production, profits and gains from the sale of such spare parts was 'attributable to' the priority industry carried on by the assessee as the same was intimately connected with the main activity of priority industry.

62. Thus it can be noted that in the context of section 80HH, where the similar expression 'derived from' is used, the Hon'ble Supreme Court in Sterling Steel's case (supra) has held that sale consideration of import entitlements cannot be held as profits and gains derived from the industrial undertaking in as much as the source of the import entitlements is the export promotion scheme of the Central Government and not the industrial undertaking. Coming back to the context of section 80HHC, we note that the expression used in sub-section (1) is profits 'derived from' the export of such goods. Strictly going as per the ambit of this phrase, only the profit directly emanating from the export of goods, being a part of the realization of sale proceeds in the convertible foreign exchange, should form the basis for the entitlement to deduction. Export incentives, though relatable to export business, cannot be said to be derived from it as the direct nexus of such incentives is with scheme of Government providing incentives. Irrespective of the fact that such incentives are granted or not, the export proceeds shall remain unaffected. Thus such incentives, though a relevant consideration and initiative in the decision as to the making of exports, cannot be categorized as derived from export of goods or merchandise. At the same time, it is equally true that such incentives and the export of goods or merchandize cannot be said to be foreign to each other. The relation between the two albeit not immediate, is indirect. In that sense the export incentives can be held to be attributable to export.

63. The use of expression 'derived from' in sub-section (1) is not the end of the road. When we turn to sub-section (3) of section 80HHC, it is observed that the words 'profits derived from such exports' have been given an artificial meaning as "amount which bears to the 'profits of the business' the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee". Proceeding further the expression 'profits of business' as referred to in sub-section (3) has been defined in Explanation (baa) below sub-section (4C) to mean the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced, inter alia, by 90 per cent of the incentives as described in section 28 (iiia) to (iiie). After computing profits of business, as per Explanation (baa), we need to go back to sub-section (3) to determine the amount of profits derived from export. For this purpose, when we peruse the first proviso to this sub-section, it transpires that 90 per cent of such incentives as referred to section 28 (iiia) to (iiic) in the proportion of the export turnover to the total turnover are to be added to the proportionate profit of business as worked out in Explanation (baa). Similar is the position for a merchant exporter, whose computation of profits derived from exports is governed by clause (b) of section 80HHC (3), in which case such profits shall be first computed without export incentives as per section 28 (iiia) to (iiie), but the mandate of the first proviso, which is again applicable here also, will require the inclusion to the extent of 90 per cent of the amounts referred to in section 28 (iiia) to (iiic) in the proportion of export turnover to the total turnover. It means the export incentives, though strictly going by the meaning of the expression 'derived from' are not to form part of the profits derived from such exports under sub-section (1) but by virtue of sub-section (3) read with Explanation, are to be included in the eligible amount. Thus it becomes apparent the entire mechanism for computation of profits derived from exports under section 80HHC has been specifically provided for in the section itself and there is no need to be governed by the understanding of the expression 'profits derived from export' in common parlance. If we go by the contention of the ld. DR that since the export incentives are not derived from exports and hence, should not be taken into consideration while computing deduction under section 80HHC, then the sub-section (3) and Explanations below sub-section (4C) shall become redundant. If that had been the intention of the Legislature then the expression 'profits derived from exports' as used in sub-section (1) would have been left open as has been done in several other sections such as 80HH and 80-I. In that case there was no need to give a specific meaning to it as per sub-section (3) read with Explanation. The very fact that the export incentives have also been made eligible for deduction as per the provisos to sub-section (3), it shows that the strict interpretation of this expression, as understood generally in the context of other sections, is not applicable here.

64. At the same time we do not find any substance in the submission made on behalf of the intervener, on the strength of Explanation (baa), that any income which falls under the head 'Profits and gains of business or profession' shall automatically become eligible for deduction. Deduction under section 80HHC is available to manufacturer, merchant and hybrid exporters for which separate methods of computing 'profits derived from exports' have been provided in sub-section (3). The merchant exports are governed by clause (b) of sub-section (3) of section 80HHC as per which the "profits derived from such export" shall be the export turnover in respect of trading goods as reduced by the direct costs and indirect costs attributable to such export. "Direct Costs" have been exhaustively defined in clause (d) of Explanation below sub-section (3) to mean 'costs directly attributable to the trading goods exported out of India including the purchase price of such goods.' It means that the costs which are distinctly identifiable with the trading goods exported are covered within the ambit of "direct costs". Clause (e) of Explanation below sub-section (3) defines "indirect costs" to mean 'costs, not being direct costs, allocated in the ratio of export turnover in respect of the trading goods to the total turnover.' It implies that the expenses which are collectively incurred both for the domestic as well as the export turnover are to be segregated from the direct costs and then bifurcated in the ratio of export turnover to total turnover for the purpose of determination of the indirect costs of the trading goods exported and only that part is to be considered for clause (b) of section 80HHC (3). On subtracting both the direct and indirect costs from export turnover, we get "the profits derived from such export".

65. Here, it is important to mention that a controversy was continuing towards the claim for reduction of the indirect costs as are not attributable to the goods exported. In other words, the exporters were raising a claim that usually there are certain incomes like interest, miscellaneous income and export incentives etc., which are credited to the P & L account and some expenditure is also always incurred for earning of such items of income. If no reduction is made from the indirect costs, towards the expenditure incurred for such incomes, then there will artificial inflation of indirect costs and the consequent deflation of the profits derived from export. It was claimed that the expenditure incurred for these items of income should be reduced from the total "indirect costs" so that only the indirect costs as relatable to the export turnover are deducted along with direct costs from the export turnover. Parity was sought between the manufacturer exporters and merchant exporters on the basis of clause (baa) of Explanation below section 80HHC (4C) which defines "profits of the business" under which 90 per cent of export incentives and other independent incomes is reduced. The net effect of this reduction by 90 per cent of the incomes is that the 10 per cent of such income is presumed as expenditure incurred for earning them and it automatically gets reduced and the export profit is resultantly elevated to its original position. The Special Bench of the Tribunal in the case of Surendra Engg. Corpn. v. Asstt. CIT [2003] 86 ITD 121 (Mum.) (SB) accepted the assessee's claim for reducing 10 per cent of the export incentives and other miscellaneous incomes, unrelated with exports, from the total indirect costs. The Hon'ble Supreme Court in the case of Hero Exports v. CIT [2007] 295 ITR 454 upheld this view by which the proportionate indirect costs of goods exported was directed to be determined after deducting ten per cent of export incentives, miscellaneous and interest income from total indirect cost as representing the costs incurred to earn such incomes. The net effect of this judgment by the Hon'ble Summit Court is that the expenses attributable to incomes other than from exports, that is, incentives, interest and miscellaneous income, are to be reduced from the total indirect costs so as to unload the element of indirect costs which do not relate to the turnover of business. The amount of such expenses on ad hoc basis has been held to be ten per cent of the amount of income.

66. Now coming to the manufacturer exporters, we note that the computation of profits derived from exports is governed by clause (a) of section 80HHC (3) which provides that such profit shall be the amount which bears to the 'profits of the business' the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. When we proceed further to examine the scope of 'profits of business' as explained in clause (baa) of Explanation below section 80HHC (4C), it transpires that it starts with the profits of the business as computed under the head "Profits and gains of business or profession" which is then reduced by 90 per cent of the sums referred to in section 28 (iiia) to (iiie) or receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in such profits. Thus in order to compute "profits of the business" we have to firstly determine the profit under the head "Profits and gains of business or profession". If any item of income does not fall under this head or in other words it falls under other head, say "Income from other sources", that will stand excluded at the very outset and hence will not be reckoned for computation of profits derived from export and will be automatically shunted out for the purposes of deduction under section 80HHC. It is on the basis of the definition of "profits of the business" as referred to in Explanation (baa) with the starting point of profits as computed under the head "Profits and gains of business or profession" that the learned A.R. has argued that any income falling under this head will qualify for deduction. If we bring this contention to the logical conclusion, it would mean that any Business income whether or not connected with exports, shall qualify for deduction under this section. However it is not correct because the deduction under section 80HHC is based on the export income and not other independent incomes. The Hon'ble Supreme Court in the case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 has clarified the position in this regard. It has been laid down in this case that the processing charges earned by the assessee independent of its export business did not qualify for inclusion in "Profits of business" as defined under Explanation (baa). The processing charges, although a part of gross total income, were held to be in the nature of independent income like rent commission, brokerage, etc., and therefore, 90 per cent of the said income was directed to be reduced from the gross total income to arrive at the business profits. On going through this judgment, it becomes abundantly clear that any income which is independent of exports business, even if it falls under the head "Profits and gains of business or profession" will not per se become eligible for deduction under section 80HHC. To cite an example, a person engaged in the financing business also carries out export business. Both the activities form part of his composite business and income from both of them is includible under the head "Profits and gains of business or profession". In such a situation the income from the financing business, even if falling under the head "Profits and gains of business or profession", cannot, by any stretch of imagination, be considered as profits eligible for deduction under section 80HHC on the sole ground that it also falls under Chapter IV-D of the Act. Since in our above supposition, it is a composite business and the common expenses may have been incurred, 90 per cent of such finance charges will be reduced from the total income under the head "Profits and gains of business or profession" which also includes income from financing business. The reduction by 90 per cent of such income is to ensure that the common expenses incurred for earning the independent stream of income, presuming to be at 10 per cent of the income, do not needlessly raise the export expenses resulting into the reduction of the export income.

67. At the same time it is obvious that the 'Profits and gains of business or profession' as referred to clause (baa) of Explanation below sub-section (4C) will include both the profits from domestic sales as well as exports. Even though the element of income as relatable to the domestic sales forms part of the profits of the business as computed under the head "Profits and gains of business or profession", but, that part will stand eliminated when the total profit is proportionately restricted to in the ratio of export turnover to total turnover. That means only the profit from the export business will come up for consideration for the purpose of granting deduction under this section. However, in the case of merchant exporter where clause (b) of section 80HHC (3) applies, the profit derived from export shall be the export turnover as reduced by the direct cost and indirect cost attributable to such export. Neither the domestic sales nor the cost of goods sold in the Indian market will be taken into consideration. Thus it is noted that whether it is the case of a manufacturer or the merchant exporter, the net result remains the same that only the profit as relatable to the export business qualify for deduction under this section and it is not the total income of the assessee falling under the head "Profits and gains of business or profession".

68. We further wish to make it clear that the export incentives cannot be construed as an "independent income" as the processing charges have been referred to in the case of K. Ravindranathan Nair (supra). These incentives are not unrelated to export business. That is why these are included in the income under the head "Profits and gains of business or profession" from which 90 per cent of such incentives is firstly reduced as per Explanation (baa) and thereafter coming to proviso to section 80HHC (3), 90 per cent is added. In the case of a merchant exporter, where clause (b) of section 80HHC (3) applies, export incentives are not included in the export turnover. However, ten per cent of such incentives is reduced from the indirect cost to unload the proportionate part of expenditure presumed to have been incurred for such incentives from the common pool of indirect expenses. It is thereafter that 90 per cent of the incentives is included as per the proviso to section 80HHC (3).

69. On a conjoint reading of profits derived by both the classes of exporters viz., manufacturer and merchant, in the light of the above noted two Supreme Court judgments governing the respective cases and the relevant part of section 80HHC, it is manifest that the scope of deduction is restricted only in respect of income from export business. Here, it is imperative to take note of the submission advanced by the learned Departmental Representative, with reference to the sub-section (2) of section 80HHC, in the light of which it was initially argued that unless income is realized in convertible foreign exchange within the specified period, no deduction can be allowed and further since the export incentives are realized in Indian currency only, the test laid down in sub-section (2) will fail. We are not agreeable with this contention for the reason that section 80HHC talks of granting deduction in respect of profits derived by the assessee from export business. When it is further seen in the light of Explanation (baa) defining "profits of the business" along with sub-section (3), it is manifest that all the incomes arising from the export business are covered within its scope. Income arising from export business does not only mean the profit on the realization of the export proceeds in convertible foreign exchange but also the items of income which are directly incidental to export business, being the export incentives covered under section 28, which have been referred to in the five provisos to sub-section (3) to section 80HHC. It is only with reference to the former component of income from export business, being the profit from the realization of export proceeds, that sub-section (2) has its application as is apparent from the language of sub-section extending to "the sale proceeds of such goods or merchandise exported out of India". It does not talk of the later component of items referred to in section 28. It is rightly so because if sub-section (2) is read as extending to the entire gamut of profits from export business including those as referred to in section 28, then the five provisos to section 80HHC (3) will be rendered as meaningless since the incentives referred to therein are always in Indian currency and under no circumstances can be received in convertible foreign exchange.

70. The ld. DR has conceded that the word 'profit' referred to in clause (iiid) to section 28 indicates that the sale price cannot be considered as 'profit' and hence some expenses incurred like fees for application of DEPB, professional charges in respect thereof and miscellaneous expenses can be legitimately deducted from the sale proceeds. He, however, maintained that since the scheme of section 80HHC itself provides for deduction of 10 per cent of such incentives as representing expenses, there will be no case for allowing any further expenditure unless the incurring of expenditure over and above that 10 per cent was established by the assessee. He however stressed that there was no scope for reducing the face value of DEPB from the sale proceeds for the ascertaining the 'profit' on the transfer as the face value was not the cost of DEPB. We find that some of the benches of the Tribunal, which have not accepted the view point of the assessee, have held that only the expenses like fees for making application, professional expenses and miscellaneous expenses (hereinafter called 'the expenses') qualify for reduction from the sale proceeds of DEPB for calculating profit on transfer of DEPB under section 28 (iiid). Since the computation under section 28 (iiia) to (iiie) is relevant for computing the deduction under section 80HHC, there can be no scope for the reduction of the 'the expenses' from the sale proceeds of DEPB inasmuch as there is inbuilt ad hoc deduction for such expenses at the rate of 10 per cent in the scheme of the section 80HHC itself. Firstly when we include the amount of DEPB in the 'profits of the business' and then reduce 90 per cent of the same as per Explanation (baa) in the case of a manufacturer exporter, ten per cent of such income stands reduced towards 'the expenses'. Similarly in the case of merchant exporter when we reduce 10 per cent of such income from the 'indirect costs' again the same result follows. Thus it can be seen that 'the expenses' against such incentives income get automatic reduction at a fixed percentage of ten per cent instead of independently establishing the amount of expenses incurred for earning such income in each and every case. It has been so provided in section with a view to get rid of the difficulty which may arise in each case in proving the expenses incurred for earning such incentives as the identification of such expenses from the common pool of expenses may be an intricate task. Thus it is obvious that 10 per cent of such incomes representing 'the expenses' are reduced from the total expenses at the time of computing the profits derived from export under sub-section (3) of section 80HHC and hence there is no scope for granting any further deduction towards such expenses while working out the profits on transfer of DEPB under section 28 (iiid).

71. We, therefore, hold that the contentions raised on behalf of the Intervener as well as by the revenue on this issue do not merit acceptance inasmuch as the profit derived from the export of goods as referred to in sub-section (1) can neither be strictly restricted to the element of profit embedded in the export proceeds as contended by the learned Departmental Representative, nor it can rope in any independent income falling under the head "Profits and gains of business or profession" de hors export business.

72. Reverting to the main question posted before this Special Bench for consideration as to whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28 (iiid) or some artificial cost is to be interpolated, we find that the relevance of this question is only in the context of the computation of deduction under section 80HHC. We have held above that sub-section (3) dealing with the computation of the profits derived from export of goods or merchandize is a complete code in itself. Thus the computation of eligible profits is to be made firmly as per this sub-section with the aid of Explanation as interpreted by the Hon'ble Supreme Court in the case of Hero Exports (supra) and K. Ravindranathan Nair's case (supra). The Assessing Officer has denied the deduction under section 80HHC by holding that the entire sale proceeds of DEPB fall under section 28 (iiid) and since in that view of the matter, there is no positive income, the deduction is impermissible. On the contrary the view point of the assessee is that the face value of DEPB should be reduced from the cost of purchases as it is given by the Government of India only to neutralize the incidence of custom duty on the import content of the exports. We have examined the format of DEPB Scheme and come to the conclusion that the face value of DEPB is nothing but partial reimbursement of the purchase price of goods. Our this view is based on the understanding of the scheme of DEPB in commercial sense and in the light of the Foreign Trade Policy of the Government of India. But when we come to the computation of deduction and the placement of the face value of DEPB in the scheme of section 80HHC, the general view based on the Foreign Trade Policy about the reduction of such amount from the purchase cost, fails. We have seen above that sub-section (3) of section 80HHC is complete code in itself insofar as the computation of the eligible profits derived from export are concerned. The mandate of sub-section (3) has to be religiously followed for determining the amount of eligible profits for deduction and as such the general view about the understanding of the nature of DEPB will be subdued and the one based on the prescription of this provision will come to fore. In that view of the matter we hold that the face value of DEPB cannot be reduced from the cost of purchases and has to be considered as a separate species of 'Business income'. Thus all the contentions put forward on behalf of the assessees and the interveners about the reduction of the face value of DEPB have become academic in the context of section 80HHC. Similarly the comparison of DEPB with MODVAT, which is an off-shoot of the basic contention of reduction of the DEPB value from the purchases and also the arguments by the ld. AR towards the reduction of the face value of DEPB from the purchase cost on the strength of certain decisions rendered in the framework of section 80-IB, lose their relevance in the present context of section 80HHC and hence need not be examined.

73. If the intention of the Legislature had been to allow the reduction of the face value of DEPB from the cost of purchases, as has been contended before us, then there was no need to have clauses (iiia) to (iiie) of section 28 and also the first to fifth provisos to section 80HHC (3) along with the necessary ingredients of Explanation below section 80HHC (4C). We have held that the face value of DEPB under the scheme of the Income-tax Act, 1961 falls under section 28 (iiib) and the profit element on the sale of DEPB, that is, the excess of sale proceeds over the face value of DEPB falls under section 28 (iiid). 'Profits of business' as per Explanation (baa) provides for the exclusion of ninety per cent of any sum referred to in section 28 (iiia) to (iiie). Then first proviso to sub-section (3) states that the profits computed under clause (a) or (b) or (c) shall be further increased by the amount which bears to the ninety per cent of any sum referred to in section 28 (iiia), (iiib) and (iiic). It means that the ninety per cent of the face value of DEPB which was reduced while computing the 'profits of the business' shall stand included when effect is given to first proviso. If we go with this argument that the face value of DEPB is to be reduced from the cost of purchase then in the case of merchant exporter with turnover of less than Rs. 10 crores, an anomalous situation will crop up inasmuch as the amount of eligible profit will far exceed the actual profit as demonstrated below.

Export turnover	Rs. 1,000
Cost of goods sold—Direct costs	Rs. 800
(without DEPB) —No indirect costs
Face value of DEPB	Rs. 100

74. Going by sub-section (3) (b) the profits derived from such export shall be export turnover minus the direct and indirect costs attributable to such export. Going by the contention of the ld. AR, the direct cost will come at Rs. 700 (800 - 100) as against the export turnover at Rs. 1,000 resulting into profits derived from export as per clause (b) of sub-section (3) coming to Rs. 300 i.e. Rs. 1,000 minus Rs. 700. When we further give effect to the first proviso to sub-section (3), the profit of Rs. 300 as computed above would require to be further increased by the ninety per cent of the face value of DEPB. The amount of Rs. 90 (i.e. 90 per cent of Rs. 100 i.e. face value of DEPB) would, therefore, be added and the profit as determined in clause (b) of section 80HHC (3) will come at Rs. 390. As against that we find the real profit from export after giving effect to the DEPB benefit is only Rs. 300 [1000 -700 (800 - 100) ]. Thus it can be easily ascertained that whereas the total business profit from export is Rs. 300 but if we accept the contention that the face value of DEPB be reduced from the cost of purchases then the amount of profits derived from export as per section 80HHC (3) (b) will come at Rs. 390. Obviously this calculation defies all logics and is incapable of acceptance due to awkward situation created by determining the profits derived from export at a figure higher than the actual business profit. The former amount, in no case can be higher than the later. We find that the logic behind introducing clauses (iiia) to (iiic) to section 28 is to delink the export incentives from the business profits while continuing them to be governed by Chapter IV-D at the same time. The natural outcome following the prescription of clauses (iiia) to (iiic) of section 28 along with section 80HHC (3) is that all the export incentives including the DEPB and DFRC etc. be considered as separate business income and not to reduce them from the cost of purchases.

75. We will now endeavour to evaluate the stand point of the Assessing Officer from another angle that the entire amount of sale proceeds is covered under clause (iiid) and not only the profit element. Continuing with the above example, where we supposed that the exporter made export turnover of Rs. 1,000 and he earned Rs. 200 from the export transaction in addition to Rs. 100 towards the face value of DEPB. The amount of profits derived from export shall come at Rs. 300 as per clause (baa) of Explanation below 80HHC (4C) read with sub-section (3) including the first proviso. Further suppose that the said DEPB is held as such at the close of the year and is then sold in the succeeding year for Rs. 110. If we agree with the view point of the Department that at the time of sale of DEPB, the entire amount of Rs. 110 is includible in section 28 (iiid) then it would mean that in order to give effect to sub-section (3), firstly the sum of Rs. 110 will require inclusion in the "Profits and gains of business or profession" in the year of sale, because the question of 90 per cent exclusion shall arise only if 100 per cent is included in the profits of the business as computed under the head 'Profits and gains of business or profession'. That obviously cannot be the done because the sum of Rs. 100 had already been included in the 'Profits and gains of business or profession' for the last year when such income accrued to the assessee under section 28 (iiib). The further inclusion of Rs. 110 in succeeding year at the time of sale in the "Profits and gains of business or profession" would lead to obvious incongruity and an impossible situation because the inclusion of face value of Rs. 100 in the profits of the second year also will amount to double taxation of Rs. 100 firstly in the year one when the income on account of the face value of DEPB accrued under section 28 (iiib) and then in the year two at the time of sale under section 28 (iiid).

76. The ld. DR has fairly admitted that if the exporter utilizes the face value of DEPB in his own business and imports goods on that basis, then no amount shall be considered under section 28 (iiid) and there will not be any loss to the assessee in terms of deduction. He however claimed that if the DEPB is sold in the market then the sale proceeds shall be considered as covered in clause (iiid). We are unable to digest this view canvassed by the Revenue for the reason that unless the statute makes separate classes of exporters, there can be no discrimination between the exporter who imports the goods for his own business utilizing the face value of DEPB and the other exporter who sells the DEPB as such. If the Departmental view is acted upon, there will arise variation in the quantum of deduction qua the face value of DEPB earned on the making of exports, between two exporters otherwise equally placed in terms of goods exported identical in quantity, quality and value. Such a discrimination cannot be impliedly inferred unless expressly provided by the statute.

77. We, therefore, hold that in the scheme of section 80HHC, the face value of DEPB cannot be reduced from the purchase cost but is separate income under section 28 (iiib), which accrues at the time of making application pursuant to exports. Only the profit element on the sale of DEPB, that is the amount in excess of sale proceeds over the face value, is covered under section 28 (iiid).

Rationale behind section 28 (iiid) and (iiie)

78. It is noticed above that export incentive is provided by way of the face value of DEPB. It is this value, which has relation with the export business. The subsequent sale of DEPB is a step divorced from export. The relation between the act of exporting goods and DEPB exists only upto the stage of its acquisition and not thereafter. Once the DEPB is acquired pursuant to exports, the subsequent events of its utilization for self consumption or making imports for resale or the sale of DEPB as such, are independent transactions unrelated to export. Section 80HHC provides deduction in respect of income from export business. Considering the text of section 80HHC and the manner of computation of deduction it has been noticed above that though the face value of DEPB is profit from export business, but the profit on sale of DEPB is not covered within the scheme of this section inasmuch as the DEPB has only a local market from the point of view of its sale. When DEPB is sold, the sale proceeds will form part of total turnover but not export turnover for the reason that the sale proceeds are not received in or brought into India in convertible foreign exchange. In that situation the sale proceeds of DEPB will be included in the total turnover but not the export turnover and resultantly the deduction to the extent of profit on sale of DEPB will be automatically denied when the profits of business are proportionately reduced in the ratio of export turnover to total turnover.

79. The second proviso to section 80HHC (3) provides that in the case of an assessee having export turnover not exceeding Rs. 10 crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. In other words, in the case of an assessee with export turnover not exceeding Rs. 10 crores, even the profit element of Rs. 10 in the above example on the sale of DEPB for Rs. 110 will also be considered as eligible for deduction despite the fact that it is out of the trading of DEPB entitlement in India only. But for this proviso no profit on sale of DEPB or DFRC could have been considered for deduction under this section. In contrast to it the third and fourth provisos are applicable to the case of an assessee having export turnover exceeding rupees ten crores in which case the profit computed under clause (a) or clause (b) or clause (c) of sub-section (3) or after giving effect to the first proviso, shall be further increased by the amount which bears 90 per cent of any sum referred to in section 28 (iiid) or (iiie) in proportion to the export turnover to the total turnover only if the further two conditions stipulated therein are fulfilled and also the assessee has sufficient evidence to prove the fulfilment of such conditions. It is this category of exporters which has been statutorily discriminated vis-a-vis the small exporters having turnover not exceeding Rs. 10 crores. They shall not be entitled to increase in the quantum of deduction by profit of transfer of DEPB/DFRC, which is otherwise available to small exporters, unless the two conditions as set out in these provisos are fulfilled. In the cases under consideration it is an admitted position that the two conditions as so specified in third and fourth provisos are not capable of compliance and hence the further increase as suggested in these two provisos cannot be made to the computation of deduction under section 80HHC. Thus, it is apparent that the statutory discrimination is between the exporters having export turnover not exceeding Rs. 10 crores and those having exceeding Rs. 10 crores. Whereas the benefit of deduction in respect of the profit of sale of DEPB realized from the Indian market is also available to small exporters having export turnover, it is not so in the case of the large exporters having export turnover exceeding Rs. 10 crores. This appears to be the only reason for inserting clauses (iiid) and (iiie) to section 28 by the Taxation Laws (Amendment) Act, 2005 simultaneous with the insertion of section 3rd and 4th provisos.

Non-inclusion of section 28 (iiid) in definition of income under section 2 (24)

80. It was argued by the learned A.R. that profit on the transfer of DEPB as referred to in section 28 (iiid) cannot be considered as income on the ground that section 2 (24) has not been amended to include within this ambit clauses (iiid) and (iiie) of section 28. It was further argued that when clauses (iiia to iiic) were inserted in section 28 by the Finance Act, 1990, corresponding amendment was made in the definition of 'income' under section 2 (24) by way of insertion of clauses (va), (vb) and (vc). The intentional non-incorporation of clauses (iiid) and (iiie) of section 28 in the definition of income under section 2 (24) was claimed to be reason for not considering these items as income. In other words the point canvassed is that since section 2 (24) has not been amended to include the items of income referred to in section 28 (iiid) and (iiie), hence these cannot be included in the definition of 'income', even though there has been an amendment in section 28 accordingly. The impact of the non-inclusion of the profit on transfer of DEPB/DFRC in the definition of income, according to the ld. AR is that these items will not at all be included in total income and ex consequenti the question of granting or denying the deduction under section 80HHC on them shall not arise.

81. We are not convinced with this submission for the reason that sub-section (24) of section 2 defines 'income' in an inclusive manner and not exhaustively. According to this provision "'income' includes (i) profits and gains......." Thus this definition includes various items as mentioned in clauses (i) to (xiv). If an item of receipt is or contains the element of income in common parlance, that would still be included within 'income' under this provision notwithstanding the fact that there is no specific inclusion of such item of income in the definition. The word 'income' has to be understood in the generic sense. If a receipt bears the traits of income as per the plain and natural meaning, the same will still be included within the scope of section 2 (24) even though there is no specific mention of such item in the definition clause. From the items enumerated in clauses (i) to (xiv) of section 24, we find that the first item is, "profits and gains". This clause covers all the items of income resulting from the carrying of the business or otherwise having the element of profit and gain. Thus, any receipt ensuing from the business having characteristics of income cannot be excluded from the definition of "income". If we strictly go by the interpretation of section 2 (24) as suggested by the learned A.R., then the receipts by way of rent from property, would stand excluded for the reason that it is not specifically included in the definition clause. This contention does not hold any water for the obvious reason that the income from house property has been specifically included in Chapter IV-C of the Act.

82. The Hon'ble Supreme Court in the case of CIT v. G.R. Karthikeyan [1993] 201 ITR 866 has held that "even if a receipt does not fall within the ambit of any of the sub-clauses in section 2 (24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2 (24) is not to limit its meaning but to widen its net. This Court has repeatedly said that the word "income" is of widest amplitude and that it must be given its natural and grammatical meaning." Similar view has been reiterated recently by the Hon'ble Madras High Court in the case of Commissioner Of Income-Tax v. K. Thangamani [2009] 309 ITR 15 by holding that "section 2 (24) gives an inclusive definition to the word "income". The expression "income" is very wide and the object of the I.T. Act being one to tax income it has to be given an extended meaning."

83. From the above, it is clear that the contention raised by the learned A.R. about the exclusion of profit on transfer of DEPB from the tax net on the ground that section 2 (24) has not been accordingly amended deserves to be and is hereby rejected. Since profit on transfer of DEPB as well as the DEPB entitlement itself is in the nature of income, in our considered opinion, the same requires to be included within the general meaning of income even if it is not specifically enshrined in section 2 (24).

Miscellaneous contentions raised on behalf of revenue

84. The learned Departmental Representative, relying on some of the orders deciding the present controversy against the assessee, contended that if the face value of the DEPB is reduced from the sale proceeds, then it will amount of double deduction, firstly when it is booked in the Profit and Loss account on actual basis and secondly when it is sought to be deducted on notional basis when the credit on entitlement is sold. In his opinion no notional cost can be deducted from the sale proceeds. We find a clear fallacy in the argument of the ld. DR about the alleged double deduction. When the face value of DEPB accrues as income to the assessee, the said amount is credited to the Profit and loss account and not debited as contended having the effect of claiming deduction. Resultantly at the time of claiming set off the face value against the sale proceeds, there is no question of double deduction, because at the first stage no deduction was claimed rather income was offered for taxation. The purchase cost, in the scheme of section 80HHC remains intact and is not altered with the amount of the face value of DEPB. We fail to appreciate the contention about the double deduction. It is self evident that section 28 deals with the items of income chargeable to income-tax under the head 'Profit and gains of business or profession' and not the items of deduction. In our considered opinion, there is no question of allowing double deduction when the face value of DEPB is reduced from the sale proceeds for working out the amount of profits on sale of DEPB.

85. It is patent that when the overall profit of the exporter is determined from the Trading, Profit and loss account, all the items of expenses and incomes including the face value of DEPB pursuant to the making of export, are taken care of. However when the question comes of computing profit on the transfer of DEPB and we reduce the face value of DEPB, it does not amount to granting any separate deduction against the overall income. Determination of profit on transfer of DEPB is a separate computation distinct from the computation of total income. By making this computation under section 28 (iiid) what we intend to do is to give effect to the deduction under section 80HHC. It is not as if some separate deduction is claimed when face value of DEPB is reduced from the sale proceeds for the purpose of section 28 (iiid). This view can be appreciated from a different perspective also. An assessee may have four units including one unit which is eligible for deduction under section 80-IC or 80-ID or 80-IE and composite set of books of account is maintained for all the units. When a combined Trading, Profit and loss account is drawn, the resultant figure of profit will include income from all the four units. Now while giving effect to the computation of deduction under section 80-IC or 80-ID or 80-IE, which is available in respect of one unit only, what we need to do is to determine the income earned by this eligible unit. In order to compute the income of the eligible unit we will separate the items of income and expenses relatable to the eligible unit from the consolidated figures. Though such expenses are included in the total expenses, can it be said that that there is double deduction of expenses, firstly when the overall profit and loss account was drawn claiming deduction for such expenses and secondly when the profit of the eligible unit is determined for computing the profit eligible for deduction under section 80-IC etc.? The answer has to be in negative and negative alone because the process of determining the income of eligible unit is a separate computation though it involves segregation from the common items of incomes and expenses. This separate computation cannot be mingled with the overall computation of income for concluding that when the expenses of the eligible unit are taken out from common expenses and then deducted from the income of the eligible unit, there has resulted any double deduction of such expenses, firstly when the overall profit of the assessee from all the four units was deduced and secondly when income of the eligible unit was worked out. In the like manner the computation of profits on transfer of DEPB under section 28 (iiid) is a separate computation and need not be confused with computation of the overall profit of the assessee.

86. The ld. DR, relying on one of the orders passed against the assessee, stated that exporter may or may not apply for DEPB, considering the premium in the open market on the raw material/goods to be imported if the raw material is available in the local market at the same rate at which imported material is available. In that case neither the assessee would be interested in importing such material nor any purchaser would be available in the market for purchasing such import entitlement. There appears to be some misunderstanding about the very scheme of DEPB. Primarily the question of the exporter applying for the DEPB or not is not germane to the dispute about the computation of profit on transfer of DEPB under section 28 (iiid) as it pre-supposes that the exporter did apply and get the certificate. Further there is no one-to-one co-relation between the item exported and item to be imported under DEPB. Any item can be imported under DEPB except those which are specifically banned. To say that exporter may not apply for the DEPB at all considering the premium in the open market on the raw material consumed, is fallacious on the ground that it is an incentive having intrinsic value, which is a tradable commodity in the open market. The amount of incentive under DEPB is an income which has no relation with the premium in the open market for a particular raw material. As it can be used for the import of any commodity, the benefit which flows from it is that the exporter or any party purchasing it from the exporter, gets benefit in the payment of import duty to the extent of the face value of DEPB on making import of any item.

87. The ld. DR, relying on another order in favour of the Revenue contended that if only the profit realized on transfer of DEPB is considered then only the amount actually realized/received on account of sale of DEPB would be liable to be included in "business income" of the assessee for the year under consideration as against the total income received as well as receivable included in its business income and in that case, even if the exclusion as per Explanation (baa) is restricted to the amount actually received, there will be hardly any effect on the quantum of deduction permissible to the assessee under section 80HHC. Here again we find that distinction between sale proceeds of DEPB and profit on the sale of DEPB has been lost sight of. We have held above that the face value of DEPB accrues as income on making application after effecting exports, which is chargeable to tax at that time under section 28 (iiib). Any subsequent event, such as the utilization of DEPB for self import or the sale of DEPB, cannot affect the accrual of income taking place at any earlier point of time. The consequences, as cited by the ld. DR, will follow only if profit on sale of DEPB is equated with the amount realized on the sale of DEPB. In view of the fact that face value of DEPB is includible in the business income under section 28 (iiib) at the earlier stage of accrual, the question of considering the gross sale proceeds as falling under section 28 (iiid) at the time of sale of DEPB, therefore, does not arise. Both the items, viz., the face value of DEPB and profit on transfer of DEPB are two distinct items of income. The logic given by the ld. DR appears to be based on the solitary reading of clause (iiid) as divorced from other clauses of section 28, including (iiib) thus ignoring the stage of accrual of income to the extent of the face value of DEPB, which is equally important aspect to be considered concurrently. It is only on the appreciation of all the relevant aspects relating to the income on account of DEPB, that a proper conclusion can be drawn.

88. With utmost respect to the Benches deciding the point in favour of the Revenue, we are inclined to agree with the contrary view in favour of the assessee.

Conclusion

89. The question raised before the Special Bench has two parts. Insofar as the first part : 'Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28 (iiid) of the Income-tax Act, is concerned, we answer it in negative and the second part of the question : 'for the profit referred to therein requires any artificialcost to be interpolated?' is replied in affirmative to the extent that the face value of DEPB shall be deducted from the sale proceeds. As regards the grounds raised in these appeals against the denial of deduction under section 80HHC, in full or part, we find that the computation of profits derived from exports and the resultant amount of deduction under this section can be made only when the decision is taken on the amount and the timing of taxability of the face value of DEPB and the profit on its sale. On this issue we hold that the face value of DEPB is chargeable to tax under section 28 (iiib) at the time of accrual of income, that is, when the application for DEPB is filed with the competent authority pursuant to exports and profit on sale of DEPB representing the excess of sale proceeds of DEPB over its face value is liable to be considered under section 28 (iiid) at the time of its sale. Whatever is said about DEPB, shall also hold good for DFRC, on both its components, viz., the face value of DFRC and profit on its transfer, except for the fact that the profit on sale of DFRC shall be charged to tax under section 28 (iiie). There is no dispute about the duty drawback, which shall be chargeable to tax at the time of accrual of income under section 28 (iiic) when application is filed with the competent authority after making exports. Since the necessary facts for the determination of the quantum of deduction under section 80HHC, as discussed above, are not available on record, we, therefore, set aside the impugned orders and direct the Assessing Officer to compute the amount of relief in accordance with the view expressed by us hereinabove.

90. Ground Nos. 6 and 7 in case of M/s. Topman Exports are against the confirmation of disallowance of telephone expenses, motor car expenses and interest on car loan. The Assessing Officer disallowed 10 per cent of the telephone and fax expenses and 20 per cent of motor car expenses and interest on car loan on account of personal use of partners. The learned CIT (A) sustained the additions.

91. After considering the rival submissions and perusing the relevant material on record we hold that the disallowance so made on account of telephone expenses is reasonable and does not warrant any further interference. Insofar as the disallowance of motor car expenses and interest on car loan is concerned, the Assessing Officer has made disallowance at 20 per cent of such expenses. Considering the facts of this case in entirety, we are of the opinion that the disallowance at this rate is on higher side. We order to restrict it to 10 per cent of these expenses. Thus ground No. 6 is dismissed and ground No. 7 is partly allowed.

Interest income and deduction under section 80HHC

92. The only other ground in case of M/s. Kalpataru Colours & Chemicals is against treating the interest receipt of Rs. 8,35,528 as 'Income from other sources' and not allowing deduction under section 80HHC on such amount. The assessee had included such interest income under the head 'Profits and gains of business or profession' and claimed deduction accordingly. On being called upon to explain the nature of such interest income, it was stated to have been earned out of temporary deployment of the business funds. Not convinced, the Assessing Officer held it to be falling under the head 'Income from other sources'. The assessee failed to convince the ld. CIT (A) on its line of reasoning.

93. After considering the rival submissions and perusing the relevant material on record we find it as an undisputed fact that the said interest was earned from the 'temporary deployment of business funds', as contended by the assessee before the authorities below. The ld. AR has relied on the judgment rendered by the Hon'ble Bombay High Court in CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 for putting forth the submission that the interest be considered as falling under Chapter IV-D of the Act. We are not convinced with the view point canvassed on behalf of the assessee. From the statement of facts filed before the ld. CIT (A), it is found that the assessee paid interest of Rs. 23,21,999 to banks and at the same time earned interest of Rs. 8,09,529 on loans given to various parties and Rs. 26,000 from bank. It is beyond our comprehension as to how the interest income, in the present circumstances, can be considered as falling under the 'Profits and gains of business or profession' and thus becoming eligible for deduction under section 80HHC.

94. According to section 56 interest income is chargeable to tax under the head "Income from other sources" if it is not chargeable to tax under the head "Profits and gains of business or profession". On the other hand section 28 (i) states that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year shall be chargeable under the head 'Profits and gains of business or profession'. Section 2 (13) defines "Business" which "includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture." Thus in order to cover any activity under the ambit of 'business', it is sine qua non that it must be continued on regular business with the intention of earning income therefrom. Coming back to our point, interest income will be falling under the head 'Profits and gains of business or profession' if the assessee carries on the business of finance and the earning of interest is its main business. Or alternatively the interest can be classified as 'business income' if the business is different from that of financing but interest income results in carrying on the main business activity and is incidental to it.

95. It has been contended that the interest income be treated as business "income because the business funds were deployed for the earning income. In our considered opinion the necessary pre-requisite condition is not the deployment of business funds but the nature of activity which results into such income. If the funds of the business are parked for safe keeping or with a view to earn interest income de hors the main business activity, the interest resulting therefrom cannot assume the character of business income and hence will resultantly fall under the residual head of income, viz. 'Income from other sources'. Once the interest income is taxable under the last head of income, only the deductions permissible under section 57 will be permissible. Clauses (i) to (iia) of this section provide for deductions in respect of specific types of income. Obviously interest does not fall under these clauses. Then there is a general clause (iii) as per which "any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income" shall be allowed as deduction. So in order to qualify for this clause it is of paramount importance that the expenditure must be 'wholly and exclusively' laid out for earning such income. We are considering a situation in which the business funds were temporarily deployed with private parties and a small fraction with bank. Nothing has been shown that there was some business exigency necessitating the deployment of funds. Thus it is a case of simple parking of surplus funds with third parties and bank, having no relation, worth the name, with the export business. We are, therefore, of the considered opinion that the interest income has been rightly held to be taxable under the last head of income and there is no amount deductible against this income. The natural consequence which, therefore, follows is that once a particular income does not fall under the head "Profits and gains of business or profession, that goes out of reckoning for the purposes of deduction under section 80HHC, be it the case of the manufacturer or trader or hybrid exporter.

96. The Hon'ble Delhi High Court in CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 has elaborately dealt with the issue of interest income vis-a-vis its eligibility for falling under the head 'Business income'. After taking into consideration the order passed by the Special Bench of the Tribunal in Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 (Delhi) , it has been held as under:—

"Turning to the submissions in the present case, as regards the first of the categories, viz., the parking of the surplus funds there should be no difficulty at all. In view of the large number of the decisions of the Hon'ble Supreme Court in the context of section 56 and section 57 and those of the Kerala High Court in the context of section 80HHC itself, we are unable to accept the contention of the assessee based on Snam Proghetti [1981] 132 ITR 70 (Delhi) that interest earned on parked surplus funds should qualify as business income. Clearly Snam Proghetti [1981] 132 ITR 70 (Delhi) was not rendered in the context of section 80HHC and cannot but be confined to the facts of that case.... We are, therefore, of the view that where surplus funds are parked with the bank and interest is earned thereon it can only be categorized as income from other sources."

97. In a recent decision rendered by the Hon'ble Delhi High Court in CIT v. Delhi Brass & Metal Works Ltd. [2009] 313 ITR 352 the earlier view taken in Shri Ram Honda Power Equip's case (supra) has been reiterated. In this later case it has been laid down "that the interest earned on fixed deposits did not have any immediate nexus with the export business and, hence, would have to be treated as 'Income from other sources'." Resultantly the assessee in that case was not allowed to adjust by way of expenditure interest paid to the bank on overdraft facility against the interest received by it on fixed deposits kept with the bank as this was not expenditure laid out 'wholly and exclusively' for the purpose of earning interest on fixed deposits.

98. From the facts of the instant case it is abundantly clear that the interest was earned by the assessee from the parking of surplus business funds. There is no co-relation of such deployment of funds with the export business, much less any business purpose. In our considered opinion the ld. CIT (A) was fully justified in considering such interest as falling under the head 'Income from other sources' and hence ineligible for deduction under section 80HHC. The judgment in the case of Indo Swiss Jewels (supra), relied on behalf of the assessee, is distinguishable on facts and was rendered in the context of different sections, viz., 80HH and 80-I. That assessee was engaged in the business of manufacture of industrial jewels. Funds were kept in various companies for short terms in order to make payment for the imported machinery. The Assessing Officer did not accept the contention of the assessee that the interest income be treated as business income. The Hon'ble High Court accepted the assessee's plea on the ground that a finding was recorded that the balance sheet of the assessee for the next year also showed that all these deposits were withdrawn and the machinery was paid for. We find that this case does not assist the assessee for the reason that the parking of funds in that case was made for a business purpose, as the assessee was to purchase machinery for its business with these funds, and the same was, in fact, purchased. Here is a case of simple deployment of funds. No specific business purpose for the temporary deployment of funds has been brought on record either before the authorities below or the Tribunal, leave aside any relation with export business. We, therefore, approve the view taken by the ld. CIT (A) on this issue and dismiss this ground of appeal.

99. Before parting with these appeals, we place on record our appreciation for the enlightening arguments put forth by both the sides, which have assisted us in the disposal of the issues raised in these appeals. We want to make it clear that all the cases relied on by both the sides have been duly taken into consideration while deciding the matter. The reference to some of the cases in the order is avoided either due to their irrelevance or to relieve the order from the burden of the repetitive ratio decidendi laid down in such decisions.

100. In the result both the appeals are partly allowed for statistical purposes.

Finance Act, 1990,