Commissioner of Income Tax Delhi v. K.R.B.L.Ltd

"h | ..1 I t. \'-/ COURT OF DELHI AT NEW DELHI Ileserved on: 20th November. 2012 Date of Decisron; 5'h December, 2012 TN THE HIGH + + -r ITA2O7 of2009 ITA 228 of 2009 ITA 419 of2009 COMMISSIONER OF INCOME TAX Through Versus IvI/S K.R B L. LIMITED Through CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR R.V. EASWAR. J. For orders see ITA No 201/2009. Mr N.P Sahni, Counsel wrth Mr. Advocate. . Appellant Senror Standing Ruchesh Sinha. t Mr s K Aggarw",,ofi,totlilotn' rl f'\ -,-". I (R.V.EASWAR) JUDGE I II J,.[,._r, (S. RAVINDRA BIIAT) JUDGE DECEMBER 05,2012 ITA Nos 207 . 228 and 4 I 9 of 2009 Pagc I of I Certify that the digital and physical file have been compared and the digital data is as per the physical file and no page is missing. X IN TIIE HIGTI COURT OF DELHI AT NEW DELHI Reserved on: 20'h November, 2012 "/, Dale of Decision; 5'n December, 2012 ITA 201 of2009 COMMISSIONER OF INCOME, TAX-CENTRAL-III Appellant Through Mr N.P. Sahnt, Sentor Standing Counsel wrth Mr Ruchesh Sinha, Advocate. Vcrsus IVI/SKRBL LIMITED ResPondent T'hrough. Mr S. K Aggarwal, Advocate' + LTA2O7 of2009 COMMISSIONER OF INCOME TAX-CENIRAL-III Appellant Through Mr. N P. Sahnt, Sentor Standing Counsel wrth Mr Ruchesh Sinha, Advocate. Versus I\4/S K.lt B L LIMITED ResPondent Through. Mr S. K Aggarwal, Advocate + lTA 228 of 2009 COMMISSIONER Or NCOME TAX-CENTRAL-III Appellant Through Mr N.P. Sahni, Senior Standing Counsel with Mr Ruchesh Sinha, Advocate Versus , M/SKI{BL I,IN4ITED 'Ihrough ITA Nos ZOI , 207 , 228 an<l4 I 9 ol 2009 . . . Respondcnt Mr S K. Aggarwal, Advocate Page I of9 + ITA 419 of2009 COMMISSIONER OF INCOME TAX-CENTRAL-II Appellant Through Mr. N P Sahnr, Senror Standrng Counsel with Mr. Ruchesh Srnha. Advocate Versus NI/S K R B.L. LIMITED ResPondent Through Mr. S K Aggarwal, Advocate. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR R.V. EASWAR. J. These are appeals filed under Sectton 260A of the Income Tax Act, 1961 ('Act') by the Revenue On 28th September 2070, the followrng substantial question of law, common to all the appeals, was framed: "Whether the Tnbunal was iustrfed in law m holding that the assessee v,ould be entilled to deduclron under Section S0 HHC by holding that the said DEBP credit ufiltzed by lhe ussessee itself, amountmg to ?5,79,74,883 fell under Section 28 (iiic) of the Income Tax Act, I96l?"

¶2We have extracted the above question of law framed in respect of ITA No 201 of 2009 The questron framed rn the other appeals is the same, but for the variation in the amount mentioned in the questton. Subsequently, on 7tr'March 2012, when the appeals were listed forhearing, itwas pornted out on behalf of the Revenue that the question should refer to both DEPB credrt as well as moneys recetved on sale of Special Import License ('SL') ITA Nos 201. 207.228 and 4 I 9 of 2009 Page 2 of9 fi" \---t-Accordingly,thesesappealsaredisposedoftakingthequestronstoinclude bothDEPBcredrtandmoneysrecetvedonsaleofSlL.Themodified question, common for all the appeals' wrll be as follows' "Whether the Trfiunal was justtfied m law in holding that ihe assessee v'ottld be entitled to the deduction under-SecttonS0HHContheDEPButizisedbyilself arul on lhe sale of 'special import license'7 " 3SofarastheDEPBcredrtlsconcemed,theissuenowstandscovered by the judgment of the Supreme Court n Topman Exports v' Commissioner oflncome-Tax(2012)342ITRTglnthisludgmentttwasheldthatsince the objective of DE,BP scheme ts to neutralrze the tncidence of customs duty ontheimportofcontentoftheexportproducts,ithasdirectnexuswiththe cost of rmports made by an exporter for manufacturing the export products Theneutraltzattonshownofthecostofcustomdutyunderthescheme, however,rsbygrantrngadutycreditagatnsttheexportproductandthrs credit can be utilzed for payrng customs duty on any item which rs freely importable.IheDE,PBcredtttstransferablebytheexporterltwasheld that the DEPB credtt lS ..cash asslstance,, recetvable by a person agalnst exportsundertheschemeofGovernmentoflndraandfallsunderclause

(iiib)ofsectton23oftheActandrschargeabletotaxunderthehead ..Profitsandgatnsofbustnessorprofession,,evenbeforetttstransferredby theassessee.Oncetttstransferred,thesurplusorprofitrecetvedbythe assesseeischargeabletotaxunderClause(iiid)ofsection23oftheAct, agalnunderthesameheadasanttemseparatefromcashassistanceunder clause(rrib)ltwasfurtherlreldinthejudgmentthatforthepurposesof Sections0FIHC(3Xa)oftheAct,readwrthExplarratron(baa),90oAofany sumreferrcdtornclauses(rrra)to(riie)ofSectron28,hastobereduced fromtheassessedprofitsofthebusinessAccordrng|y,90o/ooftheDEPB Page 3 of9 ITA Nos 201' 207, 278 ar:rc4l9 of 2009 credit which represents cash assistant under clause (irrb) of Section 28 will be excluded from the assessed profits. If durrng the same year the DEPB is transferred, the surplus artsing on the transfer wrll represent the profit and wrll be covered by clause (iiid) of Sectton 28 of the Act and 9oo/o thereof wrll get reduced from the assessed profits We are not concemed rn the present appeals with the transfer of DEPB credrt. The substantial questton of law itself refers to the fact that DEpB credit was utilized by the assessee. Accordrngly, the only questron that anses, so fbr as the present appeals are concemed, wrth regard to Section 80 HHC read with Explanatron (baa), rs whether 90"h of the DEPB credit can be excluded from the assessed profits of the business Since DEPB credrt rs accessible as profit of the bustness under Clause (iirb) of Sectron 2g as held by the Supreme court n Topman F-xports (supra), 90% of the credrt wrll stand excluded from the assessed profits of the bustness' Havrngbeenexcluded,rtwrllcomebackforconsrderationunderthe provrsos to sectron 80 HHC (3) Under the first proviso' gooh of the DEPB credit will be added back to the profits of the bustness tn the same proportion as the export tumover bears to the total turnover of the bustness carned on by the assessee Flavlng referred to the fact that the DEPB credit was utihzed by the assessee rtself rn tts bustness and was not transferred by it, the provlslons of clause (rrrd) are not attracted and, therefore, the second' third and fourth provisos to Sectron s0 HHC (3) are not attracted to the assessee,s case. The Assessrng officer is, accordrngly, directed to re-compute the deductions under Sectton 8OF{HC, tn so far as the DEPB credtt ls concemed, rn accordance wrth the law as held by the Supreme court in the ludgment Topnrun Exports (supra)' I'tA Nos.201, 2O'1 ,228 and 419 of 2009 Page 4 of9 ffii I i': l[i |l1i H] We now turn to the second part of the substantial questton of law that relates to deductron under Sectron 80 HHC tn respect of the moneys recetved on sale of SIL The contention of the revenue before us was that SIL drd not fall under any of the clauses of Section 28 enumerated tn Explanation (baa), but the argument was that it would fall under the residuary provisions in clause (l) of the sard Explanation as "any other receipt of a similar nature rncluded tn such profits" We are afraid that this rs not the proper manner of interpretrng the clause The Explanation ts reproduced below "(baa) "profits of the busmess" nleans the profits of thebusinessascompLttedunderthehead"Proftsand gains of business or profession" as reduced by -

(l) ninety per cent of any sum referred, to^in clauses

(iua), (iiib), [!irc), and (iid) and (iiie)J of Section 28 or o/'any recetpls by way of brokerage, commission' inlerest,rent,chargesoranyotherrecerptofasimilar nature mcluded in such Profits; and

(2) the pro/its o/'any branch, ffice, warehouse or any other Lstabhshment o/' the assessee situate outside India." The argument of the Revenue splits clause (1) into three parts, (r)90% of the sum referred rn clauses (iiia) to (irre) of Sectron 28; (ii) 90o/o of any receipts by way of brokerage, commlsslon, interest, rent, charges; and (iir) 90% of any other receipt of a srmtlar nature included in such profits. The further argument is that the last part of the clause should be read 'ejusdem generis' with the first part which refers to vartous clauses of Section 28 and the contention is that the recerpt by way of proceeds of SIL being of a srmtlar nature to the recerpts enumerated in the first part of the clause under the vanous clauses of Sectron 28,9ooh of such proceeds ts also to be excluded from the assessed profits When it comes to the addrng back under the ITA Nos 2Ol , \Oj , 228 and 4 I 9 of 2009 Page 5 of9 o proviso to Section 80 lfi{c (3), rt is the contentton of the Revenue is that srnce the proceeds of sale of SIL do not specifically fall under any of the five enumerated clauses of Section 28, the excluded profit cannot be added back to the profits under the provrsos The net effect of the contentton of the Revenue rs that 90% of the profits of sale of SIL would stand excluded from the assessed profits for the purposes of computing the deduction under Section 80 HI{C We are afrard that this ts not the proper way of interpreting the Explanatron The Explanatton cannot be split into three parts as contended by the Revenue lt has only two parts, which are as follows' (r) 90% of any sum referred to rn the enumerated clauses of Section 28; and (ii) 90% of any recetptbywayofbrokerage,commlssion'tnterest'rent'chargesoranyother recetptofasimilarnaturerncludedinsuchprofits.Thereasonwhythe words ".or any other receipts of a srmilar nature rncluded tn such profits" cannot refer to the first part of the clause whrch contatns references to vanous clauses of Section 28 is two-fold. Firstly, rf the words "or any other recetpt of a srmilar nature rnclude any such profits" are to be treated separately,theactualwordsoughttohavebeenusedwouldbe..orofany other recerpt of a simrrar nature rncluded in such profits"; the word "of' would have been added therern to srgnrfy 90% of such similar recetpt Secondly, rn the quoted words, the word "receipt" would not have been used.andtheword..Sum,,wouldhavebeenusedsoastoaccordwrththe wordsusedtnthefirstpartoftheclausecontainingreferencestovartous clausesofsectron23,whrcharereferredtoaS..anySum',.Moreover,rnthe absence of the word ..of' precedrng the word "any other recetpt of a similar nature included tn such profits,,, the receipts talked about should be taken to be brokerage, commission, tnterest, rent and charges. The words ..any other Page 6 of9 ITA Nos.201, }O7, 228and 41 9 of 2009 ffi receipt" cannot ju-p the specific recetpts menttoned immediately before them and go back to the first part of the clause which contains references to vanous clauses of Section 28. In other words, we have to read the enttre group of words "or of any recelpts by way of brokerage, commlsslon, interest, rent, charges or any other receipts of a stmilar nature included rn such profits" contiguously wrth the result that the "other receipt" from which 90o/o thereof can be reduced would only refer to recetpts of a nature simrlar to receipts by way of brokerage, commission, tnterest, rent and charges That this was how the Explanatton was understood even by the Revenue ts rernforced by the CBDT Circular No 621 dated 19 121991 explaining the Finance (No.2) Act, 1991, whrch tnserted the Explanatron [pl. see (1992) le5 ITR (St ) 1 s4 @ 1781 "I.he exislrng fornntla oJten grves a distorted figtre of exp)rtprofitswhenreceiptshkeinterest,commissiott, etc.,tuhichdonothaveanelementoflurnoverare included in the prof t and loss account' It has, there/bre, clarifred that "pro./its of the busmess"forthepurposeofsections7HHCwillnot ulcludereceiptsbywayofbrokerage,commtssion' interest,rent,chargesoranyotherreceiptofasirular nalure.Assomeexpendituremightbeincurredin earningtheseincontes,whichmthegeneraltyoJ'cases is parl of comnton expenses, ad hoc I0 per cent' dedttctionfromntchincomestoaccountforlhese expenses. "

¶8If thrs is the proper way of interpretrng Explanation (baa), the profits of the sale of SIL cannot be reduced from the profits of the business to the extent of gOYo lf tt cannot be so excluded, since rt does not fall under the various clauses of Sectron 28 enumerated rn such Explanatlon, whrch ts also the case of the Revenue as canvassed before us; then there wrll neither be an ITA Nos 2Ol " 201 . 228 an 4 1 9 of 2009 PageT of9 frrtt/ exclusion nor addrng back under varlous provlsos of sub-section (3) of Sectron 80 FIHC g There is one more way of lookrng at the controversy The SIL scheme was undisputedly notrfied under the Forergn Trade (Development and Regulation) Act 1992. Sectton 28 (iria) brings the profits of sale of Ircense granted under the Imports (control) order, 1995, made under the Imports and Exports (Control) Act, 1947, to charge under the head ..business" The lmports and Exports control Act, 1947 stood repealed on the enactment of Foreign Trade (Development and Regulation) Act of 1992 Under Sectron 8 of the General Clauses Act, 1897 where any Central Act made after the commencement of the General clauses Act, repeals and re-enacts. with or without modificatron, any provision of the former enactment, then references ln any enactment or ln any instrument to the provisions, so repealed shall, unless a drfferent tntentton appears, be construed as references to the provtsions so re-enacted

¶10The effect of thrs rs that under Clause (riia) of Sectron 28, areference to Imports and Exports (control) Lct,1947 should be taken to be a reference to Forergn Trade (Development and Regulation) Act and the scheme for SIL having been notified under the latter Act, which must be read into Sectton 2g(rria), the profits of sale of SIL would fall to be assessed under Sectron 28

(rrra) If that is so, the profits of sale of SIL would be assessed as busrness profits; then 90o/o thereof would be excluded from the business profits and, thereafter, the excluded profits would be added back under the first provrso to Sectron 80 Hllc (3) rn the same proportion as the export turnover bears to the tumover of the bustness carrted on by the assessee' Thrs is another way to look at the controversy and resolve it Page 8 of9 ITA Nos 201. 207' 228 a:Lld 4 I 9 of 2009

¶11we note that a srmrlar logrc and reasoning had appealed to the central Board of Direct Taxes (CBDT) tn tts ctrcular No 5 of 2006 dated 15,r'May 2006, whrle directrng the Assessrng Officers not to deny the benefit of Sectron B0 F{FIC to an assessee claimrng refund of the duty drawback under the Duty Drawback Rules, 1995, for the purposes of Section 2g(iiie) of the Act. In that proviston, the reference was to the repealed Drawback Rules of 1g71. The Duty Drawback Rules of 1995 repealed the 1g71 Rules but provided for savrngs The GBDT invoked sectton 8 of the General Clauses Act and directed the Assessing officers not to deny the benefits of Section 80 HHC to the assessees on the ground that the customs orexciserepardtotheassesseswerenotsorepaidunderthelgTlRules 12Forthefbregorngreasons,weanswerthesubstantialquestionoflaw rn the affirmatrve and rn favour of the assessee, both with regard to DEPB credrt and sale of SIL. The Assessrng Officer will re-compute the deductron accordrngly.AlltheappealsoftheRevenuearedismtssed,butinthe circumstances wtth no order as to costs h/ V.:l cj-4._-l t- (R.V.EASWAR) JUDGE (s. RAVINDRA Br{Ar) JUDGE DECEMBER 05' 2012 JTK IlANos 201,201-228and419 of 2009 Page 9 of9