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income Tax Officer Vs. Bothra International and ors. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Jodhpur
Decided On
Judge
Appellantincome Tax Officer
RespondentBothra International and ors.
Excerpt:
1. all these appeals by revenue are directed to be disposed of by a common order as the issues in dispute are stated to be common. the learned departmental representative, however, desired to address in ita nos. 607/jd/2007 and 608/jd/2007 as a lead case which is an appeal by the revenue against the separate orders dt. 28th may, 2007 of learned cit(a), jodhpur. on the consent of the parties this request was allowed. on the facts and in the circumstances of the case the learned cit(a)-i, jodhpur has erred in: 1. deleting the trading addition made by the ao on account of low gp rate by invoking provision of section 145 of it act. 2. directing to allow deduction under section 10ba on account of depb and ddb receipts ignoring the fact that depb and ddb are not part of export business profit.....
Judgment:
1. All these appeals by Revenue are directed to be disposed of by a common order as the issues in dispute are stated to be common. The learned Departmental Representative, however, desired to address in ITA Nos. 607/Jd/2007 and 608/Jd/2007 as a lead case which is an appeal by the Revenue against the separate orders dt. 28th May, 2007 of learned CIT(A), Jodhpur. On the consent of the parties this request was allowed.

On the facts and in the circumstances of the case the learned CIT(A)-I, Jodhpur has erred in: 1. Deleting the trading addition made by the AO on account of low GP rate by invoking provision of Section 145 of IT Act.

2. Directing to allow deduction under Section 10BA on account of DEPB and DDB receipts ignoring the fact that DEPB and DDB are not part of export business profit from eligible articles or things.

2. The first common ground relates to deletion of the trading addition of Rs. 5,00,000 and Rs. 3,00,000 made by the AO in asst. yrs. 2004-05 and 2005-06 respectively, on account of low GP rate by invoking Section 145 of IT Act.

3. Briefly the facts are that the AO rejected the books of account by invoking action under Section 145 of the Act for the reason that there was fall in GP rate and the assessee did not maintain stock records.

The AO considering the facts and past history made ad hoc trading addition of Rs. 5 lacs in asst. yr. 2004-05 and Rs. 3 lacs in asst. yr.

2005-06.

4. The learned CIT(A) set aside the action and deleted ad hoc addition as no material was placed on record by the AO to show that there are material defects, omissions or any unauthorised trading activity carried by the assessee. He also found that the AO has failed to find any fault or incorrectness in the explanation tendered by assessee for decline in GP rate. He further observed that the appellant dealt in manufacturing of innumerable items of wooden handicrafts which are distinct and separate in all respects and it is practically not possible to maintain day-to-day production record, i.e., stock register in respect of each and every item manufactured having distinct characters and specifications. The appellant maintained regular books of account, which are audited and purchases, sales and manufacturing expenses are fully vouched and verifiable. The learned AO has not pointed any specific defect with material evidences in the books of account. Therefore, the reliability of books of account cannot be doubted. After all, the raw material, i.e., wood is a natural product and therefore, the same may break at several stages of production. Such broken parts are reutilized in manufacturing other products of smaller size. Besides that the work is done mainly by carpenters and therefore, the output would differ with person to person. The consumption of material largely depends upon the type of wood. Thus, the peculiar nature of the trade rules out maintenance of stock records. A businessman cannot be supposed to maintain records, which are virtually impossible to be maintained. He further mentioned here that on similar facts his predecessor CIT(A) in appellate order dt. 6th Jan., 2005 in Appeal No. 62/03/04 in the case of M/s Curio Crafts for the asst. yr.

2000-01 held that it is not possible to maintain stock records by a person engaged in manufacturing of handicraft items.

5. The learned Departmental Representative has relied upon the reasons given in the assessment order for the respective years and urged that the CIT(A) ought to have confirmed the aforesaid additions.

6. The assessee's contention is that the AO had erred in making trading addition on ad hoc basis in the years under consideration amounting to Rs. 5,00.000 in asst. yr. 2004-05 and Rs. 3,00,000 in asst. yr.

2005-06, and the same was rightly deleted by the learned CIT(A) for both the years. It was further contended that: (i) The AO had observed that assessee was maintaining regular books of account and the same were supported by purchase vouchers, sale bills and supporting vouchers, and in the records so maintained no defect or discrepancy had been found by the AO. The rejection of books, therefore, was without any valid basis. It is contended that before rejection of books of account there should be material defects or irregularities in the accounts. Simply on the ground that GP was low cannot be a sole basis for rejection of books of account, as GP may vary from year to year on various counts. The learned CIT(A) also considered various judicial judgments in this regard.

(ii) The learned CIT(A) has also considered the decision of Hon'ble Tribunal in case of Ganesh Foundry v. ITO (2000) 67 TTJ (Jd) 434 that absence of stock register or fall in GP cannot be basis for rejection of accounts. The learned CIT(A) also considered the decision of Uttam Chuna Pathar Udyog v. ITO (1997) 59 TTJ Up) 763 : 20 Tax World 422 (Jp), that few defects would not render accounts liable for rejection and normally the profits be deduced from the regular accounts of the assessee.

(iii) That there is peculiar fact in the case of the manufacturers of handicraft items. The assessee is manufacturing large number of items, and there is large variety of products and it is not practically possible to maintain quantitative details in respect to consumption of raw material and finished goods.

(iv) The assessee is a manufacturer and exporter of handicraft items, and there is mainly export of such goods so manufactured. The raw material is mainly wood which is purchased in cubic feet or square feet. The finished goods are manufactured in numbers and that too of large variety, different sizes and combination. The various products are of different shapes and designs made on specification for various foreign buyers.

(v) Further there is continuous increase in the competition from within the country and from other countries mainly China, where such wooden handicraft items are available comparatively cheaper.

(vi) The assessee had maintained regular books of account, which are supported by regular bills and vouchers, and no defect or discrepancy had been observed by the learned AO in the records so maintained. The sales are also export where payments are fully verifiable and through banking channClauses Unless the regular books are found to be not acceptable, there would be no justification for any estimation. Even for any reasons, the books are technically rejected, the same would not justify any addition and in this regard reliance is placed on the decision of Hon'ble Rajasthan High Court in the case of CIT v. Gotan Lime Khanij Udhyog .

(vii) During the years under consideration there was considerable fall in the dollar ralrs. The prices are normally quoted in dollars only, and on account of siu-h fall, there was considerable loss in the price realization. Further on account of competition in the market, the rates had to be kept very competitive. The prices of various other raw materials had increased while no corresponding increase in the price of sale price took place.

(viii) The GP is only a resultant figure, and may vary on various accounts and the same cannot remain constant over the years. There had been very keen competition from the local suppliers also.

(ix) The comparable case relied upon by the learned AO was also not justified. Firstly no such facts were stated tp the assessee nor any opportunity was given to him. The other comparative case is of a very old and existing handicraft dealer having large volume of business. Further even in the said case ad hoc addition on account of trading account was made, which also stood deleted.

(x) The assessee has also relied upon the decision in the case of Hotel Hilltone (P) Ltd. v. Asstt. CIT (2005) 97 TTJ (Jd) 969, in which it has been held that it would not be justified to make any addition in the declared trading results without pointing out specific mistakes and discrepancies. The assessee had relied upon various other decisions in this regard in the written submissions.

It is also submitted that trading addition so made will be more of academic nature, as this would increase trading profits and shall increase the deduction allowable under Section 10BA, resulting into no fruitful exercise. Therefore, the deletion of the trading addition by the learned CIT(A) was perfectly justified.

7. Having heard the parties with reference to material on record, we find no reason or basis to interfere with the decision taken by learned CIT(A) more particularly when learned Departmental Representative has placed reliance on the order of the AO without pointing out any error in well reasoned decision reached by him. The learned CIT(A) has considered the nature of business activity, market conditions, quality of raw material used, and the fact that the AO laid no material on record to suggest that there has been any suppression of income nor that the assessee carried any activity outside the books. We also find from the remand report given by the assessing authority in appeal before learned CIT(A) that he had deputed the Ward Inspector to verify the records of the assessee and reportedly found no discrepancy or inconsistency in the business transaction of the assessee. Finding no merit in the ground in appeal for both the years, the same stands rejected. For parity of reasons and as the facts and law are same in all other appeals in ITA Nos. 609 and 610/Jd/2007. 594 and 595/Jd/2007, 605 and 606/Jd/2007 and 802/Jd/2007 the ground of Revenue in those appeals also stands rejected.

8. The next common ground in these appeals is that the learned CIT(A) has erred in directing the AO to allow deduction under Section 10BA on account of DEPB and DDB receipts ignoring the fact that DEPB and DDB are not derived from export of eligible articles or things.

9. Shri K.R. Meghwal, the learned CIT-Departmental Representative filed written submissions and also made oral submissions during the course of hearing.

(i) The learned Departmental Representative contends that the learned CIT(A) has erred in observing that DEPB and DDB are in the nature of reimbursement of customs duties and excise duties paid by the assessee. Such duties are not payable by the assessee on the purchase of raw material. The main raw material for production of handicraft articles is wood on which no excise duty is leviable. The provisions of Section 10BA also specifically provide that no imported raw material can be used in a case where exemption under the said provisions is claimed. As no imported raw material is being used, there is no question of payment of any customs duty. The learned CIT(A) has therefore, erred in placing reliance on the judgment of the Hon'ble Gujarat High Court in the case of CIT v. India Gelatine &, Chemicals Ltd. and also on the judgment, by Hon'ble Rajasthan High Court in the case of CIT v. Sharda Gum & Chemicals . He submitted that the decision of Rajasthan High Court in the aforesaid case relates to asst. yr. 1989-90 and the High Court has clearly given finding that amendment of excluding the income falling within the Clauses (iiia), (iiib) and (iiic) of Section 28 from computation of profits of business or profession for purposes of computing deduction under Section 80HHC was applicable retrospectively w.e.f. 1st April, 1989.

He submitted that both these appeals before Tribunal are for asst.

yrs. 2004-05 and 2005-06 as Section 10BA was inserted w.e.f. 1st April, 2004.

(ii) The learned Departmental Representative referred to the provisions of Sections 10BA, 80HH, 80HHC including Expln. (baa) thereof, for purposes of comparing the language of the aforesaid provisions. He contended that for eligibility of deduction under Section 10BA. the profits of the business should be derived by an undertaking from the export out of India of eligible articles or things to be manufactured or produced without use of imported raw material and the eligible articles or things should be handmade which are of artistic value of wood that has to be its main raw material.

(iii) He further submitted that DEPB is an incentive granted to the exporters in the shape of import entitlement. It is freely transferable to other importers. The assessees have earned income by sale of this import entitlement and there is no direct nexus between the sale consideration so received from sale of DEPB with the export of eligible articles or things. The sale consideration of DEPB is received in Indian currency and there is no cost incurred to earn the credit of DEPB. It is totally different from "duty drawback" because DDB is an incentive to the exporter in the form of refund of customs duty on imported raw materials. In the case of respondent, it has already been stated that the assessee cannot use imported raw material for availing benefit under Section 10BA of the Act. Section 10BA(2)(a) provides that eligible articles or things should be manufactured without use of imported raw materials and therefore there is no question of reimbursement of any duty paid or suffered on raw material. The learned Departmental Representative, therefore, distinguished the judgment of Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. (supra) which is not applicable on the facts of the present cases.

(iv) In his written note the learned Departmental Representative placed reliance on the following judgments:CIT v. K. Ravindranathan Nair (2007) 213 CTR (SC) 227 : (2007) 295 ITR 228 (SC);CIT v. B. Desraj (g) CIT v. Viswanathan and Co. (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad):P.R. Prabhakar v. CIT (j) Peerless General Finance & Investment Co. Ltd. v. AO ; (k) Lavrids Knudsen Maskinfabrik (India) Ltd. v. Addl. CIT (2006) 102 TTJ (Pn) 882;CIT v. Malwa Cotton Spinning Mills Ltd. (2008) 166 Taxman 457 (P&H); (o) Kashmir Arts v. CIT (2007) 213 CTR (Del) 421 : (2008) 166 Taxman 237 (Del); (p) CIT v. Jyoti Apparels (2007) 209 CTR (Del) 288 : (2008) 166 Taxman 343 (Del);CIT v. T.C. Usha (v)(a) In his arguments, he, however, highlighted only some of the aforesaid judgments. It was pointed out by him that the Hon'ble Supreme Court in the case of CIT v. K. Ravindranathan Nair (supra) has held that incentives and interest income etc. are independent income which have no element of export turnover and had to be reduced from gross total income to arrive at business profits. He also placed reliance on judgment of Hon'ble Supreme Court in the case of P.R. Prabhakar v. CIT (supra) in which it was held that the assessee was entitled to deduction under Section 80HHC in respect of commission and brokerage income because of the express provision in statute. It was also held that the amendment made in the Section 80HHC by the Finance (No. 2) Act, 1991 was prospective and was effective from 1st April, 1992. Likewise, the learned CIT-Departmental Representative placed reliance on various judgments relating to interpretation of Section 80HHC. In most of those cases 90 per cent of the income/receipts by way of interest, brokerage, commission, job charges etc., were excluded from the business in terms of Expln. (baa) to Section 80HHC(3). Some of the cases dealt with the question as to whether interest income is assessable as income from other sources or they are part of business profit eligible for grant of deduction under Sections 80IIHC. 80-IA etc.

(b) The learned Departmental Representative also placed heavy reliance on the judgment in the case of CIT v. Steding Foods (supra) to support his contention that import entitlement granted by Central Government cannot be treated as income derived from exports or income derived from the industrial undertaking. The source of import entitlement is the Export Promotion Scheme of the Central Government and they have no direct nexus with the sale consideration. Hence the import entitlements cannot be regarded as "profit derived from the industrial undertaking" for purposes of computing deduction under Section 80HH. The various other cases cited by the learned CIT-Departmental Representative were either based on the judgment in the case of Steding Foods (supra) or relate to interpretation of provisions contained in Section 80HHC mainly in relation to Clause (baa) of Explanation to Section 80HHC or those decisions relate to interpretation of the provisions where deduction was confined to "income derived from industrial undertaking" etc. It was, therefore, strongly urged that the amount of DEPB and DDB received by the assessee cannot be treated as profits derived by the undertaking from export of eligible articles or things. The learned CIT(A) has thus wrongly granted such deduction of DEPB and DDB. The order of the learned CIT(A) needs to be reversed and the order of the AO be restored.

10. Shri Arnit Kothari, the learned Authorised Representative strongly supported the order of the learned CIT(A). He also filed written submissions and made oral arguments during the course of hearing.

(i) The learned Counsel submitted that the learned CIT(A) had rightly held that the claim of DEPB and DDB received by the assessee was also eligible for deduction under Section 10BA of the IT Act.

The learned CIT(A) has rightly relied upon various decisions including the decision of Hon'ble Rajasthan High Court in the case of CIT v. Sharda Gum & Chemicals (supra), and also the decision in the case of Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. (supra) to support his conclusion. The assessee submits that the DEPB and DDB are inextricably linked to the export business of the assessee, and therefore, have to be regarded as part of profits from export business only, and therefore the learned CIT(A) had rightly allowed the deduction under Section 10BA in respect of such amounts received by the assessee.

(ii) The main object of DEPB/DDB is to neutralize the incidence of input cost of raw material and other manufacturing costs. It is basically part and parcel of trading and manufacturing activity. In fact, DEPB/DDB can be considered as part of trading activity of exports only, reducing the cost of raw material and production expenses. It is in the nature of a rebate or remission on the purchase price of raw material and cost of manufacturing expenses and production. The handicraft industry has to survive in global competition and has to compete with dealers and manufacturers of various other countries. The DEPB and DDB have been granted to such exporters to reduce the cost of their production/manufacturing, so that their handicraft articles can be exported In the global market at competitive rates. The contention of the learned Departmental Representative that no imported raw material can be used for manufacture of handicraft articles by the assessee, Instead of supporting the contention of the learned Departmental Representative, supports the view taken by the learned CIT(A) because the prohibition of use of imported raw material for manufacture/production of handicraft articles will require incurring of higher cost of production/manufacture, as they cannot avail the benefit of importing the required raw material at competitive and lower international rates. Such increased cost of manufacture or production is compensated by grant of DEPB and DDB etc. The true nature of DEPB and DDB can be ascertained from the concerned policy announced by the Government from time-to-time. It will therefore, be imperative to reproduce the extracts from the authentic publications relating to the aforesaid items.

(ii(a)] The nature and objective of Duty Entitlement Pass Book Scheme (DEPB) has been explained in Nabhi's book on DEPB 2005-06 at p. 1 as under: The objective of Duty Entitlement Pass Book Scheme 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. The duty credit under the scheme shall be calculated by taking into account the deemed import content of the said export product as per the Standard Input Output Norms and the basic customs duty payable on such deemed imports. The value addition achieved by export of such product shall also be taken into account while determining the rate of duty credit under the scheme.

[ii(b)] The nature of duty drawback (DDB) as explained in Nabhi's book on Duty Drawback 2005-06 at pp. 1 and 2 as under: The provisions for relief of duties paid on various inputs used in the manufacture of products for exports, where the inputs are imported, were provided under the Sea Customs Act, 1878 [under Section 43B (ibid)] and these have continued with certain modifications in the Sea Customs Act, 1962 which replaced the Sea Customs Act. Section 75 of the Customs Act, 1962 gives the legal sanction for granting such relief and it is referred to as 'drawback'. As per Section 75(1) of Customs Act, drawback shall be allowed by the Central Government in respect of such goods and in accordance with and subject to the provisions of rules made and notified under Section 75(2) of the said Act. It is essentially used in the context of Section 75 ibid (and even universally) to mean grant of relief/refund of duties suffered on imported inputs used in the manufacture of a product of its export....

The existing scheme of drawback is governed by the provisions of Section 75 of the Customs Act, 1962 read with the Customs and central excise duties Drawback Rules, 1995 framed under Section 75(2) of the Customs Act and Section 37 of the Central Excise Act, 1944. Under this scheme, drawback is allowed not only of the duties incurred on the direct inputs or raw materials and components utilized in the manufacture of export goods, but also of the earlier inputs that go into the manufacture of the said raw materials and components. Drawback also takes into consideration the wastages involved in the manufacture and the duty incidences on the packing materials used in the export of goods. Drawback rates are fixed on the basis of either the average of duty incidences on the materials or of actual duties paid by manufactures. These rates are announced either for a class of goods commonly known as all industry rates, or for manufacture of specific goods by a particular manufacturer termed as 'Brand' rates....

Under the Duty Drawback Scheme, the relief is given for the burden of duty incidence of customs and central excise on basic inputs like raw material, components, intermediates and packing materials used at various stages of production/packing. No relief by way of drawback is extended for duties suffered on capital goods, fuels and consumable vised in relation to the production of export goods as essentially internationally the drawback relates to duties suffered on goods physically incorporated and being part of export goods. It may also be noted that no relief of the sales-tax or octroi or any other State tax suffered, if any, on the basic inputs incorporated in or used in the production of export of goods is admissible by way of drawback. Drawback is admissible for export irrespective of mode of export i.e., whether dispatched by sea, air, land customs or by medium of post....

(iii) It is evident from the aforesaid nature explained in Government publication that DEPB and DDB have been granted with a view to reduce the higher cost of production, so that Indian products may be exported in the international market at competitive rates. The amount of DEPB and DDB, which are, in fact, granted to neutralize the incidence of higher cost of production by no stretch of imagination can be received in foreign exchange, as such amounts are granted only for reducing the cost of production of handcraft articles exported by the assessee. In fact the proceeds of DEPB or DDB should be credited in the cost of raw material and other direct manufacturing expenses, which will reflect the true and correct position of the total manufacturing expenses. The said amounts of DEPB and DDB have been separately disclosed in the P&L a/c with a view to make a true and fujl disclosure of the relevant facts to the concerned outside world. It is therefore, evident that amount of DEPB and DDB are parts of profits of the export business carried on by the assessee and the same has rightly been considered as eligible for grant of deduction under Section 10BA. (iv) The learned Counsel further submitted that the eligibility for grant of deduction under Section 10BA to the assessee has been accepted by the AO himself, who has accepted the claim for grant of deduction under Section 10BA on the entire income except on the amount of DEPB and DDB. The fulfilment of all the conditions prescribed in Section 10BA has thus been accepted by the AO and there is no valid reason for denying grant of such deduction on the amount of DEPB and DDB. The learned CIT(A) has given elaborate reasons for granting deduction under Section 10BA on the amount of DEPB and DDB. (v) The learned Counsel further submitted that the provision of Section 10BA(1) provides the grant of deduction in respect of profit and gain derived by an undertaking from the export out of India of eligible articles or things. Sub-section (4) of Section 10BA further provides that for the purposes of Sub-section (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking. Thus proportionate amount of the "profits of the business of the undertaking" in the ratio of export turnover to the total turnover is the amount of deduction allowable under Section 10BA. The distinction between the words "profits derived from the industrial undertaking" or "profit derived from export" used in other provisions are clearly different and distinct than the words "profits of the business of the undertaking" used in Section 10BA. The meaning and scope of "profits of the business of the undertaking" used in Section 10BA(4) determines the quantum of deduction allowable under Section 10BA(1), as is clear from the plain language of Section 10BA(4) as compared to other provisions like Section 80HH or 80-1 or Clause (baa) of Explanation to Section 80HHC, has not been properly considered by the learned CIT-Departmental Representative while citing various cases and also while making a futile attempt to distinguish the judgment relied upon by the learned CIT(A) and cited on behalf of the assessee. The learned CIT-Departmental Representative has also not taken into consideration the well-settled principles of law relating to interpretation and precedents that observations made in any judgment should be understood in the light of the question before the Court, the context in which such decision was rendered and the provisions of law in relation to which such a judgment was rendered. The judgment of any Court cannot be applied without ascertaining all these aspects and it cannot be applied divorced from the context of the questions under consideration before the Hon'ble Court. Such principles of law clearly emerge from various judgments of Hon'ble apex Court such as in the case of CIT v. Sun Engineering Works (P) Ltd. (vi) The judgment in the case of K. Ravindranathan Nair (supra) relied upon by the learned Departmental Representative relates to interpretation of Clause (baa) of Explanation to Section 80HHC(3).

It was held that 90 per cent of the processing charges will have to be excluded under Clause (baa) of Explanation to Section 80HHC like items of independent income such as rent, commission, brokerage etc.

Likewise, various other judgments relating to interpretation of Clause (baa) of the Explanation to Section 80HHC were heavily relied upon by the learned Departmental Representative.

Clause (baa) to Section 80HHC inter alia provides that "profits of the business" for the purposes of Section 80HHC, means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by-- (1) 90 per cent of any sum referred to in Clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature included in such profits and, (vii) The judgment of Hon'ble Supreme Court in the case of K. Ravindranathan Nair (supra) and other judgments relating to interpretation of Clause (baa) of Explanation to Section 80HHC are clearly distinguishable.

(viii) The learned Departmental Representative has also tired to distinguish various decisions relied upon by the learned CIT(A) by placing reliance on the provisions of Section 80HHC r/w Clause (baa) to Explanation thereof, inter alia providing for exclusion of 90 per cent of the sums referred in Section 28(iiia), (iiib), (iiic), (iiid), (iiie) and other receipts. Such argument advanced by the learned Departmental Representative instead of supporting the Revenue's contention, support the assessee's claim for grant of deduction under Section 10BA. There is no provision similar to Expln. (baa) of Section 80HHC(4A) in the relevant provisions of Section 10BA. The absence of similar provision in Section 10BA like Clause (baa) of (Explanation to section) 80HHC (Revenue authorities), further supports the grant of deduction under Section 10BA on the amount of DEPB and DDB, which are specifically regarded as part of "profits of business" under Section 28(iiie) and (iiid) etc.

(ix) In relation to the reliance placed by learned Departmental Representative on the judgment in the case of CIT v. Sterling Foods (supra) and various other judgments which are also based on the aforesaid judgment in the case of Sterling Foods (supra), it is submitted that the said judgment relates to interpretation of other sections such as Section 80HH in which the expression "income derived from industrial undertaking" or "income derived from exports" were used. All such judgments relied upon by the Departmental Representative are clearly distinguishable and do not in any manner adversely affect the grant of deductions under Section 10BA on the amount of DEPB and DDB in view of the clear provisions contained in Section 10BA(4) where the expression used in "profits of the business of the undertaking" and not the words "profits derived from..., have been used. The wide meaning and scope of the words "profits of the business of the undertaking" has been completely ignored by the learned Departmental Representative.

(x) The judgments of various Courts relied upon by the learned CIT(A) and further judgment cited during the course of hearing needs to be considered keeping in view of the aforesaid vital distinction between the relevant provisions contained in Section 103A and other relevant sections on which reliance was placed by learned Departmental Representative. The view taken by the learned CIT(A) is fully supported by the following judgments: (ii) That duty drawback is specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties are admittedly an integral part of the cost of production, any receipts by way of reimbursement of such duties are inextricably linked with the cost of production which has to be reflected in the P&L a/c of the assessee. Therefore, duty drawback was "derived from" the industrial undertaking and eligible for deduction under Section 80J of the Act....

Having heard learned Counsel for the parties, we are of the view that the question under consideration is an interesting one. While the Duty Drawback Scheme may certainly be a part of the Larger Fiscal Scheme of exports assistance and export incentives formulated by the Government for the development of foreign markets for Indian products and commodities, the Duty Drawback Scheme which is embodied in the relevant provisions of the Customs Act and Excise Act stands on a different footing from the other cash incentives under the executive instructions. Section 75(1) of the Customs Act, 1962 contains the following scheme of duty drawback: 75. Drawback on imported materials used in the manufacture of goods which are exported--(1) Whether it appears to the Central Government that in respect of goods of any class or description manufactured in India being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under Section 51 by the proper officer, a drawback should be allowed of duties of customs chargeable under this Act on any imported material of a class or description used in the manufacture of such goods, the Central Government may, by notification in the Official Gazette, directed that drawback shall be allowed in respect of such goods in accordance with the subject to the rules made under Sub-section (2).

Similar provisions are there in Section 36 of the Central Excise Act, 1944. The object of the Duty Drawback Scheme is to reimburse exports for tariffs paid on the imported raw materials and intermediates and central excise duties paid on domestically produced inputs which enter into export production. Customs duties and excise duties on inputs raise the cost of production in industries and thereby affect the competitiveness of exports.

Therefore, exporters, need to be assisted for, neutralizing the escalation in their cost attributable to such customs and excise duties. Duty drawback is, therefore, intended to reduce the cost of production. Hence, duty drawback is an integral part of the pricing of goods and, therefore, part of the cost of production of the industrial undertaking and, therefore, duty drawback has to be treated as 'derived from' the industrial undertaking.

We are of the view that the same distinction would apply while considering the various incentives being given to an industrial undertaking. If the incentives are like cash compensatory support and import entitlement, they are in the nature of general incentives though for determining the quantum of such incentives, the Government may take into consideration the export turnover of the industry. Hence, they are not derived from the industrial undertaking, but merely attributable to it. But when it comes to duty drawback, it is specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the aforesaid statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties, as indicated above. The object of the duty drawback is to reimburse customs duties and excise duties paid by the assessee. As customs duties and excise duties are admittedly an integral part of the cost of production any receipts by way of reimbursement of such duties are inextricably linked with the cost of production which has to be reflected in the P&L a/c of the assessee and, therefore, the Revenue's argument cannot be accepted.

Since the above distinction between general incentives like cash assistance and imported entitlements on the one hand and the specific incentives like duty drawback was not brought to the notice of the Madras High Court and, therefore, was not considered while deciding CIT v. Jameel Leathers & Uppers or CIT v. Viswanathan and Co. (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad), we would like to record our respectful disagreement with the view taken therein the duty drawback is not derived from the industrial undertaking.

In view of the above discussion, we are of the view that while cash compensatory support (cash assistance) received by the assessee would not constitute income 'derived from' an industrial undertaking and, therefore, the same is eligible for relief under Section 80J of the IT Act, 1961 in the case of duty drawback, the same is 'derived from' the industrial undertaking and, therefore, eligible for relief under Section 80J of the IT Act.

Because of such retrospective insertion of Clause (iiia), (iiib) or (iiic) in Section 28, these provisions must be deemed always to be existing and in force with effect from the date the same were inserted. Since all the three provisions were inserted with effect from the year prior to 1st April. 1989, they must be deemed to be part of IT Act as on 1st April, 1989, and governing assessment of income from these sources as income from 'profit and gains of business' of the assessee. This effect of retrospectively operative legislative Act hardly needs any elaboration.

In this connection, it will be pertinent to notice that Section 28 states in no uncertain terms that profits and gains of business or profession which was carried on by the assessee at any time during the previous year shall be chargeable to income-tax under the head 'Profits and gains of business or profession'.

Thus, by way of legislative edict, the income falling within Clauses (iiia), (iiib) and (iiic) of Section 28 has to be computed as income from business or profession for the asst. yr. 1989-90 also. Because of these amendments, filing of revised return was necessitated and income from these heads was included in his income 'business or profession' by the assessee. In view of the aforesaid legal position existing during the assessment year in question, there cannot be any justification that in the computation of income from business, items properly falling with Clauses (ilia), (iiib) and (iiic) are not computed as income from business under the head 'Profits and gains of business or profession'.

Considering in the aforesaid light, we have no hesitation in coming to the conclusion that the claim of the assessee to deduction under Section 80HHC could not have been denied by deduction from the income attributable to income falling under Clauses (iiia), (iiib) and (iiic) or otherwise falling under the head 'Profits and gains of business or profession', which computing the assessee's total income from 'profits and gains of business' under Part D of Chapter IV in the asst. yr. 1989-90.

The legislature in its wisdom has thought it lit to extend benefit of deduction firstly by including such profit in the income as mentioned in Clauses (iiia), (iiib) and (iiic) of Section 28 with retrospective effect and later on by directly allocating 90 per cent of such profit to the allowable deduction. Consequently, the CIT(A) was right in allowing the appeal of the assessee by directing inclusion of income falling under Clause (iiia), (iiib) or (iiic) of Section 28 in computing profits and gains of business carried on by the assessee.

Following the decision of the Tribunal in the case of Asstt. CIT v. Anand International (decided on 13th May, 2005) wherein it was held that the deduction under Section 80-ID was allowable on duty drawback as it had a direct link with the business activity of industrial undertaking, the CIT(A) was justified in allowing the assessee's claim.

Conclusion : 90 per cent of DEPB receipts assessable under Section 28(iv) cannot be excluded from the profits of business as computed under the head 'Profits and gains of business or profession' for the purpose of computing profits of business under Clause (baa) of the Explanation to Section 80HHC. Conclusion : Assessee exporter is entitled to deduction under Section 80HHC in respect of DEPB and DFRC receipts; Departmental authorities having brought the DEPB and DFRC receipts to tax under Section 28{iv) and not under Clauses (iiia) to (iiic) of Section 28, 90 per cent of these receipts cannot be excluded from the profits of the business.

Relying on the decision of the Mumbai Tribunal in the case of Suditi Industries Ltd., where it was held that export incentives were part of profits and gains of business of industrial undertaking in view of the provisions of Section 28(iiia), (iiib) and (iiic) of the Act, the Tribunal held that duty drawback was income derived from the industrial undertaking and eligible for deduction under Section 80-IB of the Act.

It has been clarified by the Board that the duty drawback claimed as per the Customs and central excise duties Drawback Rules, 1995 will also be eligible for deduction under the first proviso to Section 80HHC(3) in spite of the fact that Section 28(iiic) pertaining to duty drawbacks refers to be old Rules of 1971.CIT v. Eltek SGS (P) Ltd. consider the difference between the words so used in Sections 80HH and 80-IB and had held as under: There is a material difference between the language used in Sections 80HH and 80-IB of the IT Act, 1961. While Section 80HH requires that the profits and gains should be derived from the industrial undertaking, Section 80-IB of the Act requires that the profits and gains should be derived from any business of the industrial undertaking. In other words, there need not necessarily be a direct nexus between the activity of an industrial undertaking and the profits and gains. The sources of the duty drawback is the business of the industrial undertaking which is to manufacture and export goods out of raw material that is imported and on which customs duty is paid. The entitlement for duty drawback arises from Section 75(1) of Customs Act, 1962, read with the relevant notification issued by the Central Government in that regard. An assessee would be entitled to special deduction under Section 80-IB in respect of customs duty drawback.

(xi) The learned Counsel further submitted that a recent judgment of Hon'ble Supreme Court in the case of B. Desrqj v. CIT (2008) 7 DTR (SC) 54, dt. 1st May, 2008 conclusively and clinchingly supports and views taken by the learned CIT(A). A copy of the said judgment, was also furnished. It was held by the Hon'ble apex Court as under in this case: Held : At the relevant time an issue arose as to whether cash assistance though includible in business profits under Section 28(iiib) would or would not constitute eligible income for the purposes of deduction under Section 80HHC. Since there was some doubt, CBDT had issued a circular. By the circular, CBDT clarified that export incentives, namely, cash compensatory support and duty drawback have to be included in the profits of the business for computing the deduction under Section 80HHC. With the issuance of this circular the point is no more res integra. The formula indicated in Section 80HHC(3) itself shows that business profits include export incentives. This formula is also indicated in the circular referred to above issued by CBDT. It indicates that the Parliament as well as CBDT have taken into account the insertion of Clause (iiib) in Section 28 by the Finance Act, 1990. Further, it is also relevant to note that by the same Finance Act Clause (iiib) was inserted into Section 28 and changes were also made in Section 80HHC(3). Therefore, Section 80HHC as it stood at the relevant time was required to be read with Section 28(iiib) because both the sections have been amended by the same Finance Act of 1990. In the circumstances, the words 'business profits' in the above formula under Section 80HHC(3) would include cash compensatory allowance and duty drawback and accordingly the AO is directed to work out deduction in accordance with the law as it stood during the relevant asst. yr. 1991-92.

The assessee's contention is that the DDB/DEPB received would therefore be part of business profits, and in view of the above decisions of Hon'ble Supreme Court in the case of 13. Desrqj (supra), Delhi High Court in the case of Eltek SGS (P) Ltd. (supra), Rajasthan High Court in the case of Sharda Gum (supra) and decision of Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. (supra) and various other cases, the learned CIT(A) was right in holding such receipts as part of business profits eligible for deduction under Section 10BA.Mercator Lines Ltd. v. Dy. CIT (2007) 17 SOT 54 (Mumbai) in which it has been held as under: "Profit from business" used in Section 33AC means any profit generated during course of business of operation of ships and is not confined only to income from operation of ships-sale of scrap is an income derived from business of shipping operation and was eligible for deduction under Section 33AC. (xiii) The grant of deduction under Section 10BA on the amount of DDB and DEPB, which in fact only reduces the cost of production, is clearly supported by the following decisions: (a) Glenmark Laboratories Ltd. v. Dy. CIT : BCAJ of March, 2008 on p. 635--Held that, assessee, a trader exporter, was entitled to grant of deduction under Section 80HHC on the amount of profit on sale of DEPB. This judgment is based on various other decisions referred to in the said order.

(b) ITO v. Paramount Industrial Corporation (2007) 109 TTJ (Chd) 295--Held--Income earned on account of duty drawback is income derived from industrial undertaking eligible for deduction under Section 80-IB.Anil L. Shah v. Asstt. CIT-- Receipts in the nature of duty drawback, insurance, recover of export freight, etc. have direct nexus with the industrial undertaking, hence eligible for deduction under Section 80-1.

(xiv) The assessee further submits that the provisions of Section 28(iiid) inserted with retrospective effect w.e.f. 1st April, 1998 provide that any profit on transfer of the DEPB under the export and import policy formulated and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992, shall be treated as business income.

(xv) The amendment classifies the exporters into two categories. One having turnover of not more than Rs. 10 crorcs (small exporters) and the other having export turnover exceeding Rs. 10 crores (large exporters). The benefit of Section 80HHC has been virtually denied in relation to profit on sale of DEPB in case of large exporters.

Without prejudice to the above, it is respectfully submitted that the sale proceeds of DEPB licences are now treated as business income by virtue of amendment of Section 28. The amendment of Section 80HHC only denies grant of deduction in respect of "any profit" on sale of DEPB. In case, where assessees do not derive any profit on DEPB the sale proceeds of DEPB licences will have to be regarded as part of business income derived from exports and will be eligible for grant of deduction under Section 80HHC." (xvi) The assessee lastly submits that it is well-settled principle that when the provisions of law are enacted to provide certain deductions and exemptions to the assessees and to encourage certain trade or industry or for achieving any national objective, such as earning of foreign exchange and promotion of exports as in this case, the language of the statute should be interpreted liberally.

This view is supported by the following cases:CIT v. U.P. Co-operative Federation Ltd. (xvii) Even if it is held that, more than one view is legally possible, the view which is favourable to the taxpayers must be adopted. Such a view is fortified by the judgment of Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. followed by Rajasthan High Court in various cases, such as the judgment in the case of CIT v. Multi Metals Ltd. .

11. The learned Counsel thus strongly supported the order of the learned CIT(A) and urged that the appeals submitted by the Department may be dismissed, as all the grounds raised by the Revenue in their appeals are devoid of any merit.

12. We have heard the parties, with reference to material on record, written submission and precedents cited at Bar. The assessee is a manufacturer and exporter of handicraft items and derives income from the export of goods so manufactured, besides that it has also received incentives from the Government such as credit of DEPB and DDB. The AO found that the assessee is eligible for exemption under Section 10BA in respect of export of eligible articles or things as specified under that section and allowed deduction thereon under Section 10BA(1) of the Act but refused to consider the amount of DEPB and DDB as part of the profits of the business of the undertaking on the premise that the same are not derived from the business of undertaking from the export out of India of eligible articles or things. The assessee, however, claimed that all such profits will partake character of profit of business of undertaking and deduction on the amount of such incentives has to be allowed to it. It, therefore becomes imperative to analyse the applicability of the relevant provisions of Section 10BA of the Act which runs with the title "Special provisions in respect of export of certain articles or things". Section 10BA of the Act is, therefore, reproduced as under: 10BA. Special provisions in respect of export of certain articles or things.--(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export out of India of eligible articles or things, shall be allowed from the total income of the assessee: Provided that where in computing the total income of the undertaking for any assessment year, deduction under Section 10A or Section 10B has been claimed, the undertaking shall not be entitled to the deduction under this section: Provided further that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years.

(2) This section applies to any undertaking which fulfils the following conditions, namely: (a) it manufactures or produces the eligible articles or things without the use of imported raw materials; (b) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that the condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of such undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section; (c) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation : The provisions of Expln. 1 and Expln. 2 to Sub-section (2) of Section 80-1 shall apply for the purpose of this clause as they apply for the purpose of Clause (ii) of Sub-section (2) of that section; (d) ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things.

(3) This section applies to the undertaking, if the sale proceeds of the eligible articles or things exported out of India are received in or brought into, India by the assessee 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 : For the purposes of this sub-section, the expression "competent authority" means the RBI or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.

(4) For the purposes of Sub-section (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking.

(5) The deduction under Sub-section (1) shall not be admissible, unless the assessee furnishes in the prescribed form along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

(6) Notwithstanding anything contained in any other provision of this Act, where a deduction is allowed under this section in computing the total income of the assessee, no deduction shall be allowed under any other section in respect of its export profits.

(7) The provisions of Sub-section (8) and Sub-section (10) of Section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in Section 80-IA. (a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the RBI as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1992 (42 of 1999), and any rules made therexander or any other corresponding law for the time being in force; (b) 'eligible articles or things' means all handmade articles or things, which are of artistic value and which require the use of wood as the main raw material; (c) 'export turnover' means the consideration in respect of export by the undertaking of eligible articles or things received in, or brought into, India by the assessee in convertible foreign exchange in accordance with Sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India; (d) 'export out of India' shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance of any customs station as defined in the Customs Act, 1962 (52 of 1962).

13. As pointed out earlier, the AO has found the assessee eligible for the exemption under Section 10BA of the Act and merely disputed the quantum of deduction in that respect, it therefore, follows that the respondent assessee has made sufficient compliance that profits and gains are derived by the assessee's undertaking from the export of eligible articles or things and he has satisfied the essential conditions as are contained under Sub-section (2) of Section 10BA of the Act such as it manufactures or produces the eligible articles or things without the use of imported raw materials and ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things.

14. The deduction under Sub-section (1) of Section 10BA of the Act is subjected to the provisions of this section. Such profits and gains as are derived by the undertaking from the export out of India of the eligible articles or things that are eligible for deduction out of total income of the assessee are prescribed in Sub-section (4) to be the amount which bears to the profits of the business of the undertaking in the proportion of export turnover of such eligible articles or things to the total turnover of the business. From the language of subs. (1) of Section 10BA it is evident that the deduction to be granted is "subjected" to the provisions of this section as the section starts with the words "subject to the provisions of this section". Thus by the use of expression 'subject to' in Sub-section (1) of Section 10BA. it is clear that the provision contained under Sub-section (4) shall override the provisions of Sub-section (1) of Section 10BA of the Act. If the legislature had by mandate prescribed as to what shall be the amount of profit derived from export out of India of the eligible articles or things for the purpose of Sub-section (1) of Section 10BA of the Act then there remains little scope for the assessing authority to enter into that arena and interpret the expression "derived" used in Sub-section (I) differently than to what it has been subjected to. Once the assessing authority has found the assessee eligible for deduction under Section 10BA(1) of the Act, then the only scope available to the assessing authority was to find out the quantum of the deduction as per prescription of Sub-section (4) of Section 10BA of the Act and no other method or manner could be used as the answer is available from the scheme contained in the special provision of Section 10BA of the Act itself, where, allowability of deduction was by mandate subjected to such provisions contained therein.

15. From the mandate of this section it is evident that the business of the undertaking needs only to be manufacture or production of eligible articles or things without the use of imported raw materials. If the business is that as specified in Clause (a) of Sub-section (2) of Section 10BA of the Act then further requirement amongst others is also that 90 per cent or more of its sales should be by way of export of eligible articles or things. This means in the event the undertaking undertakes to sell more than 10 per cent of its eligible articles or things in a way other than making exports then it has to lose the benefit of deduction bestowed under Section 10BA of the Act. Put differently, from the scheme of the Act as contained under Section 10BA of the Act, the undertaking in order to make it eligible for deduction under Section 10BA of the Act, has to confine itself to the manufacture or production of eligible articles and export thereof at least to the extent of 90 per cent out of India. The moment either of these two conditions is not satisfied, the deduction of profit under Section 10BA(1) shall not be granted. Essentially, therefore, the business of the undertaking was to be of eligible articles or things only as specified in Expln. (b) below Section 10BA(7). The AO having felt satisfied on that aspect and having allowed the exemption can be said to have accepted that fact inasmuch as that only business of the assessee is that of manufacture or production of eligible articles.

There thus remains no scope for the assessee's undertaking for carrying out any other business and derive profit from that source. It is thus when the profits are derived from manufacture and export of eligible articles, the solitary business activity of the undertaking, then the incentive such as DEPB/DDB irrespective of its real character or source has to be taken into account and has to be included as profits of the business of the undertaking, in particular when the expression used in Sub-section (4) of Section 10BA is the "profits of the business of undertaking". The expression "profits" used is in plural and word "of is to be read in conjunction with the word that follows It. The word "of is preceded by "profits" and followed by "business". The legislation in its wisdom did not use the expression "profit" in singular but used it as "profits" in plural. There can thus be profits not only by exporting the eligible articles or things but also can be those which are related to export of such articles or things, which in the present cases in appeal are DEPB and DDB determined with relation to export sales effected by these assessees. A useful reference on interpretation may be had from the judgment rendered by apex Court in the case of Kerala State Co-operative Marketing Federation Ltd. and Ors. v. CIT 16. Learned Counsel for the assessee, during the course of hearing has also drawn our attention to a recent judgment rendered by apex Court in the case of B. Desraj v. CIT (2008) 7 IJTR (SC) 54 : (2008) 301 ITR 439 (SC) wherein income received by way of export incentives namely cash compensatory support and DDB were found to have been included as part of the business profits derived from export of goods or merchandise outside India to make the assessee eligible for deduction under Section 80HHC of the Act on the premise that the CBDT had issued two Circulars--No. 564, dt. 5th July, 1990 [(1990) 85 CTR (St) 53 : (1990) 184 ITR (St) 137] and No. 571. dt. 1st Aug., 1990 [(1990) 86 CTR (St) 41 : (1990) 185 ITR (St) 9] respectively which were applicable to the asst. yr. 1991-92 that came to be considered by the apex Court in the aforesaid judgment.

17. The language of Section 80HHC of the Act in Sub-section (1) for allowing deduction in asst. yr. 1991-92 was with respect to the profits derived by the assessee from export of goods or merchandise and for the purpose of this Sub-section (1), profits derived from the export of goods or merchandise outside India were to be in a proportionate manner as prescribed under Sub-section (3) thereof by using the expression "shall" as has also been used similarly in Sub-section (4) of Section 10BA of the Act for the purpose of deduction under Sub-section (1) of Section 10BA of the Act. If the CBDT itself has considered that the incentives such as DDB and cash compensatory support are profits of the business as early as in the year 1990, there remains no scope or room for the assessing authorities to deviate from such accepted position where language of statute in Section 10BA of the Act to that extent is similar. Undoubtedly the Board circulars were binding on the assessing authority and this proposition is very well-settled by now. Reference to this can be made to the apex Court judgment rendered in the case of CCE v. Dhiren Chemical Industries (five Judges), Navnit Lal C. Javeri v. K.K. Sen AACJudges), Union of India v. Azadi Bachao Andolan and Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) at p. 709, Ellerman Lines Ltd. v. CIT , K.P. Varghese v. ITO and UCO Bank 18. The apex Court in the aforesaid judgment after considering these circulars has found that with the issuance: of the circulars, the point is no more res integra. Following the same analogy that the incentive though in this case are DEPB and DDB and also considering the mandate of Section 28 of the Act which has included them under the head "Profits and gains of business" the credit of DEPB/DDB and resultant profit therefrom, have to be taken as profit of the business of the undertaking of the assessee, when there is no other business of such undertaking.

19. Through various judgments cited at Bar by learned Departmental Representative it was sought to be pleaded that numerator and denominator are required to have the common element, i.e., it is the sale proceeds and as such it was contended that the incentives such as DEPB and DDB cannot be part of total turnover. We do agree with the proposition laid down as such, and when Section 28 itself treats the profits of DEPB or DDB as profits and gains of the business, the same will not enter into the total turnover or export turnover by any direct or indirect method of accounting or otherwise and will not be treated as part of the turnover.

20. The learned Departmental Representative placed strong reliance on the judgment rendered by apex Court in the case of CIT us. Sterling Foods (supra) which was a judgment with respect to deduction under Section 80HH of the Act and the issue related to the sale of import entitlements. As per Section 80HH of the Act the deduction allowable was only on the profits and gains derived from industrial undertaking while in the present case in appeal Sub-section (1) of Section 10BA lays only the eligibility criteria but the quantum of deduction is not related only to the profits and gains of business of the undertaking but the deduction is subjected to computation prescribed under Sub-section (4).Pandian Chemicals Ltd. v.CIT (supra) was also a case where deduction under Section 80HH was being claimed on the amount of interest on deposits made with Electricity Board. The deduction under that section is allowable only on the amount of profits and gains derived from the industrial undertaking. Sub-section (1) of Section 10BA lays only the eligibility criteria but the quantum of deduction is not related only to the profits and gains of business of the undertaking but the computation is prescribed under Sub-section (4) with reference to formula prescribed under that sub-section which subject the actual amount of deduction to be given by Sub-section (1) of that section, as also distinguished in the earlier judgment relied on behalf of Revenue.

22. The judgment rendered by apex Court in CIT v. Lakshmi Machine Works (supra) is a judgment that relates to deduction under Section 80HHC in relation to total turnover as to whether excise duty, sales-tax, commissions, interest, rent, etc. partake the character of turnover. In the present case in appeal before us, the amount of profit of DEPB/DDB has specifically been included as profits and gains of business and as already found the amount thereof will not enter in the turnover of the business of the undertaking.P.R. Prabhakar v. CIT (supra) referred by learned Departmental Representative relates to deduction under Section 80HHC for asst. yr. 1990-91 where the Court held that Section 80HHC applies to an assessee engaged in the business of export out of India including trading of goods. The expression business of export must be given its due meaning. The expression "income arising out of business of export" brings within its sweep not only the export of any goods or merchandise manufactured or processed by the assessee but also of the trading goods. Parliament, therefore, intended to provide incentive when a positive profit is earned by an exporter.

23.1 In this Judgment the Hon'ble Court has also stated that "it is now a well-settled principle of law that although the exemption provisions are to be construed strictly as regards the applicability thereof to the case of the assessee onee it is found that the same is applicable, the same are required to be interpreted liberally". Reference to Tata Iron & Steel Co. Ltd. v. State of JharkhandGovernment of India v. India Tobacco Association (2005) 5 RC 379 and CCE v. I lira Cement (2006) 6 RC 219 was made.

23.2 In the assessee's case before us the AO has accepted the fact that exemption provisions contained under Section 10BA of the Act are applicable to the assessee. The same were, therefore, to be interpreted liberally for granting deduction in terms of subs. (4) unless the amount of profit arising from credit of DEPB and DDB was taken away expressly. Learned Departmental Representative appearing on behalf of Revenue did not point out any such provision under Section 10BA of the Act which could permit the Revenue to take away the amount of profit of DEPB/DDB from the profits of business of the undertaking. He however, did make a reference to Clause (i) of Section 28 to say that profits and gains of the business are distinct from profits on DDB in Clause (ilic) and profits on DEPB in Clause (iiid), but by that position, we find it difficult to accept that the exemption that is sought to be granted under Section 10BA of the Act has been taken away expressly. It is settled law that an exemption is to be granted unless it is expressly taken away and a reference to this principle may be had from the judgment rendered by apex Court in Adityapur Industrial Area Development Authority v. Union of IndiaCIT v. Ravindranathan Nair (supra), referred by learned Departmental Representative, the issue decided is that the amount of processing charges, which are part of gross total income form an independent income and have to be included in the total turnover in the formula for arriving at the business profits in terms of Clause (baa) of the Explanation to Section 80HHC(3) of the Act. However, a similar provision as contained under Clause (baa) is absent under the provisions of Section 10BA of the Act but by interpretation of Sub-section (4) and by mandatory inclusion thereof under Section 28 the amount of profits of DDB and DEPB are found to have formed part of profits and gains of business of the assessee's undertaking.

25. We also agree with the distinction drawn by the assessee's Counsel in respect of various other judgments of the High Court relied by learned Departmental Representative through written submission as well as orally in his arguments before us as are found reproduced in above paras and therefore do not consider it necessary to distinguish here again.

26. The learned CIT(A) is also found to have placed strong reliance on two judgments in the case of CIT v. Gelatine Chemicals Ltd. (supra) and also on the judgment of jurisdictional High Court in the case of CIT v.Sharda Gum & Chemicals (supra). In fact the jurisdictional High Court in the case of Sharda Gum (supra), held that export incentive as mentioned in Clauses (iiia), (iiib) and (iiic) of Section 28 is to be taken as part and parcel of the profits and gains due to retrospective amendment in the section from 1st April, 1989. The amendment was made in the statute to put at rest the controversy going on at that time as to whether the export incentive was to be treated as capital receipt or revenue receipt or whether the same were part of the income or part of turnover. The AO of Sharda Gum & Chemicals has treated the income from such incentives as income from other sources. Special Bench of the Tribunal has entertained the view on similar dispute that export incentives are to be taken as capital receipt. In order to put an end to this controversy, Clauses (iiia), (iiib) and (iiic) were inserted below Section 28 so as to say that they are profits and gains of business of the assessee. The object of the amendment has been clarified in the Circular No. 572, dt. 3rd Aug., 1990. Now the export incentives are taken as business profits and to this extent there is no dispute. Due to legislative edict these receipts are to be treated as part of the profits of the business irrespective of the fact that these are incentives bestowed on an exporter from the scheme of the Government. It thus follows that whatever be real character or source of the receipt, it essentially partakes the character of profits of the business of the undertaking. Agreeing with the learned Departmental Representative we find that the jurisdictional High Court did not hold that the export incentives are derived from the business of the undertaking. It merely held the position that these incentives are part of profits of the business for the purpose of Section 80HHC of the Act.

27. In the judgment rendered by Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. (supra) it was held that cash compensatory support is not derived from the business but the duty drawback is held to be derived from the business. The said judgment does not deal with the profits of DEPB and the assessee's Counsel did not show that the two schemes in DDB and that of DEPB are pari materia same. Secondly the Hon'ble High Court has held that the DDB is reimbursement of duty paid and therefore is inescapably linked with the business of undertaking and as such entitled to deduction. Learned Departmental Representative had pointed out that the respondent assessee in these appeals before us cannot use imported raw material and as such question of payment of import duty in his case does not arise and also likewise, the items dealt by him are being made of wood and even all raw materials being wood, no excise duty is payable for which there can be no reimbursement. As such it will not be the case of reimbursement as well. Even though there may be some force in the argument advanced by learned Departmental Representative yet the same cannot be taken to be the conclusive inasmuch as the stipulation is with respect to the use of imported raw materials but when the assessee exports its goods, it has to use a sizable quantity of packing material in which involvement of content of import duty has not been denied by either of the parties. This may be one reason that the assessee has been bestowed with such incentives. We, however, do not consider it necessary to delve deep into the scheme to And out really as to why such incentives are bestowed and what are the basis set out thereof for the simple reason that the benefit bestowed in that scheme or provisions thereof will not override the provisions of the IT Act. A useful reference may be had to the ratio laid by Hon'ble Madras High Court in the case of T.N. Power Finance & Infrastructure Development Corporation Ltd. v. Jt. CIT 28. Having regard to the valuable assistance rendered by all the learned Counsel and the learned Departmental Representative and keeping in view the entire conspectus of the case as analysed hereinbefore, we hold that the amount of credit on account of DEPB/DDB has to be included as profits of the business of the undertaking for the purpose of Section 10BA(4) of the Act and the said amount of credit of DEPB or DDB will not enter into the total turnover or export turnover of the undertaking for the purpose of calculating profits derived from business of undertaking of the assessee within the meaning of Sub-section (4) and for allowing deduction to the respondent in terms of Sub-section (1) of Section 10BA of the Act in these two appeals in ITA Nos. 607 and 608/Jd/2007 and for parity of reasons also in the appeals by Revenue in ITA Nos. 609 and 610/Jd/2007, 594 and 595/Jd/20Q7. 605 and 606/Jd/2007 and 802/Jd/2007 where facts and law are identical.

29. The conclusion reached by learned CIT(A) to allow deduction, therefore, needs no interference. Finding no merit in the grounds in appeals by Revenue, the same stand rejected.


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