No Exclusion of DEPB from Gross Profit while Calculating Business Income: ITAT strikes down ₹2.55 Cr Addition [Read Order]

The Income Tax Appellate Tribunal, Mumbai Bench held that Duty Entitlement PassBook (DEPB) benefits cannot be excluded from gross profit while estimating business income, thereby quashing an addition of ₹2.55 crore as the revisionary action taken by the tax authorities was unsustainable in law.

The appellant, Aamir Khatri, engaged in the business of exports who filed under Section 143(3) under the Income Tax Act, 1961 for the Assessment Year 2012-13, wherein the Assessing Officer (AO) estimated gross profit at 1% of turnover after excluding DEPB licence sales and made a limited addition on account of low gross profit.

The Principal Commissioner of Income Tax (PCIT) invoked revisionary jurisdiction under Section 263 of the Income Tax Act, 1961, stating that the DEPB income had been wrongly treated as part of business turnover.

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The assessment was set aside and a fresh order was passed, leading to a substantially higher addition of ₹2.55 crore by excluding the DEPB income from turnover and separately adding it to total income. This order was upheld by the first appellate authority, giving rise to the present appeal before the Tribunal.

The appellant contended that DEPB income is intrinsically linked to export activity and forms part of the operating income of the export business. And that the revision under Section 263 of the Income Tax Act, 1961, was based merely on a difference of opinion and not on any lack of inquiry in the original assessment.

The tax department argued that DEPB licence sales constitutes a separate stream of income and cannot be treated as part of operating turnover for the purpose of estimating gross profit. Subsequently, exclusion of such incentives was necessary to arrive at a realistic profit margin and that the original assessment order was erroneous and prejudicial to the interests of revenue.

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The Bench comprising Anikesh Banerjee, Judicial Member, and Prabhash Shankar, Accountant Member, allowed the appeal and deleted the addition of ₹2.55 crore. The Tribunal held that DEPB benefits arise directly from export activity and are closely connected with the normal business operations of the assessee.

They observed that Section 28 of the Income Tax Act, 1961, treats export incentives as profits and gains of business or profession, thereby reinforcing their operating nature. Further held that the revisionary jurisdiction under Section263 of the Income Tax Act, 1961, cannot be exercised merely to substitute the view of the AO with that of the PCIT when the original assessment was completed after due consideration.

On this reasoning, the Tribunal concluded that exclusion of DEPB income from gross profit was unjustified and the consequential addition was liable to be set aside.

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