Timing of taxation of export incentives under the Income Tax Act

INTRODUCTION

There are various incentives are provided to the exporters to make it simpler for them to compete in the international market in terms of cost, technology and infrastructural facilities.

Following are the benefits available to exporters with respect to payment of import duty are as under –

(a)	Duty Entitlement Pass Book Benefit (DEPB)
(b)	Duty Draw Back Benefit (DDB)
(c)	Duty Exemption Entitlement Certificate (DEEC) also known as Advance License Scheme
(d)	Duty Free Replenishment Certificate (DFRC)

Under the aforesaid schemes, an assessee is entitled to import entitlements on the basis of exports at zero or concessional rate. The said entitlements can be utilised either by way of actual import of raw material at  zero or concessional rate or the said entitlement can be sold in the open market at a premium and the profit is pocketed. In the case of advance licence scheme, the exporter is entitled to the benefit on the basis of future export commitments but on failure to honour the commitment, the exporter has to make good the benefit wrongly availed to the government.

ASSESSEE IS FOLLOWING MERCANTILE SYSTEM : ISSUE WHEN INCOME SHOULD BE RECOGINED.

A typical situation arises where the assessees is following mercantile system how to account for export benefits particularly when the benefit is merely notional and may not materialise in the subsequent year.

Common instances of such cases are-

(a)	Actual entitlement earned but no import of raw material is made.
(b)	Actual import of raw material is made at zero or concessional rate but no corresponding sale is made.
(c)	Actual entitlement earned in year one but same is sold at a profit in year two.

Department view is to offer the income for tax in the previous year in which entitlement is granted even if actual sale is made subsequently. The problem is is compounded when the assessee himself takes credit of the estimated benefit in its accounts.

CASE LAWS

Some of the reported judgements from the high courts and the apex court on the issue are analysed hereunder-

(a)	Indian Overseas Bank Ltd. vs. CIT	it was held that even in the mercantile system of accounting, any contingent/estimated benefit cannot be brought to tax.
(b)	CIT v. Shoorji Vallabhdas and Co	"Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise."

LAW IS SILENT?

As per section 28(iiia) profit on sale of a licence granted under Import (Control) Order would be charged to Income-tax.

The expression "profit on sale" is employed in this sub-section in contradistinction to the cash assistance "received or receivable" as incorporated in section 28(iiib) and the duty of customs or excise "repaid or repayable" as contained in section 28(iiic).

The intention is very clear that insofar as the import entitlements are concerned, the profit has to be recognised only when such licences are sold and the profit is, in fact, realised. Mere holding of licence as at the year end does not result into accrual of income.

If the view of the department is accepted, it would amount to double taxation because not only the profit on acquisition of such import licences as is the case in hand, would be taxable but the actual profit realized on the sale of such licences would again become subject-matter of taxation in view of the specific provision contained in section 28(iiia).