EXPORT ENTITLEMENTS AND DUTY DRAWBACK OF PROMITION SCHEME IS AN INCOME ASSESSBLE UNDER ‘PROFITS OR GAINS FROM BUSINESS OR PROFESSION’

[Mr. M. GOVINDARAJAN]

In NEKKANTI SEA FOODS LIMITED VERSUS PRINCIPAL COMMISSIONER OF INCOME TAX, VISAKHAPATNAM. [2022 (6) TMI 350 - ITAT VISAKHAPATNAM]  the assessee is a limited company engaged in the business of export of frozen shrimp and other sea foods filed its return of income for the AY 2017-18 declaring a total income of Rs. 52,30,54,010/-.  After processing the return of income under section 143(1), the case was selected for complete scrutiny under CASS.  Notices under sections 143(2) and 142(1) were issued in electronic format to the assessee calling for the information.  The assessee filed replies to the said notices.  The Assessing Officer made a disallowance under section 14A read with rule 8D for Rs.28,57,443/-

The Principal Commissioner of Income Tax noticed that the above said assessment order is erroneous and prejudicial to the interest of the revenue for the following reason-

• The Assessing Officer allowed the deduction of Rs.22,82,85,812/- under section 80IB(11A) claimed by the assessee without properly examining  the issue that the income on which deduction was claimed is derived from the business of industrial undertaking or not.

Therefore he invoked his power under section 263 of the Act and issued a show cause notice to the assessee. The Principal Commissioner of Income Tax, on considering the reply furnished by the assessee, directed the Assessing Officer to disallow a sum of Rs.10.24 crores arising from the receipt of duty draw back and Rs.6.89 crores from the sale of licences since the same did not arise from industrial undertaking which is eligible for deduction under section 80IB (11A).  For this purpose he relied on the judgment of Supreme Court in M/S LIBERTY INDIA VERSUS COMMISSIONER OF INCOME TAX [2009 (8) TMI 63 - SUPREME COURT]

Aggrieved against the order the assessee filed an appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short).  The assessee filed the appeal on the following grounds-

• The order passed by Principal Commissioner of Income Tax is against to the law, equity, weight of evidence, probabilities and the facts and circumstances in the appellant’s case.
• The revision order is without appreciating that there is no error, much less prejudicial to the interests of the revenue to warrant a revision and therefore the order passed by the is ultra vires to the scope of section 263 and requires to be cancelled under the facts and circumstances of the appellant’s case.
• The Principal Commissioner of Income Tax has erred in not appreciating the settled position of law that, where there are two opinions possible on the issue, section 263 cannot be exercised to invoke such as issue and the order is required to be cancelled.
• The order is passed without giving opportunity to the appellant.
• The appellant’s case will not fall under sub-section (1), explanation 2(b) of section 263 of the Act.
• The Principal Commissioner of Income Tax is not justified to conclude that the deduction under section  80IB(11A) of the Act, of an amount being Rs. 22,82,85,812/- was allowed by the Assessing Officer without properly examining the issue, under the facts and circumstances of the case.
• The Principal Commissioner of Income Tax is not justified in directing the Assessing Officer to re-do the assessment by taking into consideration the judgment of Apex Court, even when the facts of the appellant’s case are distinguishable on merits, under the facts and circumstances of the case.

The appellant submitted the following before ITAT-

• The order of the Principal Commissioner of Income Tax is prima facie erroneous on the ground that since the Assessing Officer has examined the books of accounts of the assessee submitted before him.
• A mere change of opinion by the Principal Commissioner of Income Tax is not in accordance with law.
• The assessee has received incentives framed under the Foreign Trade Policy arising out of the exports made by the assessee.
• These incentives are provided by the Government of India in making exports viable and more attractive in the international markets.
• The incentives are granted based on Free on Board (FOB) basis, authenticated and administered by the Commissioner of Customs in the shipping bills.
• These incentives are derived from the industrial undertaking and should be regarded as profits and gains of business.
• section 28(iiib) of the Income Tax Act, 1961 which provides that cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India should be treated as part of business profits.
• The Taxation Laws (Amendment) Act, 2005 has inserted in section 28 a new clause-(iiid) with retrospective effect from 01.04.1998 that any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 shall be treated as part of the business profits of the exporter.
• If there is no export sales, the assessee is not entitled for these incentives and hence it has direct link and nexus with the activities of the assessee industrial undertaking entitling deduction under section 80IB(11A) of the Act.
• The ‘Liberty India’ judgment (supra) has been overruled by the Supreme Court in COMMISSIONER OF INCOME TAX VERSUS MEGHALAYA STEELS LTD [2016 (3) TMI 375 - SUPREME COURT].

• The claim of deduction under section 80IB (11A) be allowed by refraining the order of the Principal Commissioner of Income Tax.

The Revenue submitted the following before the ITAT-

• The duty drawback, sale of license etc., would constitute independent source of income beyond the first degree nexus between profits earned by the industrial undertaking and do not form part of the eligible undertaking for the purpose of 80IB of the Act.
• The order of the Principal Commissioner of Income Tax shall be upheld.

The ITAT considered the submissions put forth by the parties to the present appeal.  The ITAT observed that the Authorities below have failed to understand the Legislative Intent behind the insertion of a clause-(iiid) to section 28 of the Act with retrospective effect wherein it has been held that any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 shall be treated as part of the business profits of the exporter and assessed as ‘profits and gains of business or profession’ and not under the head ‘income from other sources’.

The ITAT considered the issue to be decided in the appeal is as to the entitlement for deduction under section 80IB (11A) of the Act where the Principal Commissioner of Income Tax referred to the decision of the Supreme Court in the case of ‘Liberty India vs. Commissioner of Income Tax’ (supra) and directed the Assessing Officer to exclude the export incentives for the purpose of computation of deduction under section 80IB (11A) of the Act.  As the export incentives cannot be considered as profits derived from industrial activities for the purpose of claiming deduction under section 80IB (11A) of the Act, the reliance placed by the Revenue in ‘Meghalaya Steels Limited’ (supra) in which the Supreme Court held that Section 28(iii)(b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head ‘profits and gains of business or profession’. If cash assistance received or receivable against exports schemes are included as being income under the head ‘profits and gains of business or profession’, it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head ‘profits and gains of business or profession’, and not under the head ‘income from other sources’.

The ITAT was of the considered view that since the Supreme Court has overruled its earlier decision in the case of Liberty India (supra) the decision in the case of Meghalaya Steel Limited (supra) holds good.  The ITAT held that the export entitlements (MEIS) and the duty drawback of promotion scheme is an income assessable under the head ‘profits or gains from business or profession’ as per clause (iiib) and (iiid) to section 28 of the Income Tax Act, 1961.  The Assessing Officer has rightly considered the same and therefore the exercising his powers under section 263 by Principal Commissioner of Income Tax are not valid.  The ITAT allowed the appeal filed by the appellant.