TMI Blog2004 (4) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... 1980-81 and 1981-82. In both these references, the following common question of law has been referred for our opinion:- "Whether, in law and on facts, the Appellate Tribunal is right in holding that CCS. (cash compensatory support) and Duty Draw Back received by the assessee would constitute income derived from an industrial undertaking and eligible for relief under section 80J of the Income-tax Act, 1961?" The assessee in this case is a company engaged in the manufacture of ossein and D. C. Phosphate. The Income-tax Officer, completed the assessments under section 143(3) and in doing so, allowed relief under section 80J of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The Commissioner of Income-tax on a perusal of the record opined that the orders of the Income-tax Officer for the years under consideration were erroneous and prejudicial to the interests of the Revenue. According to the Commissioner of Income-tax, the relief under section 80J was allowed in respect of Unit No. II where the receipts on account of cash assistance and duty draw back aggregate more than the amount of profit earned by the said unit. The Commissioner of Income-tax was of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 579 (SC), which is the leading decision on similar controversy under section 80HH; (ii) CIT v. Jameel Leathers and Uppers [2000] 246 ITR 97 (Mad), which was concerned with both CCS and duty drawback under sections 80J and 80HH; (iii) CIT v. Viswanathan Co. [2003] 261 ITR 737 (Mad), which followed Jameel Leathers [2000] 246 ITR 97 (Mad). Mr. J. P. Shah for the respondent-assessee has supported the view taken by the Tribunal but submitted that in any case CCS and duty drawback are required to be treated separately. In CIT v. Jameel Leathers and Uppers [2000] 246 ITR 97, the Madras High Court was concerned with this very question and the court on an analysis of the relevant provisions and the decisions of the hon'ble Supreme Court interpreting the expression "derived from" laid down the following principles which are embodied in the headnote which correctly reflects the principles laid down in the judgment: "Sections 80J and 80HH of the Income-tax Act, 1961, use the expression 'derived from'. The word 'derived' is usually followed by the word 'from', and it means: get or trace from a source; arise from, Income Tax Reports originate in; show the origin or formation of. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) wherein it was held as under: "... the expression 'attributable to' was wider in import than the expression 'derived from'. The expression of wider import, namely, 'attributable to', was used when the Legislature intended to cover receipts from sources other than the actual conduct of the business. The Division Bench of the High Court observed that to obtain the benefit of section 80HH the assessee had to establish that the profits and gains were derived from its industrial undertaking and it was just not sufficient that a commercial connection was established between the profits earned and the industrial undertaking. The industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit. The industrial undertaking had the direct source of that profit and not a means to earn any other profit. Reference was also made to the meaning of the word 'source' and it was held that the import entitlements that the assessee had earned were awarded by the Central Government under the Scheme to encourage exports. The source referable to the profits and gains arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the industrial undertaking has to be treated as impliedly overruled by the apex court in Sterling Foods' case [1999] 237 ITR 579. The aforesaid discussion dealing with the cash compensatory support or cash assistance leads to only one conclusion that cash compensatory support is "attributable to", but not "derived from" the industrial undertaking and, therefore, it could not have been included in the profits and gains of the business for the purposes of deduction under section 80J. April 8, 2004 Duty drawback Mr. Shah, learned counsel for the assessee has submitted that duty drawback is reimbursement of the customs duty which the assessee has paid on import of raw materials and reimbursement of excise duty, if any, paid on the manufacture of the goods with those imported raw materials which reimbursement is made by the Government on account of the export of the finished goods out of India and that the benefit is given by the statutory provisions embodied in the Customs Act and the Excise Act. Hence, duty drawback is derived from the industrial undertaking and, therefore, to be included in the profits and gains of the industrial undertaking for the purposes of section 80J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with, and 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 exporters 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 costs 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 the 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. Mr. Bhatt for the Revenue would, of course, argue that the assessee could have carried on its business even without the duty drawback and, therefore, the duty drawback is merely attributable to the industrial undertaking but not derived from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishment of industries in the backward areas and once the decision to give cash subsidy was taken, the Government had to work out some method to determine the quantum of such subsidy. One of the recognised methods of working out such cash subsidy is on the basis of the amount invested by an entrepreneur in acquiring capital assets and the Government specified a certain percentage of the amount so invested in the capital assets as cash subsidy. The scheme does not say as to in what manner the subsidy granted was to be utilised and, therefore, the industry to which the subsidy was granted was free to utilise it in any manner it liked. The court, therefore, concluded that if the subsidy could be utilised by the entrepreneur in any manner it liked, it could not be said that it was granted for meeting the cost of the capital assets. It was on this basis that the court held that the subsidy was not given to meet the cost of the fixed assets and it was merely granted as an incentive to establish industry in a backward area for balanced growth of industries. Since the subsidy was not granted to meet the fixed assets or a portion thereof, it did not take the colour of the part of the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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