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TMI Blog2023 (4) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... d to as "DEPB"), the assessee has preferred the present appeal. 2. The facts leading to the present appeal in nutshell are as under:- 2.1 The assessee, a partnership firm, was engaged in the business of manufacturing and exporting wooden handicraft items. For the Assessment Year (A.Y.) 2008- 09, the assessee filed its return on 30.09.2008 declaring its income as nil, claiming deduction of Rs. 70,197/- on account of DEPB and of Rs. 76,27,636/- on account of receipts under the Duty Drawback. 2.2 The assessee credited the receipts of the aforesaid amounts into the Profit & Loss Account and claimed the same as "Profit / gains of business / profession" under Sections 28(iiic) and 28(iiib) of the Act, 1961. The assessee was issued a notice under Section 143(2) of the Act, 1961. 2.3 By order dated 24.11.2010, the Deputy Commissioner disallowed the deductions as claimed. The order of the Deputy Commissioner disallowing the exemption as claimed, came to be upheld by the Commissioner of Income Tax (Appeals). However, the Income Tax Appellate Tribunal (ITAT) allowed the appeal preferred by the assessee vide order dated 17.12.2013 by inter alia observing that the decision of this Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the business of the assessee. It is submitted that, however, this Court has rejected the said contention and held that the fact that the Government is the "immediate source" of the subsidies is not relevant so long as the subsidies reimbursed, wholly or partially, costs actually incurred by the assessee in manufacturing or selling of the products, because, the profits or gains referred to in Section 80-IB means net profit, i.e., profit derived after deduction of manufacturing cost and selling cost. 3.4 It is contended that this Court specifically relied on Section 28(iii)(b) and reiterated that any cash assistance received from the Government against exports under any Scheme is chargeable to income tax under the head of "Profit or gains of business or profession". That this Court approved the decision of the Delhi High Court in the case of Commissioner of Income Tax Vs. Dharam Pal Prem Chand Ltd., (2009) 317 ITR 353 (Del) holding that the refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB. 3.5 It is further contended that therefore, applying the law laid down by this Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). It is submitted that therefore, relying upon and following the decisions of this Hon'ble Court in the aforesaid two decisions, the High Court has not committed any error in holding that the assessee is not entitled to the deductions under Section 80-IB on the amount received by way of DEPB and Duty Drawback Schemes. 4.1 Insofar as the reliance placed by the assessee upon the decision of this Court in the case of Meghalaya Steels Limited (supra) is concerned, it is submitted that in the case of Meghalaya Steels Limited (supra), this Court has not disagreed with or disapproved the decision in the case of Liberty India (supra) or Sterling Foods, Mangalore (supra). It is submitted that even otherwise, the said decisions shall not be applicable in case of receipt of the amount under DEPB and Duty Drawback Schemes as the same cannot be said to be an income that falls under the head "profits and gains of business or profession". 4.2 Shri Balbir Singh, learned ASG has taken us through the scheme of Section 28 and Section 80-IB of the Act, 1961. It is submitted that insofar as Section 28 is concerned, it speaks about the income that falls under the head of "profit and gains of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that on a fair reading of Section 80-IB read with Section 28 and on true interpretation of Section 80-IB, the DEPB and Duty Drawback Schemes cannot be said to be deriving the income from the business undertaking and, therefore, deduction under Section 80-IB on such receipt of the Duty Drawback shall not be allowable as a deduction. 4.6 It is submitted that in the case of Sterling Foods, Mangalore (supra), while adjudicating the issue of whether on earning of import entitlements under an export promotion scheme of the Central Government, deduction under Section 80HH would be allowable or not, this Court gave the words "derived from" used in Section 80HH a restricted interpretation and it was observed that since the words "derived from" have been used, it shall suggest to go to the source of such profits and gains. 4.7 It is submitted that in the case of Liberty India (supra), this Court has considered in detail, deduction in respect of profits and gains "derived from". That in the said decision, this Court has discussed the DEPB and Duty Drawback and thereafter has held that the Duty Drawback and DEPB benefits cannot be credited against the cost of manufacture of goods debited in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt question, which is posed for consideration of this Court is:- Whether on the income amount received / profit from DEPB and Duty Drawback Schemes, the assessee is entitled to deduction under Section 80- IB of the Income Tax Act, 1961 and whether such an income can be said to be an income "derived from" industrial undertaking? 7. While considering the aforesaid issue/question, relevant portion of Section 28 and Section 80-IB are required to be referred to, which are as under:- "28. Profits and gains of business or profession.-The following income shall be chargeable to income tax under the head "Profits and gains of business or profession", - XXXXXXXX (iii-a) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947); (iii-b) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India; (iii-c) any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971; (iii-d) any profit on the transfer of the Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2.-Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with; (iv) in a case whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th-Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years: Provided also that no deduction under this sub-section shall be allowed for the assessment year beginning on the 1st day of April, 2004 or any subsequent year to any undertaking or enterprise referred to in subsection (2) of Section 80-IC. Provided also that in the case of an industrial undertaking in the State of Jammu and Kashmir, the provisions of the first proviso shall have effect as if for the figures, letters and words "31st day of March, 2004", the figures, letters and words "31st day of March, 2012" had been substituted: Provided also that no deduction under this sub-section shall be allowed to an industrial undertaking in the State of Jammu and Kashmir which is engaged in the manufacture or production of any article or thing specified in Part C of the Thirteenth Schedule. (5) The amount of deduction in the case of an industrial undertaking located in such industrially backward districts as the Central G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, thereafter, and in order to put an end to the dispute, the legislature by way of inserting clauses 28 (iiia), (iiib), (iiic), (iiid) and (iiie) has made the said incentives taxable under the head of "profits and gains of business and profession". 7.2 Section 80-IB provides for deductions in respect of profits and gains from certain industrial undertakings. Therefore, as such for claiming deductions under Section 80-IB, it must be on the "profits and gains derived from industrial undertakings" mentioned in Section 80-IB. An identical question came to be considered by this Court and, more particularly, with respect to the profit from DEPB and Duty Drawback Schemes, in the case of Liberty India (supra). 7.3 After taking into consideration the DEPB and Duty Drawback Schemes, ultimately, it is observed and held in the case of Liberty India (supra) that DEPB / Duty Drawback Schemes are incentives which flow from the schemes framed by the Central Government or from Section 75 of the Customs Act, 1962 and, hence, incentive profits are not profits derived from the eligible business under Section 80-IB. It is observed that they belong to the category of ancillary profits of such undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (See CIT v. Kirloskar Oil Engines Ltd. [(1986) 157 ITR 762 (Bom)]) 32. Continuing our analysis of Sections 80-IA/80-IB it may be mentioned that subsection (13) of Section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) of Section 80- IA, so far as may be, applicable to the eligible business under Section 80-IB. Therefore, at the outset, we stated that one needs to read Sections 80-I, 80-IA and 80-IB as having a common scheme. 33. On perusal of sub-section (5) of Section 80-IA, it is noticed that it provides for the manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-section (5) of Section 80-IA, which are also required to be read into Section 80-IB. [See Section 80-IB(13)]. We may reiterate that Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y paid by an individual importer-cummanufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in Section 75 of the Customs Act and Section 37 of the Central Excise Act. 39. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in Section 80-IB. XXXXXXXX 41. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to be the direct source of that profit and not the 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 out of the sale proceeds of the import entitlement was, therefore, the scheme of the Central Government and not the industrial undertaking of the assessee. XXXXXXXX 13. We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its products and the DEPB entitlement arises only when the undertaking goes on to export the said product, that is, after it manufactures or produces the same. In paragraph 20, in the case of Meghalaya Steels Limited (supra), while distinguishing the profit derived from DEPB / Duty Drawback, it is observed and held as under:- "20. Liberty India [Liberty India v. CIT, (2009) 9 SCC 328] being the fourth judgment in this line also does not help the Revenue. What this Court was concerned with was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is, after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralise the incidence of customs duty payment on the import conte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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