TMI Blog2009 (8) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009 & others - - - Dated:- 31-8-2009 - S.H. Kapadia and Aftab Alam, JJ. CIVIL APPEAL No. of 2009 (arising out of S.L.P.(C) No. 5827/07) Civil Appeal Nos. /09 (arising out of SLP (C) Nos. 22083-22084/07), Civil Appeal No. /09 (arising out of SLP (C) Nos. 7956-7957/08), Civil Appeal No. /09 (arising out of SLP (C) No. 11416/08), Civil Appeal No. /09 (arising out of SLP (C) No. 16875/08), Civil Appeal No. /09 (arising out of SLP (C) No. 11404/08), Civil Appeal No. 5271/07, Civil Appeal No. 5571/07, Civil Appeal No. 1465/08, Civil Appeal No. 1499/08, Civil Appeal No. 1500/08, Civil Appeal No. 1438/08, Civil Appeal No. 1439/08, Civil Appeal No. 1440/08, Civil Appeal No. 1915/08, Civil Appeal No. 2408/08, Civil Appeal No. 2409/08, Civil Appeal No. 2411/08, Civil Appeal No. 2410/08, Civil Appeal No. 5157/07, Civil Appeal No. 3479/08, Civil Appeal No. 2648/08, Civil Appeal No. 4125/08, Civil Appeal Nos. 6217-6218/08, Civil Appeal No. 427/09, Civil Appeal No. 430/09, Civil Appeal No. 429/09, Civil Appeal No. 364-365/09, Civil Appeal No. 1257- 1258/09, Civil Appeal No. 3532/09 and Civil Appeal No. 451/06. JUDGMENT S. H. KAPADIA, J. - Leave granted. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o CIT(A), credit under DEPB could be utilized by the exporter himself or it could be transferred to any other party; that such transfer could be made at higher or lower value than mentioned in the Passbook and, therefore, DEPB cannot be equated with the duty drawback, hence, the appellant who had received Rs. 20,95,740/- on sale of DEPB licence stood covered by the decision of this Court in Sterling Food (supra). Hence, to that extent, appellant was not entitled to deduction under Section 80-IB. Against the decision of CIT(A) allowing deduction on duty drawback, the revenue went in appeal to the Tribunal which following the decision of the Delhi High Court in the case of CIT v. Ritesh Industries Ltd. reported in 274 ITR 324, held that the amount received by the assessee on account of duty drawback was not an income derived from the business of the industrial undertaking so as to entitle the assessee to deduction under Section 80-IB. 6. The decision of the Tribunal was assailed by the assessee(s) under Section 260A of the 1961 Act before the High Court. Following the decision of this Court in Sterling Food (supra), the High Court held that the assessee(s) had failed to prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant(s) that payment of excise duty/customs duty on inputs consumed in manufacture of goods by an industrial undertaking eligible for deduction under Section 80-IB, was inextricably linked to the manufacturing operations of the eligible undertaking without which manufacturing operations cannot be undertaken, hence the duty, which was paid in the first instance and which had direct nexus to the manufacturing activity when received back, had first degree nexus with the industrial activity of the eligible undertaking and consequently the reimbursement of the said amount cannot be treated as income of the assessee(s) dehors the expense originally incurred by way of payment of duty. Consequently, according to the appellant(s), receipt of duty drawback/DEPB stood linked directly to the manufacture/production of goods and therefore had to be regarded as profits derived from eligible undertaking qualifying for deduction under Section 80-IB of the 1961 Act. On behalf of the appellant(s) it was further submitted that this Court's decision in Sterling Food (supra) dealt with availability of deduction under Section 80-HH with respect to profit on sale of import entitlements. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scheme, the profit as shown in Profit Loss account was regarded as income derived from industrial undertaking entitled to deduction under Section 80-IB of the 1961 Act without any adjustment whereas when the same industrial undertaking when it opts for duty drawback is denied the benefit of deduction under Section 80-IB on the duty remitted. 9. On behalf of the appellant(s) it was submitted that Section 80-IB was different from Section 80-I in the sense that under Section 80-IB, income derived from business of an industrial undertaking was admissible for deduction whereas under Section 80-I deduction was allowable to income derived from industrial undertaking. Hence, according to the appellant(s) provision of Section 80-IB was much wider in scope than Section 80-I. According to the appellant(s) Section 80-IB was wider than Section 80-I as the Legislature intended to give benefit of deduction not only to profits derived from the undertaking but also to give benefit of deduction in respect of incomes having direct nexus with the profits of the undertaking, hence, all incomes that arose during the course of running of the eligible business would be eligible for deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king. 11. Relevant provisions of the Income Tax Act, 1961: Deductions to be made with reference to the income included in the gross total income. 80-AB. Where any deduction is required to be made or allowed under any section included in this Chapter under the heading "C.- Deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc. 80-I. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on its behalf in accordance with the agreement with the Central Government, State Government, local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken place. Explanation.- For the purposes of this clause, "infrastructure facility" means- (a) a road including toll road, a bridge or a rail system; (b) a highway project including housing or other activities being an integral part of the highway project; (c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; (d) a port, airport, inland waterway or inland port; (ii) any undertaking which has started or starts providing telecommunication services whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services on or after the 1st day of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings 80-IB (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11) and (11A) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. (2)This section applies to any industrial undertaking which fulfils all the following conditions, namely: - (i) it is not formed by splitting up, or the reconstruction, of a business already in existence : rovided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re- establishment, reconstruction or revival by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng shall be twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) beginning with the initial assessment year subject to the fulfillment of the following conditions, namely: - (i) it begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st day of April, 1991 and ending on the 31st day of March, 1995 or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant not specified in sub-section (4) or sub-section (5) at any time during the period beginning on the 1st day of April, 1995 and ending on the 31st day of March, 2002 . xxx (13) The provisions contained in sub-section (5) and sub- sections (7) to (12) of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit/ Duty drawback receipt comes within the first degree sources? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials, components etc.. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from Section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under Section 80-IB. They belong to the category of ancillary profits of such Undertakings. 17. The next question is - what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking. 23. We are of the view that Department has correctly applied AS-2 as could be seen from the following illustration: Expenditure Amount (Rs.) Income Amount (Rs.) Opening stock 100 Sales 1,000 Purchases (including customs duty paid 500 Duty Drawback received 100 Manufacturing overheads 300 Closing stock 200 Administrative, Selling and Distribution Exp. 200 Net profit 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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