Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2009 Supreme(SC) 1515

Supreme Court of India
THE HONOURABLE MR. JUSTICE S.H. KAPADIA & THE HONOURABLE MR. JUSTICE AFTAB ALAM
M/s Liberty India
Versus
Commissioner of Income Tax
CIVIL APPEAL No. of 2009 (arising out of S.L.P.(C) No. 5827/07) with 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 N
Decided on : 31-08-2009

Appearing Advocates:
For the Appearing Parties:Gourab Banerji, A.S.G., S. Ganesh, Sr. Advocate (NP), Dr. Rakesh Gupta, Ashwani Taneja, Ms. Poonam Ahuja, Rajan Verma,
S.K. Mukhi, Rameshwar Prasad Goyal, Ms. Shashi M. Kapila, Anoop Sharma, Ms. Malika Chaudhary, Ms. Charu Kapoor, Ms. Nupur Kanungo, Ram Raj, Vikas Mehta, Pankaj Jain, S.K. Sabharwal, Arun Jain, Jasbir Singh Malik, Preetesh Kapur, Ms. Radha Rangaswamy, Ajay Vohra, Ms. Kavita Jha, Sandeep S. Karhail, Pankaj Jain, M.K. Choudhary, Ms. Namita Choudhary, S.K. Verma, Ambhoj Kumar Sinha, Kailash Mittal, Sunil Mukhi, Gagan Gupta, Rajiv Tyagi, H. Raghavendra Rao, T.A. Khan and B.V. Balaram Das, Advocates.

IMPORTANT POINT
Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking. Hence these are not eligible for deduction u/s 80-IB, Income Tax Act, 1961.

Headnote:(a) Income Tax Act, 1961 – Section 80-IA/80-IB – Profit linked incentive, not investment linked incentive – Each eligible business u/s 80-IA(11A)(3) stand alone item for computation of profits – Segment reporting, Indian Accounting Standards (IAS) –Generation of operational profit attracts incentive u/s 80-IA/80-IB – Sections 80I, 80-IA and 80-IB have a common scheme and so, provisions of sub-section (5) of Section 80IA, are required to be read into Section 80-IB – So read, these sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. (Para 13, 15)
       (b) Income Tax Act, 1961 – Section 80-IB – Deduction in respect of profits and gains derived from the eligible business – Expression ‘derived from’ – Narrower than ‘attributable to’ – Refers to first degree sources – DEPB credit/ Duty drawback receipt – Whether first degree source – Apart from eligibility, sub-section(1) restricts quantum of deduction to a specified percentage of profits – "Derived from industrial undertaking" and "profits attributable to industrial undertaking" – Distinction – Devices adopted to reduce or inflate profits of eligible business – Got to be rejected. (Para 14, 15)
       (c) Customs Act, 1962 – Section 75 and Section 37, Central Excise Act, 1944 – DEPB/Duty Drawback – Are incentives flowing from schemes or from section 75, Customs Act, 1962 – These are incentive profits – Ancillary profits – Not "profits derived from industrial undertaking" – Not eligible for deduction u/s 80-IB, Income Tax Act, 1961. (Para 16, 18)
       [1986] 157 ITR 762 – Relied upon
       237 ITR 579; 274 ITR 324 (Delhi); 275 ITR 284 (Guj); 262 ITR 278 – Referred
       (d) Accounting Standard – AS-2 – Valuation of inventories – Comprising cost of purchase including duties and taxes, cost of conversion, cost of transportation etc. – Trade discounts, rebate, duty drawback, and such similar items deducted in determining costs of purchase – Duty drawback, rebate etc. not adjustments (credit) to cost of purchase or manufacture of goods – These are separate items of revenue or income – Not first degree sources of profit (Para 20, 21, 22)
       Facts of the case:
       The issue for consideration in this case is: whether profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme could be said to be profit derived from the business of the Industrial Undertaking eligible for deduction under Section 80-IB of the Income-tax Act, 1961?
       During the relevant previous year corresponding to Assessment Year 2001-02, appellant claimed deduction under Section 80-IB on the increased profits of Rs. 22,70,056.00 as profit of the industrial undertaking on account of DEPB and Duty Drawback credited to the Profit & Loss account. The Assessing Officer denied deduction under Section 80-IB on the ground that the said two benefits constituted export incentives, and that they did not represent profits derived from industrial undertaking.
       In appeal, CIT(A) held that the AO was not justified in denying deduction under Section 80-IB.
       High Court held that the assessee(s) was not entitled to deduction under Section 80-IB(3).
       Finding of the Court:
       Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961 Act.
       Result:
       Appeals dismissed.

Judgment :-

S.H. KAPADIA, J.

Leave granted.

2. The issue for consideration is: whether profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme could be said to be profit derived from the business of the Industrial Undertaking eligible for deduction under Section 80-IB of the Income-tax Act, 1961 (1961 Act)?

3. At the outset, we may indicate that although in the present judgment we have focused on the analysis of Section 80-IB, the basic Scheme of Sections 80I, 80-IA and 80-IB (as they then stood) remains the same.

Facts:

4. The facts in the lead matter (Civil Appeal arising out of SLP(C) No. 5827/07 entitled M/s Liberty India v. CIT) are as follows:

5. The appellant, a partnership firm, owns a small scale industrial undertaking engaged in manufacturing of fabrics out of yarns and also various textile items such as cushion covers, pillow covers etc. out of fabrics/yarn purchased from the market. During the relevant previous year corresponding to Assessment Year 2001-02, appellant claimed deduction under Section 80-IB on the increased profits of Rs. 22,70,056.00 as profit of the industrial undertaking on account of DEPB and Duty Drawback credited to the Profit & Loss account. The Assessing Officer denied deduction under Section 80-IB on the ground that the said two benefits constituted export incentives, and that they did not represent profits derived from industrial undertaking. In this connection the AO placed reliance on the judgment of this Court in CIT v. Sterling Food reported in 237 ITR 579.

Aggrieved by the said decision, matter was carried in appeal to CIT(A), who came to the conclusion, that duty drawback received by the appellant was inextricably linked to the production cost of the goods manufactured by the appellant; that, duty drawback was a trading receipt of the industrial undertaking having direct nexus with the activity of the industrial undertaking and consequently, the AO was not justified in denying deduction under Section 80-IB. According to CIT(A), the DEPB Scheme was different from Duty Drawback Scheme inasmuch as the DEPB substituted value based Advance Licencing Scheme as well as Passbook Scheme under the Exim Policy; that entitlements under DEPB Scheme were allowed at pre-determined and pre-notified rates in respect of exports made under the Scheme and consequently, DEPB did not constitute a substitute for duty drawback. According to 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 prove the nexus between the receipt by way of duty drawback/DEPB benefit and the industrial undertaking, hence, the assessee(s) was not entitled to deduction under Section 80-IB(3), hence this Civil Appeal(s).

Arguments:

7. The submission of the appellant(s) [assessee(s)] in nutshell was that the amount of duty drawback/DEPB was intended to neutralize the incidence of duty on inputs consumed

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2009 Supreme(SC) 1515

IMPORTANT POINTDuty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking. Hence these are not eligible for deduction u/s 80-IB, Income Tax Act, 1961.

IMPORTANT POINT
Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking. Hence these are not eligible for deduction u/s 80-IB, Income Tax Act, 1961.