Summary
A firm exporting wooden handicrafts claimed deduction under Section 80-IB of the Income Tax Act, 1961 for assessment year 2008-09 on Duty Drawback receipts and profit on transfer of Duty Entitlement Pass Book credits. The Tribunal allowed it treating Liberty India as per incuriam, but the Rajasthan High Court restored the disallowance. The Supreme Court dismissed the assessee's appeal, holding that under Sterling Foods and Liberty India such export incentives flow from Government schemes or Section 75 of the Customs Act and are not profits derived from the industrial undertaking; Meghalaya Steels, which concerned transport, interest and power subsidies reimbursing manufacturing costs, did not depart from Liberty India and itself described DEPB and drawback as one step removed from manufacture.
Issues
- Whether profits from the Duty Entitlement Pass Book and Duty Drawback Schemes are profits and gains derived from an industrial undertaking eligible for deduction under Section 80-IB of the Income Tax Act, 1961, and whether Meghalaya Steels widened the meaning of derived from laid down in Liberty India.
Provisions considered
- Section 80-IB, Income Tax Act, 1961Deduction is available only on profits and gains derived from the eligible industrial undertaking; derived from is narrower than attributable to and requires a first-degree nexus, which export incentives under DEPB and Duty Drawback lack. (¶¶ 7, 7.2, 7.3, 7.4, 7.6, 8)
- Section 28(iiia) to (iiie), Income Tax Act, 1961Cash assistance, duty drawback and profit on transfer of DEPB were made chargeable under profits and gains of business or profession to end the dispute whether such incentives were capital or revenue receipts; their chargeability under Section 28 does not make them profits derived from the undertaking for Section 80-IB. (¶¶ 7, 7.1, 7.6)
- Section 75, Customs Act, 1962Duty drawback has its source in Section 75 of the Customs Act and Section 37 of the Central Excise Act, that is in statutory or policy provisions rather than in the industrial undertaking. (¶¶ 7.3, 7.4)
Held
- Following Sterling Foods and Liberty India, DEPB and Duty Drawback are incentives flowing from schemes framed by the Central Government or from Section 75 of the Customs Act; they are ancillary profits constituting an independent source of income beyond the first-degree nexus between profits and the industrial undertaking, and do not form part of the net profits of the eligible undertaking for Section 80-IB. The High Court committed no error in disallowing the deduction, and such income is in any event chargeable under Section 28(iiid) and (iiie). (¶¶ 7.2, 7.3, 7.4, 7.5, 7.6)
- Meghalaya Steels concerned transport, interest and power subsidies which directly reimburse an element of manufacturing cost and therefore have a direct nexus with the undertaking's profits; it noted Liberty India, described DEPB and drawback as export incentives not related to manufacture or sale and one step removed, and did not disapprove it or consider Sterling Foods. Its paragraph 20 in fact favours the Revenue, and Liberty India and Sterling Foods clinch the issue. (¶ 7.7)
- On profit earned from DEPB and Duty Drawback Schemes the assessee is not entitled to deduction under Section 80-IB, and any contrary decision of any High Court is not good law. (¶ 8)
Result
Appeal dismissed; Rajasthan High Court judgment dated 04.02.2016 in D.B. Income Tax Appeal No. 7 of 2014 holding the assessee not entitled to deduction under Section 80-IB on Duty Drawback and DEPB receipts affirmed; contrary High Court decisions held not good law; no costs.