Supreme Court: The appellant challenged the impugned order passed by the Division Bench of Rajasthan High Court which had allowed the appeal preferred by the Revenue Department and had held that the assessee was not entitled to the deductions under Section 80-IB of the Income Tax Act, 1961 (Act of 1961) with respect to the receipts under the Duty Drawback Scheme (‘Duty Drawback’) and on transfer of Duty Entitlement Pass Book Scheme (“DEPB”). While exercising its civil appellate jurisdiction, the Division Bench of M.R. Shah* and B.V. Nagarathna J.J., dismissed the appeal filed by the assessee and affirmed the order passed by the High Court.
In the matter at hand, the assessee filed its return dated 30-09-2008 declaring its income as nil, claiming deduction of INR 70,197 on account DEPB and INR 76,27,636 on account of receipts under the Duty Drawback. 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 of 1961.
Legal Trajectory
The assessee was issued a notice under Section 143(2) of the Act of 1961. The Deputy Commissioner dismissed the deductions as claimed vide order dated 24-11-2010 which was 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. The Revenue then appealed against the said order which was allowed by the High Court which had restored the order passed by the Deputy Commissioner disallowing the deductions claimed under the provisions of the Act of 1961. Hence, the present appeal filed by the assessee.
Issue for consideration
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Whether on the income amount received or profit from DEPB and Duty Drawback Schemes, the assessee was entitled to deduction under Section 80-IB of the Act of 1961?
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Whether such an income can be said to be an income ‘derived from’ industrial undertaking?
Court Analysis
The Bench perused Sections 28(iiid) and (iiie) of Act of 1961 which stated that any profit on the transfer of the Duty Drawback and on transfer of DEPB Schemes, would be chargeable to income tax under the head ‘profits and gains of business or profession’.
The Bench further perused Section 80-IB of Act of 1961 which provided for deduction in respect of profits and gains from certain industrial undertakings.
The Court referred to Liberty India v. Commissioner of Income Tax, (2009) 9 SCC 328 which had observed that DEPB / Duty Drawback Schemes were incentives which flow from the schemes framed by the Central Government or from Section 75 of the Customs Act, 1962 hence, incentive profits were not profits derived from the eligible business under Section 80-IB.It was observed that they belonged to the category of ancillary profits of such undertakings.
The Bench noted that similar view was also expressed with respect to the Duty Drawback stating that Duty Drawback, DEPB benefits, rebated etc. could not be credited against the cost of manufacture of goods debited in the profit and loss account for purpose of Sections 80-IA and 80-IB as such remissions would constitute an independent source of income beyond the first degree nexus between profits and the industrial undertaking. Thus, it was observed that duty drawback receipts or DEPB benefits did not form part of the net profits of eligible industrial undertakings for the purpose of Section 80-IB of the Act of 1961.
The Bench affirmed the order passed by the High Court stating that the respondent assessee was neither entitled to the deductions nor profit earned under Section 80-IB on the amount of DEPB as well as Duty Drawback Scheme.
With the above observation, the Court dismissed the appeal.
[Saraf Exports v Commissioner of Income Tax, Jaipur-III, 2023 SCC OnLine SC 385, decided on 10-04-2023]
Judgment authored by Justice M.R. Shah
Advocates who appeared in this case :
For the appellants- Advocate on Record Gautam Narayan;
For the respondents- Additional Solicitor General Balbir Singh, Advocate on Record Raj Bahadur Yadav, Advocate Shashank Bajpai, Advocate Siddhant Kohli, Advocate Shyam Gopal, Advocate Chinmayee Chandra, Advocate Adit Khorana and Advocate Monica Benjamin.
