Supreme Court: Profit Earned from DEPB / Duty Drawback Schemes is not elgibile for Deduction under Section 80-IB of Income Tax Act

Supreme Court: Profit Earned from DEPB / Duty Drawback Schemes is not elgibile for Deduction under Section 80-IB of Income Tax Act

The Supreme Court by its coram compisring of Justices M.R. Shah and B.V. Nagarathna has ruled that income amount received / profit from Duty Entitlement Pass Book Scheme (DEPB) and Duty Drawback Schemes, cannot be said to be an income “derived from” industrial undertaking as per Section 28(iiid) and (iiie) and such an income is chargeable to tax, hence assessee was not entitled to deduction under Section 80- IB of the Income Tax Act, 1961 (the Act).

In the present case, the assessee/appellant- M/s. Saraf Exports is a partnership firm engaged in the business of manufacturing and exporting wooden handicraft items.

The assessee filed its income tax return declaring its income as nil after claiming deduction under Section 80-IB with respect to the profit/ amount recieved under the Duty Drawback Scheme and on transfer of the DEPB.

The assessee was issued a notice under Section 143(2) of the Act. In an order passed by the Deputy Commissioner, the deductions claimed by the assesse were disallowed. The same was challenged by the assessee before the Income Tax Appellate Tribunal (ITAT), who allowed the deductions claimed by the assessee. In an appeal filed by the revenue department, the Rajasthan High Court restored the order passed by the Deputy Commissioner disallowing the deductions claimed under Section 80-IB.

Aggrieved by the order of the High Court, the assessee filed an appeal before the Supreme Court.

The issue that came for consideration before the bench was 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?

In this regard, the bench opined that as per Sections 28(iiid) and (iiie) any profit on the transfer of the Duty Drawback and on transfer of DEPB Schemes, etc., shall be chargeable to income tax under the head “Profits and gains of business or profession”.

The Court noted that earlier, there used to be a dispute regarding the receipt by way of incentives from the Government being in the nature of cash assistance, duty drawback, profits on transfer of DEPB Scheme, etc., i.e., as to whether these receipts were capital receipt or revenue receipt and would thus, be taxable. However, 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) had made the said incentives taxable under the head of “profits and gains of business and profession.”

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, stated the bench.

The Court while placing reference on the decision passed in the case of Liberty India vs. Commissioner of Income Tax, (2009) observed 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 undertakings.”

Further, the bench held that duty drawback, DEPB benefits, rebates, etc. cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute an independent source of income beyond the first degree nexus between profits and the industrial undertaking.

Thus, it was observed and held that duty drawback receipts / DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of Section 80-IB of the Act, 1961.

Therefore, following the law laid down by the Apex Court in the case of Commissioner of Income Tax, Karnataka Vs. Sterling Foods, Mangalore (1999) and Liberty India (supra) the Court was of the considered view that as such, “there was no error committed by the High Court in holding that on the profit from DEPB and Duty Drawback claims, the assessee shall not be entitled to the deductions under Section 80-IB as such income cannot be said to be an income “derived from” industrial undertaking and even otherwise as per Section 28(iiid) and (iiie), such an income is chargeable to tax.”

In view of the the reasons stated above, the Court upheld the decision passed by the the High Court and held that the appellant/assessee was not entitled to the deductions under Section 80-IB on the amount of DEPB as well as Duty Drawback Schemes.