M/S. SARAF EXPORTS versus COMMISSIONER OF INCOME TAX, JAIPUR-III on 10 April 2023

[2023] 4 S.C.R.

M/S. SARAF EXPORTS

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v.

COMMISSIONER OF INCOME TAX, JAIPUR-III

(Civil Appeal No. 4822 of 2022)

BAPRIL 10, 2023

[M. R. SHAH AND B. V. NAGARATHNA, JJ.]

Income Tax Act, 1961 – ss.80-IB and 28 – Deduction u/s 80-IB – Denial of – For AY 2008-09 the respondent-assessee(partnership firm) filed its return declaring its income as nil, claimingCdeduction of Rs. 70,197/- on account of Duty Entitlement Pass BookScheme (DEPB) and of Rs. 76,27,636/- on account of receipts underthe Duty Drawback – Respondent claimed the same as “Profit/ gainsof business/ profession” under ss. 28(iiic) and (iiib) of the Act of1961– Deputy commissioner disallowed the deductions – The saidDorder was upheld by Commissioner of Income Tax (Appeals) – ITATallowed the deductions – However, the High Court restored the orderpassed by the Deputy commissioner and held that the respondent isnot entitled to the deduction u/s.80-IB of Act of 1961 with respect tothe receipts under the Duty Drawback Scheme and DEPB – Onappeal, held: For claiming deductions under s. 80-IB, it must be onEthe “profits and gains derived from industrial undertakings”mentioned in s. 80-IB – It was held in Liberty India that DEPB/DutyDrawback Schemes are incentives which flow from the schemesframed by the Central Government or from section 75 of the CustomsAct, 1962 and hence, incentive profits are not profits derived fromFthe eligible business u/s. 80-IB – Following the law laid down in thecase of Sterling Foods, Mangalore and Liberty India, no error wascommitted by the High Court in holding that on the profit from DEPBand Duty Drawback claims, the respondent-assessee shall not beentitled to the deductions u/s. 80-IB – Such income cannot be saidto be an income “derived from” industrial undertaking and evenGotherwise as per Section 28(iiid) and (iiie), such an income ischargeable to tax – Judgment of High Court upheld.

Dismissing the appeal, the Court

HELD: 1. After taking into consideration the DEPB andHDuty Drawback Schemes, ultimately, it is observed and held in the case of Liberty India that DEPB/Duty Drawback Schemes areincentives which flow from the schemes framed by the CentralGovernment or from Section 75 of the Customs Act, 1962 and,hence, incentive profits are not profits derived from the eligiblebusiness under Section 80-IB. It is observed that they belong tothe category of ancillary profits of such undertakings. Dutydrawback, DEPB benefits, rebates, etc. cannot be credited againstthe cost of manufacture of goods debited in the profit and lossaccount for purposes of Sections 80-IA/80-IB as such remissions(credits) would constitute an independent source of incomebeyond the first degree nexus between profits and the industrialundertaking. Thus, it is observed and held that duty drawbackreceipts/DEPB benefits do not form part of the net profits ofeligible industrial undertakings for the purpose of Section 80-IBof the Act, 1961. [Paras 7.3 and 7.4][352-F-H; 353-A-B]

2. Prior thereto, the treatment of “profits and gains derivedfrom industrial undertakings” for the purpose of determining taxliability came up for consideration before this Court in the caseof Sterling Foods, Mangalore and Liberty India as such, no errorhas been committed by the High Court in holding that on theprofit from DEPB and Duty Drawback claims, the assessee shallnot be entitled to the deductions under Section 80-IB as suchincome cannot be said to be an income “derived from” industrialundertaking and even otherwise as per Section 28(iiid) and (iiie),such an income is chargeable to tax. [Para 7.6][358-B-C]

Liberty India v. Commissioner of Income Tax (2009) 9SCC 328 : [2009] 13 SCR 1037; Commissioner ofIncome Tax, Karnataka v. Sterling Foods, Mangalore(1999) 4 SCC 98 : [1999] 2 SCR 699 – relied on.

Commissioner of Income Tax v. Meghalaya SteelsLimited (2016) 6 SCC 747 : [2016] 1 SCR 952;Commissioner of Income Tax v. Dharam Pal Prem ChandLtd. (2009) 317 ITR 353 (Del); Topman Exports v.Commissioner of Income Tax, Mumbai (2012) 3 SCC593 : [2012] 4 SCR 684; B. Desraj v. Commissioner ofIncome Tax, Salem (2010) 14 SCC 510; ACG Associated A

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ACapsules Private Limited v. Commissioner of Income Tax,Central-IV, Mumbai (2012) 3 SCC 321 : [2012] 2 SCR401; Vikas Kalra v. Commissioner of Income Tax – VII,New Delhi (2012) 3 SCC 611 : [2012] 3 SCR 273;Nissan Export v. Commissioner of Income Tax (2014)14 SCC 152 – referred to.B

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4822of 2022.

EFrom the Judgment and Order dated 04.02.2016 of the High Courtof Judicature for Rajasthan at Jaipur in DBITA No. 7 of 2014.

Gautam Narayan, Ms. Asmita Singh, Advs. for the Appellant.

Balbir Singh, ASG, Shyam Gopal, Ms. Chinmayee Chandra,Siddhanth Kohli, Adit Khorana, Shashank Bajpai, Kaveesh Nair,FShubhankar Singh, Ms. Monica Benjamin, Samarvir Singh, Raj BahadurYadav, Advs. for the Respondent.

The Judgment of the Court was delivered by

M. R. SHAH, J.

G1. Feeling aggrieved and dissatisfied with the impugned judgmentand order passed by the High Court of Judicature for Rajasthan at Jaipurdated 04.02.2016 in D.B. Income Tax Appeal No. 7 of 2014 by whichthe High Court has allowed the said appeal preferred by the Revenueand has held that the assessee is not entitled to the deduction underSection 80-IB of the Income Tax Act, 1961 (hereinafter referred to asH

“Act, 1961”) with respect to the receipts under the Duty DrawbackScheme (hereinafter referred to as “Duty Drawback”) and on transferof Duty Entitlement Pass Book Scheme (hereinafter referred to as“DEPB”), the assessee has preferred the present appeal.

2. The facts leading to the present appeal in nutshell are as under:- 2.1 The assessee, a partnership firm, was engaged in the businessof manufacturing and exporting wooden handicraft items. For theAssessment Year (A.Y.) 2008-09, the assessee filed its return on30.09.2008 declaring its income as nil, claiming deduction ofRs. 70,197/- on account of DEPB and of Rs. 76,27,636/- on account ofreceipts under the Duty Drawback.

2.2 The assessee credited the receipts of the aforesaid amountsinto the Profit & Loss Account and claimed the same as “Profit/gains ofbusiness/profession” under Sections 28(iiic) and 28(iiib) of the Act, 1961.The assessee was issued a notice under Section 143(2) of the Act, 1961.

2.3 By order dated 24.11.2010, the Deputy Commissionerdisallowed the deductions as claimed. The order of the DeputyCommissioner disallowing the exemption as claimed, came to be upheldby the Commissioner of Income Tax (Appeals). However, the IncomeTax Appellate Tribunal (ITAT) allowed the appeal preferred by theassessee vide order dated 17.12.2013 by inter alia observing that thedecision of this Court in the case of Liberty India Vs. Commissionerof Income Tax, (2009) 9 SCC 328 : (2009) 317 ITR 218 (SC) canbe said to be per incuriam and allowed the deductions as claimed on thereceipts of amount under DEPB Scheme and Duty Drawback Scheme.

2.4 By the impugned judgment and order and relying upon thedecision of this Court in the case of Liberty India (supra) and thedecision of this Court in the case of Commissioner of Income Tax,Karnataka Vs. Sterling Foods, Mangalore (1999) 4 SCC 98, theHigh Court has allowed the appeal preferred by the Revenue and hasrestored the order passed by the Deputy Commissioner disallowing thedeductions claimed under Section 80-IB of the Act, 1961. The impugnedjudgment and order passed by the High Court is the subject matter ofthe present appeal.

3. Learned counsel appearing on behalf of the assessee has heavilyrelied upon the decision of this Court in the case of Commissioner of A

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AIncome Tax Vs. Meghalaya Steels Limited, (2016) 6 SCC 747 :(2016) 383 ITR 217 (SC), 3.1 It is submitted that the meaning of “derived from” under Section80-IB as laid down in Liberty India (supra) has been widened by thisHon’ble Court in the case of Meghalaya Steels Limited (supra).B

3.2 It is further submitted that the conclusion of Liberty India(supra) is based on the finding that “derived from” under Section 80-IBrequires a “first degree” connection with the business of the industrialundertaking whereas the source of DEPB/Duty Drawback are incentivesgiven under the Duty Exemption Remission Scheme/Section 75 of theCCustoms Act, 1962. That applying the test of “first degree”, this Court inthe case of Liberty India (supra) held that receipts from DEPB/DutyDrawback cannot be deducted under Section 80-IB.

3.3 It is next submitted that, however, subsequently, in the case ofMeghalaya Steels Limited (supra), the issue before this Court wasDwhether transport, interest and power subsidy granted by the Governmentwere entitled to be deducted under Section 80-IB and this Hon’ble Courthas held that receipts of amount on the aforesaid subsidies were entitledto be deducted under Section 80-IB. It is submitted that in the said case,before this Court, the Revenue relied upon Liberty India (supra) tocontend that the source of subsidies was the Government and therefore,Eit could not be considered as having a direct nexus/close connectionwith the business of the assessee. It is submitted that, however, thisCourt has rejected the said contention and held that the fact that theGovernment is the “immediate source” of the subsidies is not relevantso long as the subsidies reimbursed, wholly or partially, costs actuallyFincurred by the assessee in manufacturing or selling of the products,because, the profits or gains referred to in Section 80-IB means netprofit, i.e., profit derived after deduction of manufacturing cost and sellingcost.

3.4 It is contended that this Court specifically relied on SectionG28(iii)(b) and reiterated that any cash assistance received from theGovernment against exports under any Scheme is chargeable to incometax under the head of “Profit or gains of business or profession”. Thatthis Court approved the decision of the Delhi High Court in the case ofCommissioner of Income Tax Vs. Dharam Pal Prem Chand Ltd.,(2009) 317 ITR 353 (Del) holding that the refund of excise duty shouldH

not be excluded in arriving at the profit derived from business for thepurpose of claiming deduction under Section 80-IB.

3.5 It is further contended that therefore, applying the law laiddown by this Court in the case of Meghalaya Steels Limited (supra),the expression “Profit or gains derived from any business” under Section80-IB will include any reimbursement of cost even if the immediatereimbursement of such source is the Government or its policy.

3.6 It is submitted by the learned counsel appearing on behalf ofthe assessee that in the case of Topman Exports Vs. Commissionerof Income Tax, Mumbai, (2012) 3 SCC 593, it is observed and heldthat the DEPB/Duty Drawback are relatable to cost of manufactureand has a direct nexus with the cost of imports. That the said view is inconsonance with the view taken earlier in the case of B. Desraj Vs.Commissioner of Income Tax, Salem, (2010) 14 SCC 510, whichheld that the Duty Drawback was in the nature of cash assistance underSection 28(iii)(b).

3.7 It is next contended that in the case of Topman Exports(supra), it is held that the DEPB is assistance given by the Governmentto an exporter to pay customs duty on its imports and it is receivableonce exports are made and an application under the DEPB Scheme ismade. That this Court has also held that DEPB also has a cost elementin so much as the cost of acquiring it is not nil because it is acquired bypaying customs duty on the import content of the export product. It issubmitted that the decision of this Court in the case of Topman Exports(supra) has been subsequently followed in the cases of ACG AssociatedCapsules Private Limited Vs. Commissioner of Income Tax,Central-IV, Mumbai (2012) 3 SCC 321; Vikas Kalra Vs.Commissioner of Income Tax – VII, New Delhi, (2012) 3 SCC611 and Nissan Export Vs. Commissioner of Income Tax, (2014)14 SCC 152.

3.8 It is submitted that, therefore, and in view of the developmentof law in Meghalaya Steels Limited (supra) and the Topman Exports(supra) DEPB/Duty Drawback are “profits and gains derived from anybusiness” within the purview of Section 80-IB.

3.9 It is averred by the learned counsel appearing on behalf of theassessee that various High Courts have taken the view that the “immediatesource” of the income is not determinative.

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A4. Shri Balbir Singh, learned ASG while opposing the present appealhas vehemently submitted that the issue involved in the present appeal issquarely covered against the assessee in view of the decision of thisCourt in the case of Liberty India (supra) and Sterling Foods,Mangalore (supra). It is submitted that therefore, relying upon andfollowing the decisions of this Hon’ble Court in the aforesaid twoBdecisions, the High Court has not committed any error in holding that theassessee is not entitled to the deductions under Section 80-IB on theamount received by way of DEPB and Duty Drawback Schemes.

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4.1 Insofar as the reliance placed by the assessee upon the decisionof this Court in the case of Meghalaya Steels Limited (supra) isCconcerned, it is submitted that in the case of Meghalaya Steels Limited(supra), this Court has not disagreed with or disapproved the decision inthe case of Liberty India (supra) or Sterling Foods, Mangalore(supra). It is submitted that even otherwise, the said decisions shall notbe applicable in case of receipt of the amount under DEPB and DutyDDrawback Schemes as the same cannot be said to be an income that falls under the head “profits and gains of business or profession”.

4.2 Shri Balbir Singh, learned ASG has taken us through the schemeof Section 28 and Section 80-IB of the Act, 1961. It is submitted thatinsofar as Section 28 is concerned, it speaks about the income that fallsEunder the head of “profit and gains of business or profession”. Thatearlier there used to be a dispute regarding the receipt by way of incentivesfrom the Government being in the nature of cash assistance, DutyDrawback, profits on transfer of DEPB Scheme, as to whether thesereceipts were capital receipts or revenue receipts and would these betaxable. That to put an end to the uncertainty, the legislature by way ofFinserting clauses (iiia), (iiib), (iiic), (iiid) and (iiie) in Section 28 has madethe said incentives taxable under the head of profits and gains of businessand profession.

4.3 It is further submitted that Section 80-IB provides fordeductions in respect of profits and gains from certain ‘industrialGundertakings’ other than infrastructure development undertakings. Thatthis Section applies to the following “industrial undertakings” which areeligible for deduction under the said Section:- a)Small scale industries into manufacturing and production b)Undertaking in industrially backward state and North-EasternHRegion

c)Ship

d)Hotels

e)Cold storage plants and cold chains

f)Mineral oil and natural gas

g)Housing projects

h)Scientific research and development i)Processing, preservation and packaging of food items j)Multiplex theatre k)Convention centre

l)Hospitals in rural and specified areas

4.4 It is next submitted that as per the language used in Section80-IB with regard to calculating the deduction, the deduction would beapplicable on “any profits and gains ‘derived from’ any business referredto in…” included in the gross total income of the assessee. That themost important thing to be considered while interpreting the said sectionis that the words used are “derived from” and not “attributable to”. Thatthe words “attributable to” in the given clause have been given a widerconnotation as opposed to the words “derived from” which have beeninterpreted to be confined to “first degree sources”. It is submitted thatthe words “derived from” have been given a restrictive interpretation.

4.5 It is contended that the connotation “derived from” used inSection 80-IB has to be read to be unit specific and cannot be read as“standalone” since the words used in the clauses of Section 80-IB are“industrial undertaking”. That the core issue therefore, pertains to theinterpretation of the words “derived from” in Section 80-IB of the Act.It is submitted that on a fair reading of Section 80-IB read with Section28 and on true interpretation of Section 80-IB, the DEPB and DutyDrawback Schemes cannot be said to be deriving the income from thebusiness undertaking and, therefore, deduction under Section 80-IB onsuch receipt of the Duty Drawback shall not be allowable as a deduction.

4.6 It is submitted that in the case of Sterling Foods, Mangalore(supra),while adjudicating the issue of whether on earning of importentitlements under an export promotion scheme of the CentralGovernment, deduction under Section 80HH would be allowable or not, A

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Athis Court gave the words “derived from” used in Section 80HH arestricted interpretation and it was observed that since the words “derivedfrom” have been used, it shall suggest to go to the source of such profitsand gains.

4.7 It is submitted that in the case of Liberty India (supra), thisBCourt has considered in detail, deduction in respect of profits and gains“derived from”. That in the said decision, this Court has discussed theDEPB and Duty Drawback and thereafter has held that the DutyDrawback and DEPB benefits cannot be credited against the cost ofmanufacture of goods debited in the profit and loss account for the purposeof Section 80-IB as such remissions would constitute independent sourceCof income, beyond the first degree nexus between profits and the industrialundertaking.

4.8 Insofar as the reliance placed by the assessee upon the decisionof this Court in the case of Meghalaya Steels Limited (supra) isconcerned, it is submitted that the question in Meghalaya Steels LimitedD(supra) pertained to three subsidies, namely, a) Transport Subsidy, b)Interest Subsidy and c) Power Subsidy. That this Court held that sincethese subsidies directly affect the cost of manufacturing, they have adirect nexus between the profits and gains of the undertaking. Sincethese subsidies have a direct nexus, they can be said to be derived fromEthe industrial undertaking. It is submitted that though in the said decision,this Court has not held the decision in the case of Liberty India (supra)to be bad in law, in para 20, this Court has also observed that since ifthere is no export, there is no DEPB entitlement. Therefore, its relationto manufacture of a product and/or sale within India is not proximate ordirect but is one step removed. That it is observed that the object behindFthe DEPB entitlement, as has been held by this Court, is to neutralise theincidence of customs duty payment on the import content of the exportproduct. In such a scenario, it cannot be said that such duty exemptionscheme is derived from profits and gains made by the industrialundertaking or business itself. It is submitted that, therefore, in light ofGthe above, the decision in the case of Meghalaya Steels Limited (supra)shall not be applicable to the present matter as it pertains to the above-mentioned subsidies only. It is next submitted that though binding, theITAT did not follow the decisions of this Court in the case of LibertyIndia (supra) and Sterling Foods, Mangalore (supra), and, therefore,the High Court has rightly set aside the order passed by the ITAT followingH

the decisions of this Court in the case of Liberty India (supra) andSterling Foods, Mangalore (supra). It is submitted that therefore,the impugned judgment and order passed by the High Court is not requiredto be interfered with.

4.9 Making above submissions, it is prayed that the present appealbe dismissed.

5. Heard the learned counsel for the respective parties at length.

6. The short question, which is posed for consideration of thisCourt is:- Whether on the income amount received/profit from DEPB andDuty Drawback Schemes, the assessee is entitled to deductionunder Section 80-IB of the Income Tax Act, 1961 and whethersuch an income can be said to be an income “derived from”industrial undertaking?

7. While considering the aforesaid issue/question, relevant portionof Section 28 and Section 80-IB are required to be referred to, whichare as under:- “28. Profits and gains of business or profession.—Thefollowing income shall be chargeable to income tax under thehead “Profits and gains of business or profession”,—

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(iii-a) profits on sale of a licence granted under the Imports(Control) Order, 1955, made under the Imports and Exports(Control) Act, 1947 (18 of 1947); (iii-b) cash assistance (by whatever name called) received orreceivable by any person against exports under any scheme ofthe Government of India; (iii-c) any duty of customs or excise repaid or repayable asdrawback to any person against exports under the Customs andCentral Excise Duties Drawback Rules, 1971; (iii-d) any profit on the transfer of the Duty Entitlement PassBook Scheme, being the Duty Remission Scheme under the exportand import policy formulated and announced under Section 5 ofthe Foreign Trade (Development and Regulation) Act, 1992 (22of 1992); A

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(iii-e) any profit on the transfer of the Duty Free ReplenishmentCertificate, being the Duty Remission Scheme under the exportand import policy formulated and announced under Section 5 ofthe Foreign Trade (Development and Regulation) Act, 1992 (22of 1992); A

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“80-IB. Deduction in respect of profits and gains fromcertain industrial undertakings other than infrastructure

development undertakings.—(1) Where the gross total incomeof an assessee includes any profits and gains derived from anyCbusiness referred to in sub-sections (3) to (11), (11-A) and (11-B)(such business being hereinafter referred to as the eligiblebusiness), there shall, in accordance with and subject to theprovisions of this section, be allowed, in computing the total incomeof the assessee, a deduction from such profits and gains of anamount equal to such percentage and for such number ofDassessment years as specified in this section.

(2) This section applies to any industrial undertaking which fulfilsall the following conditions, namely:—

(i) it is not formed by splitting up, or the reconstruction, of a businessalready in existence:

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Provided that this condition shall not apply in respect of anindustrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of thebusiness of any such industrial undertaking as is referred to inFSection 33-B, in the circumstances and within the period specifiedin that section;

(ii) it is not formed by the transfer to a new business of machineryor plant previously used for any purpose;

(iii) it manufactures or produces any article or thing, not beingany article or thing specified in the list in the Eleventh Schedule,or operates one or more cold storage plant or plants, in any part ofIndia:

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Provided that the condition in this clause shall, in relation to asmall-scale industrial undertaking or an industrial undertakingHreferred to in sub-section (4) shall apply as if the words ‘not being any article or thing specified in the list in the Eleventh Schedule’had been omitted.

Explanation 1.—For the purposes of clause (ii), any machineryor plant which was used outside India by any person other thanthe assessee shall not be regarded as machinery or plant previouslyused for any purpose, if the following conditions are fulfilled,namely:—

(a) such machinery or plant was not, at any time previous tothe date of the installation by the assessee, used in India; (b)such machinery or plant is imported into India from anycountry outside India; and

(c) no deduction on account of depreciation in respect of suchmachinery or plant has been allowed or is allowable underthe provisions of this Act in computing the total income ofany person for any period prior to the date of the installationof the machinery or plant by the assessee.

Explanation 2.—Where in the case of an industrial undertaking,any machinery or plant or any part thereof previously used forany purpose is transferred to a new business and the total valueof the machinery or plant or part so transferred does not exceedtwenty per cent of the total value of the machinery or plant usedin the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to havebeen complied with;

(iv) in a case where the industrial undertaking manufactures orproduces articles or things, the undertaking employs ten or moreworkers in a manufacturing process carried on with the aid ofpower, or employs twenty or more workers in a manufacturingprocess carried on without the aid of power.

(3) The amount of deduction in the case of an industrial undertakingshall be twenty-five per cent (or thirty per cent where the assesseeis a company), of the profits and gains derived from such industrialundertaking for a period of ten consecutive assessment years (ortwelve consecutive assessment years where the assessee is acooperative society) beginning with the initial assessment yearsubject to the fulfilment of the following conditions, namely:—

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(i) it begins to manufacture or produce, articles or things or tooperate such plant or plants at any time during the period beginningfrom the 1st day of April, 1991 and ending on the 31st day ofMarch, 1995 or such further period as the Central Governmentmay, by notification in the Official Gazette, specify with referenceto any particular undertaking;

(ii) where it is an industrial undertaking being a small-scaleindustrial undertaking, it begins to manufacture or produce articlesor things or to operate its cold storage plant not specified in sub-section (4) or sub-section (5) at any time during the periodbeginning on the 1st day of April, 1995 and ending on the 31st dayof March, 2002.

(4) The amount of deduction in the case of an industrial undertakingin an industrially backward State specified in the Eighth Scheduleshall be hundred per cent of the profits and gains derived fromsuch industrial undertaking for five assessment years beginningwith the initial assessment year and thereafter twenty-five percent (or thirty per cent where the assessee is a company) of theprofits and gains derived from such industrial undertaking:

Provided that the total period of deduction does not exceed tenconsecutive asssessment years (or twelve consecutive assessmentyears where the assessee is a cooperative society) subject tofulfilment of the condition that it begins to manufacture or producearticles or things or to operate its cold storage plant or plantsduring the period beginning on the 1st day of April, 1993 and endingon the 31st day of March, 2004:

Provided further that in the case of such industries in the North-Eastern Region, as may be notified by the Central Government,the amount of deduction shall be hundred per cent of profits andgains for a period of ten assessment years, and the total period ofdeduction shall in such a case not exceed ten assessment years:

Provided also that no deduction under this sub-section shall beallowed for the assessment year beginning on the 1st day of April,2004 or any subsequent year to any undertaking or enterprisereferred to in sub-section (2) of Section 80-IC.

Provided also that in the case of an industrial undertaking in theState of Jammu and Kashmir, the provisions of the first proviso shall have effect as if for the figures, letters and words “31st dayof March, 2004”, the figures, letters and words “31st day of March,2012” had been substituted:

Provided also that no deduction under this sub-section shall beallowed to an industrial undertaking in the State of Jammu andKashmir which is engaged in the manufacture or production ofany article or thing specified in Part C of the Thirteenth Schedule.

(5) The amount of deduction in the case of an industrial undertakinglocated in such industrially backward districts as the CentralGovernment may, having regard to the prescribed guidelines, bynotification in the Official Gazette, specify in this behalf asindustrially backward district of category ‘A’ or an industriallybackward district of category ‘B’ shall be,—

(i) hundred per cent of the profits and gains derived from anindustrial undertaking located in a backward district of category‘A’ for five assessment years beginning with the initial assessmentyear and thereafter, twenty-five per cent (or thirty per cent wherethe assessee is a company) of the profits and gains of an industrialundertaking:

Provided that the total period of deduction shall not exceed tenconsecutive assessment years or where the assessee is acooperative society, twelve consecutive assessment years:

Provided further that the industrial undertaking begins tomanufacture or produce articles or things or to operate its coldstorage plant or plants at any time during the period beginning onthe 1st day of October, 1994 and ending on the 31st day ofMarch, 2004;

(ii) hundred per cent of the profits and gains derived from anindustrial undertaking located in a backward district of category‘B’ for three assessment years beginning with the initial assessmentyear and thereafter, twenty-five per cent (or thirty per cent wherethe assessee is a company) of the profits and gains of an industrialundertaking:

Provided that the total period of deduction does not exceed eightconsecutive assessment years (or where the assessee is acooperative society, twelve consecutive assessment years):

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Provided further that the industrial undertaking begins tomanufacture or produce articles or things or to operate its coldstorage plant or plants at any time during the period beginning onthe 1st day of October, 1994 and ending on the 31st day ofMarch, 2004.

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7.1 Thus, as per Sections 28(iiid) and (iiie) any profit on the transferof the Duty Drawback and on transfer of DEPB Schemes, etc.,shall be chargeable to income tax under the head “Profits andgains of business or profession”. It appears that earlier, there usedto be a dispute regarding the receipt by way of incentives fromthe Government being in the nature of cash assistance, dutydrawback, profits on transfer of DEPB Scheme, etc., i.e., as towhether these receipts were capital receipt or revenue receiptand would thus, be taxable. However, thereafter, and in order toput an end to the dispute, the legislature by way of inserting clauses28 (iiia), (iiib), (iiic), (iiid) and (iiie) has made the said incentivestaxable under the head of “profits and gains of business andprofession”.

7.2 Section 80-IB provides for deductions in respect of profitsand gains from certain industrial undertakings. Therefore, as suchfor claiming deductions under Section 80-IB, it must be on the“profits and gains derived from industrial undertakings” mentionedin Section 80-IB. An identical question came to be considered bythis Court and, more particularly, with respect to the profit fromDEPB and Duty Drawback Schemes, in the case of LibertyIndia (supra).

7.3 After taking into consideration the DEPB and Duty DrawbackSchemes, ultimately, it is observed and held in the case of LibertyIndia (supra) that DEPB/Duty Drawback Schemes are incentiveswhich flow from the schemes framed by the Central Governmentor from Section 75 of the Customs Act, 1962 and, hence, incentiveprofits are not profits derived from the eligible business underSection 80-IB. It is observed that they belong to the category ofancillary profits of such undertakings.

7.4 Similar view was also expressed with respect to the DutyDrawback. Thereafter, in paragraph 43 of the above decision, it

is observed and held that duty drawback, DEPB benefits, rebates,etc. cannot be credited against the cost of manufacture of goodsdebited in the profit and loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute anindependent source of income beyond the first degree nexusbetween profits and the industrial undertaking. Thus, it is observedand held that duty drawback receipts / DEPB benefits do notform part of the net profits of eligible industrial undertakings forthe purpose of Section 80-IB of the Act, 1961. The relevantdiscussions are in paragraphs 24, 28 to 36, 38, 39, 41, 43 and 45,which are as under:- “24. Before analysing Section 80-IB, as a prefatory note,it needs to be mentioned that the 1961 Act broadly provides fortwo types of tax incentives, namely, investment-linked incentivesand profit-linked incentives. Chapter VI-A which provides forincentives in the form of tax deductions essentially belong to thecategory of “profit-linked incentives”. Therefore, when Sections80-IA/80-IB refers to profits derived from eligible business, it isnot the ownership of that business which attracts the incentives.What attracts the incentives under Sections 80-IA/80-IB is thegeneration of profits (operational profits).

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28. In the present batch of cases, the controversy whicharises for determination is: whether DEPB credit/duty drawbackreceipt comes within the first degree sources?

29. According to the assessee(s), DEPB credit/dutydrawback receipt reduces the value of purchases (costneutralisation), hence, it comes within first degree source as itincreases the net profit proportionately.

30. On the other hand, according to the Department, DEPBcredit/duty drawback receipt do not come within the first degreesource as the said incentives flow from the incentive schemesenacted by the Government of India or from Section 75 of theCustoms Act, 1962. Hence, according to the Department, in thepresent cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, the Department AB

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places heavy reliance on the judgment of this Court in SterlingFoods [(1999) 4 SCC 98 : (1999) 237 ITR 579] .

31. Therefore, in the present cases, in which we are requiredto examine the eligible business of an industrial undertaking, weneed to trace the source of the profits to manufacture.(See CIT v. Kirloskar Oil Engines Ltd. [(1986) 157 ITR 762(Bom)])

32. Continuing our analysis of Sections 80-IA/80-IB it maybe mentioned that sub-section (13) of Section 80-IB provides forapplicability of the provisions of sub-section (5) and sub-sections(7) to (12) of Section 80-IA, so far as may be, applicable to theeligible business under Section 80-IB. Therefore, at the outset,we stated that one needs to read Sections 80-I, 80-IA and 80-IBas having a common scheme.

33. On perusal of sub-section (5) of Section 80-IA, it isnoticed that it provides for the manner of computation of profitsof an eligible business. Accordingly, such profits are to becomputed as if such eligible business is the only source of incomeof the assessee. Therefore, the devices adopted to reduce orinflate the profits of eligible business has got to be rejected inview of the overriding provisions of sub-section (5) of Section 80-IA, which are also required to be read into Section 80-IB. [SeeSection 80-IB(13)]. We may reiterate that Sections 80-I, 80-IAand 80-IB have a common scheme and if so read it is clear thatthe said sections provide for incentives in the form of deduction(s)which are linked to profits and not to investment.

34. On an analysis of Sections 80-IA and 80-IB it becomesclear that any industrial undertaking, which becomes eligible onsatisfying sub-section (2), would be entitled to deduction undersub-section (1) only to the extent of profits derived from suchindustrial undertaking after specified date(s). Hence, apart fromeligibility, sub-section (1) purports to restrict the quantum ofdeduction to a specified percentage of profits. This is theimportance of the words “derived from industrial undertaking” asagainst “profits attributable to industrial undertaking”.

35. DEPB is an incentive. It is given under the DutyExemption Remission Scheme. Essentially, it is an export incentive.

No doubt, the object behind DEPB is to neutralise the incidenceof customs duty payment on the import content of export product.This neutralisation is provided for by credit to customs duty againstexport product. Under DEPB, an exporter may apply for creditas percentage of FOB value of exports made in freely convertiblecurrency. Credit is available only against the export product andat rates specified by DGFT for import of raw materials,components, etc. DEPB credit under the Scheme has to becalculated by taking into account the deemed import content ofthe export product as per the basic customs duty and specialadditional duty payable on such deemed imports.

36. Therefore, in our view, DEPB/duty drawback areincentives which flow from the schemes framed by the CentralGovernment or from Section 75 of the Customs Act, 1962, hence,incentives profits are not profits derived from the eligible businessunder Section 80-IB. They belong to the category of ancillaryprofits of such undertakings.

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38. Section 75 of the Customs Act, 1962 and Section 37 ofthe Central Excise Act, 1944 empower the Government of Indiato provide for repayment of customs and excise duty paid by anassessee. The refund is of the average amount of duty paid onmaterials of any particular class or description of goods used inthe manufacture of export goods of specified class. The Rules donot envisage a refund of an amount arithmetically equal to customsduty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the CustomsAct requires the amount of drawback to be determined on aconsideration of all the circumstances prevalent in a particulartrade and also based on the facts situation relevant in respect ofeach of various classes of goods imported. Basically, the sourceof duty drawback receipt lies in Section 75 of the Customs Actand Section 37 of the Central Excise Act.

39. Analysing the concept of remission of duty drawbackand DEPB, we are satisfied that the remission of duty is on accountof the statutory/policy provisions in the Customs Act/Scheme(s)framed by the Government of India. In the circumstances, we AB

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hold that profits derived by way of such incentives do not fallwithin the expression “profits derived from industrial undertaking”in Section 80-IB.

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41. The cost of purchase includes duties and taxes (otherBthan those subsequently recoverable by the enterprise fromtaxing authorities), freight inwards and other expenditure directlyattributable to the acquisition. Hence trade discounts, rebate, dutydrawback, and such similar items are deducted in determining thecosts of purchase. Therefore, duty drawback, rebate, etc.Cshould not be treated as adjustment (credited) to cost ofpurchase or manufacture of goods. They should be treated asseparate items of revenue or income and accounted for accordingly(see p. 44 of Indian Accounting Standards & GAAP by DolphyD’Souza).

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43. Therefore, we are of the view that duty drawback,DEPB benefits, rebates, etc. cannot be credited against the costof manufacture of goods debited in the profit and loss account forpurposes of Sections 80-IA/80-IB as such remissions (credits)Ewould constitute independent source of income beyond the firstdegree nexus between profits and the industrial undertaking.

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45. In the circumstances, we hold that duty drawbackreceipt/DEPB benefits do not form part of the net profits of eligibleFindustrial undertaking for the purposes of Sections 80-I/80-IA/80-IB of the 1961 Act. The appeals are, accordingly, dismissedwith no order as to costs.”

7.5 Prior thereto, the treatment of “profits and gains derived fromindustrial undertakings” for the purpose of determining tax liability cameGup for consideration before this Court in the case of Sterling Foods,Mangalore (supra), which was followed by this Court in the case ofLiberty India (supra). In the case of Sterling Foods, Mangalore(supra), in paragraph 7 and 13, it is observed and held as under:- “7. The question, therefore, was whether the incomeHderived by the assessee by the sale of the import entitlements was profit and gain derived from its industrial undertaking ofprocessing seafood. The Division Bench of the High Court cameto the conclusion that the income which the assessee had madeby selling the import entitlements was not a profit and gain whichit had derived from its industrial undertaking. For that purpose, itrelied upon the decision of this Court in Cambay Electric SupplyIndustrial Co. Ltd. v. CIT [(1978) 2 SCC 644 : 1978 SCC (Tax)119 : (1978) 113 ITR 84]. It was there held that the expression“attributable to” was wider in import than the expression “derivedfrom”. The expression of wider import, namely, “attributable to”,was used when the legislature intended to cover receipts fromsources other than the actual conduct of the business. The DivisionBench of the High Court observed that to obtain the benefit ofSection 80-HH the assessee had to establish that the profits andgains were derived from its industrial undertaking and it was justnot sufficient that a commercial connection was establishedbetween the profits earned and the industrial undertaking. Theindustrial undertaking itself had to be the source of the profit. Thebusiness of the industrial undertaking had directly to yield thatprofit. The industrial undertaking had to be the direct source ofthat profit and not the means to earn any other profit. Referencewas also made to the meaning of the word “source”, and it washeld that the import entitlements that the assessee had earnedwere awarded by the Central Government under the scheme toencourage exports. The source referable to the profits and gainsarising out of the sale proceeds of the import entitlement was,therefore, the scheme of the Central Government and not theindustrial undertaking of the assessee.

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13. We do not think that the source of the import entitlements canbe said to be the industrial undertaking of the assessee. The sourceof the import entitlements can, in the circumstances, only be saidto be the Export Promotion Scheme of the Central Governmentwhereunder the export entitlements become available. There mustbe, for the application of the words “derived from”, a direct nexusbetween the profits and gains and the industrial undertaking. Inthe instant case the nexus is not direct but only incidental. Theindustrial undertaking exports processed seafood. By reason of AB

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Asuch export, the Export Promotion Scheme applies. Thereunder,the assessee is entitled to import entitlements, which it can sell.The sale consideration therefrom cannot, in our view, be held toconstitute a profit and gain derived from the assessee’s industrialundertaking.”

B7.6 Therefore, following the law laid down by this Court in thecase of Sterling Foods, Mangalore (supra) and Liberty India (supra)as such, no error has been committed by the High Court in holding thaton the profit from DEPB and Duty Drawback claims, the assessee shallnot be entitled to the deductions under Section 80-IB as such incomecannot be said to be an income “derived from” industrial undertakingCand even otherwise as per Section 28(iiid) and (iiie), such an income ischargeable to tax.

7.7 Insofar as reliance placed by the learned counsel for theassessee upon the subsequent decision of this Court in the case ofMeghalaya Steels Limited (supra) is concerned, at the outset, it isDrequired to be noted that in the case of Meghalaya Steels Limited(supra), it was a case of three subsidies, namely a) Transport Subsidy,b) Interest Subsidy, and c) Power Subsidy and in that context this Courtobserved and held that since these subsidies directly affect the cost ofmanufacturing, they have a direct nexus with the profits and gains of theEundertaking and since these subsidies have a direct nexus, they can besaid to be derived from the industrial undertaking. It is to be noted that inthe case of Meghalaya Steels Limited (supra), this Court did takenote of the decision in the case of Liberty India (supra), however, thisCourt specifically observed that the case of Liberty India (supra) wasconcerned with an export incentive, which is very far removed fromFreimbursement of an element of cost. While dealing with the decision inthe case of Liberty India (supra), this Court distinguished DutyEntitlement Pass Book and Duty Drawback Schemes and specificallyobserved that the DPEB / Duty Drawback Scheme is not related to thebusiness of an industrial undertaking for manufacturing or selling itsGproducts and the DEPB entitlement arises only when the undertakinggoes on to export the said product, that is, after it manufactures orproduces the same. In paragraph 20, in the case of Meghalaya SteelsLimited (supra), while distinguishing the profit derived from DEPB /Duty Drawback, it is observed and held as under:- H

“20. Liberty India [Liberty India v. CIT, (2009) 9 SCC328] being the fourth judgment in this line also does not help theRevenue. What this Court was concerned with was an exportincentive, which is very far removed from reimbursement of anelement of cost. A DEPB drawback scheme is not related to thebusiness of an industrial undertaking for manufacturing or sellingits products. DEPB entitlement arises only when the undertakinggoes on to export the said product, that is, after it manufactures orproduces the same. Pithily put, if there is no export, there is noDEPB entitlement, and therefore its relation to manufacture of aproduct and/or sale within India is not proximate or direct but isone step removed. Also, the object behind DEPB entitlement, ashas been held by this Court, is to neutralise the incidence of customsduty payment on the import content of the export product whichis provided for by credit to customs duty against the export product.In such a scenario, it cannot be said that such duty exemptionscheme is derived from profits and gains made by the industrialundertaking or business itself.”

Thus, from paragraph 20 of the said decision, it can be seen thatthis Court did not disapprove of the decision of this Court in the case ofLiberty India (supra). Even in the case of Meghalaya Steels Limited(supra), this Court did not consider the earlier decision in the case ofSterling Foods, Mangalore (supra). Thus, the decision of this Courtin the cases of Liberty India (supra) and Sterling Foods, Mangalore(supra), which as such are on DEPB / Duty Drawback Schemes clinchthe issue at hand. It cannot be said that the decision taken in the case ofMeghalaya Steels Limited (supra) is contrary to the decisions in thecase of Sterling Foods, Mangalore (supra) and Liberty India(supra). On the contrary, the observations made in paragraph 20 can besaid to be in favour of the Revenue and against the assessee.

8. In view of the above and for the reasons stated above, theHigh Court has rightly held that the respondent – assessee is not entitledto the deductions under Section 80-IB on the amount of DEPB as wellas Duty Drawback Schemes. We hold that on the profit earned fromDEPB / Duty Drawback Schemes, the assessee is not entitled todeduction under Section 80-IB of the Act, 1961. Any contrary decisionof any High Court is held to be not good law.

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[2023] 4 S.C.R.

APresent appeal deserves to be dismissed and is accordinglydismissed. However, in the facts and circumstances of the case, thereshall be no order as to costs.

Ankit Gyan

B(Assisted by : Abhishek Pratap Singh and Aarsh Choudhary, LCRAs)

Appeal dismissed.

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