Export Entitlements And Duty Drawback Of Promotion Scheme Is An Income Assessable Under "Profits Or Gains From Business Or Profession": ITAT

The two-member bench of Duvvuru Rl Reddy (Judicial Member) and S. Balakrishnan (Accountant Member) concluded that the authorities below failed to appreciate the legislative intent underlying the addition of a clause-(iiid) to Section 28 of the Income Tax Act having retroactive effect.

"Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992, shall be treated as part of the business profits of the exporter and assessed as "profits and gains of business or profession" and not under the headincome from other sources," the ITAT said.

The assessee is in the business of exporting frozen shrimp and other sea foods. The assessee filed its return of income for the AY 2017-18, declaring a total income of Rs.52,30,54,010. After processing the return of income under section 143(1), the case was selected for complete scrutiny under CASS. The statutory notices were issued in electronic format to the assessees, calling for the information. The assessee's representative filed its reply online through an e-filing portal. The AO, on examination of the information furnished by the assessee, made a disallowance under section 14A read with Rule 8D for Rs. 28,57,443.

Invoking the powers conferred by Section 263 of the Act, the Pr. CIT observed that the assessment order issued is clearly erroneous and prejudicial to the revenue's interests.

The PCIT issued a show cause notice to the assessee. In response, the assessee-company made its submissions. Considering the submissions made by the assessee, the PCIT directed the Assessing Officer to disallow a sum arising from the receipt of duty drawback and the amount arising from the sale of licences. The PCIT considered it as not derived from the industrial undertaking so as to entitle the assessee to claim the benefit of a deduction under section 80IB (11A) of the Income Tax Act.

The assessee submitted that the order of the PCIT is prima facie erroneous on the ground that since the AO has examined the books of accounts of the assessee submitted before him. A mere change of opinion by the PCIT was not in accordance with the law. The assessee has received incentives framed under the Foreign Trade Policy arising out of the exports made by the assessee.

The assessee argued that cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India should be treated as part of business profits under section 28(iiib) of the Income Tax Act of 1961.

The department contended that PCIT has rightly held that the duty drawback, sale of licence, etc., would constitute an independent source of income and does not form part of the eligible undertaking for the purpose of 80IB of the Income Tax Act.

The ITAT relied on the decision of the Supreme Court in the case of CIT vs. Meghalaya Steels Ltd., in which it was held that if cash assistance received or receivable against export schemes is included as income under the head "profits and gains of business or profession". Subsidies which go to reimbursement of costs in the production of goods by a particular business would also have to be included under the head "profits and gains of business or profession", and not under the head "income from other sources".

Case Title: Nekkanti Sea Foods Limited Versus PCIT

Citation: I.T.A. No.156/Viz/2021

Dated: 06/06/2022

Counsel For Appellant: Pawan Chakrapani

Counsel For Respondent: MN Murthy Naik

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