S. 80-IB Of Income Tax Act - Assessee Not Entitled To Deduction Under On Profit Derived From DEPB And Duty Drawback Schemes: Supreme Court

The Supreme Court has ruled that the assessee is not entitled to deduction under Section 80- IB of the Income Tax Act, 1961 on the amount received / profit derived from the Duty Entitlement Pass Book Scheme (DEPB) and the Duty Drawback Schemes.

The bench of Justices M.R. Shah and B.V. Nagarathna held that the profit from DEPB and the Duty Drawback claims cannot be said to be an income “derived from” the industrial undertaking. The court added that even otherwise, such an income is chargeable to tax as per Sections 28(iiid) and (iiie) of the Income Tax Act.

The top court observed that in Liberty India vs. Commissioner of Income Tax, (2009) 9 SCC 328, the Apex Court had held that the 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. Thus, the said incentive profits are not profits derived from the eligible business under Section 80-IB, and they belong to the category of ancillary profits of such undertakings.

The court thus upheld the decision of the Rajasthan High Court that the assessee was not entitled to the deductions under Section 80-IB.

Section 80-IB of the Income Tax Act provides for deduction in respect of profits and gains from certain industrial undertakings other than the infrastructure development undertakings.

As per Sections 28(iiid) and (iiie), any profit on the transfer of the Duty Drawback and on transfer of DEPB Schemes shall be chargeable to income tax under the head “Profits and gains of business or profession.”

The assessee, 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 received under the Duty Drawback Scheme and on transfer of the Duty Entitlement Pass Book Scheme (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 assessee 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.

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

The assessee contended that the expression “Profit or gains derived from any business” under Section 80-IB will include any reimbursement of cost, even if the immediate reimbursement of such source is the Government or its policy.

To this, the revenue department averred that receipt of the amount under DEPB and the Duty Drawback Schemes cannot be said to be an income that falls under the head “profits and gains of business or profession”, thus the same is not eligible for deduction under Section 80-IB. Further, it cannot be said to be an income “derived from” an industrial undertaking so as to fall within the ambit of Section 80-IB.

The Supreme Court reckoned that for claiming deductions under Section 80-IB, the deductions must be claimed on the “profits and gains derived from industrial undertakings” mentioned in Section 80-IB.

The court noted that in the case of Liberty India (2009), the Apex Court had observed and held that the incentive profits derived from the DEPB / Duty Drawback Schemes are not profits “derived” from the eligible business under Section 80-IB, and that they belong to the category of ancillary profits of such undertakings.

Referring to Liberty India (2009), the bench observed, “Similar view was also expressed with respect to the Duty Drawback. Thereafter, in paragraph 43 of the above decision (Liberty India), it is observed and 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 is 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.”

The Supreme Court thus upheld the decision of the High Court that the assessee was not entitled to the deductions under Section 80-IB on the profit from DEPB and the Duty Drawback claims, since such income cannot be said to be an income “derived from” industrial undertaking.

“In view of the above and for the reasons stated above, the High Court has rightly held that the respondent – assessee is not entitled to the deductions under Section 80-IB on the amount of DEPB as well as Duty Drawback Schemes. We hold that on the profit earned from DEPB / Duty Drawback Schemes, the assessee is not entitled to deduction under Section 80-IB of the Act, 1961. Any contrary decision of any High Court is held to be not good law,” the court held.

The court thus dismissed the appeal.

Case Title: M/s. Saraf Exports vs. Commissioner of Income Tax, Jaipur-III

Citation : 2023 LiveLaw (SC) 299

Counsel for the Appellant: Mr. Gautam Narayan

Counsel for the Respondent: Mr. Balbir Singh, ASG, Mr. Raj Bahadur Yadav

Income Tax Act, 1961, Section 80-IB- Assessee is not entitled to deduction under Section 80- IB of the Act on the amount received / profit derived from the Duty Entitlement Pass Book Scheme (DEPB) and the Duty Drawback Schemes.

The bench held that the profit from the DEPB and the Duty Drawback claims cannot be said to be an income “derived from” the industrial undertaking. The court added that even otherwise, such an income is chargeable to tax as per Sections 28(iiid) and (iiie) of the Income Tax Act.

Click Here To Read/Download Judgment