2013 (11) TMI 729 - HC - Income Tax

Deduction u/s 80IB of the Income tax act Whether Assessing Officer to exclude amount of Duty Drawback net of expenses incurred for its realization for the purpose of computing deduction u/s 80IB Held that - When income on DDB falls exclusively in the domain of export incentives earned by the assessee in the nature of facility provided under legislative enactments or by Government of India in its schemes and is not derived from the business of industrial undertaking of the assessee and lacks nexus between the profits earned and business of such industrial undertaking, even expenses incurred on receipt of such export incentives pursuant to policies and schemes of the Government, would not form part of expenses of the business. Merely because some expenses have been incurred on getting DDB incentives, which incentives have neither any direct nexus nor are derived from business of industrial undertaking and are also included in the net profits and gains of such undertaking, any expenditure having nexus with such export incentive as DDB would also not qualify for allowable deduction under Section 57 or 71 of the Act - Gross receipt of DDB incentive, without reduction of expenditure spent for its recovery, is to be excluded from allowable deductions under Section 80-IB of the Act Decided in favor of Revenue.

Summary

Issues:
1. Interpretation of Section 80-IB of the Income Tax Act, 1961 regarding the treatment of duty drawback income.
2. Determination of whether expenses incurred for the realization of duty drawback should be excluded for computing deductions under Section 80-IB.

Analysis:
The case involved an appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal regarding the treatment of duty drawback income for the assessment year 2006-07. The respondent-assessee, engaged in manufacturing and sale of fabrics and garments, claimed deductions under Section 80-IB. The Assessing Officer disallowed certain items, including duty drawback, leading to appeals and subsequent orders.

The key contention revolved around whether expenses incurred for the realization of duty drawback should be excluded for computing deductions under Section 80-IB. The Income Tax Appellate Tribunal partially allowed the appeal, directing the Assessing Officer to exclude only the net amount of duty drawback income after deducting the expenses incurred for its realization. The Tribunal's decision was challenged by the revenue, arguing that duty drawback benefits should not be part of the net profits of the industrial undertaking for Section 80-IB purposes.

The court analyzed the nature of duty drawback as an export incentive provided by the government to reduce manufacturing costs. The revenue contended that since duty drawback is not business income, expenses for its realization should not be allowed as deductions. Citing the Supreme Court's judgment in Liberty India case, the court held that profits from export incentives like duty drawback do not fall within the scope of Section 80-IB.

The court further explained that expenses related to duty drawback, being unrelated to the business profits of the industrial undertaking, cannot qualify for deductions under the Act. It emphasized that the industrial undertaking should be the direct source of income, which duty drawback incentives are not. Therefore, any expenditure on duty drawback recovery does not align with allowable deductions under the Act.

In conclusion, the court ruled in favor of the revenue, stating that gross duty drawback receipts, without deducting the expenses for their recovery, should be excluded from allowable deductions under Section 80-IB. Consequently, the appeal was accepted, reversing the Income Tax Appellate Tribunal's decision on this matter.