2017 (5) TMI 1630 - HC - Income Tax

Deduction u/s 80IB on the amount of duty drawback - Income from Business Held that - On the very first issue, the issue is squarely covered by the decision of Supreme Court in Liberty India (2009 (8) TMI 63 - SUPREME COURT) as held duty drawback, rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. - They should be treated as separate items of revenue or income and accounted for accordingly - for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories - duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking - Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB The attempt made to distinguish the same by subsequent judgment, in our considered opinion, will not apply inasmuch as there is no cash transaction and netting off will not apply in the present case, therefore, first issue is required to be answered in favour of the department and against the assessee. Allowing deduction u/s 80IB on interest earned on FDRs - interest income is not a business income and certainly not derived from the business of the industrial undertaking - Decided against assessee.

Summary

Issues Involved:
1. Deduction under Section 80IB on duty drawback.
2. Deduction under Section 80IB on interest earned on FDRs.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IB on Duty Drawback:

Substantial Question of Law:
The primary question was whether the Tribunal was justified in allowing a deduction under Section 80IB on the amount of duty drawback, which is not considered an income derived from an industrial undertaking.

Arguments by Appellant:
The appellant cited the Supreme Court's judgment in Liberty India vs. Commissioner of Income Tax, which ruled that duty drawback receipts do not form part of the net profits of eligible industrial undertakings for Sections 80IA/80IB. The appellant argued that duty drawback should be treated as a separate item of revenue or income, not directly derived from the industrial undertaking.

Counterarguments by Respondent:
The respondent referred to Section 28 of the Income Tax Act, which includes various incomes chargeable under the head "Profits and gains of business or profession." They also cited the Supreme Court's judgment in Topman Exports vs. Commissioner of Income Tax, which clarified the nature of DEPB and its treatment under Section 28. The respondent argued that duty drawback has a direct nexus with the cost of imports for manufacturing export products and should be considered part of the business income.

Court's Analysis:
The court referred to Liberty India, where it was held that duty drawback and DEPB benefits are incentives and not profits derived from an eligible business under Section 80IB. The court emphasized that these incentives are ancillary profits and do not have a direct nexus with the industrial undertaking's profits.

Conclusion:
The court ruled in favor of the department, holding that duty drawback receipts do not qualify for deductions under Section 80IB, as they are not directly derived from the industrial undertaking.

2. Deduction under Section 80IB on Interest Earned on FDRs:

Substantial Question of Law:
The second issue was whether the Tribunal was justified in allowing a deduction under Section 80IB on interest earned on FDRs, which is not considered business income derived from the industrial undertaking.

Arguments by Appellant:
The appellant argued that interest income from FDRs does not constitute business income and should not be eligible for deductions under Section 80IB. They cited the full bench decision of the court in M/s Reliance Trading Corporation vs. ITO, which held that interest income should be excluded for the purposes of deduction under Section 80HHC, applying the principle of direct and proximate nexus to business income.

Counterarguments by Respondent:
The respondent relied on the judgment in ACG, Associated Capsules (P) Ltd. vs. Commissioner of Income Tax, which discussed the treatment of various incomes under Explanation (baa) to Section 80HHC. They argued that expenses incurred in earning such interest should be deducted to arrive at the net interest income, which should then be considered for deductions.

Court's Analysis:
The court acknowledged the arguments but emphasized that interest income, even after netting off expenses, should be treated as interest income and not business income. This was consistent with the decision in K.G. Petrochem Ltd., where it was held that interest income should be considered separately.

Conclusion:
The court ruled in favor of the department, holding that interest income from FDRs does not qualify for deductions under Section 80IB, as it is not derived from the industrial undertaking's business.

Final Judgment:
Both issues were resolved in favor of the department, and the appeals were allowed. The deductions under Section 80IB on duty drawback and interest earned on FDRs were denied.