2009 (8) TMI 63 - SC - Income Tax

Deduction u/s 80-IB Income from Business profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme Held that - 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 of the 1961 Act

Summary

Issues Involved:
1. Whether profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme qualifies as profit derived from the business of the Industrial Undertaking eligible for deduction under Section 80-IB of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Profit from DEPB and Duty Drawback Scheme under Section 80-IB

Facts:
The appellant, a small-scale industrial undertaking engaged in manufacturing, claimed a deduction under Section 80-IB for profits that included amounts from DEPB and Duty Drawback. The Assessing Officer denied the deduction, arguing these benefits were export incentives, not profits derived from the industrial undertaking. The CIT(A) partly allowed the deduction, distinguishing DEPB from Duty Drawback. The Tribunal and the High Court upheld the denial, leading to the present appeal.

Arguments:
The appellant contended that DEPB and Duty Drawback neutralize duty on inputs used in manufacturing exported goods, thus increasing profits derived from the business of the industrial undertaking. They argued that these benefits should be credited against manufacturing costs, not treated as independent profit sources. The appellant also distinguished the present case from Sterling Food, where import entitlements were deemed windfall profits unrelated to industrial operations.

Department's Position:
The Department argued that DEPB and Duty Drawback are incentives from government schemes, not directly derived from the industrial undertaking. They cited Sterling Food and Pandian Chemicals to support that the immediate source of these benefits is the incentive scheme, not the industrial activity.

Legal Provisions:
- Section 80-IB: Allows deductions for profits derived from eligible businesses.
- Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944: Provide for duty drawback.

Analysis:
The Court emphasized that Sections 80-IA and 80-IB are profit-linked incentives, not investment-linked. The term "derived from" is narrower than "attributable to," indicating a direct source. DEPB and Duty Drawback, being incentives from government schemes, do not qualify as profits directly derived from industrial undertakings. These benefits are ancillary profits, not operational profits from manufacturing.

Accounting Standards:
AS-2 on Valuation of Inventories and ICAI guidelines indicate that trade discounts, rebates, and duty drawbacks should be treated as separate revenue items, not adjustments to manufacturing costs. This supports the Department's view that DEPB and Duty Drawback are independent income sources.

Conclusion:
The Court concluded that DEPB and Duty Drawback receipts are not profits derived from industrial undertakings under Section 80-IB. They are ancillary profits from government schemes, not directly linked to the manufacturing process. Thus, these receipts do not qualify for the deduction under Sections 80I, 80-IA, and 80-IB of the Income-tax Act, 1961.

Judgment:
The appeals were dismissed, affirming that Duty Drawback and DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purposes of Sections 80I, 80-IA, and 80-IB.