2009 (11) TMI 619 - AT - Income Tax

Deduction under s. 80-IB - excise duty refund - CIT(A) has treated the refund of excise duty as revenue receipt but not derived from Industrial Under and denied the benefit of deduction u/s 80IB - Held that - In the present case, firstly, the assessee collects the excise duty from the customers and after collection it makes the payment, to the Excise Department. In the third step, the Excise Department refunds the excise duty to the assessee - The learned CIT(A), after appreciation of the factual position of the present case and on examination of the scheme applicable to the State of J&K, recorded specific finding that excise duty refund has swelled the profit of the assessee and, thus, rejected the contention of the assessee Before analyzing s. 80-IB, as a prefactory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of profit linked incentives - According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately - Supreme Court, in the case of Liberty India (2009 -TMI - 34471 - SUPREME COURT ) - held that the incentives under ss. 80-IA and 80-IB of the Act, must be from the generation of profits (operation of profits derived from the industrial undertaking) - It was, further, held that the words derived from as appearing under s. 80-IB of the Act, are narrower in connotation as compared to the words attributable to . By using the expression derived from , Parliament intended to cover sources not beyond the first degree nexus or source whether the income was derived from industrial undertaking, as against income from other sources irrespective of the question whether such source was inextricably connected with the business activity of the assessee - the expression derived from has been judicially defined by the Hon ble Supreme Court, having regard to the text and context of the statutory provisions of s. 80-IB of the Act. In view of this, expression derived from cannot embrace incidental income such as excise duty refund and interest subsidy, as the same do not have first degree nexus with the operational profit derived from the industrial undertaking itself - Held that the impugned receipts, in the form of excise duty refund and interest subsidy are not eligible for deduction under s. 80-IB - Decided against the assessee

Issues Involved:
1. Legality and validity of the orders passed by the AO and CIT(A).
2. Taxability of excise duty refund and interest subsidy.
3. Eligibility of excise duty refund and interest subsidy for deduction under Section 80-IB of the IT Act, 1961.
4. Levy of interest under Section 234B of the IT Act, 1961.
5. Admission of additional grounds of appeal.

Detailed Analysis:

1. Legality and Validity of Orders:
The assessee challenged the legality, validity, and correctness of the orders passed by the AO and CIT(A). It was contended that the orders were "illegal, invalid and void ab initio and bad in law." However, the Tribunal did not find any substantial ground to cancel the orders based on these claims, and thus, the legality and validity of the orders were upheld.

2. Taxability of Excise Duty Refund and Interest Subsidy:
The primary issue was whether the excise duty refund and interest subsidy received by the assessee were capital receipts or revenue receipts. The assessee argued that these receipts were capital in nature and not liable to tax. However, the Tribunal, after considering various judicial precedents including the landmark decision of the Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. vs. CIT, concluded that such receipts were revenue in nature. The Tribunal noted that the incentives were given to assist the industrial undertaking in carrying on its business more profitably and not for setting up the industry or acquiring capital assets. Therefore, the excise duty refund and interest subsidy were held to be taxable as revenue receipts.

3. Eligibility for Deduction Under Section 80-IB:
The next issue was whether the excise duty refund and interest subsidy were eligible for deduction under Section 80-IB of the IT Act, 1961. The Tribunal held that for any income to be eligible for deduction under Section 80-IB, it must be "derived from" the industrial undertaking. The Tribunal relied on the Hon'ble Supreme Court's decision in Liberty India vs. CIT, which clarified that the expression "derived from" is narrower in scope compared to "attributable to." The Tribunal concluded that the excise duty refund and interest subsidy did not have a direct nexus with the industrial undertaking's profits and were not "derived from" the industrial undertaking. Therefore, these receipts were not eligible for deduction under Section 80-IB.

4. Levy of Interest Under Section 234B:
The assessee contested the levy of interest under Section 234B of the IT Act, 1961. The Tribunal noted that the issue was consequential in nature. Since the primary contentions regarding the taxability and eligibility for deduction of the excise duty refund and interest subsidy were decided against the assessee, the levy of interest under Section 234B was upheld as a consequential outcome.

5. Admission of Additional Grounds of Appeal:
The assessee raised additional grounds of appeal, arguing that the excise duty refund and interest subsidy should be treated as capital receipts. The Tribunal admitted these additional grounds, noting that they were purely legal issues arising from the facts already on record. However, after detailed consideration, the Tribunal dismissed the additional grounds, reaffirming that the excise duty refund and interest subsidy were revenue receipts and not capital receipts.

Conclusion:
The Tribunal dismissed the appeals filed by the assessees and the appeal by the Revenue. It upheld the taxability of the excise duty refund and interest subsidy as revenue receipts and denied the deduction under Section 80-IB for these receipts. The levy of interest under Section 234B was also upheld as a consequential matter.

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