2013 (9) TMI 85 - AT - Income Tax

Deduction u/s 80IB - Duty drawback refund - Nexus with profit - Whether deduction under section 80 IB was available with respect to refund of excise duty - Held that - The assessee is virtually a one hundred percent export oriented undertaking - What clearly emerges from these facts is that the industrial undertaking was used only for the purpose of manufacturing and exporting the export products. In a situation in which an important part of the revenues generated as a result of the exports, which is as high as almost 7.4% of total turnover, is duty drawback itself, it may not really be correct to say that duty drawback receipt is an incidental, unintended, ancillary or independent benefit, which can be seen as a standalone or independent source of income. In a situation in which the duty drawback receipts are nothing but additional or incidental profits, and when even in the absence of duty drawback receipts, operations of industrial undertaking make business sense - In a particular fact situation, even material cost may be required to be adjusted for duty drawback - The industrial undertaking so manufacturing precision equipments is a commercial venture for making profits, and exports or no exports, the industrial undertaking is in business anyway. In such a situation, in case the assessee is able to make some exports of the same product on the similar price, the duty drawback income is an incidental or standalone income. However, in another situation, in which, for example, the assessee is a one hundred percent exporter, and he is operating on the basis of costs duly adjusted by duty drawback, as evident from the fact that but for duty drawback receipts, he will have virtually no profits, the duty drawback receipts could as well have the first degree nexus since these cannot be viewed as incidental or ancillary profits or standalone income - What should have been really examined by the authorities below is whether or not, on the facts of this case, the duty drawback receipts can be said to have first degree nexus with the industrial undertaking or whether these profits can be said to be ancillary, incidental or standalone income. Everything thus hinges on the findings about the degree of nexus between duty drawback receipts and the industrial undertaking, and it is only when there is a clear finding on this aspect that the correctness of assessee s claim can be tested on the principles of law. - That exercise has not been carried out at all - matter is remitted back to CIT for fresh adjudication - Following decision of M/s Liberty India Versus Commissioner of Income Tax 2009 (8) TMI 63 - SUPREME COURT - decided in favor of assessee by way of remand.

Summary

Issues Involved:
1. Deduction under section 80 IB of the Income Tax Act, 1961, in respect of duty drawback received.
2. Disallowance of expenses under section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deduction under section 80 IB of the Income Tax Act, 1961, in respect of duty drawback received:

The primary issue in these appeals is whether the duty drawback receipts qualify for deduction under section 80 IB. The assessee, engaged in manufacturing and exporting footwear, claimed deduction under section 80 IB, including duty drawback receipts. The Assessing Officer (AO) denied this deduction, arguing that duty drawback is not derived from industrial activity but from the government's export promotion scheme. The AO relied on the judgment in CIT Vs Ritesh Industries (274 ITR 324) to support this view.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, referencing the Supreme Court's ruling in Liberty India Vs CIT (317 ITR 218), which held that duty drawback does not qualify for deduction under section 80 IB as it is not derived from industrial activity.

The assessee contended that duty drawback receipts subsidize production costs and are integral to export profits. They cited the Delhi High Court's ruling in CIT Vs Dharmpal Premchand Ltd (317 ITR 353), which allowed deduction for refunds of excise duty, arguing that the Supreme Court dismissed an SLP against this judgment, indicating its validity.

The Tribunal examined various judicial precedents, including the Supreme Court's rulings in Sterling Foods (237 ITR 579) and Liberty India. It noted that the key issue is whether duty drawback receipts have a direct nexus with industrial profits or are ancillary profits. The Tribunal observed that in cases where duty drawback receipts are substantial and integral to the business model, they cannot be seen as incidental profits.

The Tribunal concluded that the factual matrix must be examined to determine the degree of nexus between duty drawback receipts and industrial profits. It remitted the matter back to the CIT(A) for a detailed examination and a speaking order, considering the specific facts of the case. The CIT(A) was also directed to consider the assessee's alternate contention that duty drawback receipts representing refunds of duties should be included in profits eligible for deduction under section 80 IB.

2. Disallowance of expenses under section 14A of the Income Tax Act, 1961:

The second issue involves the disallowance of expenses amounting to Rs 36,000 under section 14A. The assessee did not press this issue beyond stating the facts, leaving it to the Tribunal's discretion. Given the small amount involved, the Tribunal did not delve deeply into this matter.

Conclusion:

The Tribunal allowed the appeals for statistical purposes, remitting the matter back to the CIT(A) for re-examination of the duty drawback issue. The CIT(A) is to provide a detailed, speaking order based on the factual matrix and legal principles discussed. The Tribunal emphasized the importance of examining the direct nexus between duty drawback receipts and industrial profits to determine eligibility for deduction under section 80 IB.