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TMI Blog2017 (5) TMI 1630X X X X Extracts X X X X X X X X Extracts X X X X ..... t? (ii) Whether on the facts and circumstances of the case, the Tribunal was right and justified in allowing deduction u/s 80IB of Rs. 21,76,234/- on interest earned on FDRs, inspite the fact that interest income is not a business income and certainly not derived from the business of the industrial undertaking?" 2.2 Appeal No.12/2010 admitted on 11.1.2010 "(1) Whether on the facts and circumstances of the case, the Tribunal was right and justified in allowing deduction of Rs. 79,52,247/- u/s 80IB on the amount of duty drawback which is admittedly not an income derived from industrial undertaking, simply by relying upon its own order, which are also under challenged before this Hon'ble High Court? (2) Whether on the facts and circumstances of the case, the Tribunal was right and justified in allowing deduction u/s 80IB on interest earned on FDRs, inspite the fact that interest income is not a business income and certainly not derived from the business of the industrial undertaking?" 3. Counsel for the appellant Mr. Singhi has taken us to the judgment of the Supreme Court in Liberty India vs. Commissioner of Income Tax reported in (2009) 317 ITR 218 (SC) pursuant to which, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing illustration: Expenditure Amount(Rs.) Income Amount(Rs.) Opening Stock Purchases (Incouding Customs duty paid) Manufacturing overheads Administrative, setting and distribution exp. 100 500 300 200 Sales Duty Drawback received Closing Stock 1,000 100 200 1,300 1,300 In the circumstances, we hold that Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80IA/80IB of the 1961 Act. 4. However, counsel for the respondent has taken us to the provision of Section 28 (b, c, d) and (iii) of the Income Tax Act reads as under:- 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",- (i)........... (ii)........... (a)........... (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto ; (c) any person, by whatever name called, holding an agency in India for any par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such rates as may be specified by the Director General of Foreign Trade by way of public notice issued in this behalf, for import of raw materials, intermediates, components, parts packing material etc. The holder of Duty Entitlement Passbook Scheme (DEPB) shall have the option to pay additional customs duty, if any, in cash as well. Validity 7.15. The DEPB shall be valid for a period of 12 months from the date of issue. 7.16 The DEPB and/or the items imported against it are freely transferable. The transfer of DEPB shall however be for import at the port specified in the DEPB which shall be the port from where exports have been made. However, imports from a port other than the port of export shall be allowed under TRA facility as per the terms and conditions of the notification issued by Department of Revenue. 7.38 (i) An application for grant of credit under DEPB may be made to the licensing authority concerned in the form given in Appendix-11C alongwith the documents prescribed therein. The provisions of paragraphs 7.2 shall be applicable for DEPB also. The FOB value in free foreign exchange shall be converted into Indian rupees as per the authorized dealer's T/T bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign Trade (Development and Regulation) Act, 1992 (22 of 1992) (iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992). 12. It will be clear from the aforesaid provisions of Section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income tax under the head "Profits and Gains of Business or Profession". DEPB is a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it is receivable once exports are made and an application is made by the exporter for DEPB. We have, therefore, no doubt that DEPB is "cash assistance" receivable by a person against exports under the scheme of the Government of India and falls under Clause (iiib) of Section 28 and is chargeable to income tax under the head "Profits and Gains of Business or Profession" even before it is transferred by the Assessee. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court. The first reason given by the High Court is that Clause (iiia) of Section 28 treats profits on the sale of an import license as income chargeable to tax and when the license is sold, the entire amount is treated as profits of business under Clause (iiia) of Section 28 and thus there is no justification to treat the amount which is received by an exporter on the transfer of the DEPB any differently than the profits which are made on the sale of an import license under Clause (iiia) of Section 28 of the Act. In taking the view that when the import license is sold the entire amount is treated as profits of business, the High Court has visualized a situation where the cost of acquiring the import license is nil. The cost of acquiring DEPB, on the other hand, is not nil because the person acquires it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports has a cost element in it. Accordingly, when DEPB is sold by a person, his profit on transfer of DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB. The second reason given by the High Court in the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to industrial undertaking". 35. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc.. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. 36. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from Section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business Under Section 80-IB. They belong to the category of ancillary profits of such Undertakings. (Paras 34, 35 and 36) 17. An analysis of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level playing field so that they could compete with their counterparts in central (non-remote) areas. The huge transportation cost for getting the raw materials to the industrial unit and finished goods to the existing market outside the state, was making it unviable for industries in remote parts of the country to compete with industries in central areas. Therefore, industrial units in remote areas were extended the benefit of subsidized transportation. For industrial units in Assam and other northeastern States, the benefit was given in the form of a subsidy in respect of a percentage of the cost of transportation between a point in central area (Siliguri in West Bengal) and the actual location of the industrial unit in the remote area, so that the industry could become competitive and economically viable. (Paras 14 and 15) 25. The decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the Revenue against the order of the Tribunal, the High Court has set aside the order of the Tribunal and directed the Assessing Officer to dispose of the issue in accordance with the judgment of the Bombay High Court in Commissioner of Income-Tax v. Asian Star Company Ltd. (supra). We must, thus, examine whether reasons given by the High Court in its judgment in Commissioner of Income-Tax v. Asian Star Company Ltd. (supra) were correct in law. 14. On a perusal of the judgment of the High Court in Commissioner of Income-Tax v. Asian Star Company Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High Court has relied on a decision of this Court in Commissioner of Income-Tax v. K. Ravindranathan Nair MANU/SC/4281/2007 : (2007) 295 ITR 228 (SC) in which the issue raised before this Court was entirely different from the issue raised in this case. In that case, the Assessee owned a factory in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered opinion, it was not necessary to refer to the explanatory Memorandum when the language of Explanation (baa) to Section 80HHCwas clear that only ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits computed under the head profits and gains of business of an Assessee could be deducted under Clause (1) of Explanation (baa) and not ninety per cent of the quantum of any of the aforesaid receipts which are allowed as expenses and therefore not included in the profits of business of the assessee. 16. In the result, we allow the appeal and set aside the impugned order of the High Court and remand the matter to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment. No costs. 6. He contended that the judgment in Liberty India can be distinguished in case duty draw back and netting off is required to be carried out. 7. However, he has also made reference of the Gujarat High Court judgment reported in Commissioner of Income Tax vs. India Gelatine & Chemicals Ltd. reported in (2005) 145 Taxman 303 (Gujarat) wherein it has been held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s there so that the region may develop and promote the welfare of the people living in that region. One of the incentives which the Government decided to grant was cash subsidy so that entrepreneurs could utilise such cash subsidy for any purpose connected with the establishment of industries in the backward areas and once the decision to give cash subsidy was taken, the Government had to work out some method to determine the quantum of such subsidy. One of the recognised methods of working out such cash subsidy is on the basis of the amount invested by an entrepreneur in acquiring capital assets and the Government specified a certain percentage of the amount so invested in the capital assets as cash subsidy. The scheme does not say as to in what manner the subsidy granted was to be utilised and, therefore, the industry to which the subsidy was granted was free to utilise it in any manner it liked. The Court, therefore, concluded that if the subsidy could be utilised by the entrepreneur in any manner it liked, it could not be said that it was granted for meeting the cost of the capital assets. It was on this basis that the Court held that the subsidy was not given to meet cost of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om" the industrial undertaking and, therefore, eligible for relief under Section 80J of the Income Tax Act, 1961. 8. He has also relied upon the decision of this court in D.B. ITA No.580/2008 (K.G. Petrochem Ltd. vs. CIT) decided on 7.12.2016 wherein it has been held as under:- Mr. Sanjay Jhanwar has relied upon para 40 of Full Bench decision of this court in D.B. Income Tax Appeal No. 13/2002 (supra) which reads as under:- In commissioner of Income-Tax Vs. Shri Ram Honda Power Equip (Supra), the Delhi High Court held that the word "interest" in Clause (baa) of the Explanation to Section 80HHC of the Act, is indicative of net interest i.e. gross interest as reduced by expenditure incurred by the assessee in earning such interest. 11. Taking into consideration the provisions of Section 57(iii) and both the judgments of the High Court and the Hon'ble Supreme Court. We are of the opinion that interest income, as reduced by the expenses incurred for the purpose of such income is required to be excluded or deducted for arriving at the figure of income u/s 80IB. 9. Regarding second issue, he has relied upon the full bench decision of this court in M/s Reliance Trading Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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