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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 ..... udgment, 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. - D.B. Income Tax Appeal No. 464/2009, D.B. Income Tax Appeal No. 12/2010 - - - Dated:- 29-5-2017 - MR. JUSTICE K.S. JHAVERI And DR. JUSTICE VIRENDRA KUMAR MATHUR For the Appellant : Mr. Anuroop Singhi with Mr. Aditya Vijay For the Respondent : Mr. Sanjay Jhanwar with Ms. Archana ORDER 1. Both these appeals arising out of the judgment of the tribunal whereby tribunal has dismissed the appeal of the department and confirmed the order of the CIT(A) and since both the appeals relate to the same assessee, they are decided by this common judgment. 2. This court while admitting the appeals framed following substantial questions of law:- 2.1 Appeal No.464/2009 admitted on 23.3.2015 (i) Whether on the facts and circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, 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 (see: page 44 of Indian Accounting Standards GAAP by Dolphy D'souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Commissioner of Income Tax, Mumbai reported in (2012) 342 ITR 49 wherein it has been held as under:- 10. For appreciating the nature of the DEPB, paragraphs 4.37 and 4.42 of the Hand Book on DEPB issued by the Government of India and paragraphs 7.14, 7.15, 7.16 and 7.38 of the Export and Import Policy, 1997-2002 as notified by the Central Government in the Notification No. 1(RE-99)/ 1997-2202 dated 31st March, 2000 are extracted hereinbelow: Hand Book on DEPB 4.37 Duty Entitlement Passbook Scheme (DEPB) The Policy relating to Duty Entitlement Passbook (DEPB) Scheme is given in Chapter4 of the Policy. The duty credit under the scheme shall be calculated by taking into account the deemed import content of the said export product as per SION and the basic custom duty payable on such deemed imports. The value addition achieved by export of such product shall also be taken into account while determining the rate of duty credit under the scheme. 4.42 Utilization of DEPB credit. The credit under DEPB shall be utilized for payment of customs duty on any item which is freely importable. Export and Import Policy, 1997-2002 7.14 For exporters not desirous of going thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant applies for DEPB after realization, the DEPB shall be issued with transferable endorsement. On a reading of the aforesaid paragraphs of the Hand Book on DEPB and the Export and Import Policy of the Government of India, 1997-2002, it is clear that the objective of DEPB scheme is to neutralize the incidence of customs duty on the import content of the export products. Hence, it has direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralization of the cost of customs duty under the DEPB scheme, however, is by granting a duty credit against the export product and this credit can be utilized for paying customs duty on any item which is freely importable. DEPB is issued against the exports to the exporter and is transferable by the exporter. 11. We may now consider the relevant provisions of Section 28 for determining whether DEPB will fall under clause (iiib) or under Clause (iiid) of Section 28. The relevant provisions of Section 28 of the Act are reproduced hereunder: Section 28. Profits and Gains of Business or Profession.-The following income shall be chargeable to income-tax under the head Profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or investment over and above expenditures. This Court in E.D. Sassoon and Company Ltd. and Ors. v. Commissioner of Income-Tax, Bombay City MANU/SC/0088/1954 : (1954) 26 ITR 27 (SC) has quoted the following observations of Lord Justice Fletcher Moulton in The Spanish Prospecting Company Limited ((1911) I Ch. 92) on the meaning of the word profits : ... 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. 'Profits', therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB has direct nexus with the cost of imports for manufacturing an export product, any amount realized by the Assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of DEPB. 14. We are, thus, of the considered op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB. 5.1 And judgment of the Supreme Court in Commissioner of Income Tax vs. Meghalaya Steels Ltd. reported in (2016) 383 ITR 217 (SC) wherein Supreme Court held as under:- 16. The sheet anchor of Shri Radhakrishnan's submissions is the judgment of this Court in Liberty India v. Commissioner of Income Tax MANU/SC/1585/2009 : (2009) 9 SCC 328. This was a case referring directly to Section 80-IB in which the question was whether DEPB credit or Duty drawback receipt could be said to be in respect of profits and gains derived from an eligible business. This Court first made the distinction between attributable to and derived from stating that the latter expression is narrower in connotation as compared to the former. This Court further went on to state that by using the expression derived from Parliament intended to cover sources not beyond the first deg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utable to . Since we are directly concerned with the expression derived from , this judgment is relevant only insofar as it makes a distinction between the expression derived from , as being something directly from, as opposed to attributable to , which can be said to include something which is indirect as well. 20. Liberty India being the fourth judgment in this line also does not help Revenue. What this Court was concerned with was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralize the incidence of customs duty payment on the import content of the export product which is provided for by credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head income from other sources , which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head profits and gains of business or profession . If cash assistance received or receivable against exports schemes are included as being income under the head profits and gains of business or profession , it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of the Assessee arising out of the receipt of processing charges was not deducted under Clauses (1) of the Explanation (baa) to Section 80HHC. This Court held that the processing charges was included in the gross total income from cashew business and hence in terms of Explanation (baa), ninety per cent of the gross total income arising from processing charges had to be deducted under Explanation (baa) to arrive at the profits of the business. In this case, this Court held that the processing charges received by the Assessee were part of the business turnover and accordingly the income arising there from should have been included in the profits and gains of business of the Assessee and ninety per cent of this income also would have to be deducted under Explanation (baa) under Section 80HHC of the Act. In this case, this Court was not deciding the issue whether ninety per cent deduction is to be made from the gross or net income of any of the receipts mentioned in Clause (1) of the Explanation (baa). 15. The Bombay High Court has also relied on the Memorandum explaining the clauses of the Finance Bill, 1991 contained in the circular dated 19.12.1991 of the Central Board of Dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... originates from and the source of duty drawback is export of goods and not manufacturing activity of the industrial undertaking. 14. In this regard, we would like to refer to the distinction that the Courts have made in the context of the question whether the subsidy granted by the Government is to be taken into account for determining the actual cost of assets under Section 43(1) of the Act for the purpose of depreciation and development rebate. In CIT vs . Grace Paper Industries Pvt. Ltd., MANU/GJ/0017/1990 : [1990]183ITR591(Guj) the revenue had contended that the amount of subsidy paid by the Government to the assessee had a direct nexus and is based on the actual cost of the fixed assets. Therefore, to the extent of the subsidy actual cost of the fixed assets would stand reduced. On the other hand, the contention of the assessee was that the subsidy was granted by the Government for development of industries in backward areas and it was not given to reduce the cost of plant and machinery although the costs of the assets including the building and plant and machinery was a measure for determining the quantum of subsidy. This Court held that the cost of the fixed assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount for reducing the actual cost of acquisition of the assets. The above view came to be approved by the Apex court in CIT vs . PJ Chemicals, MANU/SC/0535/1994 : [1994]210ITR830(SC) . We are of the view that the same distinction would apply while considering the various incentives being given to an industrial undertaking. If the incentives are like cash compensatory support and import entitlement, they are in the nature of general incentives though for determining the quantum of such incentives, the Government may take into consideration the export turnover of the industry. Hence, they are not derived from the industrial undertaking, but merely attributable to it. But when it comes to duty drawback, it is specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the aforesaid statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties, as indicated above. The object of the duty drawback is to reimburse customs duties and excise duties paid by the assessee. As customs duties and excise duties are admittedly an integral part of the cost of production and, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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