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TMI Blog2009 (8) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... 6217-6218/08, Civil Appeal No. 427/09, Civil Appeal No. 430/09, Civil Appeal No. 429/09, Civil Appeal No. 364-365/09, Civil Appeal No. 1257- 1258/09, Civil Appeal No. 3532/09 and Civil Appeal No. 451/06. JUDGMENT S. H. KAPADIA, J. - Leave granted. 2. The issue for consideration is: whether profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme could be said to be profit derived from the business of the Industrial Undertaking eligible for deduction under Section 80-IB of the Income-tax Act, 1961 (1961 Act)? 3. At the outset, we may indicate that although in the present judgment we have focused on the analysis of Section 80-IB, the basic Scheme of Sections 80I, 80-IA and 80-IB (as they then stood) remains the same. Facts: 4. The facts in the lead matter (Civil Appeal arising out of SLP(C) No. 5827/07 entitled M/s Liberty India v. CIT) are as follows: 5. The appellant, a partnership firm, owns a small scale industrial undertaking engaged in manufacturing of fabrics out of yarns and also various textile items such as cushion covers, pillow covers etc. out of fabrics/yarn purchased from the market. During the relevant previous year corresponding to Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Tribunal was assailed by the assessee(s) under Section 260A of the 1961 Act before the High Court. Following the decision of this Court in Sterling Food (supra), the High Court held that the assessee(s) had failed to prove the nexus between the receipt by way of duty drawback/DEPB benefit and the industrial undertaking, hence, the assessee(s) was not entitled to deduction under Section 80-IB(3), hence this Civil Appeal(s). Arguments: 7. The submission of the appellant(s) [assessee(s)] in nutshell was that the amount of duty drawback/DEPB was intended to neutralize the incidence of duty on inputs consumed/utilized in the manufacture of exported goods resulting into increased profits derived from the business of the industrial undertaking which profits qualified for deduction under Section 80-IB. According to the appellant(s) since no excise duty/customs duty was payable on raw materials consumed/utilized in manufacturing goods exported out of India, the duty paid stood refunded under Section 37(2)(xvia) of the Central Excise Act, 1944 and under Section 75 of the Customs Act, 1962 read with Customs, Central Excise Duties and Service Tax Drawback Rules, 1995. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the appellant(s) it was further submitted that this Court's decision in Sterling Food (supra) dealt with availability of deduction under Section 80-HH with respect to profit on sale of import entitlements. The said decision, according to the appellant, had no applicability to the issue under consideration for the reason that import entitlement/REP licence was granted by the Government on the basis of exports made; the same were granted gratuitously without antecedent cost having being incurred by the industrial undertaking, unlike duty drawback and DEPB, which had direct link to the costs incurred by such industrial undertaking by way of payment of customs/excise duty in respect of duty paid inputs used in the manufacture of goods meant for export and in such circumstances, profit from sale of import entitlements/REP licence was in the nature of windfall and it was in those circumstances, that the apex Court held that source of profit on sale of import entitlements was not the industrial undertaking but the source was the Export Promotion Scheme. According to the appellant(s), in the case of sale of import entitlements/REP licence, the source was the Scheme framed by Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of deduction in respect of incomes having direct nexus with the profits of the undertaking, hence, all incomes that arose during the course of running of the eligible business would be eligible for deduction under Section 80-IB, which would include income arising on sale of DEPB at premium. 10. In reply, Shri Gourab Banerji, learned Additional Solicitor General, submitted that, for application of the words "derived from" there must be a direct nexus between the profit and the industrial undertaking. According to the learned senior counsel, merely because under the Scheme to encourage exports a certain amount was repaid as "duty drawback", it cannot be regarded as profit "derived from" the industrial undertaking. It may constitute profit from business under Section 28, but it cannot be construed as profits "derived from" the industrial undertaking, for its immediate and proximate source was not the industrial undertaking but the scheme for "duty drawback". According to the learned counsel, this position was placed beyond doubt by a judgment of this Court in Sterling Food (supra). Therefore, according to the learned counsel, the source of duty drawback was not the industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof : Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words "twenty per cent", the words "twenty-five per cent" had been substituted. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication services whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services on or after the 1st day of April, 1995, but on or before the 31st day of March, 2003. Explanation.-For the purposes of this clause, "domestic satellite" means a satellite owned and operated by an Indian company for providing telecommunication service; (iii) any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government in accordance with the scheme framed and notified by that Government for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2006: Provided that in a case where an undertaking develops an industrial park on or after the 1st day of April, 1999 or a special economic zone on or after the 1st day of April, 2001 and transfers the operation and maintenance of such industrial park or such special economic zone, as the case may be, to another undertaking (hereafter in this section referred to as the transferee undertaking), the deduction under sub-section (1) shall be allowed to suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India : Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted. Explanation 1.- For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day of April, 1995 and ending on the 31st day of March, 2002 . xxx (13) The provisions contained in sub-section (5) and sub- sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible business under this section. Discussions and Findings: 12. In this batch of Civil Appeals we are concerned with admissibility of the amounts of duty drawback and DEPB for deduction under Section 80-IB. 13. Before analyzing Section 80-IB, as a prefatory 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". Therefore, when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Section 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (see CIT v. Kirloskar Oil Engines Ltd. reported in [1986] 157 ITR 762) 15. Continuing our analysis of Sections 80-IA/80-IB it may be mentioned that sub-section (13) of Section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) of Section 80-IA, so far as may be, applicable to the eligible business under Section 80-IB. Therefore, at the outset, we stated that one needs to read Sections 80I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-section(5) of Section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub- section (5) of Section 80-IA, which are also required to be read into Section 80-IB. [see Section 80-IB(13)]. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in Section 75 of the Customs Act and Section 37 of the Central Excise Act. 18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in Section 80-IB. 19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard. 20. AS-2 deals with Valuation of Inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in form of materials or supplies to be consumed in the production. 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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