Madras H.C : Rejecting the deduction under section 80-IB in respect of duty drawback

High Court Of Madras

Eastman Exports Global Clothing (P.) Ltd. Vs. ACIT

Assessment Year : 2004-05

Section : 80-IB

Raviraja Pandian And M.M. Sundresh, JJ.

 T.C. (A) No. 1144 Of 2009

November 3, 2009

JUDGMENT

K. Raviraja Pandian, J. — The appeal is filed by the assessee against the order of the Income-tax Appellate Tribunal Madras “C” Bench made in I.T.A. No. 1509/Mds/2008 dated April 17, 2009. The relevant assessment year is 2004-05. The substantial question of law formulated for entertainment of the appeal is as follows :

“Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in rejecting the deduction under section 80-IB in respect of duty drawback ?”

2. The statement of facts culled out from the memorandum of grounds are as follows :

The assessee for the assessment year 2004-05 filed a return on November 1, 2004, admitting a total income of Rs. 3,89,97,640. The return was processed under section 143(1) of the Income-tax Act. The assessee claimed deduction under section 80-IB of the Act in respect of duty drawback amounting to Rs. 2,85,88,324 relating to a small scale unit situated at Panickanpalayam, Perundurai Taluk, Erode District. The Assessing Officer was of the view that duty drawback is not a profit or gain derived from industrial activity and hence it was not eligible for deduction under section 80-IB and on that ground rejected the claim of the assessee. However, the claim so made by the assessee found favour before the Commissioner of Income-tax (Appeals), when the assessee filed an appeal against the order of the assessment. For granting the relief in favour of the assessee, the Commissioner of Income-tax (Appeals) relied on the decision of the Gujarat High Court in CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 284 / 145 Taxman 303. The Revenue aggrieved by the order of the Commissioner of Income-tax (Appeals) carried the matter on appeal to the Income-tax Appellate Tribunal. The Tribunal following the decision of the High Court in Sakthi Footwear v. Asstt. CIT (No. 2) [2009] 317 ITR 199/ 177 Taxman 71 (Mad.) reversed the order of the Commissioner of Income-tax (Appeals) and non-suited the assessee for the claim under section 80-IB in respect of the duty drawback. The correctness of the same is now canvassed before this court by filing the present appeal on the question of law referred to above.

3. We heard the learned counsel appearing for the appellant.

4. In the case of Sakthi Footwear (supra) the Division Bench of this court to which one of us (K. Raviraja Pandian J.) was a party, observed as follows (page 200) :

“In respect of the assessee’s own case pertaining to the assessment year 2001-02, this court in Sakthi Footwear v. Asstt. CIT (No. 1) [2009] 317 ITR 199 (Mad.) T.C. (A) No. 1252 of 2007-[2009] 317 ITR 194 (Mad.) dated November 7, 2007, to which one of us (K. Raviraja Pandian J.) was a party, held thus (pages 196-197) :

‘4. As far as the first question is concerned, viz., the deduction under section 80-I in respect of duty drawback, the learned counsel for the appellant placed reliance on the Gujarat High Court decision reported in CIT v. India Gelatine and Chemicals Ltd. [2005] 275 ITR 284 wherein it was held that duty drawback was “derived from” the industrial undertaking and, therefore, would be eligible for deduction under section 80-J. The learned counsel for the appellant also pointed out that in the case of duty drawback, the same was given specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties. Referring to the decision of the Gujarat High Court that the duty drawback is “derived from” industrial undertaking and eligible for deduction, the learned counsel seeks to draw support of the said decision to contend that the order of the Tribunal holding that the same was not “derived from” industrial activity, could not be held to be the correct view.

5. It may be seen that dealing with the inclusion of duty drawback for considering the deduction under section 80HH, this court in the decision reported in CIT v. Jameel Leathers and Uppers [2000] 246 ITR 97 , held at page 102 as follows :

“The decision of the Karnataka High Court relied on by the learned counsel appearing for the assessee in the case of Sterling Foods v. CIT [1991] 190 ITR 275 did not examine the distinction between the terms ‘derived from’ and ‘attributable to’. It only proceeded on the basis, that such income being part of the business income, it must follow that the income is derived from the industrial undertaking.”

6. Referring to the decision reported in National Organic Chemical Industries Ltd. v. CCE [1997] 106 STC 467; AIR 1997 SC 690 the Division Bench held that, the Supreme Court held the word “derived” is usually followed by the word “from”, and it means : get or trace from a source; arise from, originate in ; show the origin or formation of. The Division Bench also followed the decision of this court reported in CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad.).

7. In the said decision, this court held that profits or gains eligible for deduction under section 80-HH must be derived from the actual conduct of the business. This court further held that the mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction under section 80-HH ; that mere commercial connection between the income and the industrial undertaking would not be sufficient. This court held that profits and gains derived from industrial undertaking denotes that the immediate and effective source of income eligible for the grant of relief under section 80HH must be the industrial undertaking itself and not any other source. The said decision was affirmed by the Apex Court in the decision reported in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 , wherein the Supreme Court held that the rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing the rule of liberal construction. In the circumstances, the Apex Court held that the interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits and gains derived by the undertaking for the purpose of special deduction under section 80-HH. The Apex Court held that the words `derived from’ in section 80-HH must be understood as something which has a direct or immediate nexus with the industrial undertaking. Having regard to the language of section 80-I, in the face of the decisions of the Apex Court which were consistently followed by this court, we do not find any ground to admit the appeal on the first ground, viz., entitlement of the appellant to deduction under section 80-I in respect of duty drawback’.”

5. The said judgment of the Division Bench has been confirmed by the Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218 / 183 Taxman 349 wherein it was observed as follows (page 234) :

“17. The next question is what is duty draw back ? Section 75 of the Customs Act, 1962, and section 37 of the Central Excise Act, 1944, empower the Government of India to provide for repayment of customs duty and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or Central 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 the 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.”

6. As the question of law now framed has already been answered by the Apex Court in the case of Liberty India (supra) against the assessee and in favour of the Revenue, nothing remains to be adjudicated and the appeal deserves to be dismissed. Accordingly, the appeal is dismissed.

[Citation : 331 ITR 232]

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