Commissioner Of Income Tax-I, Ludhiana v. M/S Vallabh Yarns (P) Ltd., Ludhiana

IN THE HIGH COURT FOR THE STATES OF PUNJAB ANDHARYANA AT CHANDIGARH ITA No.888 of 2010 Date of decision: July 30, 2013. Commissioner of Income Tax-I, Ludhiana ... Appellant v. M/s Vallabh Yarns (P) Ltd., Ludhiana ... Respondent CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLAHON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Present:Shri Rajesh Katoch, Advocate for the appellant.Shri Pankaj Jain, Advocate for the respondent. Dr. Bharat Bhushan Parsoon, J. This income tax appeal under Section 260A of theIncome Tax Act, 1961 (for short, the 1961 Act) is directedagainst the order of the Income Tax Appellate Tribunal,Chandigarh Bench-B, Chandigarh passed in ITANo.79/CHD/2010 dated 28.4.2010 for the assessment year2006-07. Facts of the case: The respondent-assessee is a company engagedin manufacturing and sale of finished knitted fabrics andreadymade garments. It had filed its return on 29.11.2006declaring taxable income of Rs.84,49,800/- while claiming deductions under Section 80-IB of the 1961 Act to the tuneof Rs.35,91,572/-. The assessment was finalized by theAssessing Officer on 8.12.2008. While framing assessment,the Assessing Officer re-computed deductions under Section80-IB allowable to the assessee and disallowed variousitems of receipt including duty draw back (hereinafterreferred to, as DDB) for a sum of Rs.4,40,823/-. Aggrievedwith this order, the assessee preferred an appeal before theCommissioner of Income Tax (Appeals)-I, Ludhiana whichwas decided on 11.11.2009. Though the appeal was partlyallowed in favour of the assessee in respect of certain itemsfor which deduction was disallowed under Section 80-IB butthe appellate authority had affirmed the order of theAssessing Officer with respect to duty drawback receipt. Still aggrieved from the order of theCommissioner of Income Tax (Appeals), the assesseepreferred another appeal before the Income Tax AppellateTribunal, Chandigarh Bench-B, Chandigarh. The appeal wasalso preferred by the revenue qua deductions allowed underSection 80IB of the 1961 Act to the assessee. The IncomeTax Appellate Tribunal vide order dated 28.4.2010 partlyallowed the appeal of the respondent-assessee thoughdismissed the appeal of the revenue. While allowing certainreceipts to be eligible for deduction under Section 80IB, theappellate authority also allowed the assessee to excludeexpenses incurred on realization of receipts of duty drawback. Relevant extract of order dated 28.4.2010(Annexure A-3) in this context is as under:- “13. Having considered the rival stands, on theaspect of excluding Duty Drawback income fromthe purview of Section 80IB, we set aside theissue back to the file of the Assessing Officer whoshall exclude only such amount of income whichis net of expenses incurred for its realization.Before the Assessing Officer, the assessee shallprovide the necessary workings in this regard.On being satisfied, the Assessing Officer shal re-work the disallowance u/s 80IB with respect tothe income on account of Duty Drawback. Thus,on this ground, the assessee succeeds forstatistical purposes.” Aggrieved with this order, the revenue has filed this appeal, claiming, that the appellate authority was notjustified in directing the Assessing Officer to exclude theexpenses incurred for realization of DDB for the purpose ofcomputing deductions under Section 80IB as DDB benefitsdo not form part of the net profits of eligible industrialundertaking for the purpose inter-alia of Section 80IB of the1961 Act. As per the revenue, the following substantial question of law requires determination in this appeal:- Aggrieved with this order, the revenue has filed this appeal, claiming, that the appellate authority was notjustified in directing the Assessing Officer to exclude theexpenses incurred for realization of DDB for the purpose ofcomputing deductions under Section 80IB as DDB benefitsdo not form part of the net profits of eligible industrialundertaking for the purpose inter-alia of Section 80IB of the1961 Act. As per the revenue, the following substantial question of law requires determination in this appeal:- “Whether on the facts and in law, the Hon'bleIncome Tax Appellate Tribunal was justified indirecting the Assessing Officer to exclude amountof Duty Drawback net of expenses incurred for itsrealization for the purpose of computingdeduction u/s 80IB ignoring the judgment ofHon'ble Supreme court in the case of LibertyIndia v. CIT (supra)?” During the course of arguments addressed by the parties, this question of law was modified in the following terms:- “Whether disallowance of deduction underSection 80IB on duty drawback is to be made onits gross amount or after reduction of expenses?” Praying for answer of this question in its favour, the Revenue wants quashing of the impugned order ,. Plea of the assessee is that DDB is an incentivewhich is given specially to reduce the cost of manufacturingof goods. The assessee pays custom and excise duties onthe goods which are transported by it in the course of itsbusiness. It is claimed that as these duties escalate the costof production, expenses made on realization of dutydrawback ought to be eligible for deduction to reduce theliability of taxation. Contention of the revenue per contra, however, isthat since DDB is not business income of the assessee, anyexpenditure made in realization of such export incentivealso cannot be business expenditure and, thus, is not to beallowed as eligible deduction. In short, it is claimed thatDDB is to be disallowed in its gross amount and no reductionof expenses made on its realization is to be permissible. The DDB is in the nature of an export incentive.As per Section 75 of the Customs Act, 1962 and Section 37of the Central Excise Act, 1944, Government of India hasprovided for repayment of custom and excise duty paid byan assessee. Such refund is allowed on the average amountof duty paid in respect of material of any particular nature or on description of goods used as raw material formanufacture of specified class of goods to be exported.Thus, the source of DDB receipts are statutory provisionscoupled with scheme of the Government of India to provideincentive to manufacturers of export goods of specifiedclass. In Liberty India v. Commissioner of Income Tax,(2009) 225 CTR (SC) 233, Hon'ble Apex Court had held thatprofits derived by way of export incentives such as DDB donot fall within the expression “profits derived from industrialundertaking” in terms of Section 80-IB of the Act. Following ratio decedendi laid down by the ApexCourt in Liberty India's case (supra), the High Court ofBombay in Commissioner of Income Tax v. Rachna Udhyog,(2010) 230 CTR (Bom) 72 also held that deduction of exportincentive inter-alia in the nature of DDB is not allowableunder Section 80IB. It is contended by the assessee that Income TaxAppellate Tribunal was right in granting concession ofexclusion of expenses incurred for realization of DDB as theexpenses are met out of income from the business of theassessee in the regular course of its transactions ofmanufacturing of export goods on which DDB incentivesbecome available to the assessee. This contention of the assessee lacks merit.When income on DDB falls exclusively in the domain of Following ratio decedendi laid down by the ApexCourt in Liberty India's case (supra), the High Court ofBombay in Commissioner of Income Tax v. Rachna Udhyog,(2010) 230 CTR (Bom) 72 also held that deduction of exportincentive inter-alia in the nature of DDB is not allowableunder Section 80IB. It is contended by the assessee that Income TaxAppellate Tribunal was right in granting concession ofexclusion of expenses incurred for realization of DDB as theexpenses are met out of income from the business of theassessee in the regular course of its transactions ofmanufacturing of export goods on which DDB incentivesbecome available to the assessee. This contention of the assessee lacks merit.When income on DDB falls exclusively in the domain of export incentives earned by the assessee in the nature offacility provided under legislative enactments or byGovernment of India in its schemes and is not 'derived' fromthe 'business of industrial undertaking' of the assessee andlacks nexus between the profits earned and business of suchindustrial undertaking, even expenses incurred on receipt ofsuch export incentives (which have been held to be notincome which is derived from the business of the enterprise)pursuant to policies and schemes of the Government, wouldnot form part of expenses of the business. In short, when the industrial undertaking itself isrequired to be the 'source of income' and the business ofsuch undertaking should result in direct yield of such incomewhich DDB incentives are not, any expenditure made onrecovery of such export incentives would also not qualify forallowable deductions. Merely because some expenses havebeen incurred on getting DDB incentives, which incentiveshave neither any direct nexus nor are derived from businessof industrial undertaking and are also included in the netprofits and gains of such undertaking, any expenditurehaving nexus with such export incentive as DDB would alsonot qualify for allowable deduction under Section 57 or 71 ofthe Act. In short, gross receipt of DDB incentive, withoutreduction of expenditure spent for its recovery, is to beexcluded from allowable deductions under Section 80-IB of the Act. Sequelly, question of law framed earlier isanswered in favour of the revenue. Consequently, theappeal is accepted reversing the order of the Income TaxAppellate Tribunal to the extent mentioned above. [Dr. Bharat Bhushan Parsoon] Judge July 30, 2013. kadyan [ Rajive Bhalla ] Judge