Commissioner Of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur (Raj v. Shri Suresh Kumar Bajoria 38, Madrampura, Civil Lines, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 574 / 2009 Commissioner of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur (Raj.) ----Appellant Versus Shri Suresh Kumar Bajoria 38, Madrampura, Civil Lines, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. Aditya VijayFor Respondent(s) : Ms. Gunjan Pathak with Ms. Ishita Rawat _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 18/09/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal of the department. 2.This Court while admitting the matter framed the followingsubstantial questions of law:- “i) Whether in the facts and circumstances ofthe case the Tribunal was justified in allowingdeduction under Section 80IC(2)(a)(iii) onexcise duty refund, when the said deduction isavailable only on the profits and gains derivedfrom industrial undertaking. ii) Whether in the facts and circumstances ofthe case, the Tribunal was justified in notrestoring the addition of Rs. 36,00,000/- madeunder Section 69C of the Act, considering theover billing and suppression of expenses doneby the assessee. iii) Whether in the facts and circumstances ofthe case, the Tribunal was justified in not upholding the estimation of gross profit of theassessee at Rs. 44,41,084/- as done by theAssessing Officer.?” 3.Counsel for the appellant has relied upon the decision ofthis Court in case of same assessee in appeal no. 294/2008which came to be passed on 18[th] May, 2017 wherein it has been held as under:- 4.Counsel for the appellant Mr. Singhi has contendedthat in view of the subsequent observations which aremade by the A.O. while considering the issue of deduction,he has given following findings:- “The arguments given by the assessee have beenconsidered and it is found that the same cannot beaccepted on the basis of following reasons:- a) Assessee has claimed deduction u/s 80IC(2)(a)(iii) inrespect of profit of business, which includes the amount ofduty draw back in the form of Excise Duty Refund. Thusmethod of computation of deduction claimed by assesseeu/s 80IC(2)(a)(iii) is prima-facie not correct, because theamount of deduction available u/s 80IC(2)(a)(iii) is onlyon profits and gains derived from such undertaking andExcise Duty Refund is not derived from undertaking. b) Basic conditions required to be met for claimingdeduction u/s80IC are as follows:- Where the gross total income of an assessee includes anyprofits and gains derived by an undertaking or anenterprise from any business referred to in sub-section(2), there shall, in accordance with and subject to theprovisions of this section, be allowed, in computing thetotal income of the assessee, a deduction from suchprofits and gains, as specified in sub-section(3). profits and gains derived by an undertaking or anenterprise from any business referred to in sub-section(2), there shall, in accordance with and subject to theprovisions of this section, be allowed, in computing thetotal income of the assessee, a deduction from suchprofits and gains, as specified in sub-section(3). 3. The deduction referred to in sub-section (1) shall be- (i) in the case of any undertaking or enterprise referredto in sub-clauses (i) and (iii) of clause (a) or sub-clause(i) and (iii) of clause (b), of sub-section (2), one hundredper cent of such profits and gains for ten assessmentyears commencing with the initial assessment year; 3. The deduction referred to in sub-section (1) shall be- (i) in the case of any undertaking or enterprise referredto in sub-clauses (i) and (iii) of clause (a) or sub-clause(i) and (iii) of clause (b), of sub-section (2), one hundredper cent of such profits and gains for ten assessmentyears commencing with the initial assessment year; (ii) in the case of any undertaking or enterprise referredto in sub-clauses (ii) of clause (a) or sub-clause (ii) ofclause (b), of sub-section (2), one hundred per cent ofsuch profits and gains for five assessment yearscommencing with the initial assessment year andthereafter, twenty five percent (or thirty percent wherethe assessee is a company) of the profits and gains. c) The word used for the profits and gains to which provisions of section 80IC(2)(A)(iii) are applicable is‘derived from’. It has been held by the Hon’ble SupremeCourt in the case of Cambay Electric Supply Industrial Co.Ltd vs. CIT (113 ITR 84) that the expression ‘derived from’has a much narrower meaning than the expression“attributable to” or “from” d) Further while explaining the meaning of ‘profits andgains’ derived from industrial undertaking, it has been heldby the Hon’ble Supreme Court in the case of CIT vs.Sterling Foods (237 ITR 579) that income earned on saleof import entitlement could not be included in the incomeof the assessee for the purpose of relief u/s 80HH, wherealso the amount of deduction available was a fixedpercentage of profits and gains derived from industrialundertaking. The Supreme Court held that the sourceof import entitlements can not be said to beindustrial undertaking of the assessee. The source ofimport entitlements can, in the circumstances, only be saidto be the export promotions scheme of the CentralGovernment where under the export entitlements becameavailable. On the similar analogy Excise Duty refund cannot be the motive of installation of undertaking orenterprise. There must be for the application of the words‘derived from’, a direct nexus between the profit and gainsand the industrial undertaking. In the instant case, thenexus is not direct but only incidental. The industrialundertaking exports processed with sea food. By reason ofsuch export and export promotion scheme applies. Thereunder the assessee is entitled to import entitlements,which it can sell. The sale consideration there from can notin the view of SC be held to constitute a profit and gainderived from the assessee industrial undertaking. Similarconclusion applies to excise duty refund cases. e) The assessee has desired to distinguish its case fromthat of Sterling Foods by claiming that in the case ofImport entitlements has not been sold. It has only resultedin reduction of its costing and accordingly there is increasein profit. However, the fundamental finding of Hon’bleSC still remains same and is applicable in the case ofthe assessee that the “nexus of profit withundertaking should be direct and not-incidental”. f) The sole question for consideration is whether theamount of excise duty refund and DEPBaccrued/receivedfrom the government by the assesse, is includible in theprofits for the purpose of allowing deduction u/s 80IC(2)(a)(iii) and whether it can be treated as derived from theindustrial undertaking to make the assessee eligible fordeduction u/s 80IC(2)(a)(iii). In the assessee’s case isengaged a manufacturing of menthol flakes and DMO fromMantha Oil. But besides this profit the assessee alsoreceives Excise Duty Refund income from the govt. andsuch receipts can not be said to have been derived fromthe undertaking though they form part of the profit and f) The sole question for consideration is whether theamount of excise duty refund and DEPBaccrued/receivedfrom the government by the assesse, is includible in theprofits for the purpose of allowing deduction u/s 80IC(2)(a)(iii) and whether it can be treated as derived from theindustrial undertaking to make the assessee eligible fordeduction u/s 80IC(2)(a)(iii). In the assessee’s case isengaged a manufacturing of menthol flakes and DMO fromMantha Oil. But besides this profit the assessee alsoreceives Excise Duty Refund income from the govt. andsuch receipts can not be said to have been derived fromthe undertaking though they form part of the profit and gains of business, since these amounts were derived fromthe activities of sale and the immediate source thereofwas thus the trade and not the undertaking in NorthEastern State. This view founds support form the decisionof Madras High Court in the case of M/s Fenner (India) Ltd.vs. CIT 239 ITR 480, wherein held that case assistance forexport is not derived from industrial undertaking andtherefore it is not eligible for any relief u/s 80HH of theAct. The other decisions which support this view are asunder:- CIT vs. Eastern Sea Foods Exports (P) Ltd 215 ITR 64(Madras). (Madras). CIT vs. Pandian Chemicals Ltd. 233 ITR 497 (Madras). Canbey Electric Supply Ind. Co. Ltd vs. CIT 113 ITR 84 (SC). CIT vs. Raja Bahadur Kamakhya Narain Singh 16 ITR 325(Privy Counsel). (Privy Counsel). g) The amount of Excise Duty Refund has been given to theassessee by the Govt. as part of the scheme to developindustrial set up in backward states. It was not theindustrial undertaking which yield the income by wayof Excise Duty Refund, but it was the scheme of theGovt. which entitled the assessee to receive ExciseDuty Refund and the existence of such a scheme wasnot the essential part of setting up an undertaking.The Excise Duty Refund or any other cash assistance andother import entitlements are undoubtedly attributable tothe business carried on by the assessee as the assesseewould not have been in a position to receive such benefits,as it not been carrying on the business. However, it cannot be said the amount received on account of ExciseDuty Refund is derived from such business. h) Further the crux of all the arguments of the assesseementioned in reply is that Excise Duty Refund allowed tohim is reimbursement of Excise Duty included in the costfor manufacturing. Thus the Excise Duty Refund increasesthe profit from manufacturing activity and therefore there isa direct nexus between income from Excise Duty with theindustrial activity. The above arguments have a basic inherent fallacy. Thebenefit of the Excise Duty Refund is available for units setup in North Eastern States as per Govt. norms prescribed.Thus a person who is trading same articles from openmarket as those which are manufactured by the assessee,he would have also been receiving same amount of benefitunder Excise Duty Refund Scheme. It clearly means thatthese two benefits are not at all directly linked withindustrial activity and therefore brings out theinherent fallacy in the argument of the assessee. i) The fact that the Excise Duty Refund benefits do not havedirect nexus with undertaking and therefore can not betreated as part of profit derived from undertaking, is alsosupported by the view of Hon’ble SC in the case of The above arguments have a basic inherent fallacy. Thebenefit of the Excise Duty Refund is available for units setup in North Eastern States as per Govt. norms prescribed.Thus a person who is trading same articles from openmarket as those which are manufactured by the assessee,he would have also been receiving same amount of benefitunder Excise Duty Refund Scheme. It clearly means thatthese two benefits are not at all directly linked withindustrial activity and therefore brings out theinherent fallacy in the argument of the assessee. i) The fact that the Excise Duty Refund benefits do not havedirect nexus with undertaking and therefore can not betreated as part of profit derived from undertaking, is alsosupported by the view of Hon’ble SC in the case of Pandian Chemicals Ltd. vs. CIT, 262 ITR 278. Thepoint of consideration in that decision was whether on thefacts and in the circumstances of the case the AppellateTribunal was right in holding that interest on deposits withTamil Nadu Electricity Board should be treated as incomederived by the industrial undertaking or not. It was arguedbefore the Hon’ble SC that for the purpose of getting theessential input, i.e. electricity statutory requirement wasthat the deposit must be made as a preconditioned for thesupply of electricity which interest was also given and onthis basis the assessee has treated this interest income asincome derived from industrial undertaking. The Hon’bleCourt observed that although electricity mayberequired for the purposes of industrial undertaking,the deposit required for its supplying was a stepremoved from the business of the industrialundertaking and the derivation of profits on thedeposit made with Electricity Board could not be saidto flow directly from the industrial undertaking itself.Similarly the same thing can be said wit regard to thereceipt of the Excise duty Refund in the case of theassessee. j) Importantly, recently, the Hon’ble High Court of Delhi havedelivered a judgment on 23.09.2004 in the case of CIT vs.Ritesh Industries Ltd. 192 CTR 81(del) and have held thatExcise Duty Rerfund is not profits derived from industrialundertaking and can not reckon in computing reduction u/s80I, which is also applicable in respect of profits “Derived”from industrial activity. It has been observed by the Hon’bleCourt that on raw materials utilized as inputs the assesseepays duty and on the total component or costs the assesseeadds his profit component to arrive at the sale price. It isthis profit which is included in the expression “profits andgains derived from an industrial undertaking”. Merelybecause under the scheme to encourage the exports theduty is refunded subsequently by way of Duty Draw Back. Itcannot be regarded as the profit and gain derived from theindustrial undertaking. It may constitute profit or gains ofthe business by virtue of section 28, but it cannot beconstrued as profits or gains derived from the industrialundertaking because its immediate and proximate surce isnot the industrial undertaking but the scheme for Duty DrawBack. Whether Excise Duty Refund is not allowed, the profitderived from the industrial undertaking remains to be theprofit. On account of the Duty Draw Back, businessprofit may be increased, but so far as profits and gainsderived from an industrial undertaking is concerned, itwill not increase and it will remain the same. Thus thefacts of the decision are squarely applicable to thefacts of this case. k) The assessee has placed heavy reliance upon ITAT’sdecisions. But in view of the Delhi High Court’sdecision (192 CTR 81) now, the reliance placed by assessee became irrelevant. k) The assessee has placed heavy reliance upon ITAT’sdecisions. But in view of the Delhi High Court’sdecision (192 CTR 81) now, the reliance placed by assessee became irrelevant. l) Therefore, it is held that the benefit derived by wayof Excise Duty Refund by the assessee, though theyare part of profits and gains of business, but cannot betreated as profits derived from undertaking establishedin north eastern states. Therefore, deduction u/s80IC(2)(a)(iii) is not available on such export benefits.Accordingly the computation of deduction u/s 80IC(2)(a)(iii) is being altered to give effect to this finding. Inthis case the assessee has received a benefit ofRs.2,90,51,228/- as Excise Duty Refund on whichdeduction u/s 80IC(2)(a)(iii) will not beavailable. 4.1The same was confirmed by CIT (A) in its judgment holding as under: “6.30. It has also distinguished the facts of its casefrom the facts of case laws filed upon by the AO inpara 17, 18, 19, & 20, 21, & 22 of the submissions andhas finally contended that section 80IC is incentiveprovision meant for the promotion of industrial growthas per CBDT circular No. 421 dt 12.8.05 and it hasbeen held in the case of CIT Vs Bajaj Tempo Ltd 196ITR 188(SC) that the incentive provision has to beconstrued liberally. 6.31. The above submission of the appellant is dulyconsidered. As can be seen from the above that theappellant has mainly contended that the ratio ofHon’ble Supreme Court decision in the case of SterlingFood Ltd, does not apply on the facts of its case. Theword used in 80HH are significantly different fromphraseology used in section 80IC. According to it theconcept in section 80IC is much wider than envisagedin Section 80HH. Phraseology of section 80IC includesin its fold the profit, which is arising from the businessof the undertaking and not merely the undertaking.For this purpose, reliance has been placed on variousdecision wherein on the basis of phraseology the factsof Sterling Foods have been distinguished, mainlyDelhi ITAT decision in the case of ITO vs. Five StarRugs (2006) 100 TTJ 222 wherein the deduction of80IB has been allowed on duty draw back. 6.32. The above argument of the appellant is dulyconsidered by me and I may find myself in agreementwith the view of the appellant that the profit envisagedin section 80IC is much wider than the concept ofprofit envisaged in section 80HH. However, the abovejudicial pronouncement in the case of Five Star Rugs,had allowed the deduction u/s 80IB on duty drawback. In this connection, it is surprising to note that at 6.32. The above argument of the appellant is dulyconsidered by me and I may find myself in agreementwith the view of the appellant that the profit envisagedin section 80IC is much wider than the concept ofprofit envisaged in section 80HH. However, the abovejudicial pronouncement in the case of Five Star Rugs,had allowed the deduction u/s 80IB on duty drawback. In this connection, it is surprising to note that at one place the appellant says that its case is not of dutydraw back and on the other hand trying to get thesupport from various judicial pronouncements whichare dealing with the issue of allowability of deductionof duty draw back. With utmost respect to all thejudicial pronouncements relied upon by the appellant,I feel that for claiming deduction u/s 80IC, theappellant has to first establish that the said profit andgains is ‘derived by an undertaking’ i.e. there has tobe a direct nexus between the profit and gains and theindustrial undertaking. And also ‘any business’mandates that any business as enterprises this sectionapplies to. The present industrial undertaking i.e. theappellant is entitled for the exemption, by virtue of thenotification No.33/99/CE dated 8.7.99 hence, its caseis entirely distinguishable from the case laws reliedupon by it. The assessee’s industrial undertakingmanufactures and sells Menthol, DMO and otheressential oils and makes profits and gains. By reasonof such industrial undertaking, the governmentscheme for incentives applies under which theassessee is entitled for excise duty refund, therefore, itis the government scheme which is the direct sourcefor such refund and not the assessee’s running newlyestablished undertaking. In view of the facts andcircumstances and legality of the case, as discussed inthe preceding paragraph, it is to be held here that theexcise duty refund is not the income derived from theindustrial undertaking. The source of this incentive inthe form of excise duty refund is that particularscheme notified by the government and not theindustrial undertaking itself. Hence, it is held here thatthe AO is right in not allowing the deduction u/s80IC(2)(a)(iii) of the Act on the excise duty refund ofRs.2,90,51,228/-. The addition made by the AO is thusconfirmed.” 4.2It is also contended that mere dismissal of SLP isnot a good law and the tribunal has not considered theSupreme Court judgment. However, the tribunalsummarily without considering the conclusion reachedby both the authorities has allowed the appeal byholding as under :- “12. After perusal of the facts, we find that theassessee is exempt from Excise Duty videnotification No33/99CE dated 8.7.99. To claim theexemption, the assessee has to deposit Excise Dutywith the Excise Department in cash for allowingclearance of goods and the payment so made isdebited to Excise Duty account which is shown as adebit in the P&L A/c. Similarly, after the payment ofExcise Duty an clearance of goods, the said ExciseDuty is returned to the manufacturer by 15[th] of the 4.2It is also contended that mere dismissal of SLP isnot a good law and the tribunal has not considered theSupreme Court judgment. However, the tribunalsummarily without considering the conclusion reachedby both the authorities has allowed the appeal byholding as under :- “12. After perusal of the facts, we find that theassessee is exempt from Excise Duty videnotification No33/99CE dated 8.7.99. To claim theexemption, the assessee has to deposit Excise Dutywith the Excise Department in cash for allowingclearance of goods and the payment so made isdebited to Excise Duty account which is shown as adebit in the P&L A/c. Similarly, after the payment ofExcise Duty an clearance of goods, the said ExciseDuty is returned to the manufacturer by 15[th] of the following month. What has been refunded to theassessee is the amount which has been paid byhim. The Excise Duty payment debited to P & L A/cand subsequent refund credited to P & L A/c doesnot give rise to income. Mere book entries do notgive rise to any income of the assessee. Whenpayment of Excise Duty is shown in the P & L A/c,then refund of Excise Duty has to be taken intoconsideration to the credit of P & L A/c to neutralizethe entry. By doing so, the assessee is not claimingany extra income but the realization of the asset,but through the P & L A/c. Therefore, the case lawsrelied upon by the AO are not applicable in thepresent case since the issue in the present case isquite different and distinguishable from the casesrelied upon by the AO. The ld. AR has reghtly reliedupon the decision of Delhi Bench in the case of ACITVs. Dharampal Premchand in ITA No.4031/Del/2003 dated 31.1.2006 where the facts aresimilar to the facts in assessee’s case and the issuehas been decided in that case in favour of theassessee that by credit of the Excise Duty refundwith P & L A/c, the net effect is Nil. The assesseewas refunded the same amount which he paid underthe modalities for giving effect to notification andmere book entries cannot give rise to the income tothe assessee. Therefore, following the decision inthe case of ACIT Vs. Dharampal Premchand, supra,the assessee is allowed the Excise Duty refund forthe deduction u/s 80IC of the Act as claimed by theassessee and deduction of Rs.3,32,89,399/- u/s80IC is directed to be allowed. As mentionedhereinbefore, the AO has not brought any materialon record with regard to the suppression of theexpenses and the assessee has also not made theover billing and all the purchases made are genuineand the assessee is allowed the exemption of ExciseDuty and therefore, the AO in the absence of anymaterial cannot estimate the gross profit other thandeclared by the assessee. No addition on account ofsuppression of expenses u/s 69C can be made bythe AO, Also the addition made on account ofestimation of gross profit is directed to be deleted.Thus Ground No. 1,2,3 and 4 of the assesseeare allowed and the solitary ground of theRevenue is dismissed. 4.3He has relied upon the decision of LibertyIndia Vs. CIT, (2009) 317 ITR 218 holding as under:-13. Before analyzing Section 80IB, as aprefatory note, it needs to be mentioned thatthe 1961 Act broadly provides for two types oftax incentives, namely, investment linked 4.3He has relied upon the decision of LibertyIndia Vs. CIT, (2009) 317 ITR 218 holding as under:-13. Before analyzing Section 80IB, as aprefatory note, it needs to be mentioned thatthe 1961 Act broadly provides for two types oftax incentives, namely, investment linked incentives and profit linked incentives. ChapterVI-A which provides for incentives in the formof tax deductions essentially belong to thecategory of "profit linked incentives". Therefore,when Section 80IA/80IBrefers to profitsderived from eligible business, it is not theownership of that business which attracts theincentives. What attracts the incentives underSection80IA/80IBis the generation of profits(operational profits). For example, an assesseecompany located in Mumbai may have abusiness of building housing projects or a shipin Nava Sheva. Ownership of a ship per se willnot attract Section 80IB(6). It is the profitsarising from the business of a ship whichattracts Sub-section (6). In other words,deduction under Sub-section (6) at thespecified rate has linkage to the profits derivedfrom the shipping operations. This is what wemean in drawing the distinction between profitlinked tax incentives and investment linked taxincentives. It is for this reason that Parliamenthas confined deduction to profits derived fromeligible businesses mentioned in Sub-sections(3) to (11A) [as they stood at the relevanttime]. One more aspect needs to behighlighted. Each of the eligible business inSub-sections (3) to (11A) constitutes a stand-alone item in the matter of computation ofprofits. That is the reason why the concept of"Segment Reporting" stands introduced in theIndian Accounting Standards (IAS) by theInstitute of Chartered Accountants of India(ICAI). 14. Analysing Chapter VI-A, we find thatSections80IB/80IAare the Code by themselvesas they contain both substantive as well asprocedural provisions. Therefore, we need toexamine what these provisions prescribe for"computation of profits of the eligible business".It is evident that Section 80IBprovides forallowing of deduction in respect of profits andgains derived fromthe eligible business. Thewords "derived from" is narrower in connotationas compared to the words "attributable to". Inother words, by using the expression "derivedfrom", Parliament intended to cover sources notbeyond the first degree. In the present batch ofcases, the controversy which arises fordetermination is: whether the DEPB credit/Duty drawback receipt comes within the first degreesources? According to the assessee(s), DEPBcredit/duty drawback receipt reduces the valueof purchases (cost neutralization), hence, itcomes within first degree source as it increasesthe net profit proportionately. On the otherhand, according to the Department, DEPBcredit/duty drawback receipt do not comewithin first degree source as the said incentivesflow from Incentive Schemes enacted by theGovernment of India or from Section 75of theCustoms Act, 1962. Hence, according to theDepartment, in the present cases, the firstdegreesourceistheincentivescheme/provisions of the Customs Act. In thisconnection, Department places heavy relianceon the judgment of this Court in SterlingFood (supra). Therefore, in the present cases,in which we are required to examine the eligiblebusiness of an industrial undertaking, we needto trace the source of the profits tomanufacture. see CIT v. Kirloskar OilEnginesLtd. reportedinMANU/MH/0099/1984: (1986) 157 ITR 762 17. The next question is - what is dutydrawback? Section75of the Customs Act, 1962and Section37of the Central Excise Act, 1944empower Government of India to provide forrepayment of customs and excise duty paid byan assessee. The refund is of the averageamount of duty paid on materials of anyparticular class or description of goods used inthe manufacture of export goods of specifiedclass. The Rules do not envisage a refund of anamount arithmetically equal to customs duty orcentral excise duty actually paid by anindividual importer-cum-manufacturer. Sub-section (2) of Section75of the Customs Actrequires the amount of drawback to bedetermined on a consideration of all thecircumstances prevalent in a particular tradeand also based on the facts situation relevant inrespect of each of various classes of goodsimported. Basically, the source of dutydrawback receipt lies in Section75of theCustoms Act and Section 37of the CentralExcise Act.” reached by the Supreme Court derived by andderived from the income which has been sought tobe relied upon, levy of excise duty will not becovered under clause 80IC derived by and in view ofthe observations by the Supreme Court it willsquarely fall. He also relied on CIT Vs. SterlingFoods (1999) 237 ITR 579 (SC) wherein it has beenheld as under:- “Whether income derived by assessee from sale ofimport entitlements was profit and gain derivedfrom its industrial undertaking of processing seafood and therefore includible in the assessee'sincome for the purpose of computing the reliefunder S. 80HH of the Income Tax Act, 1961--Thesource of the import entitlements being the ExportPromotion Scheme of the Central Government, thesource of profit from sale proceeds of such importentitlements cannot be said to be the industrialundertaking of the assessee. There has to be adirect and clear nexus between the profit and theindustrial undertaking. Since the profit was notdirectly derived from the assessee's industrialundertaking, it cannot be included for purposes ofcomputing relief under S. SOHH. Income Tax Act,1961: S. 80HH. "We do not think that the sourceof the import entitlements can be said to be theindustrial undertaking of the assessee. The sourceof the import entitlements can, in thecircumstances, only be said to be the ExportPromotion Scheme of the Central Governmentwhereunder the export entitlements becomeavailable. There must be, for the application of thewords "derived from ", a direct nexus between theprofits and gains and the industrial undertaking. Inthe instant case the nexus is not direct but onlyincidental. The industrial undertaking exportsprocessed seafood. By reason of such export, theExport Promotion Scheme applies. Thereunder, theassessee is entitled to import entitlements, whichit can sell. The sale consideration therefromcannot, in our view, be held to constitute a profitand gain derived from the assessees' industrialundertaking. ...........In the result, the appeals areallowed The judgment under appeal is set aside.The question is answered in the affirmative and infavour of the Revenue." 4.5He contended that both the judgments ofthe Supreme Court have been considered by theDivision Bench of this Court in another decision inADCI Dye Chem Pvt.Ltd. vs. Dy. Commissioner ofIncome Tax (2015) 370 ITR 408 (Guj.) where Division Bench has considered the case andobserved as under:- 4.5He contended that both the judgments ofthe Supreme Court have been considered by theDivision Bench of this Court in another decision inADCI Dye Chem Pvt.Ltd. vs. Dy. Commissioner ofIncome Tax (2015) 370 ITR 408 (Guj.) where Division Bench has considered the case andobserved as under:- “Heard the learned advocates for the respectiveparties at length. The question which is posed forconsideration of this court is whether the learnedTribunal was right in law in confirming that theappellant was not entitled to deduction under-section80IAof the Income-tax Act, 1961, inrespect of Central excise duty set off and sales taxset off? At the outset, it is required to be notedthat the aforesaid issue is squarely coveredagainst the assessee in view of the decision of thehon'ble Supreme Court in the case of liberty Indiav. CIT reported inMANU/SC/1585/2009: [2009]317 ITR 218 (SC) as well as in the case of SterlingFoods (supra). It is required to be noted that withrespect to export incentive under the scheme ofDEPB, it is held by the hon'ble Supreme Court inthe case of Liberty India (supra) that in respect ofDEPB and duty drawback the assessee is not-entitled to deduction under section80IBof theAct. In the facts and circumstances of the caseand so observed by the learned Tribunal, theassessee must claim the Central excise duty set offto be in the nature of duty drawback linked withexport profit while claiming deduction undersection80HHC of the Act. Therefore, it is rightlyobserved by the Tribunal that for claimingdeduction under section 80HHC, the assessee itselfclaimed that the Central excise duty set off isexport incentive by way of duty drawback, theassessee cannot take different stand while-claiming deduction under section80IAof the Act.Under the circumstances and if that be so applyingthe decisions of the hon'ble Supreme Court in thecase of Liberty India (supra) and Sterling Foods(supra) and the stand taken by the assessee whileclaiming deduction under section 80HHCunder theAct, the learned Tribunal has rightly held that theassessee shall not be entitled to deduction under-section80IAof the Act on the Central excise dutyset off as well as sales tax set off. Under thecircumstances, the question of law raised in thepresent tax appeals in the aforesaid facts andcircumstances of the case is held against theassessee and in favour of the Revenue.Consequently, all the appeals deserve to bedismissed and are, accordingly, dismissed.” 4.6The same was confirmed by another Benchof Gujarat High Court in CIT-II vs. MetrochemIndustries Ltd. (2016) 0 Supreme (Guj.) 1285 in which one of us (Mr. K.S. Jhaveri) was a partywherein it has been held as under:- 4.6The same was confirmed by another Benchof Gujarat High Court in CIT-II vs. MetrochemIndustries Ltd. (2016) 0 Supreme (Guj.) 1285 in which one of us (Mr. K.S. Jhaveri) was a partywherein it has been held as under:- 14. On a perusal of the judgment of the HighCourt in Commissioner of Income-Tax v. AsianStar Co. Ltd. (supra), we find that the reasonwhich weighed with the High Court for taking adifferent view, is that rent, commission, interestand brokerage do not possess any nexus withexport turnover and, therefore, the inclusion ofsuch items in the profits of the business wouldresult in a distortion of the figure of exportprofits. The High Court has relied on a decision ofthis Court in Commissioner of Income-Tax v. K.RavindranathanNair MANU/SC/4281/2007:[(2007) 295 ITR 228 (SC)] in which the issueraised before this Court was entirely differentfrom the issue raised in this case. In that case,the assessee owned a factory in which heprocessed cashew nuts grown in his farm and heexported the cashew nuts as an exporter. At thesame time, the assessee processed cashew nutswhich were supplied to him by exporters on jobwork basis and he collected processing chargesfor the same. He, however, did not include suchprocessing charges collected on job work basis inhis total turnover for the purpose of computingthe deduction under Section80HHC(3)of the Actand as a result this turnover of collection chargeswas left out in the computation of profits andgains of business of the assessee and as a resultninety per cent of the profits of the assesseearising out of the receipt of processing chargeswas not deducted under clauses (1) of theExplanation (baa) to Section 80HHC. This Courtheld that the processing charges was included inthe gross total income from cashew business andhence in terms of Explanation (baa), ninety percent of the gross total income arising fromprocessing charges had to be deducted underExplanation (baa) to arrive at the profits of thebusiness. In this case, this Court held that theprocessing charges received by the assessee werepart of the business turnover and accordingly theincome arising there from should have beenincluded in the profits and gains of business of theassessee and ninety per cent of this income alsowould have to be deducted under Explanation(baa) under Section 80HHCof the Act. In thiscase, this Court was not deciding the issuewhether ninety per cent deduction is to be madefrom the gross or net income of any of thereceipts mentioned in clause (1) of theExplanation (baa). 17. The next question is - what is duty drawback?Section75 of the Customs Act, 1962 andSection37 of the Central Excise Act, 1944empower Government of India to provide forrepayment of customs and excise duty paid by anassessee. The refund is of the average amount ofduty paid on materials of any particular class ordescription of goods used in the manufacture ofexport goods of specified class. The Rules do notenvisage a refund of an amount arithmeticallyequal to customs duty or central excise dutyactually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75of theCustoms Act requires the amount of drawback tobe determined on a consideration of all thecircumstances prevalent in a particular trade andalso based on the facts situation relevant inrespect of each of various classes of goodsimported. Basically, the source of duty drawbackreceipt lies in Section 75of the Customs Act andSection37 of the Central Excise Act. 4.7Therefore considering that the refund ofthe excise is not derived from the business theview taken by CIT and A.O. is required to beupheld the fundamental argument of dutydrawback including repayment of excise duty isduty drawback. 4.7Therefore considering that the refund ofthe excise is not derived from the business theview taken by CIT and A.O. is required to beupheld the fundamental argument of dutydrawback including repayment of excise duty isduty drawback. 5.Counsel for the respondent Mr. Pathak hascontended that while considering the case of theassessee the tribunal has considered the judgmentof the Delhi High Court in CIT vs. Dharampal PremChand Ltd. reported in (2009) 317 ITR 353wherein it has been held as under:- “The notifications issued by the excise dutydepartment and government clearly mandatethat the exemption from excise duty is availableonly if the industrial activity carried out by theassessee either in a new industrial undertaking orin an industrial undertaking in which installedcapacity is increased at least by 25 per cent. It isthus clear that in the first notification, i.e., 32 of1999 the exemption is area specific, while in thesecond notification, i.e., 33 of 1999 theexemption is specific to goods as referred to inthe Schedule appended to the said notification. Itis thus clear that the exemption is directlyrelatabletoanindustrialundertakingmanufacturing goods which are otherwise exgibleto duty. The exemption is available either underNotification No. 32 of 1999 or under NotificationNo. 33 of 1999 dependent on where the unit is located or the type of goods manufactured by anassessee as specified in the relevant notification.[Para 4.7] The procedure for granting ofexemption is, as indicated above, that the,assessee in the first instance, pays the exciseduty from its current account. The statementwith respect to clearances made, is submittedwith the concerned central excise authorities bythe 7th of the succeeding month. The centralexcise authorities after verifying the claim of theassessee are required to grant refund of exciseduty paid from the current account during themonthunderconsiderationtothemanufacturer/asses see by the 15th of thesucceeding month. The notifications furtherprovided that in the event it was not possible forthe concerned authorities to verify the claim forrefund of excise duty then it had to be made onprovisional basis. [Para 4.8] In thesecircumstances, the submissions of the learnedCounsel for the revenue that there is no directnexus between refund of excise duty paid or thatthe refund of excise duty paid was dependent onthe said notifications is, to say the least,completely untenable. As a matter of fact asfound by the Tribunal, as well as, theCommissioner (Appeals) in the instant case, theassessee has adopted an incorrect accountingmethodology. The assessee as found by theauthorities below had on the payment of exciseduty debited the Profit and Loss Account andupon receipt of refund credited the Profit andLoss Account. The net effect on the profit andloss was 'nil' on account of the methodologyfollowed by the assessee. There was thus, noreason to exclude the amount of refund of exciseduty in arriving at 'profit derived' for thepurposes of claiming deduction under Section 80-IB.” 5.1He has also relied upon the decision InCommissioner of Income Tax vs. Meghalaya SteelsLtd.(2016) 6 SCC 747 wherein it has been held asunder:- 27. A Delhi High Court judgment was also citedbefore us being CIT v. Dharampal PremchandLtd.MANU/DE/1689/2008 : 317 ITR 353 fromwhich an SLP preferred in the Supreme Court wasdismissed. This judgment also concerned itself-with Section 80IBof the Act, in which it was heldthat refund of excise duty should not be excludedin arriving at the profit derived from business for the purpose of claiming deduction Under-Section80IB of the Act. 5.1He has also relied upon the decision InCommissioner of Income Tax vs. Meghalaya SteelsLtd.(2016) 6 SCC 747 wherein it has been held asunder:- 27. A Delhi High Court judgment was also citedbefore us being CIT v. Dharampal PremchandLtd.MANU/DE/1689/2008 : 317 ITR 353 fromwhich an SLP preferred in the Supreme Court wasdismissed. This judgment also concerned itself-with Section 80IBof the Act, in which it was heldthat refund of excise duty should not be excludedin arriving at the profit derived from business for the purpose of claiming deduction Under-Section80IB of the Act. 28. It only remains to consider one furtherargument by Shri Radhakrishnan. He has arguedthat as the subsidies that are received by theRespondent, would be income from other sourcesreferable to Section 56of the Income Tax Act, anydeduction that is to be made, can only be madefrom income from other sources and not fromprofits and gains of business, which is a separateand distinct head as recognised by Section14 ofthe Income Tax Act. Shri Radhakrishnan is notcorrect in his submission that assistance by wayof subsidies which are reimbursed on theincurring of costs relatable to a business, areunder the head "income from other sources",which is a residuary head of income that can beavailed only if income does not fall under any ofthe other four heads of income. Section 28(iii)(b)specifically states that income from cashassistance, by whatever name called, received orreceivable by any person against exports underany scheme of the Government of India, will beincome chargeable to income tax under the head"profits and gains of business or profession". Ifcash assistance received or receivable againstexports schemes are included as being incomeunder the head "profits and gains of business orprofession", it is obvious that subsidies which goto reimbursement of cost in the production ofgoods of a particular business would also have tobe included under the head "profits and gains ofbusiness or profession", and not under the head"income from other sources". 5.2The said view has now been upheld by theSupreme Court. 5.3He further contended that the conclusionreached by the tribunal in paragraph No.7 & 12which reads as under:- 7. We have heard the parties. The brief facts ofthe case are that the assessee is Prop: of M/sKoolmint manufacturing company, Assam. Thesaid concern is manufacturer of Menthol, DMOand other essential oils. During the year, the saidconcern has declared a turnover of Rs.19,35,14,478/- and a gross profit ofRs.3,97,91,859/- at a gross profit rate of 20.56%.The manufacturing unit is at Assam and theassessee is having branch office in Delhi. The AOat page 2 of his order has stated that the rawmaterial which is used in the industry is Mentha 5.2The said view has now been upheld by theSupreme Court. 5.3He further contended that the conclusionreached by the tribunal in paragraph No.7 & 12which reads as under:- 7. We have heard the parties. The brief facts ofthe case are that the assessee is Prop: of M/sKoolmint manufacturing company, Assam. Thesaid concern is manufacturer of Menthol, DMOand other essential oils. During the year, the saidconcern has declared a turnover of Rs.19,35,14,478/- and a gross profit ofRs.3,97,91,859/- at a gross profit rate of 20.56%.The manufacturing unit is at Assam and theassessee is having branch office in Delhi. The AOat page 2 of his order has stated that the rawmaterial which is used in the industry is Mentha Oil which comes from the grass named MenthaArvensis. The main area of this crop is westernpart of Uttar Pradesh like Moradabad, Sambhal,Chandausi, Rampur, Kashipur & Badayun andsome other places are Barabanki & Sitapur. Thefarmers of this particular area produce MenthaArvensis and after a routine process find oil fromthe grass which is called Mentha Oil. The farmerssell their oil either to the wholesaler or to theindustries as per their convenienc