Commissioner Of Income Tax, Jaipur-Ii ,Jaipur v. M/S Mangalam Arts, Govind Nagar, Amber Palace Road, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 270 / 2011 COMMISSIONER OF INCOME TAX, JAIPUR-II ,JAIPUR ----Appellant Versus M/s MANGALAM ARTS, GOVIND NAGAR, AMBER PALACE ROAD, JAIPUR ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prateek Kedawat for Mr. R.B. MathurFor Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Order 21/08/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal. 2.This Court while admitting the matter framed the followingquestion of law:- “i) Whether in the facts and circumstances of law,the ITAT was justified in holding that the receipts ofduty draw back as income derived from businessbeing eligible for deduction u/s 10BA of the I.T.Act.? ii) Whether in the facts and circumstances of law,the ITAT was justified in deleting the addition madeon account of late deposit of PF and ESIcontribution.? 2.1Further the application (23838/11) was allowed and thefollowing substantial question of law was added. “Whether in the fact and circumstances of the casethe ITAT was justified in law in directing to allowdeduction u/s 10BA inspite of the fact that theassessee was not fulfilling the conditions laid downin the act for claiming said deduction.” 3.Counsel for the appellant has strongly relied upon the decision of Liberty India vs. CIT, (2009) 317 ITR 218, wherein ithas been held as under:- “10. In reply, Shri Gourab Banerji, learnedAdditional Solicitor General, submitted that, forapplication of the words "derived from" theremust be a direct nexus between the profit andthe industrial undertaking. According to thelearned senior counsel, merely because underthe Scheme to encourage exports a certainamount was repaid as "duty drawback", it cannotbe regarded as profit "derived from" theindustrial undertaking. It may constitute profitfrom business under Section 28, but it cannot beconstrued as profits "derived from" the industrialundertaking, for its immediate and proximatesource was not the industrial undertaking but thescheme for "duty drawback". According to thelearned Counsel, this position was placed beyonddoubt by a judgment of this Court in SterlingFood (supra). Therefore, according to the learnedCounsel, the source of duty drawback was notthe industrial undertaking but the duty drawbackscheme of the Central Government whereunderthe duty drawback entitlement became available.According to the learned Counsel, duty drawback,therefore, would stand on the same footing asimport entitlements and could not be said to bederived from industrial undertaking. Reliance wasalso placed on the judgment of this Court inPandian Chemicals Ltd. v. CIT reported inMANU/SC/0487/2003 : 262 ITR 278. Accordingto the learned Counsel, duty drawback was amatter of policy, hence, the proximate andimmediate source of duty drawback cannot beindustrial undertaking. On interpretation ofSection 80IB, learned senior counsel submittedthat what was relevant for Section 80IB(1) wasprofits derived from an eligible business.According to the learned Counsel, various eligible businesses are enumerated in Sub-sections (3) to(11) of Section 80IB. A perusal of Sub-sections(3), (4) and (5) would also show that eligiblebusiness under those provisions means certainspecific undertakings. In contrast, Sub-sections(6) and (7) cover the business of a ship, hoteletc. Thus, for all practical purposes, according tothe learned Counsel, the section has used thewords "eligible business" and "industrialundertaking" interchangeably and, therefore,there is no material difference between Section80I and Section 80IB as in both cases profitshave to be derived from an industrialundertaking. 18. Analysing the concept of remission of dutydrawback and DEPB, we are satisfied that theremission of duty is on account of thestatutory/policy provisions in the CustomsAct/Scheme(s) framed by the Government ofIndia. In the circumstances, we hold that profitsderived by way of such incentives do not fallwithin the expression "profits derived fromindustrial undertaking" in Section 80IB. 22. The cost of purchase includes duties andtaxes (other than those subsequently recoverableby the enterprise from taxing authorities), freightinwards and other expenditure directlyattributable to the acquisition. Hence tradediscounts, rebate, duty drawback, and suchsimilar items are deducted in determining thecosts of purchase. Therefore, duty drawback,rebate etc. should not be treated as adjustment(credited) to cost of purchase or manufacture ofgoods. They should be treated as separate itemsof revenue or income and accounted foraccordingly (see: page 44 of Indian AccountingStandards & GAAP by Dolphy D'souza).Therefore, for the purposes of AS-2, Cenvatcredits should not be included in the cost ofpurchase of inventories. Even Institute ofChartered Accountants of India (ICAI) has issuedGuidance Note on Accounting Treatment forCenvat/Modvat under which the inputs consumedand the inventory of inputs should be valued onthe basis of purchase cost net of specified dutyon inputs (i.e. duty recoverable from theDepartment at later stage) arising on account ofrebates, duty drawback, DEPB benefit etc. Profitgeneration could be on account of cost cutting,cost rationalization, business restructuring, taxplanning on sundry balances being written back,liquidation of current assets etc. Therefore, weare of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited againstthe cost of manufacture of goods debited in theProfit & Loss account for purposes of Sections80IA/80IB as such remissions (credits) wouldconstitute independent source of income beyondthe first degree nexus between profits and theindustrial undertaking.” 4.It has been clearly held that income which is not derivedfrom the business is required to be assessed. 5.However, counsel for the respondent has relied upon thedecision of this Court in Tax Appeal No. 294/2008 (CIT vs.Suresh Kumar Bajoria) decided on 18[th] May, 2017 wherein whileconsidering the issue in para 7.1 & 7.2 this Court has observedas under:- “7.1 No doubt issue is now squarely covered bythe decision of Delhi High Court whereby theDelhi High Court has considered the rebate ofexcise duty. In that view of the matter, in ourconsidered opinion, the view taken by the DelhiHigh Court is to be accepted by this Court and weaccept the same. 7.2No doubt the counsel for the departmenthas contended that the two views are taken bythe Gujarat High Court while considering the dutydraw back but this will not fall within the duty asheld by the tribunal and in view of judgment ofSupreme Court in Meghalaya Steel (supra). 6.He has also relied upon the other decision of this Court in Tax Appeal No. 25/2009 (CIT vs. M/s Manglam Arts) decided on 14[th] February, 2017 wherein it has been held as under:- “7.1 No doubt issue is now squarely covered bythe decision of Delhi High Court whereby theDelhi High Court has considered the rebate ofexcise duty. In that view of the matter, in ourconsidered opinion, the view taken by the DelhiHigh Court is to be accepted by this Court and weaccept the same. 7.2No doubt the counsel for the departmenthas contended that the two views are taken bythe Gujarat High Court while considering the dutydraw back but this will not fall within the duty asheld by the tribunal and in view of judgment ofSupreme Court in Meghalaya Steel (supra). 6.He has also relied upon the other decision of this Court in Tax Appeal No. 25/2009 (CIT vs. M/s Manglam Arts) decided on 14[th] February, 2017 wherein it has been held as under:- “He has contended that the word ‘production’ isto be construed as a wider meaning than‘manufacture’ and in view of the observationsmade by the Supreme Court, the view taken bythe Tribunal is just and proper. Mr. Mathur has also contended that regardingsecond issue with regard to ESI and PF, however,the same is covered by the decision of this Court in the case of Commissioner of Income Tax Vs.M/s State Bank of Bikaner & Jaipur- D.B. IncomeTax Appeal No.177/2011 decided on 06.01.2014wherein it has been held as under: “Thus, we are of the view that where the PFand/or EPF, CPF, GPF etc., if paid after the duedate under respective Act but before filing of thereturn of income under Section 139(1), cannotbe disallowed under Section 43B or underSection 36(1)(va) of the IT Act.” 7.He has also relied upon the decision of the Bombay HighCourt in case of Union of India vs. Cus. & C. Ex. SettlementCommission, Mumbai reported in 2010 (258) E.L.T. 476 (Bom.)wherein it has been held as under:- “14. The Settlement Commission whileconsidering the issue before it, relied upon theterm "drawback" as defined in Re-export ofImported Goods (Drawback of CustomsDuties) Rules, 1995 and the Drawback Rulesand also Section 74 of the Act dealing with theimported material used in the manufacture ofgoods which are exported. They alsoconsidered sweep of Section 127B of the Actand relied upon the Apex Court judgment inthe case of Chemicals and Fibres of India Ltd.v. Union of India MANU/SC/0525/1991 : 1991(54) ELT 3 (SC) to consider the scope andpurport of the "drawback" in the Act. TheSettlement Commission also considered thedefinition of the word "case" as defined inSection 127A(b) and after referring to thevarious judgments of the Tribunal came to heconclusion that the Settlement Commissionhad jurisdiction to deal with the application forsettlement moved by the respondent Nos. 2 to4. It is not necessary to again repeat thereasons given by the Settlement Commissionin support of its order which are in consonancewith the law laid down by the Supreme Courtin the case of Liberty India v. Commissioner ofIncome Tax MANU/SC/1585/2009 : (2009)317 ITR 218 (SC); wherein the Supreme Courthas observed as under: 17. The next question is - what is dutydrawback? Section 75 of the Customs Act,1962 and Section 37 of the Central Excise Act,1944 empower Government of India to provide for repayment of customs and excise duty paidby an 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 ofan amount arithmetically equal to customsduty or central excise duty actually paid by anindividual importer-cum-manufacturer. Sub-section (2) of Section 75 of 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 relevantin respect of each of various classes of goodsimported. Basically, the source of dutydrawback receipt lies in Section 75 of theCustoms Act and Section 37 of the CentralExciseAct. 18. Analysing the concept of remission of dutydrawback and DEPB, we are satisfied that theremission of duty is on account of thestatutory/policy provisions in the CustomsAct/Scheme(s) framed by the Government ofIndia. In the circumstances, we hold thatprofits derived by way of such incentives donot fall within the expression "profits derivedfrom industrial undertaking" in Section 80IB. (Emphasis supplied) 15. Reading of the aforesaid para and theanalysis made by the Apex Court with respectto the concept of "duty drawback", one cannotdispute that it is nothing but a remission ofduty on account of the statutory provisions inthe Act and scheme framed by theGovernmentofIndia.Underthesecircumstances, the duty drawback or claim forduty drawback is nothing but a claim forrefund of duty may be as per the statutoryscheme framed by the Government of India orin exercise of statutory powers under theprovisions of the Act.” 8.He has also relied upon the decision in Commissioner ofIncome Tax vs. Meghalaya Steels Ltd. (2016) 6 SCC 747wherein it has been held as under:- “20. Liberty India being the fourth judgment inthis line also does not help Revenue. What thisCourt was concerned with was an exportincentive, which is very far removed fromreimbursement of an element of cost. A DEPBdrawback scheme is not related to the businessof an industrial undertaking for manufacturingor selling its products. DEPB entitlement arisesonly when the undertaking goes on to exportthe said product, that is after it manufacturesor produces the same. Pithily put, if there is noexport, there is no DEPB entitlement, andtherefore its relation to manufacture of aproduct and/or sale within India is notproximate or direct but is one step removed.Also, the object behind DEPB entitlement, ashas been held by this Court, is to neutralize theincidence of customs duty payment on theimport content of the export product which isprovided for by credit to customs duty againstthe export product. In such a scenario, itcannot be said that such duty exemptionscheme is derived from profits and gains madeby the industrial undertaking or business itself.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 Courtwas dismissed. This judgment also concerneditself with Section 80-IB of the Act, in which itwas held that refund of excise duty should notbe excluded in arriving at the profit derivedfrom business for the purpose of claimingdeduction Under Section 80-IB of the Act.” 9.Taking into consideration, the law declared by the SupremeCourt in Meghalaya Steels (supra) and two decisions of thisCourt, the issue is required to be answered in favour of theassessee against the department. 10.The appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. A.Sharma/81