ITA No. 127 of 2008 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 127 of 2008 (O&M) Date of Decision: 18.4.2011 Commissioner of Income Tax ....Appellant. Versus M/s Bhandari Hosiery Exports Ltd. ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Rajesh Katoch, Advocate for the appellant. None for the assessee. ADARSH KUMAR GOEL, J. 1. This order will dispose of ITA Nos. 127 and 128 of 2008 as it is stated that in both the appeals question involved is same. 2. ITA No. 127 of 2008 has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order of the Income Tax Appellate Tribunal, Chandigarh Bench “A”, Chandigarh (hereinafter referred to as “the Tribunal”), passed in ITA No. 608/Chandi/2002 dated 28.6.2005 for the assessment year 1994-95, raising following substantial question of law:- “Whether on the fact, law and in the circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was legally justified in holding that the withdrawal of ITA No. 127 of 2008 -2- deduction u/s 80-I with reference to the receipts on account of duty draw back was beyond the scope of the A.O. u/s 154 in view of the law laid down by the Hon'ble Supreme Court in the case of CIT Vs. Sterling Foods Ltd., 237 ITR 379 and Pandian Chemicals Ltd. v. CIT 262 ITR 278?” 3. The assessee claimed deduction under Section 80-I of the Act in respect of export incentives received by it as per scheme framed under the provisions of the Customs Act, 1962. The claim was allowed initially but the Assessing Officer initiated proceedings under Section 154 of the Act for rectification. The assessee conceded that import entitlements did not qualify for deduction under Section 80-I of the Act in view of the judgment of the Hon'ble Supreme Court in Commissioner of Income Tax v. Sterling Foods Ltd. [1999] 237 ITR 379 but submitted that duty draw back stood on different footing. The Assessing Officer, however, rectified the order and rejected the claim for deduction for duty draw back. The CIT(A) upheld the plea of the assessee which has been further upheld by the Tribunal. The Tribunal observed:- “It is evident from the decision of the Tribunal as well as the decision of Gujarat High Court that the view that duty draw back receipts are to be taken as income derived from the industrial undertaking is a plausible view. The view canvassed on behalf of the revenue may also be a possible view. But in the light of the decision of the Gujarat High Court referred to above, the issue is not free from doubt ITA No. 127 of 2008 -3- and debate. Thus, it cannot be said that deduction allowed to the assessee with reference to receipts on account of duty drawback u/s 80-I is a mistake apparent from record. It is well settled that the power of the Assessing Officer u/s 154 cannot be exercised in respect of a debatable issue of law [see T.S. Balram, ITO v. Volkar Brothers, 82 ITR 50 (SC) and CIT v. Hero Cycles Pvt. Ltd. 228 ITR 463 (SC)]. Taking the totality of facts and circumstances of this case into consideration, we are of the considered view that withdrawal of deduction u/s 80I with reference to the receipts on account of duty drawback is beyond the scope of the AO u/s 154. We accordingly uphold the order of the CIT(A) and dismiss the appeals of revenue.” 4. We have heard learned counsel for the revenue. None appears for the assessee in spite of service. 5. Learned counsel for the revenue submits that merely because the words duty draw back were not referred to in the judgment of the Hon'ble Supreme Court in Sterling Foods Ltd's case (supra), did not affect the principle of law laid down therein that the deduction permissible under Section 80-I was only income “derived from” the industrial undertaking and did not refer to export incentives in any form. Duty draw back admittedly is also export incentive and could not be treated as income derived from the industrial undertaking in view of law settled by the Hon'ble Supreme Court in Sterling Foods Ltd's case (supra). This view has been further reiterated in subsequent judgment in Liberty India v. Commissioner of Income Tax [2009] 317 ITR 218 ITA No. 127 of 2008 -4- as follows:- “We may reiterate that ss. 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction (s) which are linked to profits and not to investment. On analysis of ss. 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-s. (2), would be entitled to deduction under sub-s. (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-s. (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words “derived from industrial undertaking” as against “profits attributable to industrial undertaking.” 16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc. DEPB credit under the ITA No. 127 of 2008 -5- Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/duty drawback are incentives which flow from the Schemes framed by Central Government or from s. 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under s. 80-IB. They belong to the category of ancillary profits of such undertakings. 17. The next question is – what is duty drawback? Sec. 75 of the Customs Act, 1962 and s. 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs 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-s. (2) of s. 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 s. 75 of the Customs Act and ITA No. 127 of 2008 -6- s. 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 s. 80-IB.” 6. The view taken by the CIT(A) and the Tribunal that the judgment of the Hon'ble Supreme Court in Sterling Foods Ltd's case (supra) was concerned only with export incentives other than duty draw back cannot, thus, be sustained. 7. In view of the above, the question has to be answered in favour of the revenue and against the assessee. 8. The appeals are allowed. 9. A photo copy of this order be placed on the file of the connected case. (ADARSH KUMAR GOEL) JUDGE April 18, 2011 (AJAY KUMAR MITTAL) gbs JUDGE