Liberty India v. Commissioner Of Income-Tax

1. This appeal has been preferred under section 260A of the Income-tax Act, 1961 (for short, “the Act”) against the order passed by the Income-tax Appellate Tribunal, Delhi Bench, Delhi in I.T.A No. 5433.Del/2004, dated June 28, 2005, in respect of the assessment year 2001-02, proposing the following question of law:

“Whether, under the facts and circumstances of the case and on interpretation of section 80-IB, the Tribunal is justified in upholding the action of the assessing authority by not allowing deduction under section 80-IB on amount of DEPB and duty drawback being export incentives at 25 per cent, of Rs. 22,70,056 being Rs. 5,67,514 ?”

2. The assessee claimed deduction under section 80-IB in respect of duty drawback amounting to Rs. 1,74,316, which was disallowed by the Assessing Officer on the ground that the said income was not “derived from” the business of the assessee as per requirement of section 80-IB, as held by the hon'ble Supreme Court in Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, [1999] 237 ITR 579. On appeal, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee on the ground that the duty drawback received by the asses-see was inextricably linked with the production cost and thus, duty drawback was trading receipt of the industrial undertaking having direct nexus with the activity of such industrial undertaking and, therefore, it formed part of the income derived from such industrial undertaking. On further appeal by the Revenue, the view taken by the Assessing Officer was restored, following the judgment of the Delhi High Court in CIT v. Ritesh Industries Ltd., [2005] 274 ITR 324, which in turn is based on the judgment of the hon'ble Supreme Court in Sterling Foods, [1999] 237 ITR 579.

3. Learned counsel for the assessee submits that the view taken by the Gujarat High Court in CIT v. India Gelatine and Chemicals Ltd., [2005] 275 ITR 284 supports the stand of the assessee and the SLP against the judgment of the Delhi High Court in Ritesh Industries Ltd., [2005] 274 ITR 324, has been admitted by the hon'ble Supreme Court being Civil Appeal No. 451 of 2006 and thus, the substantial question of law arises.

4. Learned counsel for the Revenue submits that since the matter is covered by the judgment of the hon'ble Supreme Court in Sterling Foods, [1999] 237 ITR 579, which has been followed by this court in Nahar Exports Ltd. v. Commissioner Of Income-Tax No. 642 of 2005 decided on July 4, 2006, [2007] 288 ITR 294, CIT v. Nahar Spinning Mills Ltd. I.T.C No. 201 of 1994, decided on April 19, 2006, [2007] 293 ITR 516 (Liberty Shoes Ltd. v. Commissioner Of Income-Tax No. 140 of 2005 decided on August 17, 2006, [2007] 293 ITR 478 (P&H) no substantial question of law arises. It is submitted that the crucial issue was not whether the income of the assessee had the effect of reducing the cost of production, but whether the income was “derived from” the specified business as against the income from any other source, irrespective of the question whether such source was inextricably connected with the business activity of the assessee. It was submitted that the nature of income derived from duty drawback was similar to the nature of income derived by the assessee in Sterling Foods' case, [1999] 237 ITR 579 (SC), which was considered by the hon'ble Supreme Court. Before the hon'ble Supreme Court, the question for consideration was in respect of income from import entitlements, which was similar to income from duty drawback.

5. We have considered the rival submissions and perused the record. section 80-IB(1) is as under:

“(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11) and (11A) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.”

6. Interpreting the identical language in section 80HH, the hon'ble Supreme Court in Sterling Foods' case, [1999] 237 ITR 579 observed (page 584):

“We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government where-under the export entitlements become available. There must be, for the application of the words ‘derived from’, a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking.”

7. We are of the view that for the reasoning adopted by the hon'ble Supreme Court, income of the assessee from duty drawback cannot be held to be income “derived from” specified business.

8. Distinction sought to be made by learned counsel for the assessee, in income derived from duty drawback and sale or import entitlement cannot be accepted as relevant distinction, as the core question before the court was that such income was “derived from” specified business, which reasoning is fully applicable to the present situation.

9. For the above reasons, we are of the view that the matter being covered by the judgment of the hon'ble Supreme Court in Sterling Foods' case, [1999] 237 ITR 579, no substantial question of law arises in the appeal. Learned counsel for the assessee also submitted that there has been an amendment in the year 2005 to the provisions of section 80HHC, which is as under:

“Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of—

(a) any sum referred to in clause (iiia) of clause (iiib) or clause (iiic), as the case may be, or

(b) any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be,

the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.”

10. We are unable to accept this submission. The amendment to section 80HHC of the Act does not help the appellant, the same being independent and not controlling the interpretation of section 80-IB of the Act

11. In view of the above, the appeal is dismissed.