Citation Codes

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Case Number

ITA Nos. 2446, 2447 & 2542(Del)08, Assessment Years: 2002-03 to 2004-05

Attorney(S)

Appellant by: Shri Ashwani Taneja, Adv.& Ms. Rani Kiyala
Respondent by: Shri B.K Gupta, Sr. DR

Judges

A.D Jain
K.G Bansal

Acts

147 to 151 of the Income Tax Act, 1961
Section 80 IB(1)

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Smart Summary

Summary of Opinion — A.D. Jain, J.M.

Factual and Procedural Background

This opinion contains consolidated decisions on three appeals by the assessee (ITA Nos. 2446(Del)08, 2447(Del)08 and 2542(Del)08) concerning assessment years 2002-03, 2003-04 and 2004-05 respectively. The assessments involve challenges to the Commissioner (Appeals) ("CIT(A)") decisions upholding the Assessing Officer's ("AO") disallowances and refusals of certain tax deductions and adjustments.

Key facts recited in the opinion:

The assessee is an exporter engaged in manufacture and export of handloom goods and received export incentives such as duty drawback and DEPB.
For AY 2002-03 and 2003-04, the principal dispute concerned the assessee's claim to deduction under section 80IB of the Income Tax Act, 1961 on amounts of duty drawback and DEPB (or alternatively reduction of cost of goods manufactured).
Grounds also raised included allegations that assessments were framed without compliance with sections 147–151 (reopening) and violations of natural justice; however, in ITA No. 2446(Del)08 ground No.1 (reopening) was not pressed at the hearing.
For AY 2004-05 (ITA No. 2542(Del)08), additional issues included disallowance of payment for purchase of mobile phones treated as capital expenses (Rs. 21,100), disallowance of Rs. 12,292 for travelling expenses due to non-production of bill, and tax computation interaction between sections 80IB, 80HHC and section 80IA(9).

Procedurally, the CIT(A) had upheld the AO's orders on the matters above; the assessee appealed to the Tribunal. The Tribunal considered existing precedents and the facts of the present appeals and delivered the orders summarized below.

Legal Issues Presented

Whether duty drawback, DEPB and other export incentives constitute income "derived from" the eligible business such that they qualify for deduction under section 80IB of the Income Tax Act, 1961 (or alternatively, whether such receipts should be reduced from cost of goods manufactured).
Whether the assessment for AY 2002-03 (reopening under sections 147–151) was validly framed (note: this ground was not pressed by the assessee at the hearing).
Whether purchase of mobile phones and related charges are capital expenditure or revenue expenditure for AY 2004-05.
Whether travelling expenses (specific bill of Rs. 12,292) can be allowed as business deduction in absence of supporting bills.
Whether deduction under section 80HHC should be computed after reducing the amount of deduction under section 80IB from business profits (interaction of deductions under sections 80IB, 80HHC and the effect of section 80IA(9)).
Whether the assessments were void for violation of principles of natural justice (as pleaded in certain grounds).

Arguments of the Parties

Assessee's Arguments

The assessee contended that duty drawback and DEPB are export incentives and either form part of its income eligible for deduction under section 80IB or, alternatively, should be reduced from the cost of goods manufactured (since they are in substance a return of duty paid).
The assessee challenged framing of assessment (reopening under sections 147–151) and alleged violation of principles of natural justice in some grounds (though the reopening ground was not pressed in one appeal).
For AY 2004-05, the assessee asserted that certain payments (website, internet, phone and fax, mobile phones) were business expenses and supplied supporting account details; contended that deduction under section 80HHC should be computed without reducing the amount of deduction under section 80IB.

Revenue / Assessing Officer and CIT(A)'s Position (as recorded)

The AO disallowed the assessee's claim for deduction under section 80IB in respect of duty drawback and DEPB, treating these receipts as not being "derived from" the specified business for purposes of section 80IB.
In AY 2004-05 the AO disallowed Rs. 44,709 partly for lack of bills: specifically treated purchases of mobile phones as capital expenditure (disallowance Rs. 21,100) and disallowed Rs. 12,292 for travelling expenses for which no bill was furnished; AO was directed by the CIT(A) to allow depreciation on mobile phones while upholding capital treatment.
AO applied section 80IA(9) principle (as interpreted by the Tribunal Special Bench) to reduce profit for computing section 80HHC after taking into account the deduction under section 80IB; CIT(A) upheld AO's approach.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Liberty India Ltd. v. CIT, 207 CTR 243 (P&H)	Interpreted section 80IB(1) and applied the Supreme Court reasoning in "Sterling Foods" to the question whether duty drawback income is "derived from" the specified business.	The Tribunal relied on this decision (assessee's own case) to hold that duty drawback is not income "derived from" the eligible business for section 80IB and that no substantial question of law arises.
Sterling Foods (Supreme Court) (as cited)	Held that import entitlements (and related receipts) arise from the Export Promotion Scheme of the Government and are not income "derived from" the industrial undertaking; a direct nexus is required between profits/gains and the undertaking.	The Court applied this reasoning to conclude that duty drawback/import entitlements do not have the requisite direct nexus and thus cannot be treated as profits "derived from" the specified business for section 80IB purposes.
Nahar Exports Ltd. v. Commissioner of Income-Tax, 288 ITR 494 (P&H)	Held that DEPB and duty drawback are not income eligible for deduction under section 80IB because they are not "derived from" the specified business.	The Tribunal cited this decision as one of the decisions covering the matter squarely against the assessee and applied it to reject the assessee's claim for deduction under section 80IB.
Commissioner Of Income-Tax v. Five Star Rugs, 207 CTR 246 (P&H)	Similar proposition that DEPB and duty drawback are not income eligible for deduction under section 80IB as they are not "derived from" the specified business.	Cited by the Tribunal as authority supporting the position that such export incentives are not eligible for deduction under section 80IB; applied in dismissing the relevant grounds.
Assistant Commissioner of Income Tax v. Hindustan Mini & Agro Products (P.) Ltd., 110 ITD 107 (Del) (SB)	Special Bench holding that the profit rate of deduction under section 80IA must be reduced from the profit of the business for computing deduction under section 80HHC (i.e., interaction of deductions).	The Tribunal relied on this Special Bench decision to uphold the AO/CIT(A) approach that deduction under section 80HHC is to be computed after reducing the benefit of section 80IB (as applied via section 80IA(9) principle), and rejected the assessee's contrary claim.

Court's Reasoning and Analysis

The Tribunal proceeded by addressing the appeals in sequence and applying existing authoritative decisions to the factual contentions of the assessee. The core reasoning can be summarized stepwise as follows:

Ground selection and procedural posture: For ITA No. 2446(Del)08, the learned counsel for the assessee expressly did not press ground No.1 (challenge to reopening under sections 147–151); the Tribunal recorded the non-pressing and rejected the ground as not pressed.
Central question on export incentives and section 80IB: For the disputes about deduction under section 80IB in ITA Nos. 2446 and 2447, the Tribunal found that the matter is "covered squarely against the assessee and in favour of the department" by a series of precedents. The Tribunal relied on the Liberty India Ltd. decision and the Supreme Court reasoning in Sterling Foods to conclude that duty drawback and DEPB are not income "derived from" the eligible business and therefore are not eligible for deduction under section 80IB.
Application of precedent: The Tribunal expressly applied the reasoning in Sterling Foods — that the source of import entitlements is the Export Promotion Scheme and not the industrial undertaking, requiring a direct nexus for "derived from" — to hold that duty drawback/DEPB lack the necessary direct nexus. It also cited Punjab & Haryana High Court decisions (Nahar Exports Ltd., Five Star Rugs) to the same effect.
Consequence for grounds on natural justice and validity of assessment: Having found the substantive tax law question against the assessee, the Tribunal rejected the remaining grounds (2–5 in the first appeal) which challenged the denial of section 80IB relief and alleged illegality/violation of natural justice.
For ITA No. 2447 (AY 2003-04), the Tribunal treated the grounds as pari materia with ITA No. 2446 and rejected them for the same reasons (i.e., precedent against the assessee).
For ITA No. 2542 (AY 2004-05) the Tribunal analysed discrete factual deductions:
- Website and internet charges: CIT(A) found them to be business expenses (supported by bills) and allowed.
- Mobile phones (two purchases): The CIT(A) had treated purchases as capital expenditure and directed the AO to allow depreciation; the Tribunal agreed that purchase of mobile phones constitutes capital expenditure and upheld the disallowance of Rs. 21,100 as capital in nature.
- Travelling expense of Rs. 12,292: No supporting bill was produced before the CIT(A) (or the AO). The Tribunal affirmed the disallowance for want of proof.
- Deduction under section 80HHC versus section 80IB: The Tribunal relied on the Special Bench decision in Hindustan Mini & Agro Products to hold that deduction under section 80HHC is to be computed after reducing the deduction under section 80IB (i.e., profit rate under section 80IA reduced from business profit for computing 80HHC). Accordingly, the AO/CIT(A) approach was upheld.
Final synthesis: Drawing together the precedential rule that export incentives like duty drawback and DEPB are not "derived from" the specified business, and on the specific factual findings about bills and character of expenses, the Tribunal concluded that the assessee's grounds lack merit and were to be rejected.

Holding and Implications

Holding:

All the appeals filed by the assessee are dismissed.

Direct implications and consequences:

The Tribunal affirmed the AO/CIT(A) decisions that deduction under section 80IB is not allowable in respect of duty drawback, DEPB or similar export incentives because such receipts are not income "derived from" the specified business (following Sterling Foods, Liberty India Ltd., Nahar Exports, Five Star Rugs).
The Tribunal upheld the disallowance of mobile phone purchases as capital expenditure for AY 2004-05 while directing allowance of depreciation (as per CIT(A)'s direction to the AO), thereby rejecting the assessee's claim that these were revenue expenses.
The Tribunal confirmed disallowance of Rs. 12,292 for travelling expenses for lack of documentary support (bill not furnished).
The Tribunal upheld the computation approach to section 80HHC (that it is to be computed after reducing benefits of section 80IB, consistent with the Special Bench decision in Hindustan Mini & Agro Products), rejecting the assessee's contention to the contrary.

Broader precedent impact:

The Tribunal's decision applies and follows existing higher and co-ordinate authority decisions cited in the opinion; it does not announce a novel principle but confirms the application of established authorities to the facts before it.

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M/S. Liberty India, C/O Corporate Professionals, D-28, South Extn. Part-I, N. Delhi () v. Asstt. Commissioner Of Income Tax, Circle, Panipat ().

A.D Jain, J.M:—

ITA NO. 2446(Dei)08:

This is assessee's appeal for the assessment year 2002-2003 taking the following grounds:—

“1. That having regard to the facts and circumstances of the case, Id. CIT(A) ought to have quashed the assessment order having been framed without complying with the mandatory conditions of 147 to 151 of the Income Tax Act, 1961 and reopening of assessment was invalid and not in accordance with law.

2. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not reversing action of the ld. AO in not allowing deduction u/s 80 IB in full as claimed by the assessee in his return of income.

3. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not reversing action of the ld. AO in not granting the benefit of deduction u/s 80 IB on the amount of duty draw back/DEPB/other export incentives.

4. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not quashing the assessment order framed by the AO being illegal, void ab initio, in violation of principles of natural justice.

5. That in any view of matter and in any case, action of the ld. CIT(A) in confirming the action of the ld. AO in not allowing the claim of deduction u/s 80 IB is illegal, void ab initio, arbitrary, unjustified, against the principles of natural justice and contrary to the law and facts.”

2. At the outset, the learned counsel for the assessee states at the bar that ground No. 1 is not pressed. Rejected as not pressed.

3. Ground Nos. 2 to 5 are concerning the action of the learned CIT(A) in upholding the AO's action not to allow deduction u/s 80 IB in full to the assessee, in respect of export incentives. The assessee, exporter derived income during the year from manufacture and export of handloom goods. It had received export incentives on account of duty draw back and DEPB. The assessee claimed that duty draw back and DEPB are part of export incentives. The alternative contention was that these may be reduced from the cost of goods manufactured, since it was return of the duty paid. The assessee claimed deduction u/s 80 IB of the I.T Act on the amount of duty draw back as well as DEPB. This claim was disallowed. The learned CIT(A) upheld the AO's order.

4. Undisputedly, the matter is covered squarely against the assessee and in favour of the department by numerous decisions. In the assessee's own case, “Liberty India Ltd. v. CIT”, 207 CTR 243 (P&H), it has been held as follows:—

“We have considered the rival submissions and perused the record. Section 80 IB(1) is as under:—

“(i) 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 the 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.”

Interpreting the identical language in section 80 HH, the Hon'ble Supreme Court in “Sterling Foods” (supra) observed:—

“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 whereunder 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 industrial undertaking.

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

Distinction sought to be made by the learned counsel for the assessee, in income derived from duty draw back and sale of 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.

For the above reasons, we are of the view that the matter being covered by the judgement of Hon'ble Supreme Court in “Sterling Foods” (supra), no substantial question of law arises in this appeal.”

5. In “Nahar Exports Ltd. v. Commissioner Of Income-Tax”, 288 ITR 494(P&H) and in “Commissioner Of Income-Tax v. Five Star Rugs”, 207 CTR 246(P&H), that DEPB and duty draw back are not income eligible for deduction u/s 80 IB of the I.T Act, since they are not “derived from” specific business.

6. In view of the above, finding no force in the grievance raised by the assessee by way of ground Nos. 2 to 5, the same are rejected.

ITA NO. 2447 (Del)08:

7. This is assessee's appeal for the assessment year 2003-2004. The grounds taken are as under:—

“1. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not reversing action of the ld. AO in not allowing deduction u/s 80 IB in full as claimed by the assessee in his return of income.

2. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not reversing action of the ld. AO in not granting the benefit of deduction u/s 80 IB on the amount of duty draw back/DEPB/other export incentives.

3. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not quashing the assessment order framed by the AO being illegal, void ab initio, in violation of principles of natural justice.

4. That in any view of matter and in any case, action of the ld. CIT(A) in confirming the action of the ld. AO in not allowing the claim of deduction u/s 80 IB is illegal, void ab initio, arbitrary, unjustified, against the principles of natural justice and contrary to the law and facts.”

8. The above grounds correspond to ground Nos. 2 to 5 in ITA No. 2446(Del)08, which we have dealt with hereinabove. For the reasons recorded therein, these grounds are rejected, the facts in the present appeal being pari materia with those in ITA No. 2446(Del)08.

ITA NO. 2542(Del)08:

9. This is assessee's appeal for the assessment year 2004-2005. The grounds taken are as follows:—

“1. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in confirming the action of ld. AO in sustaining the disallowance of Rs. 21,100/- on account of purchase of mobile phone treated as capital expenses.

2. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in confirming the action of the ld. AO in making the disallowance of Rs. 12,292/- on account of travelling expenses.

3. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not reversing action of the ld. AO in not allowing the deduction u/s 80 IB on the amount of duty draw back/DEPB/other export incentives.

4. That in any view of matter and in any case, action of the ld. CIT(A) in not reversing the action of the ld. AO in disallowing the claim of deduction u/s 80 IB is illegal, void ab initio, arbitrary, unjustified, against the principles of natural justice and contrary to the law and facts and has further erred in not quashing the assessment order framed by ld. AO being illegal void ab initio, in violation of principles of natural justice.

5. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not reversing the action of ld. AO in not granting the claim of deduction u/s 80 HHC in full as claimed by the assessee in the return and has further erred in confirming the action of AO in allowing the deduction u/s 80 HHC only after reducing the amount of deduction u/s 80 IB from the amount of business profit.

6. That in any view of matter and in any case, action of ld. CIT(A) in not reversing the action of ld. AO in disallowing the claim of deduction u/s 80 HHC is illegal, void ab-initio, arbitrary, unjustified against the principles of natural justice and contrary to the law and facts and has further erred in not quashing the assessment order framed by ld. AO being illegal void ab initio, in violation of principles of natural justice.”

10. Apropos ground No. 1, the AO disallowed Rs. 44,709/- on account of payment for purchase of two mobile phones and mobile charges, due to non-production of bills. Before the learned CIT(A), the assessee filed copy of account of telephone expenses, which was also stated to have been filed before the AO. These details are as follows:—

Website charges 21060/- paid by cheque Internet charges 999/- paid by cheque Phone and fax charges 1550/- cash Mobile phone 6500/- cash Mobile phone 14600/- cash Total 44709/-

11. The learned CIT(A) observed that the website charges and internet charges were business expenses and have been incurred by the assessee only, as clear from the bills. The learned CIT(A) upheld the disallowance on purchase of mobile phones for Rs. 6,500/- and Rs. 14,600/-, holding it to be a capital expenditure. The AO, however, was directed to allow depreciation thereon.

12. The learned counsel for the assessee has not been able to show as to how the learned CIT(A) has erred in confirming such disallowance amounting to Rs. 21,100/-. Purchase of mobile phone has rightly been held to be capital expenditure. Purchase of mobile phone is undoubtedly the capital expenditure. Therefore, the action of the ld. CIT(A) in confirming this disallowance is upheld. Ground No. 1 is rejected.

13. So far as regards ground No. 2, the assessee had made certain payments through credit card. Out of these, bill for Rs. 12,292/- was not furnished. It was, therefore, that the AO disallowed the payment as of personal nature. Even before the ld. CIT(A), no bill or other evidence was presented, though the expenditure was claimed to be a business expenditure. In these circumstances, the learned CIT(A) was correct in upholding the disallowance. This action of the ld. CIT(A) is thus confirmed. Ground No. 2 is rejected.

14. Ground Nos. 3&4 correspond to ground Nos. 2 to 6 in ITA NO. 2446(Del)08 which we have dealt with hereinabove. For the reasons recorded therein, these grounds are rejected, the facts in the present appeal being pari materia with those in ITA No. 2446(Del)08. Therefore, ground Nos. 3 & 4 are rejected.

15. Coming to ground Nos. 5&6, the AO held that deduction u/s 80 HHC of the Act was allowable only after reducing the amount of reduction u/s 80 IB of the I.T Act from the business profit as per section 80 IA(9) of the Act. The assessee has contended that the business income for deduction u/s 80 HHC of the Act was to be taken without any reduction on account of deduction u/s 80 IB of the Act. The action of the AO was upheld by the ld. CIT(A).

16. This issue, it is seen, is covered squarely in favour of the department by the Special Bench decision of the Delhi Bench of the Tribunal in the case of Assistant Commissioner of Income Tax v. Hindustan Mini & Agro Products (P.) Ltd., 110 ITD 107(Del)(SB), wherein, it has been held that the profit rate of deduction u/s 80 IA is to be reduced from the profit of the business for computing deduction u/s 80 HHC of the Act. Accordingly, ground Nos. 5&6 are rejected.

17. In the result, all the appeals filed by the assessee are dismissed.

M/S. Liberty India, ... v. Asstt. Commissioner ...