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Sakthi Footwear v. Assistant Commissioner Of Income-Tax (No. 2)
Summarized Legal Opinion
Factual and Procedural Background
These appeals were filed by the assessee against the order of the Income-tax Appellate Tribunal, Madras “C” Bench, dated January 18, 2008, in I.T.A. Nos. 990 and 991/Mds/2007. The relevant assessment years are 2002-03 and 2003-04, and the facts for both years are stated to be the same except for figures. The facts recited in the memorandum of appeal (T.C. No. 1066 of 2008) are as follows:
- The assessee is engaged in the manufacture and export of shoe uppers.
- For assessment year 2002-03, the assessee filed its return of income on 30 September 2002 declaring income of Rs. 2,40,000 and filed a revised return on 15 November 2002 declaring the same income.
- The return was processed under section 143(1) and a refund of Rs. 4,83,971 was issued on 25 June 2004.
- A notice under section 148 was subsequently issued and an assessment under section 143(3) read with section 147 was completed on 23 March 2006, determining total income at Rs. 23,83,500.
- While completing the assessment, the Assessing Officer disallowed the claim of deduction under section 80-IB in respect of export incentives (duty drawback) amounting to Rs. 1,45,85,838 on the premise that the duty drawback benefit was not "derived from" the industrial undertaking.
- The Commissioner of Income-tax (Appeals) confirmed the disallowance, and the Income-tax Appellate Tribunal affirmed the lower authorities' orders. The assessee challenged that confirmation before the High Court.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant is not entitled to deduction under section 80-IB in respect of duty drawback?
Arguments of the Parties
Appellant's Arguments
- The opinion records that learned counsel for the appellant relied on a Gujarat High Court decision (CIT v. India Gelatine and Chemicals Ltd.) which held that duty drawback was "derived from" the industrial undertaking and therefore eligible for deduction (in that case under the relevant special deduction provision).
- Learned counsel also argued that duty drawback is given specifically to reduce the cost of manufacturing the goods and that the scheme of duty drawback relieves exported goods of customs and excise duties, supporting the contention that such receipts are derived from the industrial undertaking.
The opinion does not set out a detailed narrative of the Revenue's specific arguments in this document beyond the recording of the Assessing Officer, Commissioner (Appeals) and Tribunal having disallowed and confirmed the denial of deduction.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sakthi Footwear v. CIT (No. 1), T.C. (A) No. 1252 of 2007; dated 7 Nov 2007 — [2009] 317 ITR 194 (Mad) | Applied previously by this court to hold that duty drawback did not qualify as being "derived from" the industrial undertaking for the purpose of the special deduction; reiterated principles about the necessary direct nexus. | The court followed and applied the reasoning in this earlier decision to dismiss the present appeals. |
| CIT v. India Gelatine and Chemicals Ltd., [2005] 275 ITR 284 (Gujarat High Court) | Held that duty drawback was "derived from" the industrial undertaking and therefore eligible for deduction under the provision considered in that case. | The appellant relied on this decision; the court discussed it but did not accept it as controlling in view of contrary authorities and interpretive principles adopted by higher courts and this court. |
| CIT v. Jameel Leathers and Uppers, [2000] 246 ITR 97 | Considered inclusion of duty drawback for purposes of special deduction and discussed the distinction between "derived from" and "attributable to". | The court cited this decision to note the jurisprudence rejecting the simplistic identification of business receipts with being "derived from" an undertaking without examining the necessary direct nexus. |
| Sterling Foods v. CIT, [1991] 190 ITR 275 | Was noted as a decision that did not examine the distinction between "derived from" and "attributable to". | Referenced to explain that reliance on Sterling Foods was insufficient because it did not address the key interpretive distinction. |
| National Organic Chemical Industries Ltd. v. Collector of Central Excise, [1997] 106 STC 467; (1997) 2 SCC 587; AIR 1997 SC 690 | The Supreme Court's exposition that the word "derived" means to get or trace from a source; to arise from or originate in — emphasizing origin or formation. | The Division Bench's reliance on this Supreme Court definition was used to underline that "derived from" requires an origin/direct source relationship with the industrial undertaking. |
| CIT v. Pandian Chemicals Ltd., [1998] 233 ITR 497 (Madras High Court) | Held that profits or gains eligible for special deduction must be derived from the actual conduct of the business; mere commercial connection is insufficient. | Followed by the Division Bench and relied upon to support the requirement of immediate and effective source being the industrial undertaking. |
| Pandian Chemicals Ltd. v. CIT, [2003] 262 ITR 278 (Supreme Court) | Affirmed that "derived from" must be understood as having a direct or immediate nexus with the industrial undertaking; refused liberal construction where language is unequivocal. | The court relied on this apex decision to conclude that receipts such as interest on deposits (example given) do not flow directly from the undertaking, and, analogously, duty drawback did not qualify as "derived from" the undertaking for the relevant deduction. |
Court's Reasoning and Analysis
The court's analysis proceeded by reference to prior decisions of this court and the Supreme Court dealing with the interpretation of the phrase "derived from" (in provisions granting special deductions to industrial undertakings). The central interpretive approach, as adopted by the court, can be summarized in the following steps which the opinion expressly records:
- The court noted that some authorities (e.g., the Gujarat High Court in CIT v. India Gelatine and Chemicals Ltd.) had held that duty drawback was "derived from" the industrial undertaking and therefore eligible for deduction; the appellant relied on that authority.
- The court reviewed controlling authorities which required a stricter test: the words "derived from" require that the profit or receipt must have its immediate and effective source in the industrial undertaking itself (i.e., flow directly from the conduct of the business of the undertaking).
- The court relied on the Supreme Court's formulation (in National Organic Chemical and in Pandian Chemicals Ltd. v. CIT) that the word "derived" carries the meaning of arising from or originating in a source; this supports a requirement of direct or immediate nexus with the undertaking.
- The court recalled and followed earlier pronouncements (this court and Supreme Court) that mere commercial connection, or the fact that a receipt reduces costs of manufacture, is not sufficient to make the receipt "derived from" the industrial undertaking for the special deduction—there must be a direct origin in the undertaking's activities.
- Having regard to this body of authorities and the language of section 80-I (and by analogy the principles applied under section 80HH in the cited cases), the court found no basis to treat duty drawback as income "derived from" the industrial undertaking so as to qualify for the deduction claimed.
The opinion thus applied settled interpretive rules and precedent rather than engaging in a novel factual or statutory construction; it concluded that the appellant's reliance on the contrary Gujarat High Court decision did not outweigh the line of authority requiring a direct nexus.
Holding and Implications
APPEALS DISMISSED.
Consequentially, the connected Miscellaneous Petition No. 1 of 2008 was also dismissed. The direct effect of the decision is that the assessee is not entitled to the deduction under section 80-IB in respect of duty drawback for the assessment years in question; the assessments confirming the disallowance under the relevant provisions stand affirmed.
The opinion expressly follows and applies existing precedent on the interpretation of "derived from" and therefore does not purport to lay down a new precedent on the point; it applies established principles requiring a direct or immediate nexus between the receipt and the industrial undertaking to qualify for the special deduction.
K. Raviraja Pandian, J.:— These appeals are at the instance of the assessee against the order of the Income-tax Appellate Tribunal, Madras “C” Bench, dated January 18, 2008, passed in I.T.A Nos. 990 and 991.Mds/2007 respectively.
2. The relevant assessment years are 2002-03 and 2003-04. The facts in both the appeals are one and the same in respect of both the assessment years, except the figures. Therefore, the facts as culled from one of the memorandum of appeals, i.e, T.C No. 1066 of 2008 are stated as follows:
The assessee is engaged in the business of manufacture and export of shoe uppers. For the assessment year 2002-03, the assessee filed its return of income on September 30, 2002, admitting an income of Rs. 2,40,000. Subsequently, the appellant filed a revised return on November 15, 2002, declaring the same income. The return was processed under section 143(1) and refund of Rs. 4,83,971 was issued on June 25, 2004. Subsequently, notice under section 148 was issued and assessment under section 143(3) read with section 147 was completed on March 23, 2006, determining the total income at Rs. 23,83,500. While completing the assessment, the Assessing Officer disallowed the claim of deduction under section 80-IB on export incentives in a sum of Rs. 1,45,85,838 on the premise that the claim of the appellant that the duty draw back benefit was derived from the industrial undertaking. On appeal, the Commissioner of Income-tax (Appeals) confirmed the same. The Income-tax Appellate Tribunal also confirmed the order of the lower authorities. The correctness of the said order is now canvassed before us in these appeals by formulating the following common question of law:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant is not entitled to deduction under section 80-IB in respect of duty drawback ?”
3. We heard the argument of learned counsel appearing for the appellant.
4. In respect of the assessee's own case pertaining to the assessment year 2001-02, this court in Sakthi Footwear v. CIT (No. 1) (T.C (A) No. 1252 of 2007) dated November 7, 2007— [2009] 317 ITR 194 (Mad), to which one of us (K. Raviraja Pandian J.) was a party, held thus (pages 196 and 197 of 317 ITR):
“4. As far as the first question is concerned, viz., the deduction under section 80-I in respect of duty drawback, learned counsel for the appellant placed reliance on the Gujarat High Court decision reported in CIT v. India Gelatine and Chemicals Ltd., [2005] 275 ITR 284, wherein it was held that duty drawback was ‘derived from’ the industrial undertaking and, therefore, would be eligible for deduction under section 80J. Learned counsel for the appellant also pointed out that in the case of duty drawback, the same was given specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties. Referring to the decision of the Gujarat High Court that the duty drawback is ‘derived from’ industrial undertaking and eligible for deduction, learned counsel seeks to draw support of the said decision to contend that the order of the Tribunal holding that the same was not ‘derived from’ industrial activity, could not be held to be the correct view.
5. It may be seen that dealing with the inclusion of duty drawback for considering the deduction under section 80HH, this court in the decision reported in CIT v. Jameel Leathers and Uppers[2000] 246 ITR 97, held at page 102 as follows:
‘The decision of the Karnataka High Court relied on by learned counsel for the assessee in the case of Sterling Foods v. CIT, [1991] 190 ITR 275 did not examine the distinction between the terms ‘derived from’ and ‘attributable to’. It only proceeded on the basis, that such income being part of the business income, it must follow that the income is derived from the industrial undertaking.’
6. Referring to the decision reported in National Organic Chemical Industries Ltd. v. Collector of Central Excise, [1997] 106 STC 467; (1997) 2 SCC 587 : AIR 1997 SC 690, the Division Bench held that the Supreme Court held the word ‘derived’ is usually followed by the word ‘from’, and it means: get or trace from a source; arise from, originate in; show the origin or formation of. The Division Bench also followed the decision of this court reported in CIT v. Pandian Chemicals Ltd., [1998] 233 ITR 497.
7. In the said decision, this court held that profits or gains eligible for deduction under section 80HH must be derived from the actual conduct of the business. This court further held that the mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction under section 80HH; that mere commercial connection between the income and the industrial undertaking would not be sufficient. This court held that profits and gains derived from industrial undertaking denotes that the immediate and effective source of income eligible for the grant of relief under section 80HH must be the industrial undertaking itself and not any other source. The said decision was affirmed by the apex court in the decision reported in Pandian Chemicals Ltd. v. CIT[2003] 262 ITR 278, wherein the Supreme Court held that the rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing the rule of liberal construction. In the circumstances, the apex court held that the interest derived by the industrial undertaking of the assessee on deposits made with the electricity board for the supply of electricity for running the industrial undertaking could not be said to flow directly from industrial undertaking itself and was not profits and gains derived by the undertaking for the purpose of special deduction under section 80HH. The apex court held that the words ‘derived from’ in section 80HH must be understood as something which has a direct or immediate nexus with the industrial undertaking. Having regard to the language of section 80-I, in the face of the decisions of the apex court which were consistently followed by this court, we do not find any ground to admit the appeal on the first ground, viz., entitlement of the appellant to deduction under section 80-I in respect of duty drawback.”
5. Therefore, following the abovesaid judgment, these appeals are dismissed. Consequently, the connected M.P No. 1 of 2008 is also dismissed.
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