Facts of the Case

  1. The assessee claimed deduction under Section 80-IB on profits represented by DEPB benefits.
  2. The Assessing Officer held that DEPB receipts were not eligible for deduction under Section 80-IB.
  3. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's view relying upon the Supreme Court decision in Commissioner of Income Tax v. Sterling Foods (237 ITR 579).
  4. The Income Tax Appellate Tribunal (ITAT) allowed the assessee's claim and held that deduction under Section 80-IB was available on DEPB receipts, relying on the Delhi High Court judgment in Commissioner of Income Tax v. Eltek SGS Pvt. Ltd. (300 ITR 6).
  5. The Revenue challenged the Tribunal's order before the Delhi High Court.

Issues Involved

  1. Whether DEPB benefits constitute profits and gains derived from an industrial undertaking within the meaning of Section 80-IB of the Income Tax Act, 1961?
  2. Whether deduction under Section 80-IB can be allowed on DEPB receipts received under the export incentive scheme?
  3. Whether the Tribunal was justified in relying upon the earlier Delhi High Court decision in Eltek SGS Pvt. Ltd. despite subsequent Supreme Court developments?

Petitioner’s (Revenue's) Arguments

  1. DEPB receipts arise from a Government incentive scheme and not from manufacturing or industrial operations.
  2. The expression "derived from" requires a direct and immediate nexus between profits and the industrial undertaking.
  3. The Supreme Court in Sterling Foods had already held that incentive-based receipts lacking direct nexus with industrial activity cannot qualify for deduction.
  4. The Tribunal incorrectly relied upon Eltek SGS Pvt. Ltd., which stood diluted in view of later Supreme Court pronouncements.

Respondent’s (Assessee's) Arguments

  1. DEPB benefits were integrally connected with export activities carried on by the industrial undertaking.
  2. Such receipts formed part of business profits generated from export operations.
  3. The Delhi High Court's earlier judgment in Eltek SGS Pvt. Ltd. supported the assessee's entitlement to deduction under Section 80-IB on DEPB benefits.
  4. Therefore, DEPB income should be treated as eligible profits for deduction purposes.

Court Findings

The Delhi High Court observed that:

  • The controversy had subsequently been settled by the Supreme Court in Liberty India v. Commissioner of Income Tax.
  • DEPB and Duty Drawback incentives originate from Government schemes and not from the manufacturing activities of the industrial undertaking.
  • Such incentives are ancillary profits and cannot be regarded as profits "derived from" the eligible business.
  • The expression "derived from" requires a direct nexus with the industrial undertaking, which DEPB receipts fail to satisfy.
  • Consequently, DEPB benefits do not qualify for deduction under Section 80-IB.

Important Clarification

The Court relied upon the Supreme Court's ruling in Liberty India v. Commissioner of Income Tax, wherein it was clarified that:

  • DEPB is an export incentive granted under Government policy.
  • The purpose of DEPB is to neutralize customs duty incidence on export products.
  • The source of DEPB income is the Government incentive scheme and not the industrial undertaking itself.
  • Therefore, DEPB and Duty Drawback receipts are outside the scope of profits eligible for deduction under Section 80-IB.

Sections Involved

  • Section 80-IB, Income Tax Act, 1961
  • Duty Entitlement Pass Book (DEPB) Scheme
  • Export Incentive Provisions
  • Customs Act, 1962 (Relevant reference made through Supreme Court precedent)

Court Order

  1. The substantial question of law was answered in favour of the Revenue and against the assessee.
  2. The judgment of the Income Tax Appellate Tribunal was set aside.
  3. The order passed by the Assessing Officer was restored.
  4. The appeals were disposed of accordingly.

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:13433-DB/AKS15102009ITA10252009_123449.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared.