The Supreme Court considered whether profits earned by an assessee from the Duty Entitlement Pass Book (DEPB) Scheme and the Duty Drawback Scheme qualify for deduction under Section 80-IB of the Income Tax Act, 1961, on the ground that such profits are “derived from” an industrial undertaking.

The assessee, engaged in the manufacture and export of wooden handicraft items, claimed deduction under Section 80-IB in respect of amounts received under the DEPB and Duty Drawback Schemes. The Assessing Officer disallowed the deduction, which was upheld by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal allowed the assessee’s claim by holding that the decision in Liberty India v. CIT was per incuriam. However, the High Court reversed the Tribunal’s decision and disallowed the deduction.

The Supreme Court affirmed the judgment of the High Court. It held that Section 80-IB allows deduction only in respect of profits and gains derived from an eligible industrial undertaking. The expression “derived from” has been consistently interpreted to require a direct and proximate nexus between the profits and the industrial undertaking, as opposed to a mere commercial or incidental connection.

Relying on its earlier decisions in Sterling Foods v. CIT and Liberty India v. CIT, the Court reiterated that DEPB and Duty Drawback are incentives granted under schemes framed by the Central Government or under statutory provisions such as Section 75 of the Customs Act, 1962. The immediate source of such income is the incentive scheme itself and not the manufacturing activity of the industrial undertaking. Consequently, such receipts constitute ancillary or incidental profits and do not satisfy the “first-degree nexus” test required for deduction under Section 80-IB.

The Court further clarified that although DEPB and Duty Drawback receipts are chargeable to tax as business income under Section 28 of the Act, such classification does not automatically render them eligible for deduction under Section 80-IB. The scope of Section 80-IB is narrower and is confined only to profits directly derived from the eligible business.

The Court distinguished its decision in Meghalaya Steels Ltd. v. CIT, noting that the subsidies considered in that case directly reimbursed elements of manufacturing cost and therefore had a direct nexus with the industrial undertaking. In contrast, DEPB and Duty Drawback benefits arise only after export and are not directly linked to the manufacturing or production process.

Accordingly, the Supreme Court held that profits earned from DEPB and Duty Drawback Schemes are not eligible for deduction under Section 80-IB of the Income Tax Act. The appeal was dismissed, and it was further clarified that any contrary view taken by any High Court would not be good law.

Source Link - https://api.sci.gov.in/supremecourt/2016/19189/19189_2016_4_1504_43314_Judgement_10-Apr-2023.pdf

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