Dr. Bharat Bhushan Parsoon, J. - This income tax appeal under Section 260A of the Income Tax Act, 1961 (for short, the 1961 Act) is directed against the order of the Income Tax Appellate Tribunal, Chandigarh Bench-B, Chandigarh passed in ITA No.79/CHD/2010 dated 28.4.2010 for the assessment year 2006-07.
2. Facts of the case:
The respondent-assessee is a company engaged in manufacturing and sale of finished knitted fabrics and readymade garments. It had filed its return on 29.11.2006 declaring taxable income of Rs.84,49,800/- while claiming deductions under Section 80-IB of the 1961 Act to the tune of Rs.35,91,572/-. The assessment was finalized by the Assessing Officer on 8.12.2008. While framing assessment, the Assessing Officer re-computed deductions under Section 80-IB allowable to the assessee and disallowed various items of receipt including duty draw back (hereinafter referred to, as DDB) for a sum of Rs.4,40,823/-. Aggrieved with this order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-I, Ludhiana which was decided on 11.11.2009. Though the appeal was partly allowed in favour of the assessee in respect of certain items for which deduction was disallowed under Section 80-IB but the appellate authority had affirmed the order of the Assessing Officer with respect to duty drawback receipt.
3. Still aggrieved from the order of the Commissioner of Income Tax (Appeals), the assessee preferred another appeal before the Income Tax Appellate Tribunal, Chandigarh Bench-B, Chandigarh. The appeal was also preferred by the revenue qua deductions allowed under Section 80IB of the 1961 Act to the assessee. The Income Tax Appellate Tribunal vide order dated 28.4.2010 partly allowed the appeal of the respondent-assessee though dismissed the appeal of the revenue. While allowing certain receipts to be eligible for deduction under Section 80IB, the appellate authority also allowed the assessee to exclude expenses incurred on realization of receipts of duty drawback. Relevant extract of order dated 28.4.2010 (Annexure A-3) in this context is as under:—
"13. Having considered the rival stands, on the aspect of excluding Duty Drawback income from the purview of Section 80IB, we set aside the issue back to the file of the Assessing Officer who shall exclude only such amount of income which is net of expenses incurred for its realization. Before the Assessing Officer, the assessee shall provide the necessary workings in this regard. On being satisfied, the Assessing Officer shall re-work the disallowance u/s 80IB with respect to the income on account of Duty Drawback. Thus, on this ground, the assessee succeeds for statistical purposes."
4. Aggrieved with this order, the revenue has filed this appeal, claiming, that the appellate authority was not justified in directing the Assessing Officer to exclude the expenses incurred for realization of DDB for the purpose of computing deductions under Section 80IB as DDB benefits do not form part of the net profits of eligible industrial undertaking for the purpose inter alia of section 80IB of the 1961 Act.
5. As per the revenue, the following substantial question of law requires determination in this appeal:—
"Whether on the facts and in law, the Hon'ble Income Tax Appellate Tribunal was justified in directing the Assessing Officer to exclude amount of Duty Drawback net of expenses incurred for its realization for the purpose of computing deduction u/s 80IB ignoring the judgment of Hon'ble Supreme Court in the case of Liberty India v. CIT (supra)?"
6. During the course of arguments addressed by the parties, this question of law was modified in the following terms:—
"Whether disallowance of deduction under Section 80IB on duty drawback is to be made on its gross amount or after reduction of expenses?"
7. Praying for answer of this question in its favour, the Revenue wants quashing of the impugned order,
Plea of the assessee is that DDB is an incentive which is given specially to reduce the cost of manufacturing of goods. The assessee pays custom and excise duties on the goods which are transported by it in the course of its business. It is claimed that as these duties escalate the cost of production, expenses made on realization of duty drawback ought to be eligible for deduction to reduce the liability of taxation.
8. Contention of the revenue per contra, however, is that since DDB is not business income of the assessee, any expenditure made in realization of such export incentive also cannot be business expenditure and, thus, is not to be allowed as eligible deduction. In short, it is claimed that DDB is to be disallowed in its gross amount and no reduction of expenses made on its realization is to be permissible.
9. The DDB is in the nature of an export incentive. As per Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944, Government of India has provided for repayment of custom and excise duty paid by an assessee. Such refund is allowed on the average amount of duty paid in respect of material of any particular nature or on description of goods used as raw material for manufacture of specified class of goods to be exported. Thus, the source of DDB receipts are statutory provisions coupled with scheme of the Government of India to provide incentive to manufacturers of export goods of specified class.
10. In Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349, Hon'ble Apex Court had held that profits derived by way of export incentives such as DDB do not fall within the expression "profits derived from industrial undertaking" in terms of Section 80-IB of the Act.
11. Following ratio decidendi laid down by the Apex Court in Liberty India's case (supra), the High Court of Bombay in CIT v. Rachna Udhyog [2010] 1 taxmann.com 29 (Bom.) also held that deduction of export incentive inter alia in the nature of DDB is not allowable under section 80IB.
12. It is contended by the assessee that Income Tax Appellate Tribunal was right in granting concession of exclusion of expenses incurred for realization of DDB as the expenses are met out of income from the business of the assessee in the regular course of its transactions of manufacturing of export goods on which DDB incentives become available to the assessee.
13. This contention of the assessee lacks merit. When income on DDB falls exclusively in the domain of export incentives earned by the assessee in the nature of facility provided under legislative enactments or by Government of India in its schemes and is not 'derived' from the 'business of industrial undertaking' of the assessee and lacks nexus between the profits earned and business of such industrial undertaking, even expenses incurred on receipt of such export incentives (which have been held to be not income which is derived from the business of the enterprise) pursuant to policies and schemes of the Government, would not form part of expenses of the business.
14. In short, when the industrial undertaking itself is required to be the 'source of income' and the business of such undertaking should result in direct yield of such income which DDB incentives are not, any expenditure made on recovery of such export incentives would also not qualify for allowable deductions. Merely because some expenses have been incurred on getting DDB incentives, which incentives have neither any direct nexus nor are derived from business of industrial undertaking and are also included in the net profits and gains of such undertaking, any expenditure having nexus with such export incentive as DDB would also not qualify for allowable deduction under Section 57 or 71 of the Act.
15. In short, gross receipt of DDB incentive, without reduction of expenditure spent for its recovery, is to be excluded from allowable deductions under Section 80-IB of the Act.
16. Sequelly, question of law framed earlier is answered in favour of the revenue. Consequently, the appeal is accepted reversing the order of the Income Tax Appellate Tribunal to the extent mentioned above.