Incentive profit arising out of DEPB & duty drawback scheme which is not derived from eligible business, not eligible for Sec 80IB deduction

While hearing the issue as to whether the Assessee herein was eligible to claim deduction under Section 80IB of the Income Tax Act, in respect of profit earned from Duty Entitlement Pass Book (DEPB) and duty drawback, the Supreme Court of India answered the question in the negative and settled the issue in favour of the Revenue.

A Division Bench of Justice MR Shah and Justice BV Nagarathna examined the nature of DEPB and Duty Drawback schemes as well as the judgment of the Supreme Court in the case of Liberty India Vs. Commissioner of Income Tax and observed that the profits on which deduction was sought to be availed, flowed from schemes framed by the Government of India as well as relevant provisions of the Customs Act 1962.

The Bench further observed that the incentive profits arising out of the DEPB and duty drawback schemes, were not derived from eligible businesses listed under Section 80IB. On this ground, the Bench observed that no deduction under Section 80IB could be allowed on incentive profits not related to the businesses listed in Section 80IB.

The Respondent-Revenue was represented by Mr. Balbir Singh, Additional Solicitor General. However, the counsel for the Appellant-Assessee was not named in the judgment.

The facts of the case, in brief, are that assessee-company, engaged in the business of manufacturing and exporting wooden handicraft items, filed Nil return of income claiming deduction for DEPB and receipts under the duty drawback under Section 80-IB. The AO however disallowed the same during assessment proceedings.

On appeal, the Commissioner of Income Tax (Appeals) upheld the disallowance, whereas, the Income Tax Appellate Tribunal allowed the deductions as claimed on the receipts of amount under DEPB Scheme and Duty Drawback Scheme.

When the matter reached the High Court, the additions were restored.

On hearing the contentions of both parties, the Bench observed – “…After taking into consideration the DEPB and Duty Drawback Schemes, ultimately, it is observed and held in the case of Liberty India (supra) that DEPB / Duty Drawback Schemes are incentives which flow from the schemes framed by the Central Government or from Section 75 of the Customs Act, 1962 and, hence, incentive profits are not profits derived from the eligible business under Section 80-IB. It is observed that they belong to the category of ancillary profits of such undertakings…”. (Para 7.3)

The Bench relied on the judgment of the Court in Liberty India Vs. Commissioner of Income Tax and observed that – “…duty drawback, DEPB benefits, rebates, etc. cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute an independent source of income beyond the first degree nexus between profits and the industrial undertaking. Thus, it is observed and held that duty drawback receipts / DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of Section 80-IB of the Act, 1961…”.

With these observations, the Bench sustained the findings of the High Court in holding that the Assessee was not entitled to deductions under Section 80IB of the Income Tax Act, in respect of profits earned from DEPB and Duty Drawback schemes.

Cause Title: M/s Saraf Exports Vs Commissioner of Income Tax, Jaipur-III [Civil Appeal No.4822 of 2022 / 2023-Enterslice-12-SC-IT]

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