Delhi High Court
Profits and gains from any business of industrial undertaking - no direct nexus required between activity of an industrial undertaking and profits and gains
Income Tax – deduction u/s 80IB - profits and gains from any business of industrial undertaking - no direct nexus required between activity of an industrial undertaking and profits and gains
NEW DELHI, MAR 19, 2008 : THE short question in this Revenue appeal before the High Court is with regard to the claim of deduction by the Assessee on customs duty drawback of Rs.42,92,725/- under Section 80-IB of the Income Tax Act.
The Assessing Officer declined to grant a deduction by relying upon the decision of the Supreme Court in Commissioner of Income Tax v. Sterling Foods. [the decision of the Supreme Court related to import entitlement under the Export Promotion Scheme of the Government of India and on the interpretation of Section 80-HH of the Act.]
Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) who set aside the order passed by the Assessing Officer by holding that Sterling Foods did not apply to the facts of the case and the language used in Section 80-HH of the Act was materially different from the language used in Section 80-IB of the Act.
The Revenue preferred an appeal before the Tribunal which dismissed the appeal and upheld the view expressed by the CIT (A).
The Sterling Foods case: 2002-TIOL-222-SC-IT
The Assessee in that case was engaged in processing prawn and other sea foods which it had exported. As a result of an Export Promotion Scheme announced by the Central Government, the Assessee earned certain import entitlements. The Assessee could either use the import entitlement or sell it to others. In that case, the Assessee sold the import entitlements to some third parties and its income, therefore, included the sale proceeds of such import entitlements, for which the Assessee claimed relief under Section 80- HH(1) of the Act, which reads as follows:
80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof.
Please see that the language used in Section 80-HH of the Act relates to profits and gains derived from an industrial undertaking.
In Sterling Foods, the Supreme Court held that on the language of Section 80-HH of the Act, the expression “derived from” is a narrower expression and so the industrial undertaking had to be the source of the profit or gain. In other words, the industrial undertaking had to be the direct source of the profit and not a means to earn the profit. Referring to import entitlements under the Export Promotion Scheme, the Supreme Court concluded that they were entitlements that the Assessee had earned under the scheme of the Central Government which was intended to encourage exports. The source referable to the profits and gains arose out of the sale proceeds of the import entitlements and was, therefore, referable to the Scheme of the Central Government and not the industrial undertaking of the Assessee.
The High Court observed that a perusal of the Drawback provisions of Section 75 of the Customs Act, shows that an exporter is entitled to drawback on the duty of customs chargeable under this Act on any imported material if those imported materials have been used in the manufacture or processing of goods for export. Of course, this is subject to a notification issued by the Central Government with respect to the goods of any class or description.
In other words, duty drawback is in the nature of re-imbursement of the customs duty that an exporter has paid on imported goods, which are subjected to a manufacturing process and then exported. In that sense, the export has a direct nexus with the industrial undertaking itself.
That apart, Section 80-IB of the Act does not use the expression profits and gains derived from an industrial undertaking as used in Section 80-HH of the Act but uses the expression profits and gains derived from any business referred to in sub-section..
Section 80-IB (1) of the Act reads as follows: -
80-IB (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-section (3) to (11), (11A) and (11B) such business being hereinafter referred to as the eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.
A perusal of the Section would show that there is a material difference between the language used in Section 80-HH of the Act and Section 80-IB of the Act. While Section 80-HH requires that the profits and gains should be derived from the industrial undertaking, Section 80-IB of the Act requires that the profits and gains should be derived from any business of the industrial undertaking. In other words, there need not necessarily be a direct nexus between the activity of an industrial undertaking and the profits and gains.
The High Court further observed,
It is crucial to appreciate the difference in language in Section 80- HH, Section 80-I and Section 80-IB of the Act. While the language used in Section 80-HH of the Act and in Section 80-I of the Act is similar, there is a clear departure in the language used in Section 80-IB of the Act and it is this choice of words that makes all the difference.
Consequently, the source of the duty drawback is the business of the industrial undertaking which is to manufacture and export goods out of raw material that is imported and on which customs duty is paid.
In view of the law laid down and explained by various decisions, the High Court held that no substantial question of law arises for consideration and dismissed the appeal with costs of Rs. 10,000/-
The Commissioner (Appeals) , the Tribunal and the High Court clearly understood the provisions, but somehow the jurisdictional Commissioner could not understand the law. Such officers who go that extra mile to prove their loyalty to the government are actually working against the interests of Revenue. Apart from the cost involved, the amount of precious time of the Department and the Court, the appellant has wasted is not ascertainable. Any way he ended up paying costs!
(See 2008-TIOL-156-HC-DEL-IT in 'Income Tax' + 2008-TIOL-156-HC-DEL-IT in 'Legal Corner')