REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4822 OF 2022

(@SLP (C) NO. 17539 OF 2016)

M/s. Saraf Exports …Appellant(s)

Versus

Commissioner of Income Tax,

Jaipur-III …Respondent(s)

J U D G M E N T

M.R. SHAH, J.

1.Feeling aggrieved and dissatisfied with the

impugned judgment and order passed by the High Court

of Judicature for Rajasthan at Jaipur dated 04.02.2016 in

D.B. Income Tax Appeal No. 7 of 2014 by which the High

Court has allowed the said appeal preferred by the

Revenue and has held that the assessee is not entitled to

the deduction under Section 80-IB of the Income Tax Act,

1961 (hereinafter referred to as “Act, 1961”) with respect

to the receipts under the Duty Drawback Scheme

CIVIL APPEAL NO. 4822 OF 2022 Page 1 of 36

(hereinafter referred to as “Duty Drawback”) and on

transfer of Duty Entitlement Pass Book Scheme

(hereinafter referred to as “DEPB”), the assessee has

preferred the present appeal.

2.The facts leading to the present appeal in nutshell

are as under:-

2.1The assessee, a partnership firm, was engaged in

the business of manufacturing and exporting wooden

handicraft items. For the Assessment Year (A.Y.) 2008-

09, the assessee filed its return on 30.09.2008 declaring

its income as nil, claiming deduction of Rs. 70,197/- on

account of DEPB and of Rs. 76,27,636/- on account of

receipts under the Duty Drawback.

2.2The assessee credited the receipts of the aforesaid

amounts into the Profit & Loss Account and claimed the

same as “Profit / gains of business / profession” under

Sections 28(iiic) and 28(iiib) of the Act, 1961. The

assessee was issued a notice under Section 143(2) of the

Act, 1961.

2.3By order dated 24.11.2010, the Deputy

Commissioner disallowed the deductions as claimed. The

CIVIL APPEAL NO. 4822 OF 2022 Page 2 of 36

order of the Deputy Commissioner disallowing the

exemption as claimed, came to be upheld by the

Commissioner of Income Tax (Appeals). However, the

Income Tax Appellate Tribunal (ITAT) allowed the appeal

preferred by the assessee vide order dated 17.12.2013 by

inter alia observing that the decision of this Court in the

case of Liberty India Vs. Commissioner of Income Tax,

(2009) 9 SCC 328 : (2009) 317 ITR 218 (SC) can be said

to be per incuriam and allowed the deductions as claimed

on the receipts of amount under DEPB Scheme and Duty

Drawback Scheme.

2.4By the impugned judgment and order and relying

upon the decision of this Court in the case of Liberty

India (supra) and the decision of this Court in the case of

Commissioner of Income Tax, Karnataka Vs. Sterling

Foods, Mangalore (1999) 4 SCC 98, the High Court has

allowed the appeal preferred by the Revenue and has

restored the order passed by the Deputy Commissioner

disallowing the deductions claimed under Section 80-IB of

the Act, 1961. The impugned judgment and order passed

by the High Court is the subject matter of the present

appeal.

CIVIL APPEAL NO. 4822 OF 2022 Page 3 of 36

3.Learned counsel appearing on behalf of the

assessee has heavily relied upon the decision of this

Court in the case of Commissioner of Income Tax Vs.

Meghalaya Steels Limited, (2016) 6 SCC 747 : (2016)

383 ITR 217 (SC),

3.1It is submitted that the meaning of “derived from”

under Section 80-IB as laid down in Liberty India (supra)

has been widened by this Hon’ble Court in the case of

Meghalaya Steels Limited (supra).

3.2It is further submitted that the conclusion of Liberty

India (supra) is based on the finding that “derived from”

under Section 80-IB requires a “first degree” connection

with the business of the industrial undertaking whereas

the source of DEPB / Duty Drawback are incentives given

under the Duty Exemption Remission Scheme / Section

75 of the Customs Act, 1962. That applying the test of

“first degree”, this Court in the case of Liberty India

(supra) held that receipts from DEPB / Duty Drawback

cannot be deducted under Section 80-IB.

3.3It is next submitted that, however, subsequently, in

the case of Meghalaya Steels Limited (supra), the issue

before this Court was whether transport, interest and

CIVIL APPEAL NO. 4822 OF 2022 Page 4 of 36

power subsidy granted by the Government were entitled

to be deducted under Section 80-IB and this Hon’ble

Court has held that receipts of amount on the aforesaid

subsidies were entitled to be deducted under Section 80-

IB. It is submitted that in the said case, before this Court,

the Revenue relied upon Liberty India (supra) to contend

that the source of subsidies was the Government and

therefore, it could not be considered as having a direct

nexus / close connection with the business of the

assessee. It is submitted that, however, this Court has

rejected the said contention and held that the fact that the

Government is the “immediate source” of the subsidies is

not relevant so long as the subsidies reimbursed, wholly

or partially, costs actually incurred by the assessee in

manufacturing or selling of the products, because, the

profits or gains referred to in Section 80-IB means net

profit, i.e., profit derived after deduction of manufacturing

cost and selling cost.

3.4It is contended that this Court specifically relied on

Section 28(iii)(b) and reiterated that any cash assistance

received from the Government against exports under any

Scheme is chargeable to income tax under the head of

“Profit or gains of business or profession”. That this Court

approved the decision of the Delhi High Court in the case

CIVIL APPEAL NO. 4822 OF 2022 Page 5 of 36

of Commissioner of Income Tax Vs. Dharam Pal Prem

Chand Ltd., (2009) 317 ITR 353 (Del) holding that the

refund of excise duty should not be excluded in arriving at

the profit derived from business for the purpose of

claiming deduction under Section 80-IB.

3.5It is further contended that therefore, applying the

law laid down by this Court in the case of Meghalaya

Steels Limited (supra), the expression “Profit or gains

derived from any business” under Section 80-IB will

include any reimbursement of cost even if the immediate

reimbursement of such source is the Government or its

policy.

3.6It is submitted by the learned counsel appearing on

behalf of the assessee that in the case of Topman

Exports Vs. Commissioner of Income Tax, Mumbai,

(2012) 3 SCC 593, it is observed and held that the DEPB /

Duty Drawback are relatable to cost of manufacture and

has a direct nexus with the cost of imports. That the said

view is in consonance with the view taken earlier in the

case of B. Desraj Vs. Commissioner of Income Tax,

Salem, (2010) 14 SCC 510, which held that the Duty

CIVIL APPEAL NO. 4822 OF 2022 Page 6 of 36

Drawback was in the nature of cash assistance under

Section 28(iii)(b).

3.7It is next contended that in the case of Topman

Exports (supra), it is held that the DEPB is assistance

given by the Government to an exporter to pay customs

duty on its imports and it is receivable once exports are

made and an application under the DEPB Scheme is

made. That this Court has also held that DEPB also has

a cost element in so much as the cost of acquiring it is not

nil because it is acquired by paying customs duty on the

import content of the export product. It is submitted that

the decision of this Court in the case of Topman Exports

(supra) has been subsequently followed in the cases of

ACG Associated Capsules Private Limited Vs.

Commissioner of Income Tax, Central-IV, Mumbai

(2012) 3 SCC 321; Vikas Kalra Vs. Commissioner of

Income Tax – VII, New Delhi, (2012) 3 SCC 611 and

Nissan Export Vs. Commissioner of Income Tax,

(2014) 14 SCC 152.

3.8It is submitted that, therefore, and in view of the

development of law in Meghalaya Steels Limited (supra)

and the Topman Exports (supra) DEPB / Duty Drawback

CIVIL APPEAL NO. 4822 OF 2022 Page 7 of 36

are “profits and gains derived from any business” within

the purview of Section 80-IB.

3.9It is averred by the learned counsel appearing on

behalf of the assessee that various High Courts have

taken the view that the “immediate source” of the income

is not determinative.

4.Shri Balbir Singh, learned ASG while opposing the

present appeal has vehemently submitted that the issue

involved in the present appeal is squarely covered against

the assessee in view of the decision of this Court in the

case of Liberty India (supra) and Sterling Foods,

Mangalore (supra). It is submitted that therefore, relying

upon and following the decisions of this Hon’ble Court in

the aforesaid two decisions, the High Court has not

committed any error in holding that the assessee is not

entitled to the deductions under Section 80-IB on the

amount received by way of DEPB and Duty Drawback

Schemes.

4.1Insofar as the reliance placed by the assessee upon

the decision of this Court in the case of Meghalaya

Steels Limited (supra) is concerned, it is submitted that

CIVIL APPEAL NO. 4822 OF 2022 Page 8 of 36

in the case of Meghalaya Steels Limited (supra), this

Court has not disagreed with or disapproved the decision

in the case of Liberty India (supra) or Sterling Foods,

Mangalore (supra). It is submitted that even otherwise,

the said decisions shall not be applicable in case of

receipt of the amount under DEPB and Duty Drawback

Schemes as the same cannot be said to be an income

that falls under the head “profits and gains of business or

profession”.

4.2Shri Balbir Singh, learned ASG has taken us

through the scheme of Section 28 and Section 80-IB of

the Act, 1961. It is submitted that insofar as Section 28 is

concerned, it speaks about the income that falls under the

head of “profit and gains of business or profession”. That

earlier there used to be a dispute regarding the receipt by

way of incentives from the Government being in the

nature of cash assistance, Duty Drawback, profits on

transfer of DEPB Scheme, as to whether these receipts

were capital receipts or revenue receipts and would these

be taxable. That to put an end to the uncertainty, the

legislature by way of inserting clauses (iiia), (iiib), (iiic),

(iiid) and (iiie) in Section 28 has made the said incentives

taxable under the head of profits and gains of business

and profession.

CIVIL APPEAL NO. 4822 OF 2022 Page 9 of 36

4.3It is further submitted that Section 80-IB provides for

deductions in respect of profits and gains from certain

‘industrial undertakings’ other than infrastructure

development undertakings. That this Section applies to

the following “industrial undertakings” which are eligible

for deduction under the said Section:-

a) Small scale industries into manufacturing and

production

b) Undertaking in industrially backward state and

North-Eastern Region

c) Ship

d) Hotels

e) Cold storage plants and cold chains

f) Mineral oil and natural gas

g) Housing projects

h) Scientific research and development

i) Processing, preservation and packaging of

food items

j) Multiplex theatre

k) Convention centre

l) Hospitals in rural and specified areas

4.4It is next submitted that as per the language used in

Section 80-IB with regard to calculating the deduction, the

deduction would be applicable on “any profits and gains

‘derived from’ any business referred to in…” included in

the gross total income of the assessee. That the most

CIVIL APPEAL NO. 4822 OF 2022 Page 10 of 36

important thing to be considered while interpreting the

said section is that the words used are “derived from” and

not “attributable to”. That the words “attributable to” in the

given clause have been given a wider connotation as

opposed to the words “derived from” which have been

interpreted to be confined to “first degree sources”. It is

submitted that the words “derived from” have been given

a restrictive interpretation.

4.5It is contended that the connotation “derived from”

used in Section 80-IB has to be read to be unit specific

and cannot be read as “standalone” since the words used

in the clauses of Section 80-IB are “industrial

undertaking”. That the core issue therefore, pertains to

the interpretation of the words “derived from” in Section

80-IB of the Act. It is submitted that on a fair reading of

Section 80-IB read with Section 28 and on true

interpretation of Section 80-IB, the DEPB and Duty

Drawback Schemes cannot be said to be deriving the

income from the business undertaking and, therefore,

deduction under Section 80-IB on such receipt of the Duty

Drawback shall not be allowable as a deduction.

4.6It is submitted that in the case of Sterling Foods,

Mangalore (supra), while adjudicating the issue of

CIVIL APPEAL NO. 4822 OF 2022 Page 11 of 36

whether on earning of import entitlements under an export

promotion scheme of the Central Government, deduction

under Section 80HH would be allowable or not, this Court

gave the words “derived from” used in Section 80HH a

restricted interpretation and it was observed that since the

words “derived from” have been used, it shall suggest to

go to the source of such profits and gains.

4.7It is submitted that in the case of Liberty India

(supra), this Court has considered in detail, deduction in

respect of profits and gains “derived from”. That in the

said decision, this Court has discussed the DEPB and

Duty Drawback and thereafter has held that the Duty

Drawback and DEPB benefits cannot be credited against

the cost of manufacture of goods debited in the profit and

loss account for the purpose of Section 80-IB as such

remissions would constitute independent source of

income, beyond the first degree nexus between profits

and the industrial undertaking.

4.8Insofar as the reliance placed by the assessee upon

the decision of this Court in the case of Meghalaya

Steels Limited (supra) is concerned, it is submitted that

the question in Meghalaya Steels Limited (supra)

CIVIL APPEAL NO. 4822 OF 2022 Page 12 of 36

pertained to three subsidies, namely, a) Transport

Subsidy, b) Interest Subsidy and c) Power Subsidy. That

this Court held that since these subsidies directly affect

the cost of manufacturing, they have a direct nexus

between the profits and gains of the undertaking. Since

these subsidies have a direct nexus, they can be said to

be derived from the industrial undertaking. It is submitted

that though in the said decision, this Court has not held

the decision in the case of Liberty India (supra) to be

bad in law, in para 20, this Court has also observed that

since if there is no export, there is no DEPB entitlement.

Therefore, its relation to manufacture of a product and/or

sale within India is not proximate or direct but is one step

removed. That it is observed that the object behind the

DEPB entitlement, as has been held by this Court, is to

neutralise the incidence of customs duty payment on the

import content of the export product. In such a scenario, it

cannot be said that such duty exemption scheme is

derived from profits and gains made by the industrial

undertaking or business itself. It is submitted that,

therefore, in light of the above, the decision in the case of

Meghalaya Steels Limited (supra) shall not be

applicable to the present matter as it pertains to the

above-mentioned subsidies only. It is next submitted that

CIVIL APPEAL NO. 4822 OF 2022 Page 13 of 36

though binding, the ITAT did not follow the decisions of

this Court in the case of Liberty India (supra) and

Sterling Foods, Mangalore (supra), and, therefore, the

High Court has rightly set aside the order passed by the

ITAT following the decisions of this Court in the case of

Liberty India (supra) and Sterling Foods, Mangalore

(supra). It is submitted that therefore, the impugned

judgment and order passed by the High Court is not

required to be interfered with.

4.9Making above submissions, it is prayed that the

present appeal be dismissed.

5.Heard the learned counsel for the respective parties

at length.

6.The short question, which is posed for consideration

of this Court is:-

Whether on the income amount received / profit

from DEPB and Duty Drawback Schemes, the

assessee is entitled to deduction under Section 80-

IB of the Income Tax Act, 1961 and whether such an

income can be said to be an income “derived from”

industrial undertaking?

CIVIL APPEAL NO. 4822 OF 2022 Page 14 of 36

7.While considering the aforesaid issue/question,

relevant portion of Section 28 and Section 80-IB are

required to be referred to, which are as under:-

“28. Profits and gains of business or

profession.—The following income shall be

chargeable to income tax under the head

“Profits and gains of business or profession”,

—

XXXXXXXX

(iii-a) profits on sale of a licence granted under

the Imports (Control) Order, 1955, made

under the Imports and Exports (Control) Act,

1947 (18 of 1947);

(iii-b) cash assistance (by whatever name

called) received or receivable by any person

against exports under any scheme of the

Government of India;

(iii-c) any duty of customs or excise repaid or

repayable as drawback to any person against

exports under the Customs and Central

Excise Duties Drawback Rules, 1971;

(iii-d) any profit on the transfer of the Duty

Entitlement Pass Book Scheme, being the

Duty Remission Scheme under the export and

import policy formulated and announced

under Section 5 of the Foreign Trade

(Development and Regulation) Act, 1992 (22

of 1992);

(iii-e) any profit on the transfer of the Duty

Free Replenishment Certificate, being the

CIVIL APPEAL NO. 4822 OF 2022 Page 15 of 36

Duty Remission Scheme under the export and

import policy formulated and announced

under Section 5 of the Foreign Trade

(Development and Regulation) Act, 1992 (22

of 1992);

XXXXXXXX”

“80-IB. Deduction in respect of profits and

gains from certain industrial undertakings

other than infrastructure development

undertakings.—(1) Where the gross total

income of an assessee includes any profits

and gains derived from any business referred

to in sub-sections (3) to (11), (11-A) and (11-

B) (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.

(2) This section applies to any industrial

undertaking which fulfils all the following

conditions, namely:—

(i) it is not formed by splitting up, or the

reconstruction, of a business already in

existence:

Provided that this condition shall not apply in

respect of an industrial undertaking which is

CIVIL APPEAL NO. 4822 OF 2022 Page 16 of 36

formed as a result of the re-establishment,

reconstruction or revival by the assessee of

the business of any such industrial

undertaking as is referred to in Section 33-B,

in the circumstances and within the period

specified in that section;

(ii) it is not formed by the transfer to a new

business of machinery or plant previously

used for any purpose;

(iii) it manufactures or produces any article or

thing, not being any article or thing specified in

the list in the Eleventh Schedule, or operates

one or more cold storage plant or plants, in

any part of India:

Provided that the condition in this clause

shall, in relation to a small-scale industrial

undertaking or an industrial undertaking

referred to in sub-section (4) shall apply as if

the words ‘not being any article or thing

specified in the list in the Eleventh Schedule’

had been omitted.

Explanation 1.—For the purposes of clause

(ii), any machinery or plant which was used

outside India by any person other than the

assessee shall not be regarded as machinery

or plant previously used for any purpose, if the

following conditions are fulfilled, namely:—

CIVIL APPEAL NO. 4822 OF 2022 Page 17 of 36

(a)such machinery or plant was not, at any

time previous to the date of the installation

by the assessee, used in India;

(b)such machinery or plant is imported into

India from any country outside India; and

(c)no deduction on account of depreciation in

respect of such machinery or plant has

been allowed or is allowable under the

provisions of this Act in computing the total

income of any person for any period prior

to the date of the installation of the

machinery or plant by the assessee.

Explanation 2.—Where in the case of an

industrial undertaking, any machinery or plant

or any part thereof previously used for any

purpose is transferred to a new business and

the total value of the machinery or plant or

part so transferred does not exceed twenty

per cent of the total value of the machinery or

plant used in the business, then, for the

purposes of clause (ii) of this sub-section, the

condition specified therein shall be deemed to

have been complied with;

(iv) in a case where the industrial undertaking

manufactures or produces articles or things,

the undertaking employs ten or more workers

in a manufacturing process carried on with the

aid of power, or employs twenty or more

workers in a manufacturing process carried on

without the aid of power.

CIVIL APPEAL NO. 4822 OF 2022 Page 18 of 36

(3) The amount of deduction in the case of an

industrial undertaking shall be twenty-five per

cent (or thirty per cent where the assessee is

a company), of the profits and gains derived

from such industrial undertaking for a period

of ten consecutive assessment years (or

twelve consecutive assessment years where

the assessee is a cooperative society)

beginning with the initial assessment year

subject to the fulfilment of the following

conditions, namely:—

(i) it begins to manufacture or produce,

articles or things or to operate such plant or

plants at any time during the period beginning

from the 1st day of April, 1991 and ending on

the 31st day of March, 1995 or such further

period as the Central Government may, by

notification in the Official Gazette, specify with

reference to any particular undertaking;

(ii) where it is an industrial undertaking being

a small-scale industrial undertaking, it begins

to manufacture or produce articles or things or

to operate its cold storage plant not specified

in sub-section (4) or sub-section (5) at any

time during the period beginning on the 1st

day of April, 1995 and ending on the 31st day

of March, 2002.

(4) The amount of deduction in the case of an

industrial undertaking in an industrially

backward State specified in the Eighth

Schedule shall be hundred per cent of the

profits and gains derived from such industrial

CIVIL APPEAL NO. 4822 OF 2022 Page 19 of 36

undertaking for five assessment years

beginning with the initial assessment year and

thereafter twenty-five per cent (or thirty per

cent where the assessee is a company) of the

profits and gains derived from such industrial

undertaking:

Provided that the total period of deduction

does not exceed ten consecutive

asssessment years (or twelve consecutive

assessment years where the assessee is a

cooperative society) subject to fulfilment of the

condition that it begins to manufacture or

produce articles or things or to operate its cold

storage plant or plants during the period

beginning on the 1st day of April, 1993 and

ending on the 31st day of March, 2004:

Provided further that in the case of such

industries in the North-Eastern Region, as

may be notified by the Central Government,

the amount of deduction shall be hundred per

cent of profits and gains for a period of ten

assessment years, and the total period of

deduction shall in such a case not exceed ten

assessment years:

Provided also that no deduction under this

sub-section shall be allowed for the

assessment year beginning on the 1st day of

April, 2004 or any subsequent year to any

undertaking or enterprise referred to in sub-

section (2) of Section 80-IC.

CIVIL APPEAL NO. 4822 OF 2022 Page 20 of 36

Provided also that in the case of an industrial

undertaking in the State of Jammu and

Kashmir, the provisions of the first proviso

shall have effect as if for the figures, letters

and words “31st day of March, 2004”, the

figures, letters and words “31st day of March,

2012” had been substituted:

Provided also that no deduction under this

sub-section shall be allowed to an industrial

undertaking in the State of Jammu and

Kashmir which is engaged in the manufacture

or production of any article or thing specified

in Part C of the Thirteenth Schedule.

(5) The amount of deduction in the case of an

industrial undertaking located in such

industrially backward districts as the Central

Government may, having regard to the

prescribed guidelines, by notification in the

Official Gazette, specify in this behalf as

industrially backward district of category ‘A’ or

an industrially backward district of category ‘B’

shall be,—

(i) hundred per cent of the profits and gains

derived from an industrial undertaking located

in a backward district of category ‘A’ for five

assessment years beginning with the initial

assessment year and thereafter, twenty-five

per cent (or thirty per cent where the

assessee is a company) of the profits and

gains of an industrial undertaking:

CIVIL APPEAL NO. 4822 OF 2022 Page 21 of 36

Provided that the total period of deduction

shall not exceed ten consecutive assessment

years or where the assessee is a cooperative

society, twelve consecutive assessment

years:

Provided further that the industrial

undertaking begins to manufacture or produce

articles or things or to operate its cold storage

plant or plants at any time during the period

beginning on the 1st day of October, 1994 and

ending on the 31st day of March, 2004;

(ii) hundred per cent of the profits and gains

derived from an industrial undertaking located

in a backward district of category ‘B’ for three

assessment years beginning with the initial

assessment year and thereafter, twenty-five

per cent (or thirty per cent where the

assessee is a company) of the profits and

gains of an industrial undertaking:

Provided that the total period of deduction

does not exceed eight consecutive

assessment years (or where the assessee is a

cooperative society, twelve consecutive

assessment years):

Provided further that the industrial

undertaking begins to manufacture or produce

articles or things or to operate its cold storage

plant or plants at any time during the period

beginning on the 1st day of October, 1994 and

ending on the 31st day of March, 2004.

CIVIL APPEAL NO. 4822 OF 2022 Page 22 of 36

XXXXXXXX”

7.1Thus, as per Sections 28(iiid) and (iiie) any profit on

the transfer of the Duty Drawback and on transfer of

DEPB Schemes, etc., shall be chargeable to income tax

under the head “Profits and gains of business or

profession”. It appears that earlier, there used to be a

dispute regarding the receipt by way of incentives from

the Government being in the nature of cash assistance,

duty drawback, profits on transfer of DEPB Scheme, etc.,

i.e., as to whether these receipts were capital receipt or

revenue receipt and would thus, be taxable. However,

thereafter, and in order to put an end to the dispute, the

legislature by way of inserting clauses 28 (iiia), (iiib), (iiic),

(iiid) and (iiie) has made the said incentives taxable under

the head of “profits and gains of business and profession”.

7.2Section 80-IB provides for deductions in respect of

profits and gains from certain industrial undertakings.

Therefore, as such for claiming deductions under Section

80-IB, it must be on the “profits and gains derived from

industrial undertakings” mentioned in Section 80-IB. An

identical question came to be considered by this Court

and, more particularly, with respect to the profit from

CIVIL APPEAL NO. 4822 OF 2022 Page 23 of 36

DEPB and Duty Drawback Schemes, in the case of

Liberty India (supra).

7.3After 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.

7.4 Similar view was also expressed with respect to the

Duty Drawback. Thereafter, in paragraph 43 of the above

decision, it is observed and held 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

CIVIL APPEAL NO. 4822 OF 2022 Page 24 of 36

not form part of the net profits of eligible industrial

undertakings for the purpose of Section 80-IB of the Act,

1961. The relevant discussions are in paragraphs 24, 28

to 36, 38, 39, 41, 43 and 45, which are as under:-

“24. Before analysing Section 80-IB, as

a prefatory note, it needs to be mentioned that

the 1961 Act broadly provides for two types of

tax incentives, namely, investment-linked

incentives and profit-linked incentives.

Chapter VI-A which provides for incentives in

the form of tax deductions essentially belong

to the category of “profit-linked incentives”.

Therefore, when Sections 80-IA/80-IB refers

to profits derived from eligible business, it is

not the ownership of that business which

attracts the incentives. What attracts the

incentives under Sections 80-IA/80-IB is the

generation of profits (operational profits).

XXXXXXXX

28. In the present batch of cases, the

controversy which arises for determination is:

whether DEPB credit/duty drawback receipt

comes within the first degree sources?

29. According to the assessee(s), DEPB

credit/duty drawback receipt reduces the

value of purchases (cost neutralisation),

hence, it comes within first degree source as it

increases the net profit proportionately.

30. On the other hand, according to the

Department, DEPB credit/duty drawback

CIVIL APPEAL NO. 4822 OF 2022 Page 25 of 36

receipt do not come within the first degree

source as the said incentives flow from the

incentive schemes enacted by the

Government of India or from Section 75 of the

Customs Act, 1962. Hence, according to the

Department, in the present cases, the first

degree source is the incentive

scheme/provisions of the Customs Act. In this

connection, the Department places heavy

reliance on the judgment of this Court

in Sterling Foods [(1999) 4 SCC 98 : (1999)

237 ITR 579] .

31. Therefore, in the present cases, in

which we are required to examine the eligible

business of an industrial undertaking, we need

to trace the source of the profits to

manufacture. (See CIT v. Kirloskar Oil

Engines Ltd. [(1986) 157 ITR 762 (Bom)])

32. Continuing our analysis of Sections

80-IA/80-IB it may be mentioned that sub-

section (13) of Section 80-IB provides for

applicability of the provisions of sub-section

(5) and sub-sections (7) to (12) of Section 80-

IA, so far as may be, applicable to the eligible

business under Section 80-IB. Therefore, at

the outset, we stated that one needs to read

Sections 80-I, 80-IA and 80-IB as having a

common scheme.

33. On perusal of sub-section (5) of

Section 80-IA, it is noticed that it provides for

the manner of computation of profits of an

eligible business. Accordingly, such profits are

to be computed as if such eligible business is

CIVIL APPEAL NO. 4822 OF 2022 Page 26 of 36

the only source of income of the assessee.

Therefore, the devices adopted to reduce or

inflate the profits of eligible business has got

to be rejected in view of the overriding

provisions of sub-section (5) of Section 80-IA,

which are also required to be read into

Section 80-IB. [See Section 80-IB(13)]. We

may reiterate that Sections 80-I, 80-IA and 80-

IB have a common scheme and if so read it is

clear that the said sections provide for

incentives in the form of deduction(s) which

are linked to profits and not to investment.

34. On an analysis of Sections 80-IA

and 80-IB it becomes clear that any industrial

undertaking, which becomes eligible on

satisfying sub-section (2), would be entitled to

deduction under sub-section (1) only to the

extent of profits derived from such industrial

undertaking after specified date(s). Hence,

apart from eligibility, sub-section (1) purports

to restrict the quantum of deduction to a

specified percentage of profits. This is the

importance of the words “derived from

industrial undertaking” as against “profits

attributable to industrial undertaking”.

35. DEPB is an incentive. It is given

under the Duty Exemption Remission

Scheme. Essentially, it is an export incentive.

No doubt, the object behind DEPB is to

neutralise the incidence of customs duty

payment on the import content of export

product. This neutralisation is provided for by

credit to customs duty against export product.

Under DEPB, an exporter may apply for credit

CIVIL APPEAL NO. 4822 OF 2022 Page 27 of 36

as percentage of FOB value of exports made

in freely convertible currency. Credit is

available only against the export product and

at rates specified by DGFT for import of raw

materials, components, etc. DEPB credit

under the Scheme has to be calculated by

taking into account the deemed import content

of the export product as per the basic customs

duty and special additional duty payable on

such deemed imports.

36. Therefore, in our view, DEPB/duty

drawback are incentives which flow from the

schemes framed by the Central Government

or from Section 75 of the Customs Act, 1962,

hence, incentives profits are not profits

derived from the eligible business under

Section 80-IB. They belong to the category of

ancillary profits of such undertakings.

XXXXXXXX

38. Section 75 of the Customs Act, 1962

and Section 37 of the Central Excise Act,

1944 empower the Government of India to

provide for repayment of customs and excise

duty paid by an assessee. The refund is of the

average amount of duty paid on materials of

any particular class or description of goods

used in the manufacture of export goods of

specified class. The Rules do not envisage a

refund of an amount arithmetically equal to

customs duty or central excise duty actually

paid by an individual importer-cum-

manufacturer. Sub-section (2) of Section 75 of

the Customs Act requires the amount of

CIVIL APPEAL NO. 4822 OF 2022 Page 28 of 36

drawback to be determined on a consideration

of all the circumstances prevalent in a

particular trade and also based on the facts

situation relevant in respect of each of various

classes of goods imported. Basically, the

source of duty drawback receipt lies in Section

75 of the Customs Act and Section 37 of the

Central Excise Act.

39. Analysing the concept of remission

of duty drawback and DEPB, we are satisfied

that the remission of duty is on account of the

statutory/policy provisions in the Customs

Act/Scheme(s) framed by the Government of

India. In the circumstances, we hold that

profits derived by way of such incentives do

not fall within the expression “profits derived

from industrial undertaking” in Section 80-IB.

XXXXXXXX

41. The cost of purchase includes duties

and taxes (other than those subsequently

recoverable by the enterprise from taxing

authorities), freight inwards and other

expenditure directly attributable to the

acquisition. Hence trade discounts, rebate,

duty drawback, and such similar items

are deducted in determining the costs of

purchase. Therefore, duty drawback, rebate,

etc. should not be treated as adjustment

(credited) to cost of purchase or manufacture

of goods. They should be treated as separate

items of revenue or income and accounted for

accordingly (see p. 44 of Indian Accounting

Standards & GAAP by Dolphy D'Souza).

CIVIL APPEAL NO. 4822 OF 2022 Page 29 of 36

XXXXXXXX

43. Therefore, we are of the view 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 independent source of income

beyond the first degree nexus between profits

and the industrial undertaking.

XXXXXXXX

45. In the circumstances, we hold that

duty drawback receipt/DEPB benefits do not

form part of the net profits of eligible industrial

undertaking for the purposes of Sections 80-

I/80-IA/80-IB of the 1961 Act. The appeals

are, accordingly, dismissed with no order as to

costs.”

7.5Prior thereto, the treatment of “profits and gains

derived from industrial undertakings” for the purpose of

determining tax liability came up for consideration before

this Court in the case of Sterling Foods, Mangalore

(supra), which was followed by this Court in the case of

Liberty India (supra). In the case of Sterling Foods,

Mangalore (supra), in paragraph 7 and 13, it is observed

and held as under:-

CIVIL APPEAL NO. 4822 OF 2022 Page 30 of 36

“7. The question, therefore, was

whether the income derived by the assessee

by the sale of the import entitlements was

profit and gain derived from its industrial

undertaking of processing seafood. The

Division Bench of the High Court came to the

conclusion that the income which the

assessee had made by selling the import

entitlements was not a profit and gain which it

had derived from its industrial undertaking.

For that purpose, it relied upon the decision of

this Court in Cambay Electric Supply

Industrial Co. Ltd. v. CIT [(1978) 2 SCC 644 :

1978 SCC (Tax) 119 : (1978) 113 ITR 84]. It

was there held that the expression

“attributable to” was wider in import than the

expression “derived from”. The expression of

wider import, namely, “attributable to”, was

used when the legislature intended to cover

receipts from sources other than the actual

conduct of the business. The Division Bench

of the High Court observed that to obtain the

benefit of Section 80-HH the assessee had to

establish that the profits and gains were

derived from its industrial undertaking and it

was just not sufficient that a commercial

connection was established between the

profits earned and the industrial undertaking.

The industrial undertaking itself had to be the

source of the profit. The business of the

industrial undertaking had directly to yield that

profit. The industrial undertaking had to be the

CIVIL APPEAL NO. 4822 OF 2022 Page 31 of 36

direct source of that profit and not the means

to earn any other profit. Reference was also

made to the meaning of the word “source”,

and it was held that the import entitlements

that the assessee had earned were awarded

by the Central Government under the scheme

to encourage exports. The source referable to

the profits and gains arising out of the sale

proceeds of the import entitlement was,

therefore, the scheme of the Central

Government and not the industrial undertaking

of the assessee.

XXXXXXXX

13. We do not think that the source of the

import entitlements can be said to be the

industrial undertaking of the assessee. The

source of the import entitlements can, in the

circumstances, only be said to be the Export

Promotion Scheme of the Central Government

whereunder the export entitlements become

available. There must be, for the application of

the words “derived from”, a direct nexus

between the profits and gains and the

industrial undertaking. In the instant case the

nexus is not direct but only incidental. The

industrial undertaking exports processed

seafood. By reason of such export, the Export

Promotion Scheme applies. Thereunder, the

assessee is entitled to import entitlements,

which it can sell. The sale consideration

therefrom cannot, in our view, be held to

CIVIL APPEAL NO. 4822 OF 2022 Page 32 of 36

constitute a profit and gain derived from the

assessee's industrial undertaking.”

7.6Therefore, following the law laid down by this Court

in the case of Sterling Foods, Mangalore (supra) and

Liberty India (supra) as such, no error has been

committed by the High Court in holding that on the profit

from DEPB and Duty Drawback claims, the assessee

shall not be entitled to the deductions under Section 80-IB

as such income cannot be said to be an income “derived

from” industrial undertaking and even otherwise as per

Section 28(iiid) and (iiie), such an income is chargeable to

tax.

7.7Insofar as reliance placed by the learned counsel for

the assessee upon the subsequent decision of this Court

in the case of Meghalaya Steels Limited (supra) is

concerned, at the outset, it is required to be noted that in

the case of Meghalaya Steels Limited (supra), it was a

case of three subsidies, namely a) Transport Subsidy, b)

Interest Subsidy, and c) Power Subsidy and in that

context this Court observed and held that since these

subsidies directly affect the cost of manufacturing, they

have a direct nexus with the profits and gains of the

undertaking and since these subsidies have a direct

CIVIL APPEAL NO. 4822 OF 2022 Page 33 of 36

nexus, they can be said to be derived from the industrial

undertaking. It is to be noted that in the case of

Meghalaya Steels Limited (supra), this Court did take

note of the decision in the case of Liberty India (supra),

however, this Court specifically observed that the case of

Liberty India (supra) was concerned with an export

incentive, which is very far removed from reimbursement

of an element of cost. While dealing with the decision in

the case of Liberty India (supra), this Court distinguished

Duty Entitlement Pass Book and Duty Drawback

Schemes and specifically observed that the DPEB / Duty

Drawback Scheme is not related to the business of an

industrial undertaking for manufacturing or selling its

products and the DEPB entitlement arises only when the

undertaking goes on to export the said product, that is,

after it manufactures or produces the same. In paragraph

20, in the case of Meghalaya Steels Limited (supra),

while distinguishing the profit derived from DEPB / Duty

Drawback, it is observed and held as under:-

“20. Liberty India [Liberty India v. CIT,

(2009) 9 SCC 328] being the fourth judgment

in this line also does not help the Revenue.

What this Court was concerned with was an

export incentive, which is very far removed

from reimbursement of an element of cost. A

DEPB drawback scheme is not related to the

business of an industrial undertaking for

CIVIL APPEAL NO. 4822 OF 2022 Page 34 of 36

manufacturing or selling its products. DEPB

entitlement arises only when the undertaking

goes on to export the said product, that is,

after it manufactures or produces the same.

Pithily put, if there is no export, there is no

DEPB entitlement, and therefore its relation to

manufacture of a product and/or sale within

India is not proximate or direct but is one step

removed. Also, the object behind DEPB

entitlement, as has been held by this Court, is

to neutralise the incidence of customs duty

payment on the import content of the export

product which is provided for by credit to

customs duty against the export product. In

such a scenario, it cannot be said that such

duty exemption scheme is derived from profits

and gains made by the industrial undertaking

or business itself.”

Thus, from paragraph 20 of the said decision, it can

be seen that this Court did not disapprove of the decision

of this Court in the case of Liberty India (supra). Even in

the case of Meghalaya Steels Limited (supra), this

Court did not consider the earlier decision in the case of

Sterling Foods, Mangalore (supra). Thus, the decision

of this Court in the cases of Liberty India (supra) and

Sterling Foods, Mangalore (supra), which as such are

on DEPB / Duty Drawback Schemes clinch the issue at

hand. It cannot be said that the decision taken in the case

of Meghalaya Steels Limited (supra) is contrary to the

decisions in the case of Sterling Foods, Mangalore

CIVIL APPEAL NO. 4822 OF 2022 Page 35 of 36

(supra) and Liberty India (supra). On the contrary, the

observations made in paragraph 20 can be said to be in

favour of the Revenue and against the assessee.

8.In view of the above and for the reasons stated

above, the High Court has rightly held that the respondent

– assessee is not entitled to the deductions under Section

80-IB on the amount of DEPB as well as Duty Drawback

Schemes. We hold that on the profit earned from DEPB /

Duty Drawback Schemes, the assessee is not entitled to

deduction under Section 80-IB of the Act, 1961. Any

contrary decision of any High Court is held to be not good

law.

Present appeal deserves to be dismissed and is

accordingly dismissed. However, in the facts and

circumstances of the case, there shall be no order as to

costs.

………………………………….J.

[M.R. SHAH]

………………………………….J.

[B.V. NAGARATHNA]

NEW DELHI;

APRIL 10, 2023.

CIVIL APPEAL NO. 4822 OF 2022 Page 36 of 36