Profit Earned from DEPB and Duty Drawback Scheme is not entitled to deduction u/s 80-IB of IT Act: Supreme Court [Read Judgement]

The assessee is not entitled to a deduction under section 80IB of the Income Tax Act, 1961 for the profit generated by the Duty Entitlement Pass Book (DEPB) and Duty drawback, according to the two-judge bench of Justice M.R. Shah and B. V. Nagarathna of the Supreme Court of India.

The assessee M/s Saraf Exports, 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. However, the deductions were disallowed by the Deputy commissioner.

Deductions for earnings and gains from specific industrial undertakings are allowed under Section 80-IB. As such, it must be on the “profits and gains derived from industrial undertakings” stated in Section 80-IB of Income Tax Act in order to claim deductions under that section.

The apex court observed the judgment of the case Liberty India where it was mentioned that the 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 Income Tax Act.

Further, it was observed and held that the 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 was 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 Income Tax Act.

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