Section 10B: Duty Drawback is not the income derived from undertaking

Brief of the case

ITAT Jaipur held in case of  ACIT Vs. Smt. Ranjana Johari that if change made in the wooden article which resulted in to a new and different article then it would amount to manufacturing activity. The assessee, Ranjana Johari, had undertaken different activities to shape up the purchased semi finished goods and other articles into marketable commodity as artistic item along with different both in character and use than what was purchased. Its amounts to manufacturing and entire sale proceeds of the undertaking is not to be treated as profits but only difference between sale value and face value of article would be allowed as deduction u/s 10BA of I.T Act.

Facts of the Case

The assessee, Smt. Ranjana Johari is a manufacturer of wooden furniture and filed IT return on 30.09.2009 as “NIL” income. In this assessment year the assessee was earning from export of wooden furniture. The assessee in her Profit & Loss account has shown the net profit of Rs.1,85,48,714/- and total turnover of Rs. 15,07,34,997/- and deducting donation and rental income etc., profit comes to Rs. 1,92,52,903/- and claimed exemption under section 10BA of the IT Act. The assessee has claimed that Rs. 98,15,615/- as paid for job work and Rs. 13,33,214/- for labour charges.

The AO was of the opinion that the assessee is not entitled for the deduction u/s 10BA in A.Y. 2004-05, 2005-06, 06-07, 07-08 and 08-09 because input purchases were made for trading purposes on Form 17B of the Sales Tax Act/Rules, no artistic items are manufactured by the assessee and AO held that the assessee does not fulfil the basic condition of manufacturing and hand made artistic wooden articles, as laid down u/s 10BA of the IT Act. Therefore, the exemption claimed u/s 10BA of the IT Act of Rs. 1,92,52,908/- was disallowed. Then the assessee went in to appeal and his appeal was allowed. Then the department went before the ITAT and assessee filed his cross objection.

Contention of the revenue:

1. AO’s contention was the assessee is not manufacturing items, which entitles him exemption u/s 10BA of the IT Act. AO also contended that even manufacturing through job worker is not manufacturing.
2. That assessee is simply a processor as her has incurred only 1% of the total turnover as labour expenses.
3. AO calculated the deduction under section 10BA at Rs.17,69,034/-.
4. Their view was receipts from Duty draw back and DEPB are not derived from industrial undertaking from the export out of India of eligible articles or things and entire sale proceeds of DEPB are not to be treated as profits but only difference between sale value and face value of credit should be treated income from DEPB.
5. The ld. Counsel for the Revenue supported the order of AO and argued that Hon’ble Supreme Court in the case of Liberty India Vs CIT (317 ITR218) held that receipts from Duty draw back and DEPB are not derived from industrial undertaking from the export out of India of eligible articles or things. Later on, the Hon’ble Supreme Court in the case of Topman Exports vs. CIT (2012) 342 ITR 49 (SC) has held that entire sale proceeds of DEPB not to be treated as profits but only difference between sale value and face value of credit should be treated income from DEPB.

Assessee contentions:

1. That the profit which is eligible for deduction is that which is derived from export of items manufactured or produced by it. The assessee has relied on provisions of section 80HHC wherein legislators have incorporated the method of calculating of deduction. So, incentives are to be treated distinctly from the profit from export of goods etc.
2. That CBDT by Circular no. 564 dated 05.07.1990 and 557 dated 01.08.1990 had clarified that export incentives, namely, cash compensatory support and duty draw back have to be included in profit of the business for computing the deduction under section 80HHC. The Hon’ble Supreme Court in the case of Desraj vs. CIT (2008) 171 Taxman 481 (SC) 301 ITR 439 (2008) “by rejecting the department’s stand that cash compensatory support and duty draw back would not be an eligible income for the purpose of deduction under section 80HHC even if part of income chargeable to tax as business profit under section 28(iiib). As per ld. A/R’s submission, section 10BA is akin to section 80HHC not similar to 80IB so as the same footing the assessee is also eligible for deduction under section 10BA of the IT Act.”
3. That the assessee relied on Saraf Seasoning Udyog vs. ITO, 219 CTR 461 (Raj.) 317 ITR 202 wherein it has been held that “ on a combined reading of sec. 80IB(4) and sec. 28(iiid), as introduced, does make clear, that the profit derived on transfer of DEPB licenses, does very much fall within four corners of profits and gains, derived from such industrial undertaking, being assessee, and is capable of being taxed only under sec. 28, subject to exemption, as provided in sec. 80IB, and/or other eligible provisions”.
4. That deduction which is to be allowed to a eligible undertaking is to be considered in accordance with section 10BA(1) while deduction is to be computed as per sec. 10BA(4).
   

Observations of the CIT(A) in light of abovementioned fact:

On First issue:

1. The Appellant business is to export wooden handicraft items having artistic value with an antique look, whose input materials such as wooden items, polish, stones, brass, iron, etc. the artistic work done by laborers like brass work, inlay work, metal work, carving, studding work, stone work and other related process it involves thought, personal skills and constructive power to manufacture artistic saleable item. So, the purchase of semi finished wooden items and other article purchased against Form 17B are shaped by putting special artistic skills of laborers bring the article in a new and finished shape, which amounts to manufacturing process and converted into eligible handmade crafted artistic wooden articles.

2. It is not correct 1% labour expenses are incurred on private labourer engaged for work. It has found that the assessee has incurred substantial expenditure on its manufacturing activity. Statements of 12 suppliers of unfinished goods to the assessee taken and major portion of work on those goods have been done by the assessee itself in their premises. The facts narrated by the supplier were found correct.

On second issue:

1. The appellant claimed deduction u/s 10BA of Rs.10,07,995/- as duty draw-back which was included for the purpose of exemption under section 10BA. The Hon’ble Supreme Court in the case of Liberty India Vs CIT (317 ITR218) has held “that deduction under section 80IB on account of DEPB/Duty Draw-back which are incentives in nature which flow from the schemes framed by Central Government or from section 75 of the customs Act, 1962, hence, incentive profits are not profits derived from the eligible business and, therefore, duty draw back receipts/DEPB benefits do not form part of net profit of the industrial undertaking for the purpose of section 80IA or 80IB. Duty draw back and profit on transfer of DEPB are to considered as profit and gains of business or profession as per section 28 of the IT Act and such incentives cannot be considered as profit derived from the industrial undertaking. However, this belongs to the category of ancillary profits of the undertaking.”

The Hon’ble Apex Court in the case of Ajanta Pharma Ltd. vs. CIT, 327 ITR 305 “consider as to whether the deduction under section 80HHC in a case where the income is being taxed under section 115JB is to be allowed for the purpose of deduction mentioned in section 80HHC(3) or is to be restricted under section 80HHC(1)(B) of the IT Act and section 80HHC(1) and 1(B) refers to the eligibility while section 80HHC(3) refers to the deductibility. So, it becomes clear after contemplating on the meaning of words ‘eligibility’ and ‘deductibility’”. So, the Credit of duty draw back or profit from DEPB is to be included in the total turnover for computing deduction under section 10BA as per section 10BA(4). The AO will re-compute the deduction under section 10BA on the duty draw back after including the same in the profit of the business and also including the same as part of the total turnover. Thus the computation will be done by the AO as per the finding recorded above.”

The ld. CIT (A) allowed the deduction under section 10BA at Rs. 1,72,40,782/- as against Rs. 1,92,52,908/- claimed by the appellant. Thus he allowed the appeal partly.

The Hon’ble ITAT upheld the orders of ld. CIT(A).

1. The ITAT held that if change made in the article which resulted in to a new and different article then it would amount to manufacturing activity which would imply a change and transformation. It was held that in a case wherein assessee had undertaken different activities to shape up the purchased semi finished goods and other articles into marketable commodity as artistic item along with different both in character and use than what was purchased. This entitles the assessee to claim deduction u/s 10B of the Income Tax Act. It was also held that even though the original material did not lose its identity completely, yet a different commercial commodity had been brought into existence by the assessee which tantamounted to manufacturing activity.

2. That the case of Liberty India squarely applicable in the present circumstances of the case in regards to the deduction u/s 10BA I.T Act and credited duty draw back and DEPB in the Profit & Loss Account, but it is not applicable on all income derives from undertaking. Therefore, we reverse the order of ld. CIT (A) to that extent. It is held in Hon’ble Supreme Court in the case of Topman Exports (supra) held that entire sale proceeds not to be treated as profits but only difference between sale value and face value of credit.

3. That it was directed by the ITAT that AO have to re-compute after considering the order of the Hon’ble Supreme Court in the case of Topman Exports (supra) and case laws referred by the assessee i.e. decision of ITAT Jodhpur Bench, Jodhpur in the case of Angira Art Exports and Suraj Exports India and others and ITAT Mumbai Bench decision in the case of Arts & Crafts Exports Vs. ITO (supra) and recalculate the income accordingly.

So, Hon’ble ITAT held, both i.e. Revenue’s appeal and C.O. of the assessee are allowed for statistical purposes only.