The Commissioner of Income Tax vs Indo Swiss Embroidery Industries Ltd.

M.R. Shah, J.

1.00. Feeling aggrieved an dissatisfied with the impugned order dated 24/11/2006 passed by the Income Tax Appellate Tribunal (hereinafter referred to as "the ITAT" for short) in ITA No. 1763/Ahd/2006 for AY 2002-03, revenue has preferred the present Tax Appeal to consider the following substantial questions of law: (A) Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that the amendment to the proviso to sec. 43B by the Finance Act, 2003, w.e.f. 01/04/2004 is retrospective nature?

(B) Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that income of Rs. 2,40,667/- from duty drawback should not be excludes from the profits eligible for deduction u/s 80IB, though it has not been "derived from" manufacturing activity carried on by the assessee?

That the assessee filed return of income for AY 2002-03 declaring total loss of Rs. 15,09,202/- and income of Rs. 76,12,454/- u/s 115JB of the Income Tax Act, 1961. That the assessment u/s 143(3) of the Act was finalized determining total taxable income at Rs. 2,74,105/- under normal provisions and Rs. 76,12,454/- u/s 115JB of the Act. While finalizing assessment, income from duty drawback of Rs. 2,40,667/- was excluded from the profits eligible for deduction u/s 80IB of the Act and disallowance of Rs. 10,638/- was made on account of delayed payment of PF (employees contribution). 1.01. Feeling aggrieved and dissatisfied with the order passed by the AO excluding income from duty drawback of Rs. 2,40,667/- from the profits eligible for deduction u/s 80IB of the Act and making disallowance of Rs. 10,638/- made on account of delayed payment of PF (employees contribution), the assessee preferred an appeal before the CIT(A) and by order dated 15/5/2006, the learned CIT(A) allowed the said appeal and held that duty drawback should be included in the profits eligible for deduction u/s 80IB of the Act and also held that payment made to PF within the grace period to be allowed.

1.02. Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A), revenue preferred an appeal before the ITAT and by the impugned judgment and order the learned ITAT has dismissed the said appeal.

1.03. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT, the revenue has preferred the present appeal to consider the following substantial questions of law:

(A) Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that the amendment to the proviso to sec. 43B by the Finance Act, 2003, w.e.f. 01/04/2004 is retrospective nature?

(B) Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that income of Rs. 2,40,667/- from duty drawback should not be excludes from the profits eligible for deduction u/s 80IB, though it has not been "derived from" manufacturing activity carried on by the assessee?

2.00. Heard Mr. Sudhir Mehta, learned counsel appearing on behalf of the revenue and Mr. B.S. Soparkar, learned advocate appearing on behalf of the respondent-assessee.

2.01. Now, so far as question No. (A), Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that the amendment to the proviso to sec. 43B by the Finance Act, 2003, w.e.f. 01/04/2004 is retrospective nature, is concerned, at the outset it is required to be noted that as such the assessee deposited the aforesaid amount of Rs. 10,638/- towards employees contribution within the grace period under the Provident Fund Act. Considering the fact that the learned tribunal has granted the relief to the issue with respect to the amount of provident fund when the assessee deposited the amount with the department within extended grace period under the Provident Fund Act, it cannot be said that the learned tribunal has committed any error in granting relief which calls for interference of this Court. Under the PF Act, if the assessee was entitled to make payment within the grace period and if within that grace period the amount is deposited, the assessee would be entitled to deduction.

2.02. Now, so far as the employer''s contribution is concerned, in view of the decision the Hon''ble Supreme Court in the case of Commissioner of Income Tax Kolkata-III Vs. Alom Extrusions Limited, and recent decision of this Court in Tax Appeal No. 36 of 2008, and more particularly when the second proviso to Section 43B came to be deleted and there is amendment in first proviso to section 43B, which is held to be operative retrospectively, the tribunal has not committed any error and/or illegality in holding that the assessee would be entitled to the deduction as claimed. Under the circumstances Question No. (A) is held against the revenue.

2.03. Now, so far as Question No. (B), Whether on the facts and circumstances of the case and in law was the Appellate Tribunal right in holding that income of Rs. 2,40,667/- from duty drawback should not be excludes from the profits eligible for deduction u/s 80IB, though it has not been "derived from" manufacturing activity carried on by the assessee, is concerned, the said question is squarely covered against the assessee by the decision of the Hon''ble Supreme Court in the case of Liberty India Vs. Commissioner of Income Tax, In the case of Liberty India (supra), the Hon''ble Supreme Court has observed that duty drawback receipt and DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of deduction u/s 80I/80IA/80IB of the Income Tax Act, 1961. It is further observed by the Hon''ble Supreme Court in the said decision that duty drawback receipt and DEPB benefits Are incentives which flow from the Scheme framed by the Central Government or from section 75 of the Customs Act, 1962 and that such incentives profits are not profits derived from eligible business u/s 80IB. It is further observed by the Hon''ble Supreme Court in the said decision that they belong to category of ancillary profit of such undertaking. It is further observed that profits derived by way of incentives such DEPB/Duty drawback cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression "profit derived from industrial undertaking" u/s 80IB. Applying the ratio laid down by the Hon''ble Supreme Court in the case of Liberty India (supra), question No. (B) is held in favour of the revenue and against the assessee. Consequently, Question No. (A) is held against the revenue and in favour of the assessee and Question No. (B) is held against the assessee and in favour of the revenue. Present appeal is partly allowed to the aforesaid extent.