2021 (1) TMI 196 - AT - Income Tax

Tribunal allows DEPB benefits as business profits for Section 80IB(11A) deduction

The Tribunal allowed the assessee's appeals for all assessment years, holding that DEPB benefits should be included as business profits for deduction ... Deduction u/s. 80IB(11A) - Claim denied on DEPB entitlement - as per AO DEPB entitlement amount is not derived from the industrial activities of the assessee, for which, the assessee is entitled for deduction u/s. 80IB(11A) - HELD THAT:- Respectfully following the decision of Meghalaya Steel [2016 (3) TMI 375 - SUPREME COURT], we hold that the DEPB entitlement amount received or receivable by the assessee under the Government of India export promotion scheme is an income includible under the head “profits and gains of business or profession” as per clause (iiib) and (iiid) to Section 28 of the Act. As we have noted above that the AO himself noted, in the middle para at page 25 of the assessment order for A.Y. 2011-12, that “The statute in 80 IB(11A) makes no difference between an export sales and domestic sales, the Act provides same level of deduction for both kind of sales”. Thereafter, he noted a complete contradictory finding to his earlier said observations that “export is an activity which is different from the scope of works envisaged by the Statute. Thus, no deduction on account export sales and consequent receipt of DEPB premium can be allowed.” As we have noted above at the time of passing assessment order, the decisions of Hon’ble Supreme Court in the cases of Sterling Foods [1999 (4) TMI 1 - SUPREME COURT] and Liberty India [2009 (8) TMI 63 - SUPREME COURT] were holding field against the assessee and in favour of the revenue, thus, the AO was bound to follow the same and thus, he denied deduction in respect of DEPB entitlements to the assessee. But thereafter the scenario changed on 9.3.2016, when the Hon’ble Supreme Court rendered decision in the case of Meghalaya Steels Ltd [2016 (3) TMI 375 - SUPREME COURT] - When the statue in section 80 IB of the Act has not made any distinct between export and domestic sales and the profit arising from both the kind of sales is entitled for deduction, then, the profit earned by the assessee in the form of DEPB entitlement amount, which is directly related and calculated on the amount of export sales, cannot be regarded or tagged as income from other sources to take it out from the benefit of deduction u/s. 80IB(11A) of the Act to the assessee. Thus we hold that DEPB entitlement amount is having direct nexus with the industrial activities of the assessee, which is export oriented entitled for deduction u/s. 80IB(11A) - DEPB entitlement amount is an income derived by the assessee from industrial undertaking of the assessee, thus, the same is also entitled for deduction u/s. 80 IB(11A) of the Act. Issues Involved:1. Validity of the CIT(A)'s order.2. Influence of AO's decision on CIT(A).3. Legality of additional depreciation disallowance.4. Bias of CIT(A) towards AO's decision.5. Disallowance of DEPB license premium for profit calculation under Section 80IB(11A).6. Legality of disallowance of deduction under Section 80IB(11A).7. Applicability of subsequent Supreme Court decisions.Issue-wise Detailed Analysis:1. Validity of the CIT(A)'s Order:The assessee contended that the order passed by the CIT(A) was unjustified, arbitrary, contrary to the facts, and bad in law. However, this ground was not pressed during the hearing and was dismissed as not pressed.2. Influence of AO's Decision on CIT(A):The assessee argued that the CIT(A) was influenced by the decision of the AO without considering the merits, facts, and circumstances of the case. This ground was also not pressed and was dismissed as not pressed.3. Legality of Additional Depreciation Disallowance:The assessee claimed that the additional depreciation disallowed by the AO and confirmed by the CIT(A) was illegal, as it was based on irrelevant case laws. This ground was not pressed and was dismissed as not pressed.4. Bias of CIT(A) Towards AO's Decision:The assessee alleged that the CIT(A) was biased towards the AO's decision and ignored the submissions that the assessee was engaged in production activities and was entitled to additional depreciation. This ground was not pressed and was dismissed as not pressed.5. Disallowance of DEPB License Premium for Profit Calculation Under Section 80IB(11A):The main issue revolved around the disallowance of the DEPB license premium for calculating profit under Section 80IB(11A). The AO observed that DEPB, available as an export incentive, could not be considered profits derived from an industrial undertaking. The AO relied on the Supreme Court decisions in Liberty India vs. CIT and CIT vs. Sterling Foods, which were upheld by the CIT(A).6. Legality of Disallowance of Deduction Under Section 80IB(11A):The assessee argued that the DEPB benefits should be included in the business income for deduction under Section 80IB(11A). The assessee cited amendments to Section 28 and various judicial precedents, including the Supreme Court decision in Topman Export, which supported the inclusion of DEPB benefits as business profits. The Tribunal noted that the legislative intent behind the amendments to Section 28 was to include DEPB benefits as business profits. The Tribunal also referred to the Supreme Court decision in Meghalaya Steels Ltd., which clarified that subsidies related to the business should be included under 'profits and gains of business or profession.'7. Applicability of Subsequent Supreme Court Decisions:The Tribunal observed that the subsequent Supreme Court decision in Meghalaya Steels Ltd. overruled the earlier decisions in Liberty India and Sterling Foods. The Tribunal concluded that DEPB benefits should be included as business profits for deduction under Section 80IB(11A). The Tribunal also noted that the Gujarat High Court decision in Banpal Oil Chem (P) Ltd. was not applicable in light of the Supreme Court's decision in Meghalaya Steels Ltd.Conclusion:The Tribunal allowed the assessee's appeals for all assessment years, holding that DEPB benefits should be included as business profits for deduction under Section 80IB(11A). The Tribunal also allowed the deduction for benefits received under the Vishesh Krishi and Gram Udyog Yojana (VKGUY) based on the Bombay High Court decision in Pioneer Foods & Agro Industries.Order:All appeals of the assessee were partly allowed. The decision was pronounced on 14/10/2020.