2025 (7) TMI 1752 - AT - Income Tax

Sale of Licenses as Other Income Not Eligible for Deduction Under Section 80IB(11A)

Nekkanti Sea Foods Limited Versus Asst. CIT - Central Circle – 1, Andhra Pradesh

The ITAT Visakhapatnam held that the assessee's inclusion of revenue from sale of licenses as 'other income' under section 80IB(11A) was incorrect. The ... Deduction u/s 80IB(11A) - net profits derived from J. Thimmapuram Unit - AO noticed that assessee has included other revenue in the form of duty draw back and sale of licenses - scope of term “other income” HELD THAT:- From the submissions of the Ld.AR it is noticed that the assessee has sold the licenses, which is a tradable product, and has characterised as “other income” in the profit and loss account. From these facts, it is observed that the assessee has not utilised the licenses for the purpose of neutralising the customs duty while making imports which goes to the root of the matter of reducing the cost of production. In these circumstances, it cannot be said that the sale of licenses disclosed under “other income” reduces the cost of production. Subsequently, in the case of Saraf Exports [2023 (4) TMI 420 - SUPREME COURT] distinguished the decision of Meghalaya Steel Ltd [2016 (3) TMI 375 - SUPREME COURT] where the incentives mainly arise due to direct subsidies and not export incentives. Decided against assessee. ISSUES: Whether profits arising from Duty Drawback and Merchandise Exports from India Scheme (MEIS)/Duty Entitlement Pass Book (DEPB) benefits qualify as 'profits and gains derived from industrial undertaking' for the purpose of claiming deduction under Section 80IB of the Income Tax Act, 1961.Whether government incentives linked to export performance such as DEPB and Duty Drawback can be considered as reducing the cost of production and thus be included in the net profits of the industrial undertaking.Whether the accounting treatment under Income Computation and Disclosure Standards (ICDS) affects the legal characterization of such government incentives as profits derived from industrial undertakings under Section 80IB. RULINGS / HOLDINGS: The Court held that profits from DEPB and 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 therefore 'incentive profits are not profits derived from the eligible business under Section 80-IB' but belong to the category of ancillary profits of such undertakings.The Court ruled that such government incentives 'do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80-I/80-IA/80-IB' and thus are not eligible for deduction under Section 80IB.The Court rejected the argument that ICDS accounting treatment, which includes such incentives as reducing the cost of purchase, creates a legal fiction making these incentives part of profits derived from industrial undertaking, stating that 'characterisation of government incentives 'as profits derived from' is a question of law and not a result of accounting treatment.' RATIONALE: The Court applied the statutory provisions of Sections 28 and 80IB of the Income Tax Act, 1961, which define taxable income under 'profits and gains of business or profession' and provide deductions only for profits 'derived from industrial undertakings.'The Court relied extensively on the precedent set by the Supreme Court in Saraf Exports v. CIT, Liberty India v. CIT, Sterling Foods v. CIT, and Meghalaya Steels Ltd. v. CIT, which distinguished between profits directly derived from manufacturing activity and government incentives linked to export performance.The Court noted that Sections 28(iiid) and (iiie) explicitly tax profits from transfer of licenses and government export incentives as business income, but these are separate from profits 'derived from' the industrial undertaking itself.The Court emphasized the need for a 'direct nexus' between profits and the industrial undertaking, rejecting a 'first degree source' test that includes government incentives as profits derived from the industrial undertaking.The Court observed that the Meghalaya Steels decision distinguished Liberty India on the ground that subsidies directly reimbursing costs have a direct nexus with manufacturing profits, whereas export incentives like DEPB are 'one step removed' and thus not eligible for Section 80IB deductions.The Court dismissed the assessee's reliance on ICDS and accounting standards as insufficient to alter the legal interpretation of 'profits derived from industrial undertaking' under the Act.