Sakthi Footwear vs Assistant Commissioner of Income Tax

K. Raviraja Pandian, J.—These appeals are at the instance of the assessee against the order of the Tribunal, Madras ''C Bench, dt. 18th Jan., 2008 passed in ITA Nos. 990 and 991/Mad/2007 respectively.

The relevant assessment years are 2002-03 and 2003-04. The facts in both the appeals are one and the same in respect of both the assessment years, except the figures. Therefore, the facts as culled from one of the memorandums of appeal i.e., Tax Case No. 1066 of 2008 are stated as follows:

The assessee is engaged in the business of manufacture and export of shoe uppers. For the asst. yr. 2002-03, the assessee filed its return of income on 30th Sept., 2002 admitting an income of Rs. 2,40,000. Subsequently, the appellant filed a revised return on 15th Nov., 2002 declaring the same income. The return was processed u/s 143(1) and refund of Rs. 4,83,971 was issued on 25th June, 2004. Subsequently notice u/s 148 was issued and assessment u/s 143(3) r/w Section 147 was completed on 23rd March, 2006 determining the total income at Rs. 23,83,500. While completing the assessment, the AO disallowed the claim of deduction u/s 80IB on export incentives in a sum of Rs. 1,45,85,838 on the premise that the claim of the appellant that the duty draw-back benefit was derived from the industrial undertaking [sic). On appeal, the CIT(A) confirmed the same. The Tribunal also confirmed the order of the lower authorities. The correctness of the said order is now canvassed before us in these appeals by formulating the following common question of law:

Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the appellant is not entitled to deduction u/s 80IB in respect of duty drawback?

We heard the argument of the learned Counsel appearing for the appellant.

In respect of the assessee''s own case pertaining to the asst. yr. 2001-02, this Court in Tax Case (Appeal) No. 1252 of 2007 dt. 7th Nov., 2007, to which one of us (K. Raviraja Pandian, J.)was a party, held thus:

As far as the first question is concerned, viz., the deduction u/s 80I in respect of duty drawback, the learned Counsel for the appellant placed reliance on the Gujarat High Court decision reported in Commissioner of Income Tax Vs. India Gelatine and Chemicals Ltd., wherein it was held that duty drawback was ''derived from'' the industrial undertaking and, therefore, would be eligible for deduction u/s 80J. The learned Counsel for the appellant also pointed out that in the case of duty drawback, the same was given specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the statutory provisions in order to relieve the goods to be exported of the burden of customs duties and excise duties. Referring to the decision of the Gujarat High Court that the duty drawback is ''derived from'' industrial undertaking and eligible for deduction, the learned Counsel seeks to draw support of the said decision to contend that the order of the Tribunal holding that the same was not ''derived from'' industrial activity, could not be held to be the correct view.

It may be seen that dealing with the inclusion of duty drawback for considering the deduction u/s 80HH, this Court in the decision reported in Commissioner of Income Tax Vs. Jameel Leathers and Uppers, held at p. 102 (of 246 ITR) as follows:

The decision of the Karnataka High Court relied on by the learned Counsel appearing for the assessee in the case of Sterling Foods Vs. Commissioner of Income Tax, did not examine the distinction between the terms ''derived from'' and ''attributable to''. It only proceeded on the basis, that such income being part of the business income, it must follow that the income is derived from the industrial undertaking.

Referring to the decision reported in National Organic Chemical Industries Ltd. Vs. Collector of Central Excise, Bombay, , the Division Bench held that, the Supreme Court held the word ''derived'' is usually followed by the word ''from'', and it means: get or trace from a source; arise from, originate in; show the origin or formation of. The Division Bench also followed the decision of this Court reported in Commissioner of Income Tax Vs. Pandian Chemicals Ltd., .

In the said decision, this Court held that profits or gains eligible for deduction u/s 80HH must be derived from the actual conduct of the business. This Court further held that the mandate of law is that unless the source of the profit is the undertaking, the assessee is not eligible to claim deduction u/s 80HH; that mere commercial connection between the income and the industrial undertaking would not be sufficient. This Court held that profits and gains derived from industrial undertaking denotes that the immediate and effective source of income eligible for the grant of relief u/s 80HH must be the industrial undertaking itself and not any other source.

The said decision was affirmed by the apex Court in the decision reported in Pandian Chemicals Ltd. Vs. Commissioner of Income Tax, , wherein the Supreme Court held that the rules of interpretation would come into play only if there is any doubt with regard to the express language used. Where the words are unequivocal, there is no scope for importing, the rule of liberal construction. In the circumstances, the apex Court held that the interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of electricity for running the industrial undertaking could not be said to flow directly from industrial undertaking itself and was not profits and gains derived; by the undertaking for the purpose of special deduction u/s 80HH. The apex Court held that the words ''derived from'' in Section 80HH must he understood as something which has a direct or immediate nexus with the industrial undertaking. Having regard to the language of Section 80I, in the face of the decisions of the apex Court which were consistently followed by this Court, we do not find any ground to admit the appeal on the first ground, viz., entitlement of the appellant to deduction u/s 80I in respect of duty drawback.

Therefore, following the abovesaid judgment, these appeals are dismissed. Consequently, the connected Misc. Petn. No. 1 of 2008 is also dismissed.