Holding

Duty‑drawback and DEPB benefits are not profits derived from the eligible industrial undertaking and therefore are ineligible for deduction under s.80‑18/80‑IB.

Summary

Liberty India, a partnership firm operating a small‑scale industrial undertaking, claimed a deduction under s.80‑18 of the Income‑Tax Act for profits arising from Duty Entitlement Passbook (DEP8) and duty‑drawback credits that were posted to its profit and loss account. The Assessing Officer rejected the claim, holding that such credits are export incentives and not profits derived from the industrial undertaking; the High Court affirmed this view. On appeal, the Supreme Court examined the meaning of "profits derived from" in s.80‑18/80‑IB, the distinction between profit‑linked and investment‑linked incentives, and the accounting treatment under AS‑2. It held that DEPB and duty‑drawback are ancillary profits flowing from government schemes, not profits generated by the eligible business, and therefore cannot be included in the net profit for deduction. The Court also affirmed that AS‑2 requires such credits to be deducted from the cost of purchase, not credited to inventory cost. Consequently, the appeals were dismissed and the Department’s treatment was upheld.

Issues considered

The scope of the expression "profits derived from" in s.80‑18/80‑IB of the Income‑Tax Act.
Whether duty‑drawback and DEPB credits constitute profits derived from the eligible industrial undertaking for the purpose of claiming deduction under s.80‑18.
The correct accounting treatment of duty‑drawback, DEPB and similar rebates under Accounting Standard AS‑2.

Legislation cited

Central Excise Act, 1944s. 37
Customs Act, 1962s. 75
Foreign Trade (Development and Regulation) Act, 1992s. 5
Income Tax Act, 1961s. 80-1, s. 80-18, s. 80-AB, s. 80-IA, s. 80-IB

Subjects

Income TaxSection 80‑18Duty drawbackDEPBProfit‑linked incentiveAccounting Standard AS‑2DeductionIndustrial undertakingEligible businessCustoms Act

Judgment

[2009] 13 (ADDL.) S.C.R. 1037

M/S LIBERTY INDIA A
...
\
v.
COMMISSIONER OF INCOME TAX
=(.
(Civil Appeal No. 5891 of 2009)
AUGUST 31, 2009
B
[S.H. KAPADIA AND AFTAB ALAM, JJ.]
·~

• INCOME TAX ACT,.1961:

s. 80-IB - Profits and gains derived from eligible business c
- Duty drawback receipt/DEPB benefits - HELD: Do not form
part of the net profits of eligible industrial undertaking for the
purposes of ss. 80-1180-1 A/80-IB - Expression "derived from"
occurring in s.80-IB is narrower in connotation as compared
...( · to words "attributable to" - By using expression "derived from~ 0
.. • Parliament intended to cover sources not beyond the first
degree - Profits derived by way of incentives, namely DEPB
· and duty drawback do not fall within the expression "profits
derived from industrial undertaking".

ACCOUNTING STANDARDS: E

AS-2 - Valuation of Inventories - Cost of Purchase -
1 HELD: Duty drawback/DEPB benefits, rebates etc. cannot be
• credited against cost of purchase of manufacture of goods
debited in the Profit and Loss account for purposes of s. 80- F
A/80-18 - Department correctly applied AS-2.

Words and Phrases:

Expressions 'derived from' and 'attributable to' -
Connotation of. G

~ The assessee-appellant in CA No. 5891 of 2009, a
partnership firm owning a small scale industrial
undertaking, during the relevant previous year
1037 H
'
1038 SUPREME COURT REPORTS [2009) 13 (ADDL.) S.C.R.

A corresponding to Assessment Year 2001-02, claime_d
deduction u/s 80-18 of the Income Tax Act, 1961 on y

account of Duty Entitlement Passbook and Duty (
I

Drawback credited to Profit and Loss account. The
Assessing Officer denied the deduction.- When the matter
B ultimately reached the High Court, it held that the
assessee having failed to prove the nexus between the
receipt by way of duty drawback/DEP8 benefit and the
industrial undertaking, was not entitled to deduction u/s
80-18. The other appeals were filed in similar
c circumstances.
The question for consideration before the Court
was: whether profit from Duty Entitlement Passbook
Scheme (DEP8) and Duty Drawback Scheme could be
said to be profit derived from the business of the
D industrial undertaking eligible for deduction u/s .80-18 of >-
the 1961 Act. ., _.,
Dismissing th,e appeals, the Court
i
HELD: 1. Duty drawback receipt/DEP8 benefits do
E not form part of the net profits of eligible industrial
undertaking for the purposes of ss.80-1/80-1A/80-18 of the
Income Tax Act, 1961. [Para 24][1062-F]
)
2.1. The 1961 Act broadly provides for two types of
F tax incentives, namely, investment linked incentives and
profit linked incentives. Chapter VI-A which provides for
incentives in the form of tax deductions essentially
belongs to the category of "profit linked incentives".
Therefore, when s. 80-IA/80-18 refers to profits derived
G from eligible business, it is the generation of profits
(operational profits), which attracts the incentives and
not the ownership of that business. Parliament has thus
confined deduction to profits derived from eligible
businesses mentioned in sub-sections (3) to (11A) [as
H they stood at the relevant time]. Besides, each of the
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1039

eligible business in sub-sections (3) to (11A) constitutes A
A-
a stand-alone item in the matter of computation of profits.
That is the reason why the concept of "Segment
Reporting" stands introduced in the Indian Accounting
J Standards by the Institute of Chartered Accountants of
~
India. [Para 13] [1057-C-H; 1058-A] B
'
2.2. In Chapter VI-A, ss.80-18/80-IA are the Code by
themselves as they contain both substantive as well as
t
•..., ~ procedural provisions. Section 80-18 provides for
allowing of deduction in respect of profits and gains
derived from the eligible business. The words "derived
c
from" are narrower in connotation as compared to the
words "attributable to". By using the expression "derived
from", Parliament intended to cover sources not beyond
the first degree. [Para 14] [1058-B-C]
~ 0
2.3. Sub-section (13) of s.80-18 provides for
.. ' applicability of the provisions of sub- section (5) and sub-
~ sections (7) to (12) of s.80-IA, so far as may be, applicable
to the eligible business u/s '80-18. On perusal of sub-
section (5) of s.80-IA, it is noticed that it provides for E
m~nner of computation of profits of an eligible business.
Accordingly, such profits are to be computed as if such
eligible business is the only source of income of the
r
assessee. Therefore, the devices adopted to reduce or
... inflate the profits of eligible business has got to be F
rejected in view of the overriding provisions of sub-
section (5) of s.80-IA, which are also required to be read
into s. 80-18 as is evident from s. 80-18(13). Thus, ss. 80-
I, 80-IA and 80-18 have a common scheme and if so read
it is clear that the said sections provide for incentives in
G
the form of deduction(s) which are linked to profits and
not to investment. On analysis of ss.80-IA and 80-18 it
J: becomes clear that any industrial undertaking, which
becomes eligible on satisfying sub-s. (2), would be
entitled to deduction under sub-s. (1) only to the extent
H
1040 SUPREME COURT REPORTS [2009) 13 (ADDL.) S.C.R.

A of profits derived from such industrial undertaking after - .)..
specified date(s). Therefore, apart from eligibility, sub-s.(1)
purports to restrict the quantum of deduction to a .\
specified percentage of profits. This is the importance of
the words "derived from industrial undertaking" as
B against "profits attributable to industrial undertaking" ..
[Para 1·5] [1058-H; 1059-A-E]
.,
'
2.4. DEPB is an export incentive. It is given under -+
Duty Exemption Remission Scheme. The object behind •
c DEPB is to neutralize the incidence of customs duty
payment on the import content of export product. This
neutralization is provided for by credit to customs duty
against export product. Under DEPB, an exporter may
·apply for credit as percentage of FOB value of exports
made in freely convertible currency. Credit is available ).._
D only against the export product and at rates specified by
DGFT for import of raw materials, components etc. DEPB 7' - · .

credit under the Scheme has to be calculated by taking
into account the d~emcd import content of the export "
product as per basic customs duty and special additional
E duty payable on such deemed imports. Therefore, DEPB/
Duty Drawback are incen~!·:~s which flow from the
Schemes framed by Central Government or from s.75 of
the Customs Act, 1962, and therefore, incentive profits 'f
are not profits derived from the eligible business u/s.80- . .
F 18. They belong to the category of ancillary profits of such
Undertakings. [Para 16] [1059-F-H; 1060-A-B]

2.5. As regards the duty drawback, s.75 of the
y
Customs Act, 1962 and s.37 of the Central Excise Act, "-
1944 empower Government of India to provide for
G
repayment of customs and excise duty paid by an
assessee. The refund is of the average amount of duty ,._
'y

paid on materials of any par:ticular class or description
of goods used in the manufacture of export goods of
specified class. The Rules do not envisage a refund of
H
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1041

"'- - an amount arithmetically equal to customs duty or central A
excise duty actually paid by an individual importer-cum-
manufacturer. Sub-s. (2) of s.75 of the Customs Act
requires the amount of duty drawback to be determined
on a consideration of all the circomstances prevalent in
a particular trade and also based on the facts situation B
relevant in respect of each of various classes of goods
imported. Basically, the source of duty drawback receipt
t lies in s. 75 of the Customs Act and s.37 of the Central
~
Excise Act. [Para 17] [1060-C-E]

2.6. Analysing the concept of remission of duty
c
drawback and DEPB, it makes clear that the remission of
duty is on account of the statutory/policy provisions in
the Customs Act/Scheme(s) framed by the Government
of India. In the circumstances, profits derived by way of
~ D
such incentives do not fall within the expression "profits
'. derived from industrial undertaking" in s.80-18. [Para 18]
[1060-F-G]

3.1. The Department has correctly applied AS-2,
which deals with Valuation of Inventories. Inventories are E
assets held for -sale in the course of business; in the
production for such· sale or in the form of materials or
r supplies to be consumed in the production. "Inventory"
>t
should be valued at the lower of cost and net realizable
value (NRV). The cost of "inventory"- should comprise all F
costs of purchase, costs of conversion and other costs
including costs incurred in bringing the "inventory" to
their present location and condition. The cost of
purchase includes duties and taxes (other than those
subsequently recoverable by the enterprise from taxing
G
authorities), freight inwards and other expenditure directly
attributable to the acquisition. Therefore, trade discounts,
rebate, duty drawback, and such similar items are
deducted in determining the costs of purchase. Therefore,
duty drawback, rebate etc. should not be treated as adjustment
H
()

1042.SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A (credited) to cost of purchase or manufacture of goods. _)...
They should be treated as separate items of revenue or
income and accounted for accordingly. [Para 20 to 23]
(1062-A; 1060-H; 1061-A-D]

Indian Accounting Standards & GAAP by Dolphy
8
D'souza page 44, referred to.

3.2. For the purposes of AS-2, Cenvat credits should
not be included in the cost of purchase of inventories.
Even Institute of Chartered Accountants of India has
C issued Guidance Note on Accounting Treatment for
Cenvat/Modvat under which the inputs consumed- and
the inventory of inputs should be valued on the basis of
purchase cos_f net of specified duty on inputs (i.e. duty
recoverable from the Department at later stage) arising on
D account of rebates, duty drawback, DEPB benefit etc.
Profit generation could be on account of cost cutting,
cost rationalization, business restructuring, tax planning
.'
on sundry balances -being written back, liquidation of
current assets t:tc. Therefore, duty drawback, DEPB
E benefits, rebates etc. cannot be credited a9ainst the cost
of manufacture of goods debited in the Profit and Loss
account for purposes of ss.80-IAl80-IB as such
remissions (credits) would constitute independent
source of income beyond the first degree nexus between
F profits and the industrial undertaking. [Para 22 and 23]
(1061-D-H]

CIT v. Sterling Food 237 ITR 579; CIT v. Kirloskar Oil
Engines Ltd. (1986] 157 ITR 762, referre~ to.

G CIT v. Ritesh Industries Ltd. 274 .ITR 324; CIT vs.India
Gelatine and Chemicals Ltd. 275 ITR 284; Pandian
Chemicals Ltd. v. CIT 262 ITR 278 - cited.

Case Law Reference:
H 237 ITR 579 referred to para 5
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1043

,.\. - 274 ITR 324 cited para 5 A
" 275 ITR 284 cited para 8
262 ITR 278 cited para 10
[1986) 157 ITR 762 referred to para 14

CIVIL APPELLATE JURISDICTION: Civil Appeal No. B
5891 of 2009.
t From the Judgment & Order dated 22.9.2006 of the High
-\
Court of Punjab and Haryana at Chandigarh in ITA No. 590 of
2005. c
WITH

Civil Appeal Nos. 5892-5898 of 2009 and Civil Appeal No.
5271 of 2007, 5571 of 2007, 1465 of 2008, 1499 of 2008,
.4. 1500 of 2008, 1438 of 2008, 1439 of 2008, 1440 of 2008, 'D
'~ 1915 of 2008, 2408 of 2008, 2409 of 2008, 2411 of 2008,
2410 of 2008, 5157 of 2007, 3479 of 2008, 2648 of 2008,
4125 of 2008, 6217-6218 of 2008, 427 of 2009, 430 of 2009,
429 of 2009, 364-365 of 2009, 1257-1258 of 2009, 3532 of
2009 and 451 of 2006. E
Gourab Banerji, A.S.G., S. Ganesh, {NP), Dr. Rakesh
y Gupta, Ashwani Taneja, Poonam Ahuja, Rajan Verma, S.K.
Mukhi, Rameshwar Prasad Goyal, Shashi M. Kapila, Anoop
•!
Sharma, Malika Chaudhary, Charu Kapoor, Nupur Kanungo,
F
Ram Raj, Vikas Mehta, Pankaj Jain, S.K. Sabharwal, Arun Jain,
Jasbir Singh Malik, Preetesh Kapur, Radha Rangaswamy, Ajay
Vohra, Kavita Jha, Sandeep S. Karhail, Pankaj Jain, M.K.
Choudhary, Namita Choudhary, S.K. Verma, Ambhoj Kumar
Sinha, Kailash Mittal, Sunil Mukhi, Gagan Gupta, Rajiv Tyagi,
G
H. Raghavendra Rao, T.A Khan and B.V. Balaram Das for the
'f appearing part·ies.
-.
' The Judgment of the Court was delivered by

H
1044 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A S.H. KAPADIA, J. 1. Leave granted. -~

,, 2. The issue for consideration is: whether profit from Duty
Entitlement Passbook Scheme (DEP8) and Duty Drawback
Scheme could be said to be profit derived from the business
of the Industrial Undertaking eligible for deduction under
B
Section 80-18 of the Income-tax Act, 1961 (1961 Act)?

3. At the outset, we may indicate that although in the
present judgment we have focused on the analysis of Section
+
80-18, the basic Scheme of Sections 801, 80~1A and 80-18 (as
•·
c they then stood) remains the same.

Facts:
4. The facts in the lead matter (Civil Appeal arising out of
SLP(C) No. 5827/07 entitled Mis Liberty India v. CIT) are as
D follows: )....

• I
5. The appellant, a partnership firm, owns a small scale
industrial undertaking engaged in manufacturing of fabrics out
of yarns and also various textile items such as cushion covers,
pillow covers etc. out of fabrics/yam purchased from the market.
E
During the relevant previous year corresponding to Assessment
Year 2001-02, appellant claimed deduction under Section 80-
18 on the increased profits of Rs. 22,70,056.00 as profit of the
l
industrial undertaking on account of DEP8 and Duty Drawback
credited to the Profit & Loss account. The Assessing Officer I'

F denied deduction under Section 80-18 on the ground that the ~

said two benefits constituted export incentives, and that they
did not represent profits derived from industrial undertaking. In
this connection the AO placed reliance on the judgment of this
Court in CIT v. Sterling Food reported in 237 ITR 579.
G Aggrieved by the said decision, matter was carried in appeal
to CIT(A), who came to the conclusion, that duty drawback
received by the appellant was inextricably linked to the
production cost of the goods manufactured by the appellant;
that, duty drawback was a trading receipt of the industrial
H undertaking having direct nexus with the activity of the industrial
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1045
[S.H. KAPADIA, J.]

~-
undertaking and consequently, the AO was not justified in A
denying deduction under Section ~0-18. According to CIT(A),
the DEPB Scheme was different from Duty Drawback Scheme
inasmuch as the DEPB substituted value based Advance
Licencing Scheme as well as Passbook Scheme under the
•'•
~
. Exim Policy; that entitlements under DEPB Scheme were 8
allowed at· pre-determTned and pre-notified rates in respect of
exports made under the Scheme and consequently, DEPB did
t not constitute a substitute for duty drawback. According to
-· CIT(A), credit under DEPB could be utilized by the exporter
r.imself or it could be transferred to any other party; that such :c
transfer could be made at higher or lower value than mentioned
in the Passbook and, therefore, DEPB cannot be equated with
the duty drawback, hence, the appellant who had received Rs.
20,95,740/- on sale of DEPB licence stood covered by the
decision of this Court in Sterling Food (supra). Hence, to that D
A
extent, appellant was not entitled to deduction under Section
'" ¥ 80-18. Against the decision of CIT(A) allowing deduction on duty
drawback, the revenue went in appeal to the Tribunal which
following the decision of the Delhi High Court in the case of CIT
v. Ritesh Industries Ltd. reported in 274 ITR 324, held that the
E
amount received by the assessee on account of duty drawback
was not an income derived from the business of the industrial
undertaking so as to entitle the assessee to deduction under
'( Section 80-18.
~1

6. The decision of the Tribunal was assailed by the F
assessee(s) under Section 260A of the 1961 Act before the
High Court. Following the decision of this Court in Sterling Food
(supra), the High Court held that the assessee(s) had failed to
prove the nexus between the receipt by way of duty drawback/
DEP8 benefit and the industrial undertaking, hence, the G
assessee(s) was not entitled to deduction under Section 80-
"!'
, ....
18(3), hence this Civil Appeal(s).

Arguments:

7. The submission of the appellant(s) [assessee(s)] in H
1046 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A nutshell was that the amount of duty drawback/DEPB was - ,.k
intended to neutralize the incidence of duty on inputs consumed/
utilized in the manufacture of exported goods resulting into
increased profits derived from the business of the industrial
undertaking which profits qualified for deduction under Section .~
B 80-18. According to the appellant(s) since no excise duty/
customs duty was payable on raw materials consumed/utilized
I
in manufacturing goods exported out of India, the duty paid ~
-+-
stood refunded under Section 37(2)(xvia) of the Central Excise I-
Act, 1944 and under Section 75 of the Customs Act, 1962 read
c with Customs, Central Excise Duties and Service Tax
Drawback Rules, 1995.

8. On the nature of DEPB it was submitted that the amount
of DEPB was granted under Exim-Policy issued in terms of
powers conferred under Section 5 of the Foreign Trade )..._
D (Development and Regulation) Act, 1992. According to the
appellant(s), the DEPB Scheme is a Duty Remission Scheme
. ,,
which allows drawback of import charges paid on inputs used
in the export product. The object being to neutralize the
incidence of customs duty on the import content of the export
E product by way of grant of duty credit. The DEPB benefit is
freely transferable. Thus, according to the appellant(s), duty
drawback/DEPB benefit received had to be credited against
y
the cost of manufacture of goods/purchases debited to the Profit
& Loss account. That, such credit was not an independent I'

F source of profit. In this connection reliance has been placed on
Accounting Standard..:2 issued by ICAI on "valuation of
inventories" which indicates that while determining cost of
purchase, cost of conversion and other costs incurred in
bringing the inventories to their present location and condition
G should be considered and that trade discounts, rebates, duty
drawback and such other similar items have to be deducted in
determining the cost of purchase. Placing reliance on AS-2, it r
was submitted that where excise duty paid was subsequently
recoverable by way of drawback, the same would not form part
of the manufacturing cost. It was submitted on behalf of the
H
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1047
[S.H. KAPADIA, J.]

'°" _appellant(s) that payment of excise duty/customs duty on inputs A
consumed in manufacture of goods by an industrial undertaking
eligible for deduction under Section 80-IB, was inextricably
linked to the manufacturing operations of the eligible
undertaking without which manufacturing operations cannot be
undertaken, hence the duty, which was paid in the first instance B
and which had direct nexus to the manufacturing activity when
received back, had first degree nexus with the industrial aGtivity
t- of the eligible undertaking and consequently the reimbursement
-; of the said amount cannot be treated as income of the
assessee(s) dehors the expense originally incurred by way of c
payment of duty. Consequently, according to the appellant(s),
receipt of duty drawback/DEPB stood linked directly to the
manufacture/production of goods and therefore had to be
regarded as profits derived from eligible undertaking qualifying
.A for deduction under Section 80-IB of the 1961 Act. On behalf
0
of the appellant(s) it was further submitted that this Court's
"' ~ decision in Sterling Food (supra) dealt with availability of
deduc:tion under Section 80-HH with respect to profit on sale
of import entitlements. The said decision, according to thr-
appellant, had no applicability to the issue under consideration E
for thei reason that import entitlemenVREP licence was granted
by thei Government on the basis of exports made; the same
were granted gratuitously without antecedent cost having being
Y incurmd by the industrial undertaking, unlike duty drawback and
~~ DEPB, which had direct link to the costs incurred by such
industrial undertaking by way of payment of customs/excise duty F
in respect of duty paid inputs used in the manufacture of goods
meant for export and in such circumstances, profit from sale of
import entitlements/REP licence was in the nature of windfall
and it was in those circumstances, that the apex Court held that
sourcH of profit on sale of import entitlements was not the G
industrial undertaking but the source was the Export Promotion
J; Scheme. According to the appellant(s), in the case of sale of
import entitlements/REP licence, the source was the Scheme
framed by Government of India whereas in the case of DEPB/
duty drawback, the source was the fact of payment of duty in H
l'
,----

1048 SUPREME COURT REPORTS [2009) 13 {ADOL.) S.C.R.

t--
A respect of inputs consumed/utilized in the manufacture of - ).. ~-

goods meant for export. That, but for such payments of duty on
inputs used- in the manufacture of goods meant for exports,
industrial undertaking(s) would not be entitled to the benefit of
duty drawback/DEPB, notwithstanding, the Export Promotion
B Scheme of the Government and, therefore, there was a direct
and immediate nexus between payment of duty on such inputs
and receipt of duty drawback/DEPB. In this connection reliance
was placed on the judgment of the Gujarat High Court in the -f
l-
case of CIT v. India Gelatine and Chemicals Ltd. reported in
275 ITR 284. Lastly, it was submitted on behalf of the
c appellant(s) that there was no difference between Advance
Licence Scheme and duty drawback/DEPB. In this connection
it was urged that duty drawback regime required the industrial
undertaking to pay in the first instance the duty on inputs and
thereafter seek reimbursement on profit of goods manufactured
D -~-
using such duty paid inputs, having been exported. The
industrial undertaking alternatively could avail of Advance ' )If

Licence Scheme whereunder the industrial undertaking could
import inputs to be used for manufacture of goods meant for
export without payment of duty. In the case where the industrial
E - undertaking enjoyed the benefit of Advance Licence Scheme,
the profit as shown in Profit & Loss account was regarded as
income derived from industrial undertaking entitled to deduction
y
under Section 80-IB of the 1961 Act without any adjustment
whereas when the same industrial undertaking when it opts for
F duty drawback is denied the benefit of deduction under Section
80-18 on the duty remitted.
9. On behalf of the appellant(s) it was submitted that
Section 80-IB was different from Section 80-1 in the sense that
G under Section 80-IB, income derived from business of an
industrial undertaking was admissible for deduction whereas
under Section 80-1 deduction was allowable to income derived ;t
from industrial undertaking. Hence, according to the appellant(s)
provision of Section 80-18 was much wider in scope than
Section 80-1. According to the appellant(s) Section 80-18 was
H
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1049
[S.H. KAPADIA, J.]
J., ~ wider than Section 80-1 as the Legislature intended to give A
) benefit of deduction not only to profits derived from the
undertaking but also to give benefit of deduction in respect of
incomes having direct nexus with the profits of the undertaking,
hence, all incomes that arose during the cou..Se of running of
i the eligible business would be eligible for deduction under 8
Section 80-18, which would include income arising on sale of
t DEPl3 at premium.
-~
10. In reply, Shri Gourab Banerji, learned Additional
Solidtor General, submitted that, for application of the words
"derived from" there must be a direct nexus between the profit c
and the industrial undertaking. According to the learned senior
counsel, merely because under the Sc'1eme to encourage
expo11s a certain amount was repaid as "duty drawback", it
.~
cannot be regarded as profit· "derived from" the industrial
undertaking. It may constitute profit from business under D
I ~ . Secti()n 28, but it cannot be construed as profits "derived from"
the industrial undertaking, for its immediate and proxin1ate
"' source was not the industrial undertaking but the scheme for
"duty drawback". According to the learned counsel, this position
was placed beyond doubt by a judgment of this Court in Sterling E
Food (supra). Therefore, according to the learned counsel, the
source of duty drawback was not the industrial undertaking but
T the duty drawback scheme of the Central Government
-· where-under the duty drawback entitlement became available.
According to the learned counsel, duty drawback, therefore, F
would stand on the same footing as import entitlements and
could not be said to be derived from industrial undertaking.
Reliance was also placed on the judgment of this Court in
Pandian Chemicals Ltd. v. CIT reported in 262 ITR 278.
According to the learned counsel, duty drawback was a matter G
'ti
of policy, hence, the proximate and immediate source of duty
~\
drawback cannot be industrial undertaking. On interpretation of
Section 80-18, learned senior counsel submitted that what was
relevant for Section 80-18(1) was profits derived from an eligible
business. According to the learned counsel, various eligible H
1050 SUPREME COURT REPOR~[2009] 13 (ADDL.) S.C.R.
A businesses are enumerated in sub-sections (3) to (11) of
. )..._
Section 80-IB. A perusal of sub-sections (3), (4) and (5) would
also show that eligible business under those provisions means
certain specific undertakings. In contrast, sub-sections (6) and
(7) cover the business of a ship, hotel etc. Thus, for all practical
B purposes, according to the learned counsel, the section has
used the words "eligible business" and "industrial undertaking"
interchangeably and, therefore, there is no material difference
between Section 80-1 and Section 80-IB as in both cases -f
profits have to be derived from an industrial undertaking. ~-

c 11. Relevant provisions of the Income Tax Act, 1961:

Deductions to be made with reference to the income
included in the gross total income.

80-AB. Where any deduction is required to be made or
D )..,
allowed under any section included in this Chapter under
the heading "C.-Deductions in respect of certain incomesn ., ,;
in respect of any income of the nature specified in that
section which is included in the gross total income of the ..
assessee, then, notwithstanding anything contained in that
E section, for the purpose of computing the deduction under
that section, the amount of income of that nature as
computed in accordance with the provisions of this Act
(before making any deduction under this Chapter) shall T
alone be deemed to be the amount of income of that
F nature which is derived or received by the assessee and
which is included in his gross total income.

Deduction in respect of profits and gains from industrial
undertakings after a certain date, ~tc. .,.__

G 80-1. (1) Where the gross total income of an assessee
includes any profits and gains derived from an industrial
undertaking or a ship or the business of a hotel or the r
business of repairs to ocean-going vessels or other
powered craft, to which this section applies, there shall, in
H accordance with and subject to the provisions of this
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1051
[S.H. KAPADIA, J.]
;._ . A
-section, be allowed, in computing the total income of the
assessee, a deduction from such profits and gains of an
amount equal to twenty per cent thereof :

Provided that in the case of an assessee, being a
company, the provisions of this sub-section shall have
B
effect in relation to profits and gains derived from an
industrial undertaking or a ship or the business of a hotel
)--
-~
as if for the words "twenty per cent", the words "twenty-five
per cent" had been substituted.

Deductions in respect of profits and gains from industrial c
undertakings or enterprises engaged in infrastructure
development, etc.

" 80-IA (1) Where the gross total income of an assessee
A includes any profits and gains derived by an undertaking D.
... ~ or an enterprise from any business referred to in sub-
section (4) (such business being hereinafter referred to as
'> the eligible business), there shall, in accordance with and
subject to the provisions of this section, be allowed, in
computing the total income of the assessee, a deduction
of an amount equal to hundred per cent of the profits and E
gains derived from such business for ten consecutive
1 assessment years.

)()()(
...
F
(4) This section applies to-

(i) any enterprise carrying on the business of (i) developing
or (ii) operating and maintaining or (iii) developing,
operating and maintaining any infrastructure facility which
fulfils all the following conditions, namely :- G
...
o(
(a) it is owned by a company registered in India or by a
consortium of such companies;

(b) it has entered into an agreement with the Central
I I
Government or a State Government or a local authority or H
1052 SUPREME COURT REPORTS [2009] 13 (ADDL.} S.C.R.

A any other statutory body for (i) developing or (ii) operating
and maintaining or (iii) developing, operating and
·A
maintaining a new infrastructure facility;

(c) it has started or starts operating and maintaining the
infrastructure facility on or after the 1st day of April, 1995:
B
Provided that where an infrastructure facility is transferred
on or after the 1st day of April, 1999 by an enterprise which
~·
developed such infrastructure facility (hereafter referred to
~-
in this section as the transferor enterprise) to another
c enterprise (hereafter in this section referred to as the
transferee enterprise) for the purpose of operating and
maintaining the infrastructure facility on its behalf in
accord_ance with the agreement with the Central
Government, State Government, local authority or statutory
D body, the provisions of this section shall apply to the >..
transferee enterprise as if it were the enterprise to which ~ .,
this clause applies and the deduction from profits and
gains would be available to such transferee enterprise for
the unexpired period during which the transferor enterprise
E would have been entitled to the deduction, if the transfer
had not taken place.

Explanation.-For the purposes of this clause, "infrastructure
facility" means- y

F (a) a road including toll road, a bridge or a raiJ
system;

(b) a highway project including housing or other
activities being an integral part of the highway
project;
G
(c) a water supply project, water treatment system,
irrigation project, sanitation and sewerage system .,.,.
or solid waste management system; •
(d) a port, airport, inland waterway or inland port;
H "
I
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1053
[S.H. KAPADIA, J.)
... - (ii) any undertaking which has started or starts providing A
telecommunication services whether basic or cellular,
including
. radio paging, .domestic satellite service, network
of trunking, broadband. network and internet services on
or after the 1st day of April, 1995, but on or before the 31st
day of March, 2003. 8
Explanation.-For the purposes of this clause, "domestic
r satellite• means a satellite owned and operated by an
-·· Indian company for providing telecommunication service;
..,- ....
(iii) any undertaking which develops, develops and c
operates or maintains and operates an industrial park or
. special economic zone notified by the Central Government
in accordance with the scheme framed and notified by that
Government for the period beginning on the 1st day of
..... April, 1997 and ending ori the 31st day of March, 2006: D
~ . Provided that in a case where an undertaking develops
an industrial park on or after the 1st day of April; 1999 or
a special economic zone on or after the 1st day of April,
2001 and transfers the operation and maintenance of such
. industrial park or such special economic zone, as the case E
may be, to another undertaking (hereafter in this section
referred to as the transferee undertaking); the deduction
-y under sub-section (1) shall be allowed to such transferee
undertaking for the remaining period in the ten consecutive
-· assessment years as if the operation and maintenance F
were not so transferred to the transferee undertaking;
(iv) an.undertaking which,-
(a) is set up in any part of India for the generation or
generation and distribution of power if it begins to G
generate power at. any time during the period beginning
~ on the 1st day of April, 1993 and ending on the 31st day
of March, 2006 ;
(b) starts transmission or distribution by laying a network
of new transmission or distribution lines at any time during H
1054 SUPREME CQURT REPORTS [2009] 13 (ADDL) S.C.R.

A the period beginning on the 1st day of April, 1999 and - )._
ending on the 31st day of March, 2006:
Provided that the deduction under this section to an
undertaking under sub-clause (b) shall be allowed only in
relation to the profits derived fron:i laying of such network
B . of new lines for transmission or distribution;
· (5) Notwithstanding anything contained in any other
provision of this Act, the profits and gains of an eligible
business to which the provisions of sub-section (1) apply
1-
c · shall, for the purposes of determining the quantum of
deduction under that sub-section for the assessment year
immediately succeeding the initial assessment year or any
subsequent assessment year, be computed as if such
· eligible business were the only source of income of the
assessee during the previous year relevant to the initial ).._
.
D
assessment year and to every subsequent assessment
year up to and including the assessment year for which the ."
determination is to be made.
Deduction in respect of profits and gains from certain
E industrial undertakings other than infrastructure,._.--
I
development undertakings
80-18 (1) Where the gross total income of an assessee y
includes any profits and gains derived from any business
. referred to in sub-sections (3) to (11) and (11A) (such ·~
F business being hereinafter referred to as the eligible
business). there shall, in accordance with and subject to
the provisions of this section, be allowed, in computing the
total income of the assessee, a deductiori from such
profits and gains of an amount equal to such percentage
G and for such number of assessment years as specified in
· this section. · '·
J'~
(2) This section applies to any industrial undertaking which
fulfils all the following conditions, namely: -.'.

H (i) it is not formed by splitting up, or the reconstruction, of
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX 1055
[S.H. KAPADIA, J.]
..4 • a business already in existence : A
Provided that this condition shall not apply in respect of
an industrial undertaking which is formed as a result of the
re-establishment, reconstruction or revival by the assessee
of the business of any such industrial undertaking as is
referred to in section 338, in the circumstances and within B
the period specified in that section;
)'
-~
(ii) it is not formed by the transfer to a new business of
machinery or plant previously used fQr any purpose;
(iii) it manufactures or produces any article or thing, ·not c
being any article or thing specified in the list in the Eleventh
Schedule, or operates one or more cold storage plant or
plants, in any part of India :
Provided that the condition in this clause shall, in relation
""' to a small scale industrial undertaking or an industrial
D
". undertaking referred to in sub-section (4) shall apply as if
I

the words "not being any article or thing specified in the
list in the Eleventh Schedulen had been omitted.
Explanation 1.-For the purposes of clause (ii), any E
machinery or plant which was used outside India by any
person other than the assessee shall not be regarded as
y machinery or plant previously used for any purpose, if the
following conditions are fulfilled, namely:-
(a) such machinery or plant was not, at any time previous F
to the date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any
country outside India; and
(c) no deduction on account of depreciation in respect of G
such machinery or plant has been allowed or is allowable
under the provisions of this Act in computing the total
income of any person for any period prior to the date of
the installation of the machinery or plant by the assessee.
H
1056 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A Explanation 2.-Where in the case of an industrial - ).
undertaking, any machinery or plant or any part thereof
previously used for any purpose is transferred to a new
business and the total value of the machinery or plant or
part so transferred do.es not exceed twenty per cent of the
B total value of the machinery or plant used in the business,
then, for the purposes of clause (ii) of this sub-section, the
· condition specified therein shall be deemed to have been
"(
complied with; ~-

(iv) in a case where the industrial undertaking
c manufactures or produces articles or things; the
undertaking employs ten or more workers in a
manufacturing process carried on with the aid of power,
or employs twenty or more workers in a manufacturing
process carried on without the aid of power.
., )..,
D
. (3) The amount of deduction In the case of an industrial . ~

undertaking shall be twenty-five per cent (or thirty per cent
where the assessee is a company), of the profits and gains
d~rived from such industrial undertaking for a period of ten
consecutive assessment years (or twelve consecutive ~
E assessment years where the assessee is a co-operative
~

society) beginning with the initial assessment year subject
to the fulfillment of the following conditions, namely: - )' I

(i) it begins to manufacture or produce, articles or things
•
.~

F or to operate such plant or pfants at any time during the ....
period beginning from the 1st day of April, 1991 and
ending on the 31st day of March, 1995 or such further
period as the Central Government may, by notification in
the Official Gazette, specify with reference to any particular -..
undertaking;
G
(ii) where it is an industrial undertaking being a small scale
industrial undertaking, it begins to manufacture or produce xl=
articles or things or to operate Its cold storage plant not
specified in sub-section (4) or sub-section (5) at any time
H during the period beginning on the 1st day of April, 1995
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1057
[S.H. KAPADIA, J.]

... . and ending on the 31st day of March, 2002 . A
- )()()(

(13) The provisions contained in sub-section (5) and sub-
sections (7) to (12) of section 80-IA shall, so far as may
be, apply to the eligible business under this section. B
Discussions and Findings:
'r 12. In this batch of Civil Appeals we are concerned with
-1
admissibility of the amounts of duty drawback and DEPB for
deduction under Section 80-18. c
.
13. Before analyzing Section 80-18, as. a prefatory note, it
needs to be mentioned that the 1961 Act broadly provides for
two types of tax incentives, namely, investment linked incentives
and profit linked incentives. Chapter VI-A which provides for
~ incentives in the form of tax deductions essentially belong to D
'I • the category of "profit linked incentives". Therefore, when
Section 80-IA/80-1 B refers to profits derived from eligible
--f business, it is not the ownership of that business which attracts
the incentives. What attracts the incentives under Section 80-
IA/80-18 is the generation of profits (operational profits). For E
example, an assessee company located in Mumbai may have
a business of building housing projects or a ship in Nava

... ....
'( Sheva. Ownership of a ship per se. will not attract Section 80-
18(6). It is the profits arising from the business of a ship which
attracts sub-section (6). In other words, deduction under sub- F
section (6) at the specified rate has linkage to the profits
derived from the shipping operations. This is what we mean in
drawing the distinction between profit linked tax incentives and
investment linked tax incentives. It is for this reason that
Parliament has confined deduction to profits derived from G
eligible businesses mentioned in sub-sections (3) to (11A) [as
JI., they stood at the relevant time]. One more aspect needs to be
highlighted. Each of the eligible business in sub-sections (3)
to (11A) constitutes a stand-alone item in the matter of
computation of profits. That is the reason why the concept of
H
1058 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

-)._
A "Segment Reporting" stands introduced in the Indian
Accounting Standards (IAS} by the Institute of Chartered
Accountants of India (ICAI}.
14. Analysing Chapter VI-A, we find that Sections 80-18/
80-IA are the Code by themselves as they contain both
8 substantive as well as procedural provisions. Therefore, we
need to examine what these provisions prescribe for
"computation of profits of the eligible business". It is evident that y
f-
Section 80-18 provides for allowing of deduction in respect of
profits and gains derived from the eligible business. The words
c "derived from" is narrower in connotation as compared to the
words "attributable to". In other words, by using the expression
"derived from", Parliament intended to cover sources not
beyond the first degree. In the present batch of cases, the
controversy which arises for determination is: whether the ;.._
D DEPB credit/ Duty drawback receipt comes within the first
degree sources? According to the assessee(s}, DEP8 credit/
. ~

duty drawback receipt reduces the value of purchases (cost
neutralization), hence, it comes within first degree source as it
increases the net profit proportionately. On the other hand,
E according to the Department, DEPB credit/duty drawback
receipt do not come within first degree source as the said
incentives flow from Incentive Schemes enacted by the
'(
Government of India or from Section 75 of the Customs Act,
1962. Hence, according to the Department, in the present
cases, the first degree source is the incentive scheme/. ...
F
provisions of the Customs Act. In this connection, Department
places heavy reliance on the judgment of this Court in Sterling
Food (supra}. Therefore, in the present cases, in which we are
required to examine the eligible business of an industrial
undertaking, we need to trace the source of the profits to
G
manufacture. (see CIT v. Kirloskar Oil Engines Ltd. reported
in (1986) 157 ITR 762}
15. Continuing our analysis of Sections 80-IA/80-18 it may
be. mentioned that sub-section ( 13} of Section 80-18 provides
"
H for applicability of the provisions of sub-section (5) and sub- .
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1059
[S.H. KAPADIA, J.]
sections (7) to (12) of Section 80-IA, so far as may be, A
.... -
applicable to the eligible business under Section 80-18.
Therefore, at the outset, we stated that one needs to read
Sections 801, 80-IA and 80-18 as having a common Scheme.
On perusal of sub-section(5) bf Section 80-IA, it is no.ticed that
it provides for manner of computation of profits of an eligible 8
business. Accordingly, such profits are to be computed as if
such eligible business is the only source of income of the
...,, assessee. Therefore, the devices adopted to reduce or inflate
_,
the profits of eligible business has got to be rejected in view
of the overriding provisions of sub-section (5) of Section 80- c
IA, which are also required to be read into Section 80-18. [see
Section 80-18(13)]. We may reiterate that Sections 801, 80-IA
and 80-18 have a common scheme and if so read it is clear
that the said sections provide for incentives in th~ form of
deduction(s) which are linked to profits and not to investment. o,
A
On analysis of Sections 80-IA and 80-18 it becomes clear that
~ . any industrial undertaking, which becomes eligible on satisfying
sub-section(2), would be entitled to deduction under sub-
section (1) only to the extent of profits derived from such
industrial undertaking after specified date(s). Hence, apart from
eligibility, sub-section(1) purports to restrict the quantum of E
deduction to a specified percentage of profits. This is the
importance of the words "derived from industrial undertaking"
'f as against "profits attributable to industrial undertaking".

.,._ 16. DEP8 is an incentive. It is given under Duty Exemption F
Remission Scheme. Essentially, it is an export. incentive. No
doubt, the object behind DEPB is to neutralize the incidence
of customs duty payment on the import content of export
product. This neutralization is provided for by credit to customs
duty against export product. Under DEP8, an exporter may
G
apply for credit as percentage of FOB value of exports made
in freely convertible currency. Credit is available only against
ft, the export product and at rates specified by DGFT for import
of raw materials, components etc .. DEPB credit under the
Scheme has to be calculated by taking into account the
H
1060 SUPREME COURT REPORTS [2009] 13 (ADDL.) S.C.R.

A deemed import content of the export product as per bas.ic - )...
customs duty and special additional duty payable on such
deemed imports. Therefore, in our view, DEPB/Duty Drawback
are incentives which flow from the Schemes framed by Central
Government or from Section 75 of the Customs Act, 1962, ...
B hence, incentives profits are not profits derived from the eligible
business under Section 80-IB. They belong to the category of
ancillary profits of such Undertakings. y
{-
. 17. The next question is - what is duty drawback? Section
75 of the Customs Act, 1962 and Section 37 of the Central
c Excise Act, 1944 empower Government of India to provide for
repayment of customs and excise duty paid by an assessee.-
The refund is of the average amount of duty, paid on materials
of any particular class or description of goods. used in the ·
manufacture of export goods of specified class. The Rules do
. I
A
D not envisage a refund of an amount arithmetically equal to
customs duty or central excise duty actually paid by an . "
individual importer-cum-manufacturer. Sub-section (2) of
Section 75 of the Customs Act requires the amount of
drawback fo be determined on a consideration of all the
E circumstances prevalent in a particular trade and also based
on the facts situation relevant in respect of each of various
classes of goods imported. Basically, the source of duty
)"'
drawback receipt lies in Section 75 of the Customs Act and

F
Section 37 of the Central Excise Act.
18. Analysing the concept of remission of duty drawback
and DEPB, we are satisfied that the remission of duty is on
-
account of the statutory/policy provisions in the Customs Act/
Scheme(s) framed by the Government of India. In the
circumstances, we hold that profits derived by way of such
G incentives do not fall within the expression "profits derived from
industrial undertaking" in Section 80-IB.
~
19. Since reliance was placed on behalf of the
assessee(s) on AS-2 we need to analyse the said Standard.

H 20. AS-2 deals with Valuation of Inventories. Inventories
LIBERTY INDIA v. COMMISSIONER OF INCOME TAX1061
(S.H. KAPADIA, J.]

A· are assets held for sale in the course of business; in the A
• production for such sale or in form of materials or supplies to
be consumed in the production.
21. "Inventory" should be valued at the lower of cost and
net realizable value (NRV). The cost of "inventory" should
comprise all costs of purchase, costs of conversion and other B
costs including costs incurred in bringing the "inventory" to their
present location and condition.

~

' "
~ t
22. The cost of purchase includes duties and taxes (other
than those subsequently recoverable by the enterprise from
taxing authorities), freight inwards and other expenditure
c
directly attributable to the acquisition. Hence·trade discoun'ts,
rebate, duty drawback, and such similar items are deducted
in determining the costs of purchase. Therefore, duty
drawback, rebate etc. should not be treated as adjustment D
"'-
(credited) to cost of purchase or manufacture of goods. They
"' . should be treated as separate items of revenue or income and
accounted for accordingly (see: page 44 of Indian Accounting
Standards & GAAP by Dolphy D'souza). Therefore, for the
purposes of AS-2, Cenvat credits should not be included in the
cost of purchase of inventories. Even Institute of Chartered E
Accountants of India (ICAI) has issued Guidance Note on
Accounting Treatment for Cenvat/Modvat under which the inputs
r consumed and the inventory of inputs should be valued on the
_._. basis of purchase cost net of specified duty on inputs (i.e. duty
recoverable from the Department at later stage) arising on F
account of rebates, duty drawback, DEPB benefit etc. Profit
generation could be on account of cost cutting, cost
rationalization, business restructuring, tax planning on sundry
balances being written back, liquidation of current assets etc.
Therefore, we are of the view that duty drawback, DEPB G
benefits, rebates etc. cannot be credited against the cost of
manufacture of goods debited in the Profit & Loss account for
purposes of Sections 80-IA/80-18 as such remissions (credits)
would constitute independent source of income beyond the first
degree nexus between profits and the industrial undertaking. H.
1062 SUPREME COURT REPORTS (2009) 13 (ADDL.) S.C.R.

A 23. We are of the view that Department has correctly
applied AS-2 as could be seen from the following illustration:

Expenditure ~
Amount Income Amount
(Rs.) (Rs.)
B
Opening stock 100 Sales 1,000 >-

Purchases (including 500 Duty Drawback 100
.., ~-
f~
customs duty paid) received
c Manufacturing overheads 300 Closing stock 200 r
Administrative, Selling
and Distribution Exp. 200
D ~
Net profit 200
. .,,
1,300 1,300

E Note: In above example, Department is allowing
deduction on profit of Rs. 100 under Section 80-18
of the 1961 Act.
"(
24. In the circumstances, we hold that Duty drawback
receipt/DE~B benefits do not form part of the net profits of
F eligible industrial undertaking for the purposes of Sections 801/ •,

80-IA/80-1 B. of the 1961 Act.

25. The appeals are, accordingly, dismissed with no order
as to costs.
G R.P. Appeals dismissed.

~
....