Income Tax Deductions Denied for Profit from DEPB and Duty Drawback Schemes, Supreme Court Rules

The Supreme Court of India, in a recent judgement, has held that profits derived from Duty Entitlement Pass Book (DEPB) and Duty Drawback Schemes are not eligible for deductions under Section 80-IB of the Income Tax Act, 1961. The bench comprising Justices M.R. Shah and B.V. Nagarathna delivered the verdict on April 10, 2023.

The court examined the relevant provisions of the Income Tax Act, including Section 28 and Section 80-IB. It noted that profits from DEPB and Duty Drawback Schemes fall under the category of incentives provided by the government or the Customs Act, and are therefore considered ancillary profits rather than profits derived directly from industrial undertakings.

The court referred to its earlier decisions in the cases of Liberty India and Sterling Foods, where a similar issue was considered. It upheld the reasoning in those cases, emphasizing that DEPB and Duty Drawback Schemes are not related to the business of manufacturing or selling products but are export incentives. The court concluded that such incentives do not qualify as profits derived from industrial undertakings for the purpose of claiming deductions under Section 80-IB.

The court also distinguished the case of Meghalaya Steels Limited, which involved subsidies directly affecting the cost of manufacturing, stating that it was not applicable to the present scenario.

Supreme Court held that the respondent-assessee was not entitled to deductions under Section 80-IB on the profit earned from DEPB and Duty Drawback Schemes. It further clarified that any contrary decisions by other High Courts on this issue would no longer be considered valid.

Date of Decision: April 10, 2023

M/s. Saraf Exports VS Commissioner of Income Tax, Jaipur-III