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

Civil Appeal · 2023 INSC 331Decided 10 Apr 2023
Civil Appeal No. 4822 of 2022
M.R. Shah · B.V. Nagarathna · C.T. Ravikumar as the second judge

Background

The appellant, a partnership firm exporting wooden handicraft items, claimed income-tax deductions under Section 80-IB for amounts received under the Duty Entitlement Pass Book (DEPB) scheme and the Duty Drawback scheme, both government export-incentive schemes that reimburse or offset customs duty on inputs used in exported goods. The tax department disallowed the deductions, and while the Income Tax Appellate Tribunal sided with the firm, the Rajasthan High Court reversed that and held the firm was not entitled to the deductions, relying on the Supreme Court's earlier rulings in Liberty India and Sterling Foods. The firm appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that Section 80-IB deductions are available only for profits "derived from" the actual business of an industrial undertaking (meaning income with a direct, first-degree nexus to manufacturing or production) and that DEPB and Duty Drawback benefits fail this test because they arise only after export takes place, one step removed from the manufacturing activity itself, and depend on a separate statutory export-incentive scheme rather than the profits of the industrial undertaking. The Court reaffirmed its earlier decisions in Liberty India and Sterling Foods on this point and held that a later decision in Meghalaya Steels, which the assessee relied on, did not actually conflict with or overrule them since it dealt with a different kind of subsidy (interest and transport subsidies, not an export-incentive scheme tied to customs duty). The High Court's ruling that the assessee was not entitled to the 80-IB deduction on DEPB and Duty Drawback income was therefore upheld, and the appeal was dismissed with no order as to costs.

Lesson Learnt

Tax deductions meant for profits "derived from" an industrial business do not automatically extend to every government incentive an exporter receives: export-linked incentives like DEPB and Duty Drawback are treated as one step removed from actual manufacturing profit and are not eligible for such deductions.

Official source (sci.gov.in)View Judgment (PDF)

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