Income Tax | Duty Drawback Not Eligible for 80-IC Relief ; Taxes on Raw Materials Must Be Set Off: Delhi High Court

The Delhi High Court has held that while duty drawback receipts are not eligible for deduction under Section 80-IC of the Income Tax Act, the excise and customs duties paid by a taxpayer on raw materials are required to be deducted/subsumed from the duty drawback while recomputing income in the facts of the case.

A Division Bench of Justices Dinesh Mehta and Vinod Kumar partly allowed the appeal filed by Narayan Industries against ITAT order denying its claim for deduction under Section 80-IC in respect of duty drawback income.

The question before the Court was whether duty drawback qualifies for Section 80-IC deduction. The Court also framed an additional question regarding whether excise and customs duties paid on raw materials should be deducted from the duty drawback received.

During the hearing however, the Appellant conceded that the issue stood concluded against it by the Supreme Court's rulings in Liberty India v. CIT (2009) and CIT v. Sterling Foods (1999).

Following these precedents, the High Court affirmed that duty drawback has no direct nexus with the industrial undertaking and therefore cannot be treated as profits “derived from” such undertaking for Section 80-IC purposes.

However, the Court proceeded to consider whether the excise and customs duties embedded in the cost of raw materials purchased by the assessee should be deducted from the duty drawback received, even if duty drawback is excluded from eligible profits.

The Bench noted that in earlier assessment years (2013-14 and 2015-16), the ITAT had already directed the Assessing Officer to allow such netting, and those orders had attained finality. It thus emphasised that there should not be inconsistent tax treatment for the same assessee across different years on identical issues.

“There cannot be two different treatments for the very same assessee in the sense that in one year he does not get deduction of the duty paid while adding back the duty drawback in his income and for the other two years, it gets such advantage,” it said.

Accordingly, while rejecting the claim for Section 80-IC deduction on duty drawback, the Court set aside the addition to the extent of the gross duty drawback amount and remanded the matter to the Assessing Officer to recompute the income after allowing deduction of the embedded duties paid.

For Appellant: Advocates Rohit Jain, Aniket D. Agrawal and Abhisek Singhvi

For Respondent: Advocate Ruchir Bhatia SSC with Mr. Anant Mann JSC.