Can I count DEPB credits and duty drawback in the profits for my 80-IB deduction?
No. 'Derived from' is narrower than 'attributable to' and confines eligible profits to sources not beyond the first degree. DEPB and drawback flow from Government schemes rather than from the manufacturing activity, so they are ancillary profits outside the deduction.
Decided by the Supreme Court (Supreme Court of India — S.H. Kapadia and Aftab Alam, JJ. (judgment delivered by Kapadia, J.)) on 2009-08-31, reported as (2009) 317 ITR 218 (SC); (2009) 183 Taxman 349 (SC); (2009) 225 CTR 233 (SC); Civil Appeal No. 5891 of 2009 and connected appeals. It bears on section 80-IB, section 80-IA of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This favours the revenue and is the case the department opens with on any incentive-linked deduction. The test is about the immediate source of the receipt, not about which section the claim is under, which is why it gets applied well beyond export incentives. If your client's eligible profit contains anything that is not operational income, assume this will be raised and quantify the exposure before the assessment rather than after.
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The assessee, a partnership firm owning a small scale industrial undertaking that made fabrics from yarn and textile items such as cushion and pillow covers, claimed deduction under s.80-IB for assessment year 2001-02 on increased profits of Rs 22,70,056 credited to its profit and loss account as Duty Entitlement Pass Book credit and duty drawback. The Assessing Officer refused the deduction on the strength of CIT v. Sterling Foods [1999] 237 ITR 579 (SC), holding these were export incentives and not profits derived from the industrial undertaking. The Commissioner (Appeals) split the two: duty drawback was inextricably linked to production cost and qualified, but Rs 20,95,740 received on sale of the DEPB licence did not. On the Revenue's appeal the Tribunal held duty drawback also did not qualify, following CIT v. Ritesh Industries Ltd. [2005] 274 ITR 324 (Delhi). The Punjab and Haryana High Court agreed, and the matter came to the Supreme Court with a batch of connected appeals raising the same question under ss.80-I, 80-IA and 80-IB.
The assessee's appeal was dismissed and the Punjab and Haryana High Court affirmed. Duty drawback receipts and DEPB benefits do not form part of the net profits of an eligible industrial undertaking for the purposes of ss.80-I, 80-IA and 80-IB. Their source is the incentive scheme framed by the Central Government, or s.75 of the Customs Act, 1962 and s.37 of the Central Excise Act, 1944, and not the industrial undertaking; they are ancillary profits, beyond the first degree.
Chapter VI-A incentives are profit-linked rather than investment-linked, so what attracts s.80-IA and s.80-IB is not ownership of an eligible business but the generation of operational profits from it — owning a ship does not attract s.80-IB(6); the profits of the shipping business do. Each eligible business is a stand-alone item for computing profits, which is why segment reporting matters. Sections 80-I, 80-IA and 80-IB share a common scheme, and s.80-IB(13) carries s.80-IA(5) into s.80-IB: profits of the eligible business are to be computed as if that business were the assessee's only source of income, so devices to inflate or reduce those profits must be rejected. Against that background 'derived from' is narrower than 'attributable to' and confines eligible profits to sources not beyond the first degree, so the source of the profit must be traced to manufacture. DEPB is an export incentive under the Duty Exemption Remission Scheme, calculated on the deemed import content of the export product at rates fixed by the DGFT; duty drawback under s.75 of the Customs Act is a refund of an average amount for a class of goods and is not arithmetically equal to what any individual manufacturer paid. Both flow from statute or policy and not from the undertaking. The assessee's argument that AS-2 requires drawback to be netted against the cost of purchase was rejected: under AS-2 and the ICAI Guidance Note on Cenvat/Modvat such credits are separate items of revenue, not adjustments to manufacturing cost, so they are an independent source of income beyond the first degree.
The words "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.
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Handle my notice → Ask a CA on WhatsAppNo. 'Derived from' is narrower than 'attributable to' and confines eligible profits to sources not beyond the first degree. DEPB and drawback flow from Government schemes rather than from the manufacturing activity, so they are ancillary profits outside the deduction. This was decided by the Supreme Court (Supreme Court of India — S.H. Kapadia and Aftab Alam, JJ. (judgment delivered by Kapadia, J.)) and bears on section 80-IB, section 80-IA of the Income Tax Act 1961. It is reported as (2009) 317 ITR 218 (SC); (2009) 183 Taxman 349 (SC); (2009) 225 CTR 233 (SC); Civil Appeal No. 5891 of 2009 and connected appeals. This favours the revenue and is the case the department opens with on any incentive-linked deduction. The test is about the immediate source of the receipt, not about which section the claim is under, which is why it gets applied well beyond export incentives. If your client's eligible profit contains anything that is not operational income, assume this will be raised and quantify the exposure before the assessment rather than after. If it applies to you, the first step is this: Break the eligible profit into its components and identify the immediate source of each before filing the claim or the reply.
The assessee, a partnership firm owning a small scale industrial undertaking that made fabrics from yarn and textile items such as cushion and pillow covers, claimed deduction under s.80-IB for assessment year 2001-02 on increased profits of Rs 22,70,056 credited to its profit and loss account as Duty Entitlement Pass Book credit and duty drawback. The Assessing Officer refused the deduction on the strength of CIT v. Sterling Foods [1999] 237 ITR 579 (SC), holding these were export incentives and not profits derived from the industrial undertaking. The Commissioner (Appeals) split the two: duty drawback was inextricably linked to production cost and qualified, but Rs 20,95,740 received on sale of the DEPB licence did not. On the Revenue's appeal the Tribunal held duty drawback also did not qualify, following CIT v. Ritesh Industries Ltd. [2005] 274 ITR 324 (Delhi). The Punjab and Haryana High Court agreed, and the matter came to the Supreme Court with a batch of connected appeals raising the same question under ss.80-I, 80-IA and 80-IB. The matter was decided on 2009-08-31 by the Supreme Court (Supreme Court of India — S.H. Kapadia and Aftab Alam, JJ. (judgment delivered by Kapadia, J.)). On those facts the Supreme Court held as follows. The assessee's appeal was dismissed and the Punjab and Haryana High Court affirmed. Duty drawback receipts and DEPB benefits do not form part of the net profits of an eligible industrial undertaking for the purposes of ss.80-I, 80-IA and 80-IB. Their source is the incentive scheme framed by the Central Government, or s.75 of the Customs Act, 1962 and s.37 of the Central Excise Act, 1944, and not the industrial undertaking; they are ancillary profits, beyond the first degree.
Chapter VI-A incentives are profit-linked rather than investment-linked, so what attracts s.80-IA and s.80-IB is not ownership of an eligible business but the generation of operational profits from it — owning a ship does not attract s.80-IB(6); the profits of the shipping business do. Each eligible business is a stand-alone item for computing profits, which is why segment reporting matters. Sections 80-I, 80-IA and 80-IB share a common scheme, and s.80-IB(13) carries s.80-IA(5) into s.80-IB: profits of the eligible business are to be computed as if that business were the assessee's only source of income, so devices to inflate or reduce those profits must be rejected. Against that background 'derived from' is narrower than 'attributable to' and confines eligible profits to sources not beyond the first degree, so the source of the profit must be traced to manufacture. DEPB is an export incentive under the Duty Exemption Remission Scheme, calculated on the deemed import content of the export product at rates fixed by the DGFT; duty drawback under s.75 of the Customs Act is a refund of an average amount for a class of goods and is not arithmetically equal to what any individual manufacturer paid. Both flow from statute or policy and not from the undertaking. The assessee's argument that AS-2 requires drawback to be netted against the cost of purchase was rejected: under AS-2 and the ICAI Guidance Note on Cenvat/Modvat such credits are separate items of revenue, not adjustments to manufacturing cost, so they are an independent source of income beyond the first degree. In the words reproduced by the source cited on this page: "The words "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." The decision followed or applied CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC); Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC); CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 (Bom.).
It was decided by the Supreme Court on 2009-08-31 and is reported as (2009) 317 ITR 218 (SC); (2009) 183 Taxman 349 (SC); (2009) 225 CTR 233 (SC); Civil Appeal No. 5891 of 2009 and connected appeals. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 80-IB, section 80-IA, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The assessee's appeal was dismissed and the Punjab and Haryana High Court affirmed. Duty drawback receipts and DEPB benefits do not form part of the net profits of an eligible industrial undertaking for the purposes of ss.80-I, 80-IA and 80-IB. Their source is the incentive scheme framed by the Central Government, or s.75 of the Customs Act, 1962 and s.37 of the Central Excise Act, 1944, and not the industrial undertaking; they are ancillary profits, beyond the first degree. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 80-IB, section 80-IA of the Income Tax Act 1961, and was decided by Supreme Court of India — S.H. Kapadia and Aftab Alam, JJ. (judgment delivered by Kapadia, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where a receipt genuinely reduces manufacturing cost rather than arising from a scheme, establish that on the accounting treatment and the contract, since the Court examined that question. Do not argue that 'derived from' and 'attributable to' mean the same thing; that is the argument the Court rejected. Quantify the disallowance on the non-operational items yourself so that penalty exposure is contained.
Still good law. Separate search for later treatment: the Supreme Court (M.R. Shah and B.V. Nagarathna JJ) reaffirmed and followed Liberty India in Saraf Exports v CIT, Jaipur-III, 2023 SCC OnLine SC 385, decided 10 April 2023, holding that duty drawback receipts and DEPB benefits do not form part of the net profits of an eligible industrial undertaking for s.80-IB. The page this note was read from was a commercial publisher's write-up and has been removed as a source; the status has not been re-verified against the judgment itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Supreme Court reaffirmed this in Saraf Exports v. CIT, 2023 SCC OnLine SC 385, so there is no room to argue that the rule has softened with time. The date is 31 August 2009 and the Bench was Kapadia and Aftab Alam, JJ.; digests giving 2 September 2009 are wrong. It affirms the Punjab and Haryana High Court in Liberty India v. CIT [2007] 158 Taxman 462, and along with it CIT v. Lakhwinder Singh [2009] 317 ITR 209, CIT v. Ritesh Industries Ltd. [2005] 274 ITR 324 (Delhi) and Shakti Footwear v. CIT (No. 2) [2009] 317 ITR 199 (Mad.). Note the second string to the judgment, which is often overlooked: s.80-IB(13) imports s.80-IA(5), so profits of the eligible business are computed as if it were the only source of income, and the Court used that to reject devices that inflate eligible profits. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assessee's appeal was dismissed and the Punjab and Haryana High Court affirmed. Duty drawback receipts and DEPB benefits do not form part of the net profits of an eligible industrial undertaking for the purposes of ss.80-I, 80-IA and 80-IB. Their source is the incentive scheme framed by the Central Government, or s.75 of the Customs Act, 1962 and s.37 of the Central Excise Act, 1944, and not the industrial undertaking; they are ancillary profits, beyond the first degree.
TaxSphere, “Liberty India v CIT”, https://taxnotice.vittsphere.com/caselaw/case/liberty-india-v-cit-derived-from/ (validity last checked 2026-08-25)
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