The officer has thrown Liberty India at us and removed foreign exchange gain, an excise duty refund and scrap sale proceeds from our s.80-IC profits. Are all three really outside 'derived from'?
No. The Gujarat High Court declined to interfere with concurrent findings that all three receipts were derived from the eligible undertaking. Exchange gain on export transactions retains its character as part of the export business even though it is realised in a later year; an excise duty refund reimburses a cost of manufacture and so falls within the Supreme Court's decision in Meghalaya Steels rather than within Liberty India, which was about DEPB and duty drawback under post-manufacture export incentive schemes; and scrap arises only because manufacturing happens, so its sale proceeds have the necessary first degree nexus.
Decided by the High Court (Sonia Gokani J and Sandeep N. Bhatt J) on 2023-01-03, reported as R/Tax Appeal No. 601 of 2022 (Gujarat High Court); reported at (2023) 451 ITR 403 (Guj). It bears on section 80-IC of the Income Tax Act 1961, in Deductions & Disallowances matters.
Liberty India is the officer's standard weapon and is very often applied too widely. This judgment shows where the line actually runs: an incentive conferred by a scheme after the goods leave the factory is outside, while something that is a direct consequence of, or a reimbursement of the cost of, the manufacturing itself is inside. Scrap, in particular, is a recurring small disallowance that is worth contesting.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2009-10 the assessee returned income of Rs 14,66,29,789 with book profit under s.115JB of Rs 64,90,33,459, and claimed deduction under s.80-IC in respect of its Baddi manufacturing unit. The Assessing Officer removed three items from the eligible profits on the ground that they lacked a first degree nexus with manufacture and were governed by Liberty India: foreign exchange gain of Rs 1,32,64,686, export benefit in the nature of excise duty refund of Rs 35,59,463, and scrap sale proceeds of Rs 14,26,979. The Commissioner (Appeals) deleted all three additions, holding that the exchange difference arose on import and export transactions of the business, that excise duty is paid and refunded only because manufacture takes place, and that scrap arises from the manufacturing process. The Tribunal dismissed the Revenue's appeal. The Revenue appealed to the High Court on all three items.
The appeal was dismissed. No substantial question of law arose on any of the three items. Foreign exchange gain on export transactions, the excise duty refund, and scrap sale proceeds were all held to be derived from the eligible industrial undertaking and eligible for deduction under s.80-IC.
On exchange gain the Court applied its own decision in CIT v ALPS Chemicals (P) Ltd, holding that a fluctuation arising on an export transaction does not lose its connection with the export business merely because it is realised in a later accounting year, and it distinguished Shah Originals, where the gain arose on an EEFC account after the export transaction was complete. On the excise duty refund it applied CIT v Meghalaya Steels Ltd, in which the Supreme Court held that a subsidy which reimburses a cost incurred in manufacture is derived from the undertaking, and it read Liberty India as confined to DEPB and duty drawback, which are conferred by schemes operating after manufacture. On scrap it followed CIT v Sadhu Forgings Ltd and DCIT v Harjivandas Juthabhai Zaveri, the reasoning being that if the assessee were not engaged in the industrial activity there would be no scrap at all, so the proceeds have the necessary direct nexus.
Issue being covered, no substantial question of law arises for consideration of this Court.
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Handle my notice → Ask a CA on WhatsAppNo. The Gujarat High Court declined to interfere with concurrent findings that all three receipts were derived from the eligible undertaking. Exchange gain on export transactions retains its character as part of the export business even though it is realised in a later year; an excise duty refund reimburses a cost of manufacture and so falls within the Supreme Court's decision in Meghalaya Steels rather than within Liberty India, which was about DEPB and duty drawback under post-manufacture export incentive schemes; and scrap arises only because manufacturing happens, so its sale proceeds have the necessary first degree nexus. This was decided by the High Court (Sonia Gokani J and Sandeep N. Bhatt J) and bears on section 80-IC of the Income Tax Act 1961. It is reported as R/Tax Appeal No. 601 of 2022 (Gujarat High Court); reported at (2023) 451 ITR 403 (Guj). Liberty India is the officer's standard weapon and is very often applied too widely. This judgment shows where the line actually runs: an incentive conferred by a scheme after the goods leave the factory is outside, while something that is a direct consequence of, or a reimbursement of the cost of, the manufacturing itself is inside. Scrap, in particular, is a recurring small disallowance that is worth contesting. If it applies to you, the first step is this: Classify each disputed receipt by its source, not by its label: ask whether it exists because manufacturing happened, or because a separate government scheme conferred a benefit after the event.
For assessment year 2009-10 the assessee returned income of Rs 14,66,29,789 with book profit under s.115JB of Rs 64,90,33,459, and claimed deduction under s.80-IC in respect of its Baddi manufacturing unit. The Assessing Officer removed three items from the eligible profits on the ground that they lacked a first degree nexus with manufacture and were governed by Liberty India: foreign exchange gain of Rs 1,32,64,686, export benefit in the nature of excise duty refund of Rs 35,59,463, and scrap sale proceeds of Rs 14,26,979. The Commissioner (Appeals) deleted all three additions, holding that the exchange difference arose on import and export transactions of the business, that excise duty is paid and refunded only because manufacture takes place, and that scrap arises from the manufacturing process. The Tribunal dismissed the Revenue's appeal. The Revenue appealed to the High Court on all three items. The matter was decided on 2023-01-03 by the High Court (Sonia Gokani J and Sandeep N. Bhatt J). On those facts the High Court held as follows. The appeal was dismissed. No substantial question of law arose on any of the three items. Foreign exchange gain on export transactions, the excise duty refund, and scrap sale proceeds were all held to be derived from the eligible industrial undertaking and eligible for deduction under s.80-IC.
On exchange gain the Court applied its own decision in CIT v ALPS Chemicals (P) Ltd, holding that a fluctuation arising on an export transaction does not lose its connection with the export business merely because it is realised in a later accounting year, and it distinguished Shah Originals, where the gain arose on an EEFC account after the export transaction was complete. On the excise duty refund it applied CIT v Meghalaya Steels Ltd, in which the Supreme Court held that a subsidy which reimburses a cost incurred in manufacture is derived from the undertaking, and it read Liberty India as confined to DEPB and duty drawback, which are conferred by schemes operating after manufacture. On scrap it followed CIT v Sadhu Forgings Ltd and DCIT v Harjivandas Juthabhai Zaveri, the reasoning being that if the assessee were not engaged in the industrial activity there would be no scrap at all, so the proceeds have the necessary direct nexus. In the words reproduced by the source cited on this page: "Issue being covered, no substantial question of law arises for consideration of this Court." The decision followed or applied CIT v. Meghalaya Steels Ltd (2016) 383 ITR 217 (SC) - followed; CIT v. ALPS Chemicals (P) Ltd (Gujarat High Court) - followed; CIT v. Sadhu Forgings Ltd (2011) 336 ITR 444 (Delhi) - followed; DCIT v. Harjivandas Juthabhai Zaveri - followed; Liberty India v. CIT (2009) 317 ITR 218 (SC) - distinguished; CIT v. Shah Originals - distinguished.
It was decided by the High Court on 2023-01-03 and is reported as R/Tax Appeal No. 601 of 2022 (Gujarat High Court); reported at (2023) 451 ITR 403 (Guj). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 80-IC, 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 taxpayer. The appeal was dismissed. No substantial question of law arose on any of the three items. Foreign exchange gain on export transactions, the excise duty refund, and scrap sale proceeds were all held to be derived from the eligible industrial undertaking and eligible for deduction under s.80-IC. It arises in Deductions & Disallowances matters, on section 80-IC of the Income Tax Act 1961, and was decided by Sonia Gokani J and Sandeep N. Bhatt 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. For exchange differences, tie the gain to identified export or import transactions of the eligible unit and show the link survives the change of accounting year. For an excise or similar refund, show it reimburses a duty actually borne on the manufacturing activity, and rely on CIT v Meghalaya Steels Ltd rather than trying to distinguish Liberty India on its own facts. For scrap, prove it is generated in the manufacturing process of the eligible unit and is not traded material.
Searched for later treatment; none was found. That is not the same as a source affirming it. Two probes and nothing. The citedby search returns no results. A second probe on the case name with section 80-IC turned up one later decision in the same assessee's own case, DCIT v Reckitt Benckiser Healthcare India Ltd (ITAT Ahmedabad, 16 July 2025); on opening it, the Tribunal decided the section 80-IC grounds on its own coordinate bench orders for AYs 2008-09 to 2010-11 and does not refer to this High Court judgment at all. So the holding - that scrap sales, foreign exchange gain on export realisations and an excise refund are derived from the eligible undertaking and qualify for deduction under section 80-IC - has not been applied, doubted or overruled by any later decision on record. A practitioner should be ready to argue it on the statutory language and on the Supreme Court authorities on 'derived from', rather than on citator weight. 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.
This is a short judgment. On each of the three issues the Court adopted the reasoning of earlier decisions - ALPS Chemicals (Guj) on exchange fluctuation, Meghalaya Steels (SC) on the refund, and Sadhu Forgings (Del) and Harjivandas Juthabhai Zaveri on scrap - and held that no substantial question of law arose. The sentence used as the key quote is the Court's own operative sentence at para 21, not a passage taken from any of those decisions. Question [C] as reproduced in the judgment contains an evident typographical error, referring to 's.89IC'. A companion appeal, R/Tax Appeal No. 604 of 2022, was decided by the same bench on the same day on the scrap issue alone (disallowance of Rs 27,26,726) and was dismissed as covered by Tax Appeal No. 601 of 2022 (https://indiankanoon.org/doc/29642233/); a reader searching the case name will find both and should know which is which. 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 appeal was dismissed. No substantial question of law arose on any of the three items. Foreign exchange gain on export transactions, the excise duty refund, and scrap sale proceeds were all held to be derived from the eligible industrial undertaking and eligible for deduction under s.80-IC.
TaxSphere, “Pr. CIT v Reckitt Benckiser Healthcare India Ltd”, https://taxnotice.vittsphere.com/caselaw/case/reckitt-benckiser-healthcare-80ic-scrap-forex-excise-refund/ (validity last checked 2026-09-07)
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My Himachal unit has had five years of 100 per cent deduction under section 80-IC. I have now carried out substantial expansion. Can I go back to 100 per cent for the next five years instead of 25 per cent?
My unit gets transport, power and interest subsidies from the State — does that money count as profit derived from the undertaking for section 80-IB or 80-IC?
My Himachal unit took the 100 per cent deduction under section 80-IC for five years and then I put in substantial expansion. Do I drop to 25 per cent, or can I go back to 100 per cent?
I filed my return on time but only claimed the section 80-IC deduction in a revised return. Does section 80AC kill the claim, and can the officer reopen an assessment in which he already allowed it?
