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  THE HIGH COURT OF DELHI

Case No.  ITA 5/2015
Parties: CIT...Appellant          vs        Maithon Power Ltd
Coram:  Hon’ble Dr. Justice S. Muralidhar;  Hon'ble Mr. Justice Vibhu Bakhru
Order Date: 21-07-215                     

Question of Law:
Whether the ITAT was right in holding that refund of excise duty claimed by the Assessee Company from DGFT is not income under Section 5 read with Section 28(iii)(c) of the Act in the hands of Assessee Company?

Case Law Referred:
Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC)
CIT v. Bokaro Steel Ltd [1999] 236 ITR 315 (SC)
ACIT v. Indian Drugs & Pharmaceuticals Ltd [1983] 141 ITR 134 (Del)
CIT v. Karnataka Power Corporation [2001] 247 ITR 268 (SC)
CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392 (SC)

Facts of the Case:
The Assessee company was a joint venture of the Tata Power Company Ltd. and Damodar Valley Corporation and was incorporated with the principal object of operating and maintaining the electric power generating stations based on conventional/non-conventional resources. The Assessee in the relevant AY 2009-10 was in the process of setting up a thermal power generation plant at Maithon, Jharkhand. It applied to the Ministry of Power, Government of India for grant of mega power status which was under examination during the AY 2009-10. The project was at the stage of construction and installation of power plants, pending the grant of mega power status. The company paid excise duty of Rs.2606.45 lakhs to its vendors towards purchase of equipments. Subsequently, it lodged a claim for Rs.1246.29 lakhs with the DGFT under para 8.2(g) of the Foreign Trade Policy as  “deemed export benefits‟. The DGFT admitted the claim of the Assessee to the extent of Rs.1059.35 lakhs which was not reimbursed in the AY in question. The assessee company contended that being a part of the equipment cost, the excise duty had been accounted for as part of the project cost and the amount refunded will be reduced from the project cost.

However, The AO treated the excise duty drawback claimed by the Assessee as income of the Assessee in the year of the claim itself. The AO treated the draw back as income invoking Section 28(iii) (c) of the Income tax Act, 1961 which provides that “any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971” shall be chargeable to income under the head “Profits and gains of business or profession”

Judgment:
However, the Delhi High Court upheld the views of CIT(A) and the Tribunal and ruled that the duty drawback was related to the cost of acquisition of a capital asset which formed part of the overall project cost incurred in the pre-commissioning phase of the project. To that extent it would go to reduce the project cost and therefore cannot, in the AY in question, be treated as business income. In other words, any refund or drawback would go to ultimately reduce the cost of the project and had therefore to be treated as a capital receipt.

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Delhi High Court-Any Refund or Duty Drawback Ultimately Reduces Cost of Project and is Capital Receipt not Income u/s 28(iiic) | 22-07-2015 |