Interest on central excise duty refund is taxable under the Income Tax Provisions

Income-tax Appellate Tribunal (ITAT), Amritsar, stated that companies with operations in the north-east, Jammu & Kashmir and Himachal Pradesh, will be legally responsible to pay tax on Central excise duty refunds. Companies, such as Balaji Alloys, Raven Bhel and Pee Ell Alloys, moved the income tax appellate tribunal (ITAT) against an income-tax department notice that required them to give the tax.
However, the ITAT dismissed their appeal late last month. Other companies in anticipation of an ITAT decision on the issue include Sun Pharma, Kashmir Udyog and Avita Mobile Industries.

Central excise duty refunds are part of a government package with an aim to promote industrial development in J & K, northeast states and Himachal Pradesh. Under this scheme, central excise duty which is paid by the companies is refunded to them.

These companies in the region are exempted from income-tax too. Section 80 IB of the Income-tax Act provides for exemptions from taxation on profits derived from industrial activity in rearward areas. In Jammu & Kashmir, Section 80 IB will be functional till 2012.

In other areas, 100 % exemption is granted for five years after the establishment of an industry and only 25% of the profit derived from industrial profit is taxed for the next five years.

The tribunal, according to an order on November 26, accepted the statement of the I-T department that central excise duty refund is liable to be taxed, even though the company’s profit is exempt from taxation under 80 IB.

The department distinguished between excise refund and profit generated through industrial activities in these areas. It was pointed out thatCentral excise refund cannot be interpreted as profit derived from industrial activity.

The refunds are rather a benefit derived from a government scheme and distinct from profit derived from industrial activity. Therefore, refunds are not entitled for deductions under Section 80 IB of the Income-tax Act.