Duty Drawback is Taxable Only in the Year of Receipt, Not on Accrual Basis

Facts

The Dispute: For the Assessment Year 2018-19, the primary conflict centered on the timing of taxability for export incentives, specifically duty drawback.
Department’s Stand: The Assessing Officer (AO) applied the mercantile system of accounting, arguing that duty drawback should be taxed on an accrual basis. The AO made an addition to the taxable income for the year in which the right to receive the drawback was established, regardless of when the funds were actually received.
Assessee’s Stand: The taxpayer contended that according to specific provisions in the Act, such incentives are governed by a unique set of rules that override general accounting methods, mandating taxability only upon actual receipt.

Decision

The Court/Tribunal ruled in favour of the assessee, directing the deletion of the addition made by the Assessing Officer.

Ratio Decidendi: The judgment was based on the interpretation of Section 145B(3) (corresponding to Section 278 of the Income-tax Act, 2025).
The Court held that while Section 145 generally allows for accrual-based accounting, Section 145B provides a specific exception for certain types of income mentioned in Section 28 (including duty drawback).
The statute creates a deeming fiction stating that such income shall be deemed to be the income of the previous year in which it is actually received. Therefore, the department cannot legally force an addition based on the mercantile/accrual principle when the specific provision mandates a receipt-based approach.

Key Takeaways

Statutory Override: Professionals should ensure that export incentives like duty drawback, cash compensatory support, and export entitlements are excluded from taxable income in the year of accrual if they have not been physically received.
Reconciliation in Audit: During tax audits, any difference between “Book Profit” (which follows accrual) and “Taxable Income” (which follows Section 145B) should be clearly reconciled in the Computation of Income to prevent automated adjustments or scrutiny notices.
2025 Act Continuity: As the Income-tax Act, 2025 comes into effect, Section 278 preserves this receipt-based treatment. This ruling provides a strong precedent for defending pending assessments and planning future compliance for export-oriented units.
Defense Against Scrutiny: When responding to notices regarding discrepancies between the P&L account and the ITR, this case should be cited to justify why certain accrued income is not yet “taxable” under the law.

IN THE ITAT DELHI BENCH ‘G’

Bando India (P.) Ltd.

Income-tax Officer^*

YOGESH KUMAR US, Judicial Member
and Smt. Renu Jauhri, Accountant Member

IT Appeal No. 6020 (Delhi) of 2025
[Assessment year 2018-19]

FEBRUARY 26, 2026

Arun Kishore, CA for the Appellant. Sahil Kumar Bansal, Sr. DR for the Respondent.

ORDER

Smt. Renu Jauhri, Accountant Member.- The above captioned appeal is preferred by the assessee against the order dated 21.08.2025, passed by Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [for short, Ld. CIT(A)/NFAC], Delhi u/s 250 of the Income Tax Act, 1961 [hereinafter referred to as, “Act”] for A.Y. 2018-19 in Appeal No. NFAC/2017-18/10086237.

2. The assessee has raised following grounds of appeal:

“(i)

That on the facts and circumstances of the case and in law Ld. CIT(A) has erred in confirming the addition of Rs. 9,25,662/- towards Duty Drawback, as erroneously made by the Ld. Assessing Officer u/s 143(3) order dated 03.09.2021.

(ii)

That as per the specific provisions of Section 145B (3) r.w.s. 2(24)(xviii), Duty Drawback is taxable on Accrual basis.

(iii)

That Ld. CIT(A) and AO have both erred in taxing Duty Drawback of Rs. 9,25,662/- on accrual basis, when the appellant has been consistently declaring this income on actual receipt basis.

(iv)

That as per note no. 2 annexed with the audited financial statements, the appellant had declared the basis of preparation of financial statements as: “The accounting policies adopted in preparation of the financial statements are consistent with those of the previous years”.

(v)

That the addition of Rs. 9,25,662/- erroneously made by changing the consistently followed accounting policy of the appellant, be deleted.”

3. Brief facts of the case are that the assessee filed its return for A.Y. 2018-19 on 29.11.2018, declaring NIL income and deemed income u/s 151JB at Rs. 15,07,99,048/-. The return was processed u/s 143(1) of the Act at an income of Rs. 10,88,640/- and deemed income u/s 151JB at Rs. 15,07,99,048/- . Subsequently, the case was selected for limited scrutiny on the ground that there was a mismatch in duty drawback offered as income by the assessee and as per the Central Board of Excise and Customs (for short, CBEC) data. The assessee contended that income on account of duty drawback claims is being offered on actual receipt basis consistently since last several years. However, Ld. AO rejected the assessee’s contention and observed that the assessee is following mercantile system of accounting, and, therefore, the duty drawback amount of Rs. 9,25,662/- not offered as income was added to the total income and assessment completed u/s 143(3) of the Act. Aggrieved, the assessee preferred an appeal before Ld. CIT(A).

3.1 Ld. CIT(A) also concurred with the observations of Ld. AO and held that since the assessee followed mercantile system of accounting, provisions of section 145B(2) of the Act are applicable whereas the assessee contended that section 145B(3) is applicable in its case. Vide order dated 21.08.2025, Ld. CIT(A) dismissed the assessee’s appeal after rejecting assessee’s contentions. Further aggrieved, the assessee filed present appeal before the Tribunal.

4. Before us, Ld. AR has submitted that the assessee’s case is clearly covered by the provisions of section 145B(3) according to which the income from duty drawback etc is deemed to be the income of the previous year in which it is received. Ld. AR has further pointed that this system of accounting in respect of duty drawback is being consistently followed by the assessee and the same has been accepted by the revenue in earlier years even under scrutiny.

4.1 On the other hand, Ld. DR has argued that the issue was taken up based on specific inputs from the CBEC data as per which duty drawback of Rs. 9,80,193/-was sanctioned during the relevant financial year whereas the assessee had offered only Rs. 54,531/- as income in the year under consideration. Since the amount was sanctioned by the CBEC, there was a reasonable certainty of its realisation within the year and accordingly, the remaining amount of Rs. 9,25,662/- has rightly been taxed by the Ld. AO during the year under consideration.

5. We have heard the rival submissions and perused the material available on record. We note that the taxability of income received by way of duty drawback etc is specifically covered by the provisions of section 145B and the relevant sub section (3) is reproduced below:

“Sec. 145B

(1)

(2)

(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.”

6. In view of clear legal position, we are of the considered view that the duty drawback has rightly been shown as income in the year of receipt and Ld. AO was not justified in including the same on accrual basis during the year under consideration. Accordingly, we hereby, direct the Ld. AO to delete the addition of Rs. 9,25,662/- made on account of duty drawback.

7. In the result, the appeal of the assessee is allowed.