Duty Drawback Taxation Under Section 145B(3): ITAT Delhi Clarifies When Income Is Taxable

Background of the Dispute

In Bando India Private Limited Vs ITO, the Income Tax Appellate Tribunal, Delhi Bench, examined whether duty drawback should be taxed on accrual or receipt basis for Assessment Year 2018–19. The controversy arose from a mismatch between the amount of duty drawback reflected in the return of income and the figures appearing in the Central Board of Excise and Customs (CBEC) data.

The assessee, a company following the mercantile system of accounting, had:

  • Filed its return of income for A.Y. 2018–19 on 29.11.2018 declaring NIL income, and
  • Reported deemed income under Section 115JB at Rs. 15,07,99,048.

The return was initially processed under Section 143(1) at:

  • Total income of Rs. 10,88,640, and
  • Deemed income under Section 115JB at Rs. 15,07,99,048.

Later, the case was picked up for limited scrutiny specifically to verify a mismatch relating to duty drawback income as disclosed in the return vis-à-vis CBEC data.

Issue Before the Authorities

The core question was:

Whether duty drawback is liable to tax on an accrual basis merely because it has been sanctioned by the customs authorities, or whether it must be taxed only in the year of actual receipt in light of Section 145B(3) of the Income Tax Act, 1961.

Position Taken by the Assessing Officer

During scrutiny, the Assessing Officer (AO) compared:

  • Duty drawback income reported by the assessee in the return; with
  • Duty drawback sanctioned as per CBEC data.

The CBEC data showed that duty drawback of Rs. 9,80,193 had been sanctioned during the relevant financial year, whereas the assessee had offered only Rs. 54,531 as income for that year on account of duty drawback.

The AO observed that:

  • The assessee was consistently following the mercantile system of accounting in its books.
  • Once duty drawback had been sanctioned by the customs authorities, there was, in the AO’s view, reasonable certainty of its receipt.

On this basis, the AO:

  • Treated the balance amount of Rs. 9,25,662 (Rs. 9,80,193 – Rs. 54,531) as income accrued during the year,
  • Added this amount to the assessee’s total income, and
  • Completed the assessment under Section 143(3).

Findings of the CIT(A)/NFAC

The assessee challenged the addition before the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [CIT(A)/NFAC]. The CIT(A), vide order dated 21.08.2025, confirmed the AO’s action, essentially on the following reasoning:

  • Since the assessee was following the mercantile system, income is generally taxable on accrual basis;
  • According to the CIT(A), the case attracted the provisions of Section 145B(2), not Section 145B(3);
  • As a result, the CIT(A) upheld the view that the duty drawback of Rs. 9,25,662 had accrued and was taxable in the relevant previous year.

The appeal of the assessee was therefore dismissed at the first appellate stage, prompting the present second appeal before the Tribunal.

Grounds Raised Before ITAT

The assessee carried the matter to the ITAT and broadly raised the following contentions: