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The Commissioner of Income Tax, Patiala Versus M/s. H.M. Steels Ltd.

2015 (8) TMI 516 - PUNJAB & HARYANA HIGH COURT

Deduction u/s 80IC - whether sales tax rebate to be included as profit derived from Industrial Undertaking and eligible as deduction u/s 80IC - Held that:- On a parity of reasoning and on an analysis of section 80- IC, it must be held that any industrial undertaking or enterprise would be entitled to deduction under sub-section (1) only to the extent of profits derived from such an industrial undertaking and not on account of any rebate or incentive made available to it by the Government. The wo .....

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adesh Government and is, therefore, not a profit derived from the business but is an ancillary profit of the business.

Question answered in favour of the Revenue. The assessee is not entitled to the benefit of section 80- IC in respect of the sales tax rebate obtained by it. - Decided against assessee.

Eligibility for interest on FDRs - Held that:- assessee had received interest on FDRs kept with the bank as margin money. He treated the same as income from other sources and .....

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aj Jain, Senior Adv. with Mr Divya Suri, Mr Deepanshu Jain & Madhur Sharma, Advs. JUDGMENT S. J. Vazifdar, Acting Chief Justice This is an appeal against the order of the Income Tax Appellate Tribunal dated 17.06.2013 partly allowing the respondents' appeal against the order of the Commissioner of Income Tax (Appeals). The matter pertains to the Assessment Year 2007-08. 2. The appellant contends that the following substantial questions of law arise in this appeal:- "(i) Whether in t .....

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in the section 80IC has narrower meaning than attributable to and the freight subsidy cannot be treated as profit derived from Industrial Undertaking though it may be attributable to Industrial Undertaking? (ii) Whether in the facts and circumstances of the case, the ITAT was right in law in holding that the freight subsidy was rightly taken into consideration by the assessee in working out the profits and gains of the business undertaking relying on the decision of Calcutta High Court in the ca .....

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w in not appreciating the judgment of Hon'ble Himachal Pradesh High Court in its decision in the case of CIT vs. Kiran Enterprises reported in 327 ITR 520 and M/s Mehar Packaging Pvt. Ltd. Vs. CIT reported in 24 Taxman 204 which are applicable in this case wherein it has already been held that the amount of transport/freight subsidy received from the Govt. by the assessee is not a profit derived from business since it is not an operational profit. The source of subsidy is not the business of .....

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eferment Rebate received by the assessee is allowed to be included as profits derived from industrial undertaking and eligible for deduction u/s 80IC of the Income Tax Act, 1961, when the assessee received it from the Himachal Govt. for the benefit of any incentive of Sales Tax leviable on the sale of manufactured goods under Himachal Pradesh General Sales Tax Act, 1968 and the income derived from such rebate is not an income derived from industrial undertaking. However, the immediate source of .....

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f netting was held to be correct for computing deduction u/s 80HHC in view of the definition of profits of business' in Explanation (baa) to Section 80HHC of the Act and not for section 80IC of the Act which deals with profits derived from the eligible business, and is different from the computation of section 80HHC." 3. The first three questions do not even arise. Mr. Jain, the learned senior counsel appearing on behalf of the respondents stated that the respondents/assessee do not eve .....

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e sentence in the Tribunal's order reads as under:- "However, transport subsidy is to be adjusted against those expenses for which it is given while working out the profit of the industrial undertaking to be eligible for deduction u/s 80IC of the Act." The concluding words "to be eligible for deduction u/s 80IC of the Act" probably led to the appellant raising the first three questions. Transport subsidy is not admissible under Section 80IC of the Act. There is no grievan .....

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achal Pradesh State Government, the industrial undertakings fulfilling certain conditions and situated in the notified areas were entitled for the Sales Tax/VAT Deferment Scheme. The eligible units were given an option either to avail deferment of payment of tax or to opt, by making an application in the prescribed form, to pay 65% of the tax liability for any tax period of the financial year and upon making such payment the unit would be deemed to have paid the full tax due from it accordingly. .....

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rises to which the section is applicable. It is applicable to the assessee/respondents. 6. Section 80-IC (1) and (3) to (7) reads as under:- 80-IC. Special provisions in respect of certain undertakings or enterprises in certain special category States.-(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in subsection (2), there shall, in accordance with and subject to the provisions of this sectio .....

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such profits and gains for ten assessment years commencing with the initial assessment year; (ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains. (4) This section applies .....

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i) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.-The provisions of Explanations 1 and 2 to sub-section (3) of Section 80-IA shall apply for the purposes of clause (ii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. (5) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee, no deduction shall be allowed under any other sect .....

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. (7) The provisions contained in sub-section (5) and subsections (7) to (12) of Section 80-IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section." 7. The operative words are "profits and gains derived by an undertaking or an enterprise from any business referred to in subsection (2)." The profits and gains must, therefore, be derived "from" the business. The word "from" means, inter alia, a starting point, a point of at .....

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tax rebate within the ambit of section 80-IC, the section it would have included any profits and gains derived not from but in respect of a business. 8. If there was no sales tax liability in respect of any business, there would have been no question of the sales tax being from the business. If sales tax is made applicable to the business, it would not be from the business but in respect of the business. It would follow then that when the sales tax is revoked, the benefit cannot be from the busi .....

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er profit from the Duty Entitlement Pass Book Scheme can be said to be the profit from the business of the industrial undertaking eligible for deduction under Section 80-IB of the Act. Section 80-IB is similar to Section 80IC. Section 80IB(1) reads as under:- "80-IB. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.-(1) Where the gross total income of an assessee includes any profits and gains derived from any .....

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includes any profits or gains derived from any business". Paragraphs 13 to 16 of the judgment read as follows:- "13. Before analyzing s.80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when s .....

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In other words, deduction under sub-s. (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in sub-ss. (3) to (11A) (as they stood at the relevant time). One more aspect needs to be highlighted. Each of the eligible busines .....

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"computation of profits of the eligible business". It is evident that s. 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises .....

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he Government of India or from s. 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. [see CIT v. .....

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ced that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-s. (5) of s. 80-IA, which are also required to be read into s. 80-IB. [see s. 80-IB(13)]. We may reiterate that ss. 80I, 80-IA and 80-IB have a c .....

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ct the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking". 16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided f .....

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imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from s. 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under s. 80- IB. They belong to the category of ancillary profits of such Undertakings." (emphasis supplied) 10. On a parity of reasoning and on an analysis of section 80- IC, it must be held that any industrial undertaking or enterprise would be entitle .....

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held by the Supreme Court in respect of the DEPB incentive applies equally to sales tax rebate in respect of section 80-IC. The sales tax rebate is an incentive which flows from the scheme framed by the Himachal Pradesh Government and is, therefore, not a profit derived from the business but is an ancillary profit of the business. 11. Liberty India vs. Commissioner of Income Tax (supra) followed the judgment of the Supreme Court in Commissioner of Income Tax vs. Sterling Food (1999) 237 ITR 579 .....

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s.-(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof." (emphasis supplied) The material words in section 80-HH and in section 80-IC are the sam .....

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dustrial undertaking. Hence, according to the appellant(s) provision of s. 80-IB was much wider in scope than s. 80-I. According to the appellant(s) s. 80- IB was wider than s. 80-I as the Legislature intended to give benefit of deduction not only to profits derived from the undertaking but also to give benefit of deduction in respect of incomes having direct nexus with the profits of the undertaking, hence, all incomes that arose during the course of running of the eligible business would be el .....

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uestion in that case was whether the freight subsidy received from the Government is allowed to be included as profit derived from the industrial undertaking and eligible for deduction under section 80- IA. Section 80-IA(1) reads as under:- "80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.-(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an ente .....

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ria with section 80-IA as they previously existed. The Central Government framed a scheme whereby freight/transport subsidy was provided to the industries set up in remote areas where rail facilities were not available and some percentage of the transport expenses was subsidized by the Central Government. The question was whether the freight subsidy is income derived from the business of the industrial undertaking and can be included in the profit eligible for deduction under section 80-IA. The .....

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t with these observations of the Himachal Pradesh High Court. 13. The two decisions of the Delhi High Court in (2009) 317 ITR 353 and (2010) 324 ITR 283 were delivered before the judgment of the Supreme Court in Liberty India vs. Commissioner of Income Tax (supra). They did not take the judgment into consideration. They must be deemed to have been impliedly overruled. In Commissioner of Income Tax vs. Dharam Pal Prem Chand Ltd., [2009] 317 ITR 353 (Delhi), the revenue contended that the deductio .....

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refund of excise duty is pivoted on the manufacturing activity carried on by the assessee. Once such a finding of fact has been returned we need not go further and examine the immediate and proximate source of refund of excise duty. In other words, as to whether there was direct nexus between the refund of excise duty and industrial activity. As a matter of fact, in the questions proposed by the Revenue, there is no specific question, that this finding of the authorities below is perverse. There .....

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cts of the other cases cited before us is, that the net effect of the accounting methodology employed by the assessee was that it did not, in sum and substance, impact the derivation of profits and gains ascertainable for the purposes of deduction under section 80-IB of the Act. 30. As noted by the Division Bench of this court in Eltek SGS P. Ltd., [2008] 300 ITR 6, the language of section 80-IB is materially different from those obtaining in the cases cited by the counsel for the Revenue in Ste .....

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h is "profit and gains derived from any business". We respectfully agree with the view of the Division Bench in Eltek SGS, [2008] 300 ITR 6 (Delhi) which has held that the test of proximity, i.e., direct nexus with the industrial activity is not necessary while claiming deduction under section 80-IB of the Act." The judgment was followed by a Division Bench of the Delhi High Court in Commissioner of Income-Tax vs. Sportking India Ltd., [2010] 324 ITR 283 (Delhi). 14. For the reaso .....

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