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Commissioner of Income Tax Versus Meghalaya Steels Ltd

2016 (3) TMI 375 - SUPREME COURT

Deduction under Section 80-IB and 80-IC on profits and gains of business of the respondentís industrial undertaking - Held that:- The judgment in Sterling Foods [1999 (4) TMI 1 - SUPREME Court ] lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental .....

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was post manufacture namely, export. - On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan st .....

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the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus und .....

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ich it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB of the Act. - It only remains to consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the respondent, would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources a .....

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y states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head "profits and gains of business or profession". If cash assistance received or receivable against exports schemes are included as being income under the head "profits and gains of business or profession", it is obvious that subsidies which go to reimbursement of cost in the produ .....

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2562, 2563, 2564, 2565, 2566, 2567, 2568, 2569, 2570, 2571 and 2572 of 2016 - Dated:- 9-3-2016 - Kurian Joseph And R. F. Nariman, JJ. For the Appellant : Mrs Anil Katiyar, Adv., Ms Sadhna Sandhu, Adv., Mr Arijit Prasad, Adv., Mr Rupesh Kumar, Adv., for Mr B V Balaram Das, Adv. For the Respondent : Ms Kavita Jha, Adv., Mr K V Mohan, Adv., Mr Vijay Kumar, Adv., Mrs Rani Chhabra, Adv., Mr Rajinder Mathur, Adv. and Mr Kunal Chatterji, Adv. Civil Appeal No.8493 of 2012 Civil Appeal No.8494 of 2012 Ci .....

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f 2016 (Arising Out of SLP (Civil) No.6867 (CC 224/2014) Civil Appeal No.2567 of 2016 (Arising Out of SLP (Civil) No.6869 (CC 1543/2014) Civil Appeal No.2568 of 2016 (Arising Out of SLP (Civil) No.11094 of 2014) Civil Appeal No.2569 of 2016 (Arising Out of SLP (Civil) No.11095 of 2014) Civil Appeal No.2570 of 2016 (Arising Out of SLP (Civil) No.12710 of 2014) Civil Appeal No.3624 of 2015 Civil Appeal No.2571 of 2016 (Arising Out of SLP (Civil) No.24620 of 2014) Civil Appeal No.2572 of 2016 (Aris .....

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C No.224/2014), SLP(C) No.………CC No.1543/2014), SLP(C) Nos.11094/2014, 11095/2014, 12710/2014, 24620/2014, 11319/2015. 3. This group of appeals arises from the State of Meghalaya and concerns deductions to be made under Sections 80-IB and 80-IC of the Income Tax Act, 1961. Civil Appeal No.7622 of 2014 has been treated as the lead matter in which a judgment of the Gauhati High Court dated 29.5.2013 has been delivered, which has been followed in all the other appeals. 4. Civil .....

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return of income for the year 2004-2005 disclosing an income of ₹ 2,06,970/- after claiming deduction under Section 80-IB of the Income Tax Act on the profits and gains of business of the respondent s industrial undertaking. The respondent had received the following amounts on account of subsidies:- Transport subsidy - Rs.2,64,94,817.00 Interest subsidy - Rs.2,14,569.00 Power subsidy - Rs.7,00,000.00 Total - Rs.2,74,09,386.00 6. The Assessing Officer, in the assessment order dated 7.12.200 .....

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d by the aforesaid order, the respondent preferred an appeal before the ITAT which, by its order dated 19.3.2010, allowed the appeal of the respondent. The Revenue carried the matter thereafter to the High Court, under Section 260A of the Act, which resulted in the impugned judgment dated 29.5.2013, which decided the matter against the Revenue. Revenue is therefore before us in appeal against this judgment. 7. Shri Radhakrishnan, learned senior advocate appearing on behalf of the Revenue, argued .....

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he assessee. Subsidies that are allowed to the assessee have no close and direct nexus with the business of the assessee but have a close and direct nexus with grants from the Government. This being the case, according to him, the respondent did not qualify for deductions under Sections 80-IB and 80-IC of the Act. In the course of his lengthy submissions, he made reference to a number of judgments including the judgment reported as Liberty India v. Commissioner of Income Tax reported in 2009 (9) .....

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also relied upon Sections 80-A and 80-AB in order to demonstrate the scheme of deductions allowable under Part-VI-A of the Income Tax Act. He also referred us to Sections 56 and 57 (iii) of the Act to buttress his submission that subsidies being in the nature of "income from other sources" could not be allowed to be deducted from profits and gains of business, which fell under a different sub-heading in Section 14 of the Act. According to him, there is one interpretation and one inter .....

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ich is a backward area. He referred to several judgments, including the judgment reported in Jai Bhagwan Oil and Flour Mills v. Union of India and Others (2009) 14 SCC 63 and Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax, A.P. - I, Hyderabad, (1997) 7 SCC 764 to buttress his submission that subsidies were given only in order that items which would go into the cost of manufacture of the products made by the respondent should be reduced, as these subsidies were reimbursement for .....

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oducts. Further, interest subsidy would also go towards reducing the interest element relatable to cost, and therefore all four subsidies being directly relatable to cost of manufacture and/or sale would therefore necessarily fall within the language of Sections 80-IB and 80-IC, as they are components of cost of running a business from which profits and gains are derived. He sought to distinguish the judgments cited by Shri Radhakrishnan, in particular the judgment of this Court in Liberty India .....

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ture or sale of the products of the respondent, such subsidies being amounts of cost which were actually incurred by the respondent and thereafter reimbursed by the State, the principle of netting off recognized in several decisions of this Court ought to be applied, and on application of the said principle, it is clear that the subsidy received by the respondent was only to depress cost of manufacture and/or sale and would therefore be "derived from" profits and gains made from the bu .....

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n of the present case. "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 business referred to in sub-sections (3) to (11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computi .....

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lt of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold .....

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rded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income o .....

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ction, the condition specified therein shall be deemed to have been complied with; (iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power. (4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the E .....

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e society) subject to fulfillment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2004: Provided further that in the case of such industries in the North-Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and .....

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ters and words 31st day of March, 2004, the figures, letters and words 31st day of March, 2012 had been substituted: Provided also that no deduction under this sub-section shall be allowed to an industrial undertaking in the State of Jammu and Kashmir which is engaged in the manufacture or production of any article or thing specified in Part C of the Thirteenth Schedule." "80-IC Special provisions in respect of certain undertakings or enterprises in certain special category States (1) .....

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are eligible businesses under both the aforesaid Sections. The parties have only locked horns on the meaning of the expression "any profits and gains derived from any business". 11. The aforesaid provisions were inserted by the Finance Act 1999 with effect from 1.4.2000. The Finance Minister in his budget speech for the year 1999-2000 spoke about industrial development in the North Eastern Region as follows:- "Mr. Speaker, Sir, I am conscious of the fact that, despite all our anno .....

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ing units in the region." 12. The reference to the 10 year tax holiday for the industries set up in the North Eastern Region is an obvious reference to the second proviso to sub-section (4) of Section 80-IB set out hereinabove. The speech of a Minister is relevant insofar it gives the background for the introduction of a particular provision in the Income Tax Act. It is not determinative of the construction of the said provision, but gives the reader an idea as to what was in the Minister s .....

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but the speech made by the Mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in accord with the recent trend in juristic thought not only in Western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logical .....

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(15) of the Act was relied upon by the Court for the purpose of ascertaining what was the reason for introducing that clause. The speech made by the Finance Minister while moving the amendment introducing Sub-section (2) clearly states what were the circumstances in which Sub-section (2) came to be passed, what was the mischief for which Section 52 as it then stood did not provide and which was sought to be remedied by the enactment of Sub-section (2) and why the enactment of Sub-section (2) was .....

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ee. The object and purpose of Sub-section (2), as explicated from the speech of the Finance Minister, was not to strike at honest and bonafide transactions where the consideration for the transfer was correctly disclosed by the assessee but to bring within the net of taxation those transactions where the consideration in respect of the transfer was shown at a lesser figure than that actually received by the assessee, so that they do not escape the charge of tax on capital gains by under-statemen .....

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the transfer is shown at a lesser figure than that actually received." 13. A series of decisions have made a distinction between "profit attributable to" and "profit derived from" a business. In one of the early judgments, namely, Cambay Electric Supply Industrial Company Limited v. Commissioner of Income Tax, Gujarat II, (1978) 2 SCC 644, this Court had to construe Section 80-E of the Income Tax Act, which referred to profits and gains attributable to the business of g .....

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ived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". Had the expression "derived from" been used it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection it may be point .....

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come Tax, Karnataka v. Sterling Foods, Mangalore, (1999) 4 SCC 98, this Court had to decide whether income derived by the assessee by sale of import entitlements on export being made, was profit and gain derived from the respondent s industrial undertaking under Section 80HH of the Indian Income Tax Act. This Court referred to the judgment in Cambay Electric Supply (supra) and emphasized the difference between the wider expression "attributable to" as contrasted with "derived from .....

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Central Govt. whereunder the export entitlements become available. There must be for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale considerati .....

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be treated as income derived from the industrial undertaking under Section 80HH. This Court held that although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with the Electricity Board could not be said to flow directly from the industrial undertaking itself. On this basis, the appeal was decided in favour of Revenue. 16 .....

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s narrower in connotation as compared to the former. This court further went on to state that by using the expression "derived from" Parliament intended to cover sources not beyond the first degree. This Court went on to hold:- "34. On an analysis of Sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section(2), would be entitled to deduction under sub-section (1) only to the extent of profits derived from such indus .....

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incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc.. DEPB credit under the Scheme has to be calculated by taking into account the deemed import .....

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foresaid decisions cited on behalf of the Revenue becomes necessary at this stage. In the first decision, that is in Cambay Electric Supply Industrial Company Limited v Commissioner of Income Tax, Gujarat II, this Court held that since an expression of wider import had been used, namely "attributable to" instead of "derived from", the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity .....

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8. The judgment in Sterling Foods lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an assessee was entitled to import entitlements which it could therea .....

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the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the busin .....

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ctually incurred by the assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the assessee, namely profits arrived at after deducting manufacturing cost and se .....

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trial undertaking itself, unlike the facts of the present case, in which, as has been held above, all the subsidies aforementioned went towards reimbursement of actual costs of manufacture and sale of the products of the business of the assessee. 20. Liberty India being the fourth judgment in this line also does not help Revenue. What this Court was concerned with was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to .....

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o neutralize the incidence of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself. 21. The Calcutta High Court in Merino Ply & Chemicals Ltd. v. CIT, 209 ITR 508 [1994], held that transport subsidies were inseparably connected with the business carr .....

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see s business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business and in arriving at such a decision on the facts the Tribunal committed no error." 22. However, in CIT v. Andaman Timber Industries Ltd., 242 ITR 204 [2000], the same High Court arriv .....

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se. In a pithy discussion of the law on the subject, the Calcutta High Court held: "Mr. Bandhyopadhyay, learned Advocate appearing for the appellant, submitted that the impugned judgment is contrary to a judgment of this Court in the case of CIT v. Andaman Timber Industries Ltd. reported in (2000) 242 ITR, 204 wherein this Court held that transport subsidy is not an immediate source and does not have direct nexus with the activity of an industrial undertaking. Therefore, the amount represen .....

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industrial undertaking. We have not been impressed by the submissions advanced by Mr. Bandhyopadhyay. The judgment of the Apex Court in the case of Liberty India (supra) was in relation to the subsidy arising out of customs draw back and duty Entitlement Pass-book Scheme (DEPB). Both the incentives considered by the Apex Court in the case of Liberty India could be availed after the manufacturing activity was over and exports were made. But, we are concerned in this case with the transport and i .....

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er consumed for production . In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra P .....

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d as under: "The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level pla .....

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ern States, the benefit was given in the form of a subsidy in respect of a percentage of the cost of transportation between a point in central area (Siliguri in West Bengal) and the actual location of the industrial unit in the remote area, so that the industry could become competitive and economically viable." (Paras 14 and 15) 25. The decision in Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax, A.P. - I, Hyderabad (1997) 7 SCC 764, dealt with subsidy received from the Stat .....

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our judgment based on the said principle. 27. A Delhi High Court judgment was also cited before us being CIT v. Dharampal Premchand Ltd., 317 ITR 353 from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB of the Act. 28. It only remains to consid .....

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