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2022 (2) TMI 818

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....nch originally passed on 19/2/2021 in the above ITA was recalled. 02. Therefore now the grounds remain to be adjudicated are as Under:- 5. The learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of deduction under section 80(IB) of Rs.25,31,96,667/-, in respect of the fertilizer unit of Haldia: a. Without going through the detailed submissions made, b. Holding that the Sales Tax Incentive Scheme does not have a direct nexus with the activities of the industrial unit; c. Holding that the Fertilizer subsidy provided by the government as price concession was not income from the industrial undertaking and therefore not eligible for deduction u/s 80(IB)." 03. The additional ground number 3 raised originally is as Under:- "3. That the sales tax incentive money of Rs. 33,061,201/- being the amount retained by the company in accordance with Section 41 of the West Bengal Sales Tax Act, 1944 (read with the West Bengal incentive scheme, 1999), was a capital receipt not chargeable to tax Under the income tax act ." 04. Facts shows that for the impugned assessment year, Hindustan Lever chemicals Ltd was amalgamated with the assessee i.e. Tata chemicals ....

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.... with the activities of the industrial unit; c. holding that the Fertilizer Subsidy provided by the government as price concession was not income from the industrial undertaking and therefore not eligible for deduction u/s 80 (IB). The assessee has also filed and additional ground, which reads as under: "That the Sales Tax Incentive money of Rs. 3,30,61,201/- being the amount retained by the company in accordance with section 41 of the West Bengal Sales Tax Act, 1944 (read with The West Bengal Incentive Scheme, 1999), was a capital receipt not chargeable to tax under the Income Tax Act." As the above additional ground does not require investigation of additional facts and as it goes to the root of the matter, we admit it for adjudication by following the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra). The AO noted that for the impugned assessment year, Hind Lever Chemicals Ltd. (HLCL) (since amalgamated with the assessee) filed its return of income on 28.11.2003, claiming a refund of Rs. 2.87 crores. In the return of income, section 80IB claim of Rs. 7.59 crores was made in respect of its 3 new industrial undertakings located in....

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....he Government scheme allowing such benefit depending upon the location of industry. Therefore, he held that there is merit in the finding of the AO that the remission/reimbursement is not 'derived from the business of' the industrial undertaking. The Ld. CIT(A) in agreement with the AO relied on the decision of the Hon'ble Supreme Court in Andaman Timber chemicals Inds (244 ITR 204) and CIT v. Sterling Foods (237 ITR 579). Stating that the impugned sales tax incentives has its genesis in the scheme of the Government, being located in a 'backward area' and not in the profits derived from the industrial undertaking per se, he upheld the action of the AO in disallowing deduction u/s 80IB in respect of sales tax incentive. In respect of fertilizer subsidy, the Ld. CIT(A) agreed with the findings of the AO that the selling price of the fertilizer in AY 2002-03 was much less than the MRP and that in case of DAP, while the MRP fixed by the Government was Rs. 9,350/- per metric ton, the selling price of the assessee was only Rs. 8,458/- per metric ton; the assessee was not able to sell the product at MRP fixed by the Government; also as noted by the AO as against pre-1994 when the price ....

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....ointed date of amalgamation was 01.04.2002 i.e. HLCL amalgamated with the assessee-company w.e.f. 01.04.2002. It is stated that the order of the Hon'ble Bombay and Punjab & Haryana High Court sanctioning the scheme of amalgamation were filed before the AO. After the amalgamation, the assessee-company filed its revised return of income for the year under reference incorporating the working results of HLCL. In the revised return of income, section 80IB claim was not made but a disclosure was made that the same will be claimed at the time of assessment. It is stated by the Ld. counsel that during the course of assessment proceedings, vide letter dated 30.11.2005, section 80IB claim of Rs. 7,59,59,000/- (same as that claimed in original return of HLCL) @ 30% of the profits (this being the 4th year of claim) in respect of erstwhile HLCL was made. It is explained that the audit report in Form No. 10CCB along with audited accounts of the new industrial undertakings, duly certified by Chartered Accountant were also filed at the time of assessment. Regarding the disallowance made by the AO of Sales Tax remission of Rs. 3.31 crores and price concession (subsidy) of Rs. 105.40 crores, inclu....

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.... 3 new industrial undertakings located in category "B" industrially backward district i.e. in Midnapore, West Bengal; the effective date of amalgamation was 01.06.2004 and the appointed date of amalgamation was 01.04.2002 i.e. HLCL amalgamated with the assessee-company w.e.f. 01.04.2002 ; after the amalgamation, the assessee-company filed its revised return of income for the year under consideration incorporating the working results of HLCL. Also it is the contentions of the assessee that during the course of assessment proceedings, vide letter dated 30.11.2005, section 80IB claim of Rs. 7,59,59,000/- (same as that claim in original return of HLCL) @ 30% of the profits (this being the 4th year of claim) in respect of erstwhile HLCL was made. Regarding fertilizer price concession from the Government of Rs. 105.40 crores, it is the contentions of the assessee that to support industries, certain portion of price is reimbursed by Central Government in the name of fertilizer concession ; while selling the fertilizer, the assessee-company recovers part cost from farmers and part cost through Government by way of concession; the subsidy is related to the business activity of the assesse....

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.... by him that since tax remission and subsidy received on account of the scheme of the government for setting up the industrial unit in the backward district is not derived from the business of the industrial undertaking relying upon the decision of the honourable Supreme Court in case of Andaman timber chemicals Ltd 244 ITR 204 and CIT versus sterling foods 237 ITR 579. Thus, the learned CIT - A held that the Sales tax incentive and the subsidy has its genesis in the scheme of the government and not in the profits derived from the industrial undertaking per se. vide paragraph number 18 the arguments of the learned authorised representative and vide paragraph number 19 the arguments of the learned departmental representative were considered. Thereafter in paragraph number 20, the coordinate bench reached its decision giving the detailed reasons. After examining the material available on record the coordinate bench set-aside the order of the learned CIT - A and restore the matter to the file of the learned assessing officer to pass an order afresh in the fifth ground as well as the additional ground raised by the assessee. 011. The coordinate bench on miscellaneous application filed....

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....herefore it should go back to the learned assessing officer for examination of the claim of the assessee with respect to the exemption/non-chargeability of tax on sales tax remission. He submitted that the purpose and intent of subsidy was never verified by the learned assessing officer and additional ground was raised first time before the coordinate bench and therefore the scheme vis-a-vis its taxability should be examined by the learned assessing officer and therefore the matter should go back to the learned AO. 015. In rejoinder the learned authorised representative submitted that the scheme was available with the CIT - A and therefore now it cannot be set-aside back to the file of the learned lower authorities as the issue may be decided by the coordinate bench. 016. In the additional ground number 3 by the assessee it is challenged that the sales tax remission benefit derived by the assessee is not chargeable to income tax as it is a capital receipt. We have carefully perused the West Bengal incentive scheme 1999, which is notified on 22 /6/1999 to extend incentive for promotion of industries in the state. The assessee has setup unit in Midnapore district and therefore acco....

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....ail price fixed by the government and the subsidy given by the government was merely an aid to the assessee. He also referred to item number 10 of the paper book where the concession scheme for the controlled phosphate and potassic fertilizer is submitted. He also submitted that the above subsidy is granted for 'to give impetus to the stagnating demand for these fertilizers and to ameliorate the nutrient imbalance in the soil, which is essential for sustaining the desired growth in agricultural productivity.' He submitted that in view of the decision of the honourable Supreme Court in case of Meghalaya steels Ltd (SC) this issue is squarely covered in favour of the assessee. The learned authorised representative further referred to the provisions of Section 80 IB of the income tax act and stated that the gross total income of an assessee includes any profits and gains derived from 'any business' referred to in a specified sections then subject to terms and conditions such profits are allowed as deduction at appropriate percentage. He further submitted that the subsidy of fertilizer is received in the business of manufacturing of the fertilizer by the assessee and therefore, such fe....

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....h 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 computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result 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 storage plant or plants....

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....n consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfilment 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 the total period of deduction shall in such a case not exceed ten assessment years. Provided also that no deduction under this sub-section shall be allowed for the assessment year beginning on the 1st day of April, 2004 or any subsequent year to any undertaking or enterprise referred to in sub-section (2) of section 80-IC. Provided also that in the case of an industrial undertaking in the State of Jammu and Kashmir, the provisions of the first proviso shall have effect as if for the figures, letters and words 31st day of March, 2004, the figures, letters and words 31st day of March,....

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.... when he sought to introduce the said provision. As an external aid to construction, this Court has, in K.P. Varghese v. ITO [1981] 7 Taxman 13 (SC), referring to a Minister's speech piloting a Finance Bill, stated as under:- "Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision 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 logically relevant should be admissible. In fact there are at least three decisions of this Court, one in Loka Shikshana Trust v. Commissioner of Income-Tax [1975] 101 ITR 234 (SC) the other in Indian Chamber of Commerce v. Commissioner of ....

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....een "profit attributable to" and "profit derived from" a business. In one of the early judgments, namely, Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC), this Court had to construe Section 80-E of the Income Tax Act, which referred to profits and gains attributable to the business of generation or distribution of electricity. This Court held: "As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor General relied, it will be pertinent to observe that the Legislature has deliberately used the expression "attributable to" and not the expression "derived 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 electric....

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....or the supply of electricity to the appellant's industrial undertaking should 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. The sheet anchor of Shri Radhakrishnan's submissions is the judgment of this Court in Liberty India's case (supra). This was a case referring directly to Section 80-IB in which the question was whether DEPB credit or Duty drawback receipt could be said to be in respect of profits and gains derived from an eligible business. This Court first made the distinction between "attributable to" and "derived from" stating that the latter expression is 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....

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....n "attributable to". Since we are directly concerned with the expression "derived from", this judgment is relevant only insofar as it makes a distinction between the expression "derived from", as being something directly from, as opposed to "attributable to", which can be said to include something which is indirect as well. 18. The judgment in Sterling Foods case (supra) 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 thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufactu....

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....upra) 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 the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to 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 Merinoply & Chemicals Ltd. v. CIT [1994] 209 ITR 508, held that transport subsidies were insepar....

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..... Commissioner of Income Tax, reported in (2009) 317 ITR 218 (SC) wherein it was held that subsidy by way of customs duty draw back could not be treated as a profit derived from the 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 interest subsidy which has a direct nexus with the manufacturing activity inasmuch as these subsidies go to reduce the cost of production. Therefore, the judgment in the case of Liberty India v. Commissioner of Income Tax has no manner of application. The Supreme Court in the case of Sahney Steel and Press Works Ltd. & Others versus Commissioner of Income Tax, reported in [1997] 228 ITR at page 257 expressed the following views:- ". . . . . Similarly, subsidy on power was confined to 'power consumed for pro....

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....ss Works Ltd.'s case (supra) dealt with subsidy received from the State Government in the form of refund of sales tax paid on raw materials, machinery, and finished goods; subsidy on power consumed by the industry; and exemption from water rate. It was held that such subsidies were treated as assistance given for the purpose of carrying on the business of the assessee. 26. We do not find it necessary to further encumber this judgment with the judgments which Shri Ganesh cited on the netting principle. We find it unnecessary to further substantiate the reasoning in our judgment based on the said principle. 27. A Delhi High Court judgment was also cited before us being Dharam Pal Prem Chand Ltd.'s case (supra) 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 consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the respondent,....