Case Law Details

Case Name : The CIT Vs M/s H. M. Steels Ltd. (Punjab & Haryana High Court)
Appeal Number : Income tax (Appeal) no. 352 of 2013
Date of Judgement/Order : 04/08/2015
Related Assessment Year :
Courts : All High Courts (4169) Punjab and Haryana HC (215)
Brief of the Case

Punjab & Haryana High Court held In the case of The CIT vs. M/s H. M. Steels Ltd that on an analysis of section 80IC, 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 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. The assessee is not entitled to the benefit of section 80 IC in respect of the sales tax rebate obtained by it.

 Facts of the Case

In this case assessee under a scheme/policy formulated by the Himachal 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. The assessee opted to pay 65% of the VAT liability and the remaining 35% i.e. a sum of Rs.24,98,964/- had been credited in the profit and loss account derived by the industrial undertaking. The assessee contended that the retention of 35% VAT has a direct nexus with the sales and is an integral part of the industrial unit and is, therefore, eligible to be deducted under section 80-IC.

Contention of the Assessee

 The learned counsel for the assessee submitted that they have not claimed that the freight subsidy received from the Himachal Pradesh Government by the assessee is allowed to be included as profit derived from an industrial undertaking and, therefore, eligible as a deduction under Section 80-IC of the Income Tax Act, 1961. The assessee had claimed a set off against the expenses which was granted.

Further he submitted that the sales tax deferment rebate is included as profit derived from the industrial undertaking and is, therefore, eligible for deduction under section 80-IC. Under a scheme/policy formulated by the Himachal 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. The assessee opted to pay 65% of the VAT liability and the remaining 35% i.e. a sum of Rs.24,98,964/- had been credited in the profit and loss account derived by the industrial undertaking. The assessee contended that the retention of 35% VAT has a direct nexus with the sales and is an integral part of the industrial unit and is, therefore, eligible to be deducted under section 80-IC.

Held by CIT (A)

 CIT (A) denied the deduction u/s 80-IC in respect of sales tax deferment rebate received by the assessee.

Held by ITAT

 ITAT held that sales tax deferment 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.

Held by High Court

 In section 80-IC, 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 attachment or a source or origin. A sales tax rebate cannot be said to be derived from any business. A sales tax rebate can be said to be in respect of a business or in favour of a business or in relation to a business, a facility to a business and incentive to a business. The rebate does not originate from the business. The source or origin of the rebate is from the policy or notification granting the same. The source or origin is not the business. If the legislature intended including the sales 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.

In the judgment of the Supreme Court in Liberty India vs. Commissioner of Income Tax, (2009) 317 ITR 218, the Supreme Court considered whether 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. In this case, it was held that DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from section 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.

.In the judgment of Liberty India vs. Commissioner of Income Tax 225 CTR 233 (SC) followed the judgment of the Supreme Court in Commissioner of Income Tax vs. Sterling Food (1999) 237 ITR 579 (SC). The question before the Supreme Court was whether the income derived by the assessee by the sale of import entitlement was profit and gain derived from its industrial undertaking of processing seafood and can be included in the income of the assessee for the purpose of computing the relief under Section 80-HH of the Act. It was held that 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 eligible for deduction under s. 80-IB, which would include income arising on sale of DEPB at premium. The reasoning though in respect of section 80-HH applies squarely to the provisions of section 80-IC.

In the judgment of the Himachal Pradesh High Court in Commissioner of Income Tax vs. Kiran Enterprises, (2010) 327 ITR 520 in which question 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. It was held that the source of transport subsidy is not the business of the assessee but the scheme framed by the Central Government. Applying the test laid down by the Supreme Court in the aforesaid judgment, the Division Bench held that the subsidy received by the assessee was not a profit derived from the business since it was not an operational profit and that the source of the subsidy is not the business of the assessee but the scheme of the Government.

Also In Commissioner of Income Tax vs. Dharam Pal Prem Chand Ltd., [2009] 317 ITR 353 (Delhi), the revenue contended that the deduction under section 80-IB in respect of the amount received by the assessee towards the refund of excise duty cannot form a part of the profits and gains derived from the undertaking. The same 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).

Accordingly, appeal of the revenue allowed.

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