CA Vinamar Gupta
The issue of deductibility of Subsidies as profits derived from undertaking stands resolved by Supreme Court in its Landmark Judgement
Exemption available under Chapter VI-A in respect of profits of industrial undertakings is available only in respect of income qualifying the litmus test of “profits or gain derived from undertaking”. The revenue and assessees have been locking their horns over the issue of Subsidies for years together as to whether or not they are covered by term ““profits or gain derived from undertaking”
In this article while an attempt has been made to construe real meaning of words “profit derived from”, it also deals with purpose test of subsidy and its relevance after recent amendments in Finance Act 2015 and Finance Bill 2016.
It will be relevant to look into the issue through a few court rulings:
1. Cambay Electric Supply Industrial Company Limited Commissioner of Income Tax, Gujarat II, (1978) 2 SCC 644 (Supreme Court)
In this case 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. It was held that the expression “attributable to” is certainly wider in import than the expression “derived from”. 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. Whenever the Legislature wanted to give a restricted meaning it has used the expression “derived from” to cover receipts from sources other than the actual conduct of the business.
2. Commissioner Of Income Tax, Karnataka Sterling Foods, Mangalore, (1999) 4 SCC 98 (Supreme Court)
The issue is this case was whether income derived by the assessee undertaking engaged in export of processed sea food by sale of import entitlements was profit and gain derived from the industrial undertaking . This Court referred to its judgment in Cambay Electric Supply (supra) and emphasized the difference between the wider expression “attributable to” as contrasted with “derived from”. Supreme also stated the industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit. Hence the source of the import entitlements can not said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the 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 assessee is entitled to import entitlements under export promotion scheme, which it can sell. The sale consideration therefrom cannot be held to constitute a profit and gain derived from the assessees’ industrial undertaking.
3. Pandian Chemicals Limited Commissioner of Income Tax, 262 ITR 278(Supreme Court)
The question before the Court was as to whether interest earned on a deposit made with the Electricity Board for the supply of electricity to the appellant’s industrial undertaking should be treated as income derived from the industrial undertaking. Supreme 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.
4. Liberty India Commissioner of Income Tax, (2009) 9 SCC 328(Supreme Court)
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. Again Supreme 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. The court further went on to state that by using the expression “derived from” Parliament intended to cover sources not beyond the first degree. 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 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 content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore 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.
5. Calcutta High Court in Merino Ply & Chemicals Ltd. CIT, 209 ITR 508 [1994],
It was held that transport subsidies were inseparably connected with the business carried on by the assessee. Transport expenditure is an incidental expenditure of the assessee’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
In CIT v. Andaman Timber Industries Ltd., 242 ITR 204 [2000], however Calcutta High Court arrived at an opposite conclusion in considering whether a deduction was allowable under in respect of transport subsidy without noticing its own judgment in Merino Plywood(supra). A Division Bench of the Calcutta High Court in C.I.T. v. Cement Manufacturing Company Limited, by a judgment dated 15.1.2015, distinguished the judgment in CIT v. Andaman Timber Industries Ltd. and followed the impugned judgment of the Gauhati High Court in Meghalya Steels which is the subject matter of discussion in this Article.
6. Sahney Steel and Press Works Ltd. Commissioner of Income Tax, A.P. – I, Hyderabad, (1997) 7 SCC 764 (Supreme Court)
It was held by the apex Court on power subsidy that subsidy on power was confined to ‘power 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.
On refund of sales tax it was held that 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 by making the business of production and sale of goods in the State more profitable
7. Delhi High Court in Dharampal Prem Chand 317 ITR 353
It was held by Delhi High Court 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. SLP of the department against this decisions has been dismissed by Supreme Court.
8. Contrary Judgements of Himachal Pradesh High Court in Kiran Enterprises (2010) 327 ITR 520 and Supriya Gill [ITA 27 & 28/2010 dtd 16-6-2010]
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 Court held that the source of transport subsidy is not the business of the assessee but the scheme framed by the Central Government. 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
Adverse Judgement of Punjab and Haryana High Court in H.M. Steels Ltd. [ITA 352/2013 dated 04-08-2015]
P&H High Court expressed agreement with view taken by Himachal High Court and also held that sales tax rebate is not profit derived from eligible business and hence entitled for deduction.
10. Purpose Test of Subsidy
