Case Law Details
Brief of the Case
The Supreme Court held In the case of CIT vs. M/s Meghalaya Steels Ltd. that 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 carried on by the assessee. Further Calcutta High Court in C.I.T. v. Cement Manufacturing Company Limited, judgment dated 15.1.2015 held that the Supreme Court in the case of Sahney Steel and Press Works Ltd. & Others versus Commissioner of Income Tax, reported in [1997] 228 ITR held 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. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the particular State by making the business of production and sale of goods in the state more profitable. The above judgments have correctly appreciated the legal position. Hence, all 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 and accordingly entitled for deduction u/s 80IB.
Facts of the Case
The respondent is engaged in the business of manufacture of Steel and Ferro Silicon. On 9.10.2014, the Respondent submitted its return of income for the year 2004 2005 disclosing an income of Rs.2, 06,970/- after claiming deduction under Section 80-IB 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, Interest subsidy – Rs.2, 14,569 and Power subsidy – Rs.7, 00,000.
The Assessing Officer, in the assessment order, held that the amounts received by the assessee as subsidies were revenue receipts and did not qualify for deduction under Section 80-IB(4) and, accordingly, the respondent’s claim for deduction of an amount of Rs.2,74,09,386/- on account of the three subsidies aforementioned were disallowed.
Contention of the Appellant
The ld counsel of the Appellant submitted that any amount received by way of subsidy was an amount whose source was the Government and not the business of the assessee. He further argued that there is a world of difference between the expression profits and gains “derived from” any business, and profits “attributable to” any business, and that since the section speaks of profits and gains “derived from” any business, such profits and gains must have a close and direct nexus with the business of the 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.
He relied on the judgment reported as Liberty India v. Commissioner of Income Tax reported in 2009 (9) SCC 328, which has been followed by the Himachal Pradesh High Court in Supriya Gill v. CIT (2010) 193 Taxman 12 (Himachal Pradesh). He submitted that the aforesaid judgment of the Himachal Pradesh High Court has taken a diametrically opposite view to the judgment of the Gauhati High Court, impugned in the present appeals, and deserves to be followed, as it, in turn, has followed Liberty India’s judgment and another Supreme Court judgment reported as CIT v. Sterling Foods, 237 ITR 579 (1999).
Contention of the Respondent
The ld counsel of the respondent referred to the Budget Speech of the Minister of Finance for 1999-2000 to buttress his submission that the idea of giving these subsidies was to give a 10 year tax holiday to those who come from outside Meghalaya to set up industries in that State, which 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 either the entire or partial costs incurred by the respondent towards transporting raw materials to its factory and transporting its finished products to dealers, who then sell the finished products.
Further, power subsidy, interest subsidy and insurance subsidy were also reimbursed, either wholly or partially, power being a necessary element of the cost of manufacture of the respondent’s products, and insurance subsidy being necessary to defray costs for both manufacture and sale of the said products. 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 also relied upon a judgment of the Calcutta High Court dated 15.1.2015, in C.I.T. v. Cement Manufacturing Company Limited, which has followed the Gauhati High Court, and a judgment of the Delhi High Court in CIT v. Dharampal Premchand Ltd., 317 ITR 353.
Held by Supreme Court
The Supreme Court held that all the decisions relied upon by the revenue are distinguishing from the facts of current case. In the case of Cambay Electric Supply Industrial Company Limited v Commissioner of Income Tax, Gujarat II (1978) 2 SCC 644, 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. 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.
Similarly case of Commissioner Of Income Tax, Karnataka v. Sterling Foods, Mangalore, (1999) 4 SCC 98 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. 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.
Similarly, the judgment in Pandian Chemicals Limited v Commissioner of Income Tax 262 ITR 278 is also distinguishable, as interest on a deposit made for supply of electricity is not an element of cost at all, and this being so, is therefore a step removed from the business of the industrial undertaking. Also Liberty India (2009) 9 SCC 328 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.
On facts of present case, 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 carried on by the assessee. However, in CIT v. Andaman Timber Industries Ltd., 242 ITR 204 [2000], the same High Court arrived at an opposite conclusion in considering whether a deduction was allowable under Section 80HH of the Act in respect of transport subsidy without noticing the aforesaid earlier judgment of a Division Bench of that very court. 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 held that the Supreme Court in the case of Sahney Steel and Press Works Ltd. & Others versus Commissioner of Income Tax, reported in [1997] 228 ITR held 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. 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 Pradesh by making the business of production and sale of goods in the State more profitable. The judgment in Merino Ply & Chemicals Ltd. and the recent judgment of the Calcutta High Court have correctly appreciated the legal position.
Further submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head “income from other sources”. Section 28(iii)(b) specifically 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 production of goods of a particular business would also have to be included under the head “profits and gains of business or profession”, and not under the head “income from other sources”.
Accordingly, appeal of the appellant dismissed.
