Subsidy income derived from business of industrial undertaking eligible for section 80IB deduction

Tata Chemicals Limited Vs DCIT (ITAT Mumbai)

Facts- The assessee has raised the ground with respect to the taxability of sales tax incentive whether is an income chargeable to tax and, if yes, whether same is eligible for deduction u/s 80 IB of the income tax act and whether the fertilizer subsidy provided by the government as per price concession was an income eligible for deduction u/s 80 IB of the income tax act, has not been decided.

Conclusion- Hon Supreme court has considered whether various types of subsidies received by the assessee manufacturer are eligible for deduction u/s 80 IB / IC of the act or not. It held that these subsidies are income derived from business of eligible industrial undertaking.

Therefore, based on the ratio laid down by the honourable Supreme Court, assessee is eligible for deduction u/s 80 IB of the Income Tax Act on fertilizer subsidy received by it. Accordingly, we hold that the fertilizer subsidy income received by the assessee is income derived from the business of the industrial undertaking and is eligible for deduction u/s 80 IB of the income tax act. Accordingly, ground number 5 of the appeal is allowed to that extent.

Held that the assessee is eligible for deduction u/s 80 IB of the Income Tax Act on fertilizer subsidy received by it. Accordingly, we hold that the fertilizer subsidy income received by the assessee is income derived from the business of the industrial undertaking and is eligible for deduction u/s 80 IB of the income tax act.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

01. This appeal is recalled by order of the coordinate bench in Miscellaneous Application number 136/M/2021 in ITA number 2439/M/2011 for assessment year 2003 – 04 passed on 17/9/2021 wherein as per paragraph number 12 it has been held that additional ground raised by the assessee number 3 with respect to the taxability of sales tax incentive whether is an income chargeable to tax and, if yes, whether same is eligible for deduction u/s 80 IB of the income tax act as well as part of ground number 5 whether the fertilizer subsidy provided by the government as per price concession was an income eligible for deduction u/s 80 IB of the income tax act, has not been decided. Therefore, accordingly to that extent the order of the coordinate bench 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 ₹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 ₹ 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 Ltd. The effective date of amalgamation was 1 June 2004 and the appointed date was 1 April 2002. Based on this the assessee filed revised return of income wherein the claim u/s 80 IB, was not made but , disclosure was made that the same will be claimed at the time of assessment. During the course of assessment proceedings letter dated 30 November 2005 was submitted claiming deduction u/s 80 IB of ₹ 75,959,000 at the rate of 30% of the profit. This was the fourth year of tax holiday period. Audit report in form number 10 CCB was also filed. Ld AO denied the deduction.

05. The learned CIT – A as per the history of assessment year 2002 – 03 in case of Hindustan Lever chemicals Ltd noted that the Sales tax remission and price concession (subsidy) forming part of 80 IB claim were rejected by the assessing Officer in that year and therefore for the year sales tax remission of ₹ 3.31 crores and price concession subsidy of Rs 105.40 crores which have been included in the computation of claim u/s 80 IB of the act were rejected. Accordingly the 80 IB profit as per revised return of ₹ 253,196,667 was converted into a loss of ₹ 833,951,044/–.

06. Based on the above facts the assessee is aggrieved that the Sales tax remission of ₹ 3.31 crores and fertilizer price concession from government of Rs 105.40 crores should be included as an eligible income for deduction u/s 80 IB of the act.

07. The coordinate bench Per its order dated 19/2/2021 dealt with the [5] ground of appeal as per para number 16 wherein assessee challenged the exclusion of fertilizer subsidy provided by the government is a price concession held to be not an eligible income from the industrial undertaking and also as per ground number (b) the sales tax incentive holding that it does not have a direct nexus with the activities of the industrial unit.

08. Assessee also raised additional ground with respect to the taxability of sales tax incentive money of ₹ 33,061,201/–

09. Coordinate bench decided ground no [5] and additional ground of sales tax remission not an income as under :-

“16. The 5th ground of appeal

a. The Ld. CIT(A) erred in upholding the disallowance of deduction u/s 80(IB) of ₹ 25,31,96,667/-, in respect of the fertilizer unit of Haldia:

b. without going through the detailed submissions made, 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).

The assessee has also filed and additional ground, which reads as under:

“That the Sales Tax Incentive money of ₹ 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 ₹ 2.87 crores. In the return of income, section 80IB claim of ₹ 7.59 crores was made in respect of its 3 new industrial undertakings located in category ―B‖ industrially backward district i.e. Midnapore, West Bengal. The return of income was processed u/s 143(1) and the refund arising on intimation was adjusted against the outstanding demand of HLCL for AY 1997-98. While processing the return of income u/s 143(1), TDS and advance tax payments of HLCL were not considered. The effective date of amalgamation was June 01, 2004 and the appointed date of amalgamation was April 01, 2002 i.e. HLCL amalgamated with the assessee w.e.f. April 2002. After amalgamation, the assessee filed a revised return of income for the financial year 2002-03 relevant to the impugned assessment year, incorporating the working results of HLCL. In the revised return of income, section 80IB claimed was not made but the disclosure was made that the same will be claimed at the time of assessment. Accordingly, during the course of assessment proceedings for the impugned assessment year, vide letter dated 30.11.2005, section 80IB claim of ₹ 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. The audit report in Form No. 10CCB along with audited accounts of the new industrial undertakings duly certified by the chartered accountant was also filed. Before the revised return of income was filed by the assessee-company, notice u/s 148-dated 31.03.2005 was issued by the AO of the erstwhile HLCL.

The AO having gone through the assessment records of AY 2002-03 of HLCL (earlier assessment year) noted that sales tax remission and price concession (subsidy) forming part of section 80IB claimed were rejected by the AO in that year. Observing that during year under consideration, both the items i.e. sales tax remission of ₹ 3.31 crores and price concession (subsidy) of ₹ 105.40 crores have been included in the computation of claim u/s 80IB of the Act, the AO disallowed the above sums by following the order of his predecessor for the earlier assessment year.

17. In appeal, the Ld. CIT (A) held that sales tax remission/subsidy has been received on account of the scheme of the Government for setting up the industrial unit in the ‘backward district‘; this finding is supported by the fact that the old unit was not in receipt of any such incentive; it is not the industrial unit from which this benefit was derived by the appellant but the 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 ₹ 9,350/- per metric ton, the selling price of the assessee was only ₹ 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 concessions were computed separately for individual units, now said concessions were being given uniformly to all the units in respect of similar variety of fertilizer and this also reflected that the concession by the Government was merely an aid to the assessee.

Further dismissing the contentions of the assessee that the fertilizer concessions being related to the sale of fertilizer products flew directly from the operations of the industrial undertaking, the Ld. CIT(A) observed that the concessions being received from the Government is a ‘step removed‘ from the principal activity of the assessee-company namely-production and sale of fertilizer; it was not the industrial undertaking which yielded the subject income by way of sales tax concession but the scheme of the Government which made it possible for the assessee to receive those amounts and the existence of such a scheme was not an essential part of the industrial undertaking.

Further dismissing the contentions of the assessee that the terms ‘profits and gains derived from any business‘ is wide enough to cover profits having indirect nexus with the industrial undertaking, the Ld. CIT(A) observed that the income from fertilizer concession is clearly relatable only to the Government scheme and not to the industrial undertaking per se; the contentions that the incentive provisions should be construed liberally would not mean that the incentives be allowed in respect of ineligible units.

Referring to the order of the AO, wherein the case of M/s Hind Lever chemicals Ltd. (AY 2002-03) is brought out to show how the assessee is not eligible for section 80IB deduction in respect of fertilizer concession/subsidy, the Ld. CIT (A) affirmed the order of the AO disallowing the claim of the assessee of deduction u/s 80IB of the Act.

18. Before us, the Ld. counsel reiterating the statement of facts filed before the Ld. CIT(A), submits that for the year under consideration, HLCL (since amalgamated with the assessee-company) filed its return of income on 28.11.2003 at Chandigarh before Addl. CIT, claiming a refund of ₹ 2.87 crores. In the said return, section 80IB claim of ₹ 7.59 crores was made in respect of its 3 new industrial undertakings located in category ―B’ industrially backward district i.e. in Midnapore, West Bengal. It is stated that 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. 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 ₹ 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 ₹ 3.31 crores and price concession (subsidy) of ₹ 105.40 crores, included in the computation of section 80IB claim, the Ld. counsel submits that the sales tax collected is a part of trading receipt as held by the Hon‘ble Supreme Court in the case of Sinclair Murray & Co. Pvt. Ltd. v. CIT 97 ITR 615 (SC) and cannot be excluded from the income of the unit. Further, it is submitted that the fertilizer concession received by the assessee is nothing but part of the sale proceeds, which cannot be excluded while working out profit u/s 80IB of the Act.

19. On the other hand, the Ld. DR submits that the sales tax remission/subsidy has been received on account of the Scheme of the Government for setting up the industrial unit in ‘backward district’, hence, it is not the industrial unit from which this benefit was derived by the assessee but the Government‘s Scheme allowing such benefit, depending upon the location of the industry. Thus, it is stated that the Ld. CIT (A) has rightly confirmed the order of the AO.

Regarding the fertilizer subsidy, the Ld. DR submits that the concession by the Government was merely an aid to the assessee and there is no merit in the contentions of the assessee that fertilizer concessions being related to the sale of fertilizer products flew directly from the operations of the industrial undertaking. Referring to the order of the Ld. CIT (A), the Ld. DR submits that it was not the industrial undertaking which yielded the subject income by way of sales tax concession but the scheme of the Government which made it possible for the assessee to receive those amounts and the existence of such scheme was not an essential part of the industrial undertaking. Referring to the order of the AO that in the case of M/s Hind Lever chemicals Ltd. (AY 2002-03) as to how the assessee was not eligible for section 80IB deduction in respect of fertilizer concession/subsidy, the Ld. DR submits that the order of the Ld. CIT (A) in respect of the above ground of appeal be affirmed.

20. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.

As mentioned earlier, it is the contentions of the Ld. counsel that for the year under reference, HLCL (since amalgamated with the assessee) filed its return of income on 28.11.2003 claiming a refund of ₹ 2.87 crores ; in the said return of income, section 80IB claim of ₹ 7.59 crores was made in respect of its 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 ₹ 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 ₹ 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 assessee as the subsidy claim arises only upon sale of the fertilizer to the farmers ; the subsidy is nothing but a difference between cost of sales and MRP indicated by the Government; it is the subsidy amount which alone permits the manufacturer, like the present assessee to recover is uncovered cost of production including distribution cost and minimal margin allowed; it is only pursuant to the sale of fertilizer to the farmers would the assessee be eligible to receive subsidy; the fertilizer concession received by the assessee is nothing but part of sales proceeds, which cannot be excluded while working out profit u/s 80IB of the Act;

In respect of sales tax remission of ₹ 3.31 crores, it is the contentions of the assessee that it sold its products at notified prices and charged sales tax in the invoices ; in the books of accounts, sales tax collected was shown as sales tax incentive and not deposited the Government as per the Industrial Development Policy of the State; sales tax remission/subsidy is arising only on account of sales from fertilizers to the farmers, which clearly indicates that the sales tax remission has direct nexus with the activities of the industrial undertaking

Having examined the materials available on record, we find that the AO has not examined in proper perspective the above contentions of the assessee. As the above contentions have a direct bearing on the above ground of appeal, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to pass an order afresh on the above 5th ground along with the additional ground raised for the first time before us, after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. As the matter has been restored to the file of the AO, we are not adverting to the case laws relied on by the Ld. Counsel. Thus the 5th ground of appeal along with the additional ground is allowed for statistical purposes.‖

010. On careful reading of the order of the coordinate bench as above, it is apparent that, as per paragraph number 16 the coordinate bench reproduced ground number 5 and admitted the additional ground as per page number 15 – 16 of the order. In paragraph number 17 the coordinate bench also considered the order of the learned CIT – A wherein it has been categorically held 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 by the assessee recalled the above order vide paragraph number 12 as under:-

’12. We noted that the facts relating to the issue whether the Sales tax incentive or fertilizer subsidy is capital receipt or a revenue receipt, the adjudication by the tribunal is not there. Hence, without commenting on the facts, we recall the order of the tribunal on this issue and the direct the registry to fix this appeal.‘

012. The learned authorised representative on the basis of the above order passed by the coordinate bench stated that two issues are required to be decided. The first one with the respect to the sales Tax subsidy, whether the same is income of the assessee or not. The second issue was with respect to the fertilizer subsidy whether, it is derived from eligible business of industrial undertaking, or not and therefore, whether it is eligible for deduction u/s 80 IB of the act or not. It is further claimed that if the Sales tax subsidy is held to be an income, and not capital receipt, then whether such sales tax subsidy is also eligible for deduction u/s 80 IB of the act or not by deciding whether same is income derived from the business of industrial undertaking or not.

013. The learned authorised representative referred to the West Bengal incentive scheme 1999 effective for five years from 1/4/1999 – 31/3/2004. He submitted that the above benefits are available to the assessee as the unit of assessee is setup in Midnapore district. He said that according to the scheme the assessee is eligible for sales tax deferment/remission on sale of finished goods for a period of nine years. He submitted the copy of the scheme, which is placed at item number 11 of the paper book. He also submitted that the purpose of the scheme will decide whether the sum is taxable or not. He submitted that once the above sum is held to be not chargeable to income tax, the question of its deduction is eligible and income u/s 80 IB of the income tax act does not arise. To support case of the assessee, he relied on decision of the coordinate bench in case of Bushan steel Ltd 63 com 96 (2015), Chaphalkar Bros (2018) 400 ITR 279 (SC), Kirloskar oil engines Ltd (2014) 364 ITR 88 (Bom) and Mapco industries Ltd (2009) 319 ITR 208 (SC).

014. The learned departmental representative stated that the above issue was not before the learned assessing officer or the learned CIT – Al and therefore 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 according to clause number [7] this area was covered under the scheme> According to scheme, assessee has option either to defer the payment of the Sales tax or remission of the Sales tax on sale of finished goods. It is apparent that assessee has opted for the remission of sales tax due for payment by the unit for nine years which is subject to ceiling of 100 % of the gross value of the fixed capital asset of the approved project. On reading of the scheme, it is apparent that it is formulated to extend incentive for promotion of industries in the state.

017. As held by Honourable Supreme court in CIT Madras Vs Ponni Sugar [2008] 174 Taxman 87 (SC)/[2008] 306 ITR 392 (SC)/[2008] it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. In the present case when once the object of subsidy is to industrialize state, it is capital receipt. All the judgments cited before us also lay down the same ratio. Even otherwise subsidy is included in the definition of Income u/s 2 (24) (xviii) with effect from 1/4/2016. Accordingly, we hold that Sales tax incentive money received of Rs 430,61,201/– 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.

018. Accordingly additional ground 3 raised by the assessee is allowed.

019. With respect to the fertilizer subsidy, whether it is income derived from the industrial undertaking or not, the learned authorised representative submitted that issue is squarely covered in favour of the assessee by the decision of honourable Supreme Court in case of Meghalaya steel Ltd 383 ITR 279 (SC). He also referred to paragraph number 14.4 of the order of the learned CIT – A to show that the fertilizer subsidy is eligible for deduction u/s 80 IB of the income tax act. It was submitted selling price of the fertilizer was much less than the maximum retail price therefore subsidy is given. It was explained that in case of DAP the maximum retail price was fixed by the government at ₹ 9350 per metric ton and the selling price of the assessee was only Rs. 8458/- per MT and therefore the assessee was not able to sell the products and the maximum retail 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 fertilizer subsidy is income derived from the business of industrial undertaking.      Therefore, same is eligible for deduction u/s 80 IB of the act.

020. The learned departmental representative vehemently supported the order of the learned assessing officer and stated that in the earlier years the issue has been decided against the assessee and therefore now the issue has been correctly set-aside by the coordinate bench to the file of the learned assessing officer for verification whether the income from fertilizer subsidy is eligible for deduction u/s 80 IB of the income tax act or not.

021. We have carefully considered the rival contention and perused orders of the lower authorities. The fact shows fertilizers produced by the appellant are under the retention-pricing scheme. Accordingly, the government decides the maximum retail price and the difference between costs less maximum retail price is paid to the appellant by the way of product subsidy. These are in fact part of the cost recovered from the government and it is directly related to the sale of fertilizer to the farmers. For example, the cost of fertilizer production and its distribution to the manufacturer is ₹ 300 and if it is sold to the farmers at the maximum retail price of ₹ 200 and the balance price of Rs 100/- is recovered from the government by way of the above subsidy. Thus, the manufacturers are paid the above subsidy to enable them to sell the fertilizers at or below the indicated maximum retail price to the farmers.

The issue is whether that Rs 100/- received from Government is  part of profit derived from the business of eligible undertaking or not.

022. We find that now the issue squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of Meghalaya steel (supra) wherein it has been held as Under:-

“9. We have heard learned counsel for the parties. Before embarking on a discussion of the relevant case law, we think it is necessary to set out Sections 80-IB and 80-IC insofar as they are relevant for the determination of the present case.

“80-IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings

(4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking:

Provided that the total period of deduction does not exceed ten 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 sub­section 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, 2012 had been substituted:

Provided also that no deduction under this sub­section 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) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), 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, as specified in sub-section (3).”

10. There is no dispute between the parties that the businesses referred to in Section 80-IB are businesses which 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 announcements, the industrial development in North Eastern Region has not come up to our expectations. To give industrialisation a fillip in this area of the country, I propose a 10 year tax holiday for all industries set up in Growth Centres, Industrial Infrastructure Development Corporations, and for other specified industries, in the North Eastern Region. I would urge the industrial entrepreneurs from this part of the country to seize the opportunity and set up modern, high value added manufacturing 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 sub­section (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 mind 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  Income-tax [1975] 101 ITR 796 (SC) and the third in Additional Commissioner of Income- tax v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) where the speech made by the Finance Minister while introducing the exclusionary clause in Section 2 Clause (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 Sub­section (2) was found necessary. It is apparent from the speech of the Finance Minister that Sub-section (2) was enacted for the purpose of reaching those cases where there was under­statement of consideration in respect of the transfer or to put it differently, the actual consideration received for the transfer was ‘considerably more’ than that declared or shown by the assessee, but which were not covered by Sub-section (1) because the transferee was not directly or indirectly connected with the assessee. The object and purpose of Sub­section (2), as explicated from the speech of the Finance Minister, was not to strike at honest and bona fide 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-statement of the consideration. This was real object and purpose of the enactment of Sub-section (2) and the interpretation of this sub-section must fall in line with the advancement of that object and purpose. We must therefore accept as the underlying assumption of Sub-section (2) that there is under-statement of consideration in respect of the transfer and Sub-section (2) applies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of 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 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 electricity. In this connection it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General it has used the expression “derived from”, as for instance in s. 80J. In our view since the expression of wider import, namely, “attributable to” has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.” (Para 8)

14. In CIT v. Sterling Foods [1999] 104 Taxman 204, 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 Industrial Co. Ltd.’s case (supra) and emphasized the difference between the wider expression “attributable to” as contrasted with “derived from”. In the course of the judgment, this Court stated that the industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit. Having said this, this Court finally held:—

“We do not think that the source of the import entitlements can be 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. where under 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 consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessees’ industrial undertaking.” (Para 13)

15. Similarly, in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539  (SC) , this Court dealt with the claim for a deduction under Section 80HH of the Act. 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 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 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 industrial undertaking after specified date(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words “derived from industrial undertaking” as against “profits attributable to industrial undertaking”.

35. 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.

36. Therefore, in our view, 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 under Section 80-IB. They belong to the category of ancillary profits of such Undertakings.’ (Paras 34, 35 and 36)

17. An analysis of all the aforesaid decisions cited on behalf of the Revenue becomes necessary at this stage. In the first decision, that is in Cambay Electric Supply Industrial Co. Ltd.’s case (supra) 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. In short, a step removed from the business of the industrial undertaking would also be subsumed within the meaning of the expression “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-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 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 business of the assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of 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 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 selling costs reimbursed to the assessee by the Government concerned.

19. Similarly, the judgment in Pandian Chemicals Ltd.’s case (supra) 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. The derivation of profits on such a deposit made with the Electricity Board could not therefore be said to flow directly from the industrial 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’s case (supra) 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 inseparably connected with the business carried on by the assessee. In that case, the Division Bench held:—

“We do not find any perversity in the Tribunal’s finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that 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 and in arriving at such a decision on the facts the Tribunal committed no error.”

22. However, in CIT v. Andaman Timber Industries Ltd., [2000] 242 ITR 204/109 Taxman 135 (Cal.), 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 Cement Mfg Co. Ltd.’s case (supra) by a judgment dated 15.1.2015, distinguished the judgment in Andaman Timber Industries Ltd.’s case (supra) and followed the impugned judgment of the Gauhati High Court in the present case. 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 204/109 Taxman  135 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 representing such subsidy cannot be treated as profit derived from the industrial undertaking. Mr. Bandhypadhyay submitted that it is not a profit derived from the undertaking. The benefit under section 80IC could not therefore have been granted.

He also relied on a judgment of the Supreme Court in the case of Liberty India v. 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 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.’

23. We are of the view that the judgment in Merinoply & Chemicals Ltd.’s case (supra) and the recent judgment of the Calcutta High Court have correctly appreciated the legal position.

24. We do not find it necessary to refer in detail to any of the other judgments that have been placed before us. The judgment in Jai Bhagwan Oil and Flour Mills’ case (supra) is helpful on the nature of a transport subsidy scheme, which is described 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 playing field so that they could compete with their counterparts in central (non-remote) areas.

The huge transportation cost for getting the raw materials to the industrial unit and finished goods to the existing market outside the state, was making it unviable for industries in remote parts of the country to compete with industries in central areas. Therefore, industrial units in remote areas were extended the benefit of subsidized transportation. For industrial units in Assam and other north-eastern 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.’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, 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 and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his 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”, which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. 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”.

29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods (supra) and Liberty India’s cases (supra) to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove.’

023. Hon Supreme court has considered whether various types of subsidies received by the assessee manufacturer are eligible for deduction u/s 80 IB / IC of the act or not. It held hat these subsidies are income derived from business of eligible industrial undertaking . The above decision of the honourable Supreme Court has already considered the other decisions of the honourable Supreme Court which are relied upon by the learned CIT – A. Therefore, based on the ratio laid down by the honourable Supreme Court, assessee is eligible for deduction u/s 80 IB of the Income Tax Act on fertilizer subsidy received by it. Accordingly, we hold that the fertilizer subsidy income received by the assessee is income derived from the business of the industrial undertaking and is eligible for deduction u/s 80 IB of the income tax act. Accordingly, ground number 5 of the appeal is allowed to that extent.

024. In the result additional ground raised by the assessee vide additional ground number 3 and ground number 5 of the appeal is allowed.

025. In the result, appeal filed by the assessee to the extent recalled is allowed.

Order pronounced in the open court on 16.02.2022.