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Monday, March 14, 2016

subsidies = 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”.


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO.7622 OF 2014


                        CIVIL APPEAL NO.8493 OF 2012
                        CIVIL APPEAL NO.8494 OF 2012
                        CIVIL APPEAL NO.8496 OF 2012
                        CIVIL APPEAL NO.2560 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.36578 OF 2013)
                        CIVIL APPEAL NO.2561 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.36579 OF 2013)
                        CIVIL APPEAL NO.2562 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.36581 OF 2013)
                        CIVIL APPEAL NO.2563 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.37831 OF 2013)
                        CIVIL APPEAL NO.2564 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.37833 OF 2013)
                        CIVIL APPEAL NO.2565 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.37834 OF 2013)
                        CIVIL APPEAL NO.2566 OF 2016
              (ARISING OUT OF SLP (CIVIL) NO.6867 (CC 224/2014)
                        CIVIL APPEAL NO.2567 OF 2016
             (ARISING OUT OF SLP (CIVIL) NO.6869 (CC 1543/2014)

                        CIVIL APPEAL NO.2568 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.11094 OF 2014)
                        CIVIL APPEAL NO.2569 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.11095 OF 2014)
                        CIVIL APPEAL NO.2570 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.12710 OF 2014)
                        CIVIL APPEAL NO.3624 OF 2015
                        CIVIL APPEAL NO.2571 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.24620 OF 2014)
                        CIVIL APPEAL NO.2572 OF 2016
                (ARISING OUT OF SLP (CIVIL) NO.11319 OF 2015)
                        CIVIL APPEAL NO.3623 OF 2015
                        CIVIL APPEAL NO.5238 OF 2015
                        CIVIL APPEAL NO.5239 OF 2015
                        CIVIL APPEAL NO.5236 OF 2015
                        CIVIL APPEAL NO.6040 OF 2015
                        CIVIL APPEAL NO.6039 OF 2015
                        CIVIL APPEAL NO.7623 OF 2014
                        CIVIL APPEAL NO.7624 OF 2014

                        J U D G M E N T

R.F. Nariman, J.

1.    Delay condoned in filing the special leave petitions.

2.    Leave granted in SLP  (C)  Nos.  36578/2013,  36579/2013,  36581/2013,
37831/2013, 37833/2013, 37834/2013,  SLP(C)  No.………CC  No.224/2014),  SLP(C)
No.………CC  No.1543/2014),  SLP(C)  Nos.11094/2014,  11095/2014,   12710/2014,
24620/2014, 11319/2015.

3.    This group of appeals arises from the State of Meghalaya and  concerns
deductions to be made under Sections 80-IB and 80-IC of the Income Tax  Act,
1961.  Civil Appeal No.7622 of 2014 has been treated as the lead  matter  in
which a judgment  of  the  Gauhati  High  Court  dated  29.5.2013  has  been
delivered, which has been followed in all the other appeals.

4.    Civil Appeal No.7622 of 2014  concerns  itself  with  two  income  tax
appeals filed by  the  Revenue  against  the  judgment  of  the  Income  Tax
Appellate Tribunal, ITA  No.7/2010  arising  out  of  the  applicability  of
Section 80-IB, and ITA  No.16/2011  arising  out  of  the  applicability  of
Section 80-IC.   For  the  purpose  of  these  matters,  the  facts  in  ITA
No.7/2010 are narrated hereinbelow.

5.    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 of the Income  Tax  Act  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.2,64,94,817.00

Interest subsidy -           Rs.2,14,569.00

Power subsidy -              Rs.7,00,000.00

Total -                      Rs.2,74,09,386.00

6.    The Assessing Officer, in the assessment order dated  7.12.2006,  held
that the  amounts  received  by  the  assessee  as  subsidies  were  revenue
receipts and did not qualify for deduction under  Section  80-IB(4)  of  the
Act and, accordingly, the respondent’s claim for deduction of an  amount  of
Rs.2,74,09,386/- on account of  the  three  subsidies  afore-mentioned  were
disallowed.   The  respondent-assessee  preferred  an  appeal   before   the
Commissioner of Income Tax (Appeals), Guwahati, who, vide  his  order  dated
8.3.2007,  dismissed  the  appeal  of  the  respondent.   Aggrieved  by  the
aforesaid order, the respondent preferred an appeal before the  ITAT  which,
by its order dated 19.3.2010, allowed the appeal  of  the  respondent.   The
Revenue carried the matter thereafter to the High Court, under Section  260A
of the Act, which resulted in the impugned judgment dated  29.5.2013,  which
decided the matter against the Revenue.  Revenue is therefore before  us  in
appeal against this judgment.

7.    Shri Radhakrishnan, learned senior advocate  appearing  on  behalf  of
the Revenue, argued before us 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 of  the  Act.   In
the course of his lengthy submissions, he made  reference  to  a  number  of
judgments including 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).  He also relied upon Sections 80-A and  80-AB  in
order to demonstrate the scheme of deductions allowable under  Part-VI-A  of
the Income Tax Act.  He also referred us to Sections 56 and 57 (iii) of  the
Act to buttress his  submission  that  subsidies  being  in  the  nature  of
“income from other sources”  could  not  be  allowed  to  be  deducted  from
profits and gains of business, which fell under a different  sub-heading  in
Section 14 of the Act.  According to him, there is  one  interpretation  and
one interpretation alone of  Sections  80-IB  and  80-IC,  which  cannot  be
deviated from with reference to any so-called object of the said sections.

8. Countering these submissions, Shri P. Chidambaram Learned Senior  Counsel
appearing on behalf of the assessee, 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  sought  to  distinguish   the   judgments   cited   by   Shri
Radhakrishnan, in particular the judgment of this Court in   Liberty  India,
on the ground that the said judgment did not deal with a  subsidy  relatable
to cost of manufacture but dealt with a DEPB drawback scheme, which  related
to export of goods and not manufacture of goods, thereby rendering the  said
decision inapplicable to the facts of the present  case.   Shri  S.  Ganesh,
learned senior counsel appearing  on  behalf  of  some  of  the  respondent-
assessees, reiterated the submissions made by Shri P. Chidambaram and  added
that as all the subsidies went towards cost of manufacture or  sale  of  the
products of the respondent, such subsidies being amounts of cost which  were
actually incurred by the respondent and thereafter reimbursed by the  State,
the principle of netting off recognized in several decisions of  this  Court
ought to be applied, and on application of the said principle, it  is  clear
that the subsidy received by the respondent was  only  to  depress  cost  of
manufacture and/or sale and would therefore be “derived  from”  profits  and
gains made from the business  of  the  assessee.   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.

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

(1) Where the gross total income of an assessee  includes  any  profits  and
gains derived from any business referred to  in  sub-sections  (3)  to (11),
(11A) and  (11B)  (such  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, in any part of India:
Provided that the condition in this clause shall, in  relation  to  a  small
scale industrial undertaking or an industrial  undertaking  referred  to  in
sub-section (4) shall apply as if the words "not being any article or  thing
specified in the list in the Eleventh Schedule" had been omitted.
Explanation 1- For the purposes of  clause  (ii),  any  machinery  or  plant
which was used outside India by any person other  than  the  assessee  shall
not be regarded as machinery or plant previously used for  any  purpose,  if
the following conditions are fulfilled, namely:-
(a) such machinery or plant was not, at any time previous  to  the  date  of
the installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any country  outside
India; and
(c) no deduction on account of depreciation in respect of such machinery  or
plant has been allowed or is allowable under the provisions of this  Act  in
computing the total income of any person for any period prior  to  the  date
of the installation of the machinery or plant by the assessee.
Explanation  2-  Where  in  the  case  of  an  industrial  undertaking,  any
machinery or plant or any part thereof previously used for  any  purpose  is
transferred to a new business and the total value of the machinery or  plant
or part so transferred does not exceed twenty per cent of  the  total  value
of the machinery or plant used in the business, then, for  the  purposes  of
clause (ii) of this sub-section, the condition specified  therein  shall  be
deemed to have been complied with;
(iv) in a case where the industrial  undertaking  manufactures  or  produces
articles or things, the  undertaking  employs  ten  or  more  workers  in  a
manufacturing process carried on with the aid of power,  or  employs  twenty
or more workers in a manufacturing process carried on  without  the  aid  of

(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 fulfillment 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, 2012 had been substituted:
Provided also that no deduction under this sub-section 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.”

1  “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
sub-section (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. Income Tax Officer,  Ernakulam  and  Anr.,  (1982)  1  SCR  629,
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  Sub-section  (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 under-statement 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 Sub-section (2), as explicated from the speech of  the
Finance Minister, was not to strike  at  honest  and  bonafide  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  Company  Limited  v.
Commissioner of Income Tax, Gujarat II, (1978) 2 SCC 644, 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  Commissioner  Of  Income  Tax,  Karnataka  v.   Sterling   Foods,
Mangalore, (1999) 4 SCC 98, 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 (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.  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  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 Limited v Commissioner of Income  Tax,
262 ITR 278, 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 v. Commissioner of Income Tax, (2009)  9  SCC
328.  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 Company Limited v Commissioner  of  Income
Tax, Gujarat II, 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 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  Limited  v  Commissioner
of Income Tax 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 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 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.  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.,  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 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 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

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 Merino Ply  &  Chemicals  Ltd.
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  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. v.  Commissioner  of
Income Tax, A.P. - I,  Hyderabad  (1997)  7  SCC  764,  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  CIT  v.
Dharampal Premchand Ltd., 317 ITR 353 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 and Liberty India  to  arrive  at  the  opposite
conclusion, is held to be wrongly  decided  for  the  reasons  given  by  us

30.   All the aforesaid appeals are, therefore, dismissed with no  order  as
to costs.

                                  (Kurian Joseph)

                                  (R.F. Nariman)
New Delhi;
March 09, 2016.

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