REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.7622 OF 2014
COMMISSIONER OF INCOME TAX …APPELLANT
VERSUS
M/S. MEGHALAYA STEELS LTD. …RESPONDENT
WITH
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
power.
(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
2
(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
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 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
hereinabove.
30. All the aforesaid appeals are, therefore, dismissed with no order as
to costs.
……………………………J.
(Kurian Joseph)
……………………………J.
(R.F. Nariman)
New Delhi;
March 09, 2016.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.7622 OF 2014
COMMISSIONER OF INCOME TAX …APPELLANT
VERSUS
M/S. MEGHALAYA STEELS LTD. …RESPONDENT
WITH
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
power.
(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
2
(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
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 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
hereinabove.
30. All the aforesaid appeals are, therefore, dismissed with no order as
to costs.
……………………………J.
(Kurian Joseph)
……………………………J.
(R.F. Nariman)
New Delhi;
March 09, 2016.
