2009-VIL-442--DT

Equivalent Citation: [2011] 330 ITR 117

HIMACHAL PRADESH HIGH COURT

Date: 19.10.2009

COMMISSIONER OF INCOME-TAX

Vs

GHERIA OIL GRAMUDYOG WORKERS WELFARE ASSOCIATION

BENCH

DEEPAK GUPTA, AHUJA V. K., JJ

JUDGMENT

Deepak Gupta J.-

The following questions of law arise for decision in this appeal :  

"1. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that `interest subsidy' received by the assessee under a scheme formulated by the State Government forms part of profits derived from the industrial undertaking and is hence eligible for deduction under section 80-IB of the Income-tax Act, 1961, when it has been clearly laid down by the hon'ble Supreme Court in the cases of CIT v. Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84 and CIT v. Sterling Foods [1999] 237 ITR 579 (SC) that the words `derived from' referred to in section 80-IB have a narrower meaning than `attributable to', and the interest subsidy could not have been treated as profits `derived' from the industrial undertaking ?  

2. Whether the Income-tax Appellate Tribunal was right in following its own decision in an earlier case, ignoring the principles laid down by the hon'ble Supreme Court in the above mentioned judgments, and the decision of different High Courts relating to various incentive incomes rendered on the basis of these principles, by merely observing that the issue has not been decided by the jurisdictional High Court of Himachal Pradesh or by the apex court ?"  

2. The admitted facts are that in terms of incentives policy issued by the State of Himachal Pradesh to encourage the setting up of industries in remote areas has framed a scheme for grant of subsidy on the interest paid by the industrial undertaking. The question which arises is whether this interest subsidy is income derived from the business of industrial under-taking and can be included in the profits eligible for deduction under section 80-IB of the Income-tax Act, 1961.  

3. Learned counsel for the parties has cited a number of authorities before the court. The basic authority on the point is CIT v. Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84 (SC). In that case, the apex court was dealing with the provisions of section 80E of the Act prior to its amendment in 1967. The assessee was carrying on the business of generation and distribution of electricity. It sold out some of its machinery and building. The question which arose was whether the amount earned from the sale of the machines and buildings was attributable to the business of the industry. The apex court held as follows (page 93) :  

"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 section 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.”

4. Relying on these observations of the apex court it is contended on behalf of the Revenue that since in section 80-IA the word "derived" has been used, the interest subsidy cannot be said to be derived from the business of the industrial undertaking.  

5. In Ashok Leyland Ltd. v. CIT [1997] 224 ITR 122 (SC), the industry was carrying out a priority industry and the question which arose before the apex court was whether the profits and gains arising from the import and sale of spare parts can be said to be attributable to the priority industry. Relying upon the law laid down in Cambay's case the apex court held that the word "attributable" has a wide meaning and concluded that the profits from sale of imported spare parts were attributable to the priority industries.

6. In CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad), a Division Bench of the Madras High Court dealt with the question as to the gains eligible for deduction under section 80HH of the Income-tax Act. In that case, the assessee was required to make a deposit before the Electricity Board before power supply was given to it. The assessee earned interest on this deposit. The question was whether this deposit is an income derived from an industrial undertaking to be eligible for relief under section 80HH. After analyzing the entire case law, the Madras High Court held as follows (page 506) :  

"A study of various case law clearly indicates that a restricted meaning is given when the Legislature uses the expression, `derived from'. Though the assessee has necessarily to make the deposit with the Electricity Board for running the industry and the power supply will not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board cannot be said to have been derived from the industrial undertaking. The immediate source of interest is the deposit itself, and the effective source of the genealogy of the source of the interest income is the deposit and not business, as the industrial undertaking is removed by one step from the source of income for the interest. Hence, the interest income cannot be held to be derived from the industrial undertaking."  

7. The Madras High Court had placed reliance on the judgment of the Karnataka High Court in Sterling Foods Ltd. v. CIT [1984] 150 ITR 292. The judgment of the Karnataka High Court was upheld by the apex court in CIT v. Sterling Foods [1999] 237 ITR 579. In this case, the assessee had sold the import entitlements and had thus derived profit. The question which arose was whether the receipts from the sale of import entitlements were eligible for relief under section 80HH. The assessee was engaged in the business of processing prawns and other sea food which it exported. Due to export of items of its products it earned some import entitlements granted by the Central Government under the Export Promotion Scheme. The assessee was entitled to use the import entitlements itself or sell the same to others. The assessee sold the import entitlements. The question before the apex court was whether the amount received for sale of import entitlements was income derived from business. The apex court held as follows (page 584) :  

"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 Government where under the export entitlements become available. There must be, for the application of the words `derived from,' a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. There under, 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."  

8. It is contended by Sh. Kuthiala that in the present case also the source of interest subsidy is the scheme framed by the Government and not the business of the industry and therefore the same cannot be said to be derived from the business of the assessee.  

9. In CIT v. Andaman Timber Industries Ltd. [2000] 242 ITR 204 (Cal), the assessee had claimed the benefit of section 80HH on profits and gains derived from the industrial undertaking and had included the amount paid to it under the transport subsidy scheme. The Calcutta High Court referred to the judgment of the apex court cited hereinabove and held that the transport subsidy is not derived from the activity of the industrial under-taking though it may be attributable to it and therefore cannot be said to be treated as parts of the profits and gains derived from the industrial undertaking.  

10. The relevant portion of the judgment reads as follows (page 207) :"The limited question for our consideration is whether the amount of transport subsidy is a profit for the purpose of deduction under section 80HH of the Income-tax Act. As referred to above, their Lordships in their latest decision in the case of CIT v. Sterling Foods [1999] 237 ITR 579 (SC), had made a distinction between the words `derived from' and `attributable to'. The words `attributable to' have wider import than the words `derived from' and when the Legislature has used the words `derived from' in section 80HH, we cannot enlarge the scope of benefit intended by the Legislature in section 80HH. Profits and gains which are derived from an industrial undertaking are only eligible for deduction under section 80HH. Any incidental income or profit to the business of the assessee or to the income of the industrial undertaking is not entitled or eligible for the benefit of section 80HH. The industrial undertaking should be the direct and immediate source of income for the purpose of deduction under section 80HH. Subsidy or transport subsidy is not the immediate source or have direct nexus with the activity of the industrial undertaking. It is an aid by the Government under the scheme. Though it is incidental to the activities of the assessee, the source is the Government. Any aid or assistance by the Government to a particular type of industry cannot be treated as profit derived from the industrial undertaking."  

11. The apex court inLibertyIndiav. CIT [2009] 317 ITR 218, after considering the legal provisions, held as follows (page 232) :  

"13. Before analyzing section 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of `profit linked incentives'. Therefore, when section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under section 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee-company located in Mumbai may have a busi- ness of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract section 80-IB(6). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under sub-section (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in sub-sections (3) to (11A) [as they stood at the relevant time]. One more aspect needs to be highlighted. Each of the eligible business in sub-sections (3) to (11A) constitutes a standalone item in the matter of computation of profits. That is the reason why the concept of `Segment Reporting' stands introduced in the Indian Accounting Standards (IAS) by the Institute of Chartered Accountants of India (ICAI).  

14. Analysing Chapter VI-A, we find that sections 80-IB/80-IA are the code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for `computation of profits of the eligible business'. It is evident that section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words `derived from' is narrower in connotation as compared to the words `attributable to'. In other words, by using the expression `derived from', Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is : whether the DEPB credit/duty drawback receipt comes within the first degree sources ? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within the first degree source as the said incentives flow from incentive schemes enacted by the Government of India or from section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, the Department places heavy reliance on the judgment of this court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (see CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762 (Bom)).  

15. Continuing our analysis of section 80-IA/80-IB it may be mentioned that sub-section (13) of section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) of section 80-IA, so far as may be, applicable to the eligible business under section 80-IB. Therefore, at the outset, we stated that one needs to read sections 80-I, 80-IA and 80-IB as having a common scheme. On perusal of sub-section (5) of section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-section (5) of section 80-IA, which are also required to be read into section 80-IB. [see section 80-IB(13)]. We may reiterate that sections 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On 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'."  

12. After the aforesaid detailed analysis, the apex court held that the duty draw backs could not be deemed to be profits derived from business. It is apparent that the apex court held that it is only the profits generated, i.e., operational profits which are entitled to the benefit under section 80-IA. In Sterling Foods the apex court had also laid down a test as to what is the source of income. In the present case, the source of income of the interest subsidy is not the business of the assessee but the scheme framed by the State Government.  

13. Applying the tests laid down in Liberty India's case and Sterling Foods' case it is apparent that the interest subsidy received by the assessee is not a profit derived from business since it is not an operational profit. The source of the subsidy is not the business of the assessee but the scheme of the State Government.  

14. In view of the above discussion, we are clearly of the view that the questions have to be answered in favour of the Revenue and against the assessee. The appeals are accordingly allowed.  

 

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