IMPORTANT POINT
1. Subsidy by way of customs duty draw back could not be treated as a profit derived from the industrial undertaking.
2. 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.

Headnote:Income Tax Act, 1961-Sections 80-IB, 80-IC - Deductions to be made- 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”.
       Facts of the case:
       (1) ITA No.7/2010
       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 aforementioned 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.
       Findings of the Court:
       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.
       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.
       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.
       Result:
       Appeals dismissed.

JUDGMENT :

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 aforementioned 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

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2016 Supreme(SC) 238

IMPORTANT POINT1. Subsidy by way of customs duty draw back could not be treated as a profit derived from the industrial undertaking.2. 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.

Cases Referred (6)

IMPORTANT POINT
1. Subsidy by way of customs duty draw back could not be treated as a profit derived from the industrial undertaking.
2. 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.