CIT vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC)
The
assessee was engaged in the business of manufacturing of steel and
ferro silicon. The assessee submitted its return of income for the year
2004-05 disclosing an income of Rs.2,06,970 after claiming deduction
u/s. 80-IB of the Income Tax Act, 1961 on the profits and gains of
business of its industrial undertaking. The assessee had received the
following amounts on account of subsides:
The
Assessing Officer, in the assessment order held that the amounts
received by the assessee as subsides were revenue receipts and did not
qualify for deduction u/s. 80-IB(4) of the Act and accordingly, the
assessee’s claim for deduction of an amount of Rs.2,74,09,386 on account
of the three subsidies aforementioned were disallowed. The assessee
preferred an appeal before the Commissioner of Income-tax (Appeals),
who, dismissed the appeal of the assessee. Aggrieved by the aforesaid
order, the assessee preferred an appeal before the Income-tax Appellate
Tribunal which allowed the appeal of the assessee. The Revenue carried
the matter to the High Court u/s. 260A of the Act, which decided the
matter against the Revenue. The Revenue therefore filed an appeal before
the Supreme Court against this judgment.
The Supreme Court
analysed all the decisions cited on behalf of the Revenue. The Supreme
Court noted that in the first decision, that is, in Cambay Electric
Supply Industrial Co. Ltd. vs. CIT (113 ITR 84), it was 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”. The Supreme Court observed
that since it was directly concerned with the expression “derived
from”, this judgment was relevant only in so far as it made distinction
between the expression “derived from”, as being something directly from,
as opposed to “attributable to”, which could be said to include
something which was indirect as well.
The Supreme Court noted
that the judgment in Sterling Foods (237 ITR 579) laid down a very
important test in order to determine whether profits and gains are
derived from business or an industrial undertaking. It has stated that
there would 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 would thereafter sell. Obviously, the sale
consideration therefrom could not be said 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. The
Supreme Court held that on an application of the aforesaid test to the
facts of the present case, it could be said that as all the four
subsidies in the present case were revenue receipts which were
reimbursed to the assessee for elements of cost relating to manufacture
or sale of their products, there could certainly be said to be a direct
nexus between profits and gains of the industrial undertaking or
business, and reimbursement of such subsidies. The Supreme Court noted
that according to the Counsel for the Revenue the fact that the
immediate source of the subsides 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 was missing. The
Supreme Court did not agree with this contention. According to the
Supreme Court, what is to be seen for the applicability of section 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
was 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.
According to the Supreme Court the judgment in
Pandian Chemicals Limited vs. CIT (262 ITR 278) was also
distinguishable, as interest on a deposit made for supply of electricity
was not an element of cost at all, and this being so, was 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 held above, all the subsidies aforementioned went towards
reimbursement of actual costs of manufacture and sale of the product of
the business of the assessee.
Further, the Supreme Court
observed that Liberty India (317 ITR 218) being the fourth judgment in
this line also did not help the Revenue. What the court was concerned
with was an export incentive, which was very far removed from
reimbursement of an element of cost. A Duty Entitlement Pass Book
Drawback Scheme was not related to the business of an industrial
undertaking or selling its products. Duty entitlement pass book
entitlement arose only when the undertaking exported the said product,
that is after it manufactured or produced the same. Pithily put, if
there were no export, there were no duty entitlement pass book
entitlement, and therefore its relation to manufacture of a product and
or sale within India was not proximate or direct but was one step
removed. Also, the object behind the duty entitlement pass book
entitlement, as has been held by the court, was to neutralize the
incidence of customs duty payment on the import content of the export
product which was provided for by credit to customs duty against the
export product. In such a scenario, it could not be said that such duty
exemption scheme was derived from profits and gains made by the
industrial undertaking or business itself.
The Supreme Court
referred to the decision of the Calcutta High Court in Merinoply and
Chemicals Ltd. vs. CIT [1994] 209 ITR 508 (Cal), in which it was held
that transport subsidies were inseparably connected with the business
carried on by the assessee.
The Supreme Court noted that
however, in CIT vs. Andaman Timber Industries Ltd.[2000] 242 ITR
204(Cal), the same High Court had arrived at an opposite conclusion in
considering whether a deduction was allowable u/s. 80HH of the Act in
respect of transport subsidy without noticing the aforesaid earlier
judgment of a Division Bench of that very court.
The Supreme
Court further observed that a Division Bench of the Calcutta High Court
in CIT v. Cement Manufacturing Company Limited, distinguished the
judgment in CIT vs. Andaman Timber Industries Ltd. and followed the
impugned judgment of the Gauhati High Court in the present case.
According
to the Supreme Court the judgment in Merinoply and Chemicals Ltd. and
the recent judgment of the Calcutta High Court had correctly appreciated
the legal position.
The Supreme Court thereafter referred to
the judgment in Jai Bhagwan Oil and Flour Mills [(2009) 14 SCC 63] in
which it was held that and economically viable transport subsidy was
given so that industry could become competitive.
Further, the
Supreme Court referred to the decision in Sahney Steel and Press Works
Ltd. vs. CIT[1997] 228 ITR 253(SC), which 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.
The Supreme Court thereafter
referred to a Delhi High Court judgment in CIT vs. Dharam Pal Prem Chand
Ltd. [2009] 317 ITR 353 (Delhi) from which a special leave petition
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 u/s.
80-IB of the Act.
The Supreme Court thereafter considered one
further argument made by the Counsel for the Revenue. He had argued that
as the subsidies that were received by the respondent, would be income
from other sources referable to section 56 of the Income-tax Act, any
deduction that was to be made, could only be made from income from other
sources and not from profits and gains of business, which was a
separate and distinct head as recognised by section 14 of the Income-tax
Act. The Supreme Court held that the Counsel for the Revenue was not
correct in his submission that assistance by way of subsidies which were
reimbursed on the incurring of costs relatable to a business, were
under the head “Income from other sources”, which is a residuary head of
income that could be availed only if income did not fall under any of
the other four heads of income. The Supreme Court held that 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, would 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 was 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 of profession”, and not under the head “Income from
other sources”.
The Supreme Court therefore dismissed the appeal.
