The Assessing Officer, while issuing the demand notice should also charge interest u/s 220(2). As the assessee appeal was allowed by CIT(A) , there is 100% chances that assess company would not have paid the tax.If AO firgets to do the same , Audit should raise this issue.
IT : Assessee is not entitled to exemption under section 10A in respect of deemed export to another Special Economic Zone
IT : Excess sale proceeds received by assessee due to exchange rate fluctuation in foreign currency is eligible for exemption under section 10A
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[2013] 33 taxmann.com 519 (Cochin - Trib.)
IN THE ITAT COCHIN BENCH
Income-tax Officer, Wd. 1(1), Kochi
v.
Electronic Controls & Discharge Systems (P.) Ltd.*
N.R.S. GANESAN, JUDICIAL MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
AND B.R. BASKARAN, ACCOUNTANT MEMBER
IT APPEAL NOS. 77 & 78 (COCH.) OF 2011
C.O. NOS. 2 & 3 (COCH.) OF 2011
[ASSESSMENT YEARS 2005-06 & 2006-07]
C.O. NOS. 2 & 3 (COCH.) OF 2011
[ASSESSMENT YEARS 2005-06 & 2006-07]
SEPTEMBER 7, 2012
I. Section 10A of the Income-tax Act, 1961 - Free trade zone [Deemed export] - Assessment years 2005-06 and 2006-07 - Whether assessee is entitled to exemption under section 10A in respect of deemed export to another Special Economic Zone - Held, no [In favour of revenue]
II. Section 10A of the Income-tax Act, 1961 - Free trade zone [Computation of deduction] - Assessment years 2005-06 and 2006-07 - Whether excess sale proceeds received by assessee due to exchange rate fluctuation in foreign currency is income from export activity and is eligible for exemption under section 10A - Held, yes [In favour of assessee]
CASE REVIEW-I
CIT v. Electronic Controls & Discharge Systems (P.) Ltd. [2011] 202 Taxman 33/13 taxmann.com 193 (Ker.)followed.
CASE REVIEW-II
Universal Radiators v. CIT [1993] 201 ITR 800/68 Taxman 45 (SC) (para 7) and CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC) (para 8) distinguished.
CASES REFERRED TO
CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC) (para 5) and Universal Radiators v. CIT [1993] 201 ITR 800/68 Taxman 45 (SC) (para 5).
Smt. A.S. Bindhu for the Appellant.
ORDER
N.R.S. Ganesan, Judicial Member - The revenue filed the present appeals challenging the independent orders of the first appellate authority both dated 29-10-2010 for the assessment years 2005-06 and 2006-07. The taxpayer has filed the cross objections.
2. No one appeared for the taxpayer even though the appeal was adjourned at the request of the taxpayer. Therefore, we heard the ld. DR and proceed to dispose of the appeals and cross objections on merit.
3. Smt. A.S. Bindhu, the ld. DR submitted that the only issue arises for consideration in both the appeals is with regard to inclusion of deemed export in the turnover for the purpose of exemption u/s 10A of the Act. The Commissioner of Income-tax (A) by following the orders of this Tribunal in the taxpayers own case for the assessment years 2003-04 and 2004-05 has allowed the claim of the taxpayer. The ld. DR further pointed out that the department has filed appeals against the orders of this Tribunal for the assessment years 2003-04 and 2004-05 and the High Court in ITA No.217 & 232 of 2010 by judgment dated 27-07-2011 found that exemption is available only on the actual profit derived on export made against receipts in convertible foreign exchange. Therefore, the inter unit sales in the export processing zone are not treated as export within the meaning of section 10A of the Act. Ultimately, the High Court reversed the orders of the Tribunal and held that the taxpayer is not entitled for exemption u/s 10A in respect of deemed export to another special economic zone. In view of the judgment of the Kerala High Court in the taxpayer's own case for the assessment years 2003-04 and 2004-05, according to the ld. DR, the Commissioner of Income-tax(A) is not justified in placing reliance on the orders of this Tribunal.
4. We have considered the submissions of the ld. DR and also perused the orders of the Commissioner of Income-tax(A) wherein he has followed the orders of this Tribunal for the assessment years 2003-04 & 2004-05 while allowing the claim of the taxpayer u/s 10A of the Act. In fact, the revenue filed appeals before the High Court in ITA Nos.217 & 232 of 2010 against the orders of this Tribunal and the High Court after considering the provisions of section 10A found that the legislature never intended the benefit to be extended to local sales made by the unit in the special economic zone. The High Court further found that in fact all special economic zones are allowed to make 25% domestic sales to domestic tariff area and the profit derived from such sales is not entitled for exemption. Accordingly the decision of this Tribunal for the assessment years 2003-04 and 2004-05 are reversed. In view of the judgment of the Kerala High Court reversing the orders of this Tribunal, the Commissioner of Income-tax (A) is not justified in placing reliance on the orders of this Tribunal. By respectfully following the judgment of the Kerala High Court in the taxpayer's own case for the assessment years 2003-04 and 2004-05 in ITA No.217 & 232 of 2010 and for the reasons stated therein the impugned orders of the first appellate authority are set aside and that of the assessing officer are restored.
5. The revenue has taken one more ground for the assessment year 2005-06 with regard to exchange rate fluctuation as profit from export. The department has placed reliance on the judgment of the Apex Court in CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 and Universal Radiators v. CIT [1993] 201 ITR 800/68 Taxman 45 (SC) to contend that exchange rate is not to be considered as business income from the profit of sale proceeds.
6. We have carefully gone through the orders of the lower authorities. The taxpayer has received profit due to foreign exchange fluctuation in foreign currency. After the export of goods, due to exchange rate difference arising from foreign currency transaction, the taxpayer has received Rs. 59,04,446 for the assessment year 2005-06. The assessing officer found that the income by way of unrealized exchange rate gain is "Income from other sources". The profit or gain derived by an undertaking alone is eligible for exemption u/s 10A. Therefore, the assessing officer found that the profit / income by way of foreign exchange difference are to be excluded while computing exemption u/s 10A of the Act. However, the first appellate authority found that the foreign exchange gain accounted by the taxpayer can be considered as receipts from exports. The foreign exchange gain is related to the export and any increase in the value of the foreign exchange resulting in the excess being credited to the account as a result of fluctuation was found to be income from business activity. The assessing officer claims that the rate difference was due to unrealized exchange which was credited in the books of account. The fact remains is that the taxpayer has exported the goods and before receiving the sale proceeds in foreign currency, due to exchange rate difference, the taxpayer has received excess sale proceeds which was credited in the books of account. The question arises for consideration is whether the excess sale proceeds received by the taxpayer due to the exchange rate fluctuation in foreign currency is the income from export activity or is it the income from other sources.
7. We have carefully gone through the judgment of the Apex Court in the case of Universal Radiators (supra). In this case, the taxpayer carried on the business in manufacturing radiator for automobiles and booked copper ingots from a corporation in the USA. When the copper ingots were imported to Bombay to convert the same into strips and sheets hostilities broke out between India and Pakistan and the vessel carrying the goods was seized by the Pakistani Authorities. The taxpayer claimed the price of the goods as compensation from the insurance company. The insurance company settled the matter in favour of the taxpayer. In the meantime, the Indian rupee devalued and therefore, in terms of Indian rupee the taxpayer received Rs.3,43,556 as against the actual value before devaluation of the Indian rupee at Rs.2,00,164. The taxpayer claimed the difference due to devaluation of the Indian rupee as not taxable. However, the assessing authority rejected the claim of the taxpayer. But the Tribunal held that when the goods were seized by the Pakistani authority, the surplus was in the nature of capital receipt and not a profit made by the taxpayer in the course of business. When the matter travelled to Supreme Court, the Supreme Court found that the business of the taxpayer is manufacturing radiators. The ingots were imported to be converted into strips and sheets at Bombay. The link which could create direct relationship between the finished goods and ingots was snapped even before it reached Bombay. Therefore, the payments received for loss of ingots did not bear any nexus with taxpayer's business. So long as the ingots did not reach Bombay and were converted into strips and sheets the connection with the taxpayers business was remote and any payment made in respect of the loss of ingots cannot be said to accrue from business. In the case before us, the taxpayer has received excess money on export of goods to foreign country due to exchange rate fluctuation. It is not a case of sterilization of raw material imported from foreign country. Therefore, this judgment of the Apex Court in the case of Universal Radiators (supra) may not be applicable to the facts of the case.
8. We have also carefully gone through the judgment of the Apex court in the case of Sterling Foods (supra). The issue before the Apex Court in the case of Sterling Foods (supra) was with regard to deduction u/s 80HH of the Act in respect of profit from sale of import entitlement. The Apex Court after considering the provisions of the Act found that the import entitlement was received by the taxpayer on the scheme of the central government and not derived from the business of the taxpayer; therefore, not eligible for deduction u/s 80HH of the Act. In the case before us, the money was received due to exchange rate fluctuation as sale proceeds of the exported goods. Therefore, it has direct nexus with the export of the goods by the taxpayer. Tribunal is of the considered opinion that the judgment of the Apex Court in the case of Sterling Foods (supra) is also not applicable to the facts of the case.
9. In view of the above, this Tribunal has no hesitation in upholding the order of the first appellate authority holding the exchange rate fluctuation as business income from export sale proceeds.
10. The taxpayer has filed the cross objections only to support the order of the Commissioner of Income-tax (A) and no independent grounds are raised. Therefore, both the cross objections filed by the taxpayer become infructuous.
11. In the result, the appeal of the revenue in ITA No.77/Coch/2011 is partly allowed and that in ITA No.78/Coch/2011 is dismissed; and the cross objections of the taxpayer are dismissed.
IT : For working out disallowance under section 40(b)(iv), in absence of any clear cut guidance that charging of interest has to be on percentage of book profit revenue cannot insist that depreciation being a charge on profit has to be deducted first before considering any interest payment on capital of firm
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[2013] 33 taxmann.com 360 (Madras)
HIGH COURT OF MADRAS
Sri Venkateswara Photo Studio
v.
Assistant Commissioner of Income-tax*
MRS. CHITRA VENKATARAMAN AND K. RAVICHANDRA BAABU, JJ.
TAX CASE (APPEAL) NOS. 1062 TO 1066 OF 2005
APRIL 24, 2012
Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary etc. paid by firm to partner [Interest] - Assessment years 1996-97 to 2000-01 - Assessee claimed deduction under section 40(b) towards payment of interest to partners on capital balances - Assessing Officer pointed out that assessee had apportioned interest in profit and loss account without claiming depreciation; and that since depreciation is a charge on profit of company, charging of interest has to be on book profit of company or firm, i.e., net profit, after working out depreciation - Whether there being no restriction placed on working of interest before working out depreciation as has been provided in case of salary that payment of salary to partners for purpose of deduction has to be worked out on percentage of book profit, revenue cannot insist that depreciation being a charge on profit, had to be deducted first before considering any interest payment on capital of firm - Held, yes [Paras 12 & 13][In favour of assessee]
FACTS
| ■ | The assessee claimed deduction under section 40(b) towards the payment of interest to the partners on the balances in the capital accounts in terms of the partnership deed. | |
| ■ | The Assessing Authority pointed out that the assessee had apportioned the interest in the profit and loss account, without claiming depreciation. He pointed out that since depreciation is a charge on the profit of the company, charging of interest has to be on the book profit of the company or firm. | |
| ■ | The Commissioner (Appeals) pointed out that in absence of definition of profit in relation to clause (iv) of section 40(b), the assistance ofExplanation 3 to clause (v) could be taken advantage to find out, how the interest paid to partners could be worked out. In the circumstances, the Commissioner (Appeals) confirmed the view of the Assessing Officer that without providing for depreciation, the partner's account could not be credited with any interest. | |
| ■ | The Tribunal confirmed the view of the Commissioner (Appeals). |
HELD
| ■ | A reading of the provisions of sections 40(b)(iv) and 40(b)(v) on interest and salary clearly shows the marked difference in the treatment of the said payments in the matter of granting deduction under section 40. | |
| ■ | Section 40(b)(iv) recognizes interest payment as deduction up to 18 per cent simple interest. For the purposes of disallowance of deduction on payment of interest, section 40(b)(iv) states that simple interest paid in excess of 18 per cent, would go for disallowance. The payment of interest, in any event, would be allowed as deduction only if it is authorised and is in accordance with the terms of partnership deed. The payment of interest may be either from the account of book profit or from the net profit. | |
| ■ | As regards deduction claim on the salary payment to partners, deduction on the payment to all partners is worked out at the percentage of book profit as given in the section itself. | |
| ■ | Explanation 3 defines what book profit means. It states that 'book profit' means the 'net profit' as shown in the profit and loss account computed in the manner laid down in Part IV-D relating to "profits and gain of business or profession", which means the net profit has to be necessarily worked out after giving such deductions and allowances as provided for in sections 28 to 44D. | |
| ■ | Taking into consideration that the legislature has consciously provided for such differential treatment in the matter of granting deduction and disallowance on the payment of interest and salary, it is difficult to be accept the plea of the revenue that section 40(b) disallowance has to be worked out only on the book profit, meaning thereby, the net profit after working out the depreciation. | |
| ■ | It is no doubt true that deprecation is given as a charge on the profit, but then, when working out section 40(b) disallowance, particularly with reference to clause (iv), when there is no specific reference to a book profit as a basis on which an interest has to be paid, unlike in the case of salary, the mere score that depreciation is made a charge on the profit, per se, would not justify the claim of the revenue that the granting of such relief on the gross profit would lead to distorted figures in the matter of working out the real income of the assessee for the purpose of taxation. [Para 10] | |
| ■ | The question is that, at what point could the interest be worked out and considered to be credited to the capital account of the partners for the purpose of considering the claim for deduction. | |
| ■ | Given the fact that the partnership deed provided for interest payment and what is disallowed under section 40(b)(iv) is the rate of interest exceeding 18 per cent simple interest, as it then stood, in the absence of any clear-cut guidance under the Act as has been provided in the case of salary, through Explanation that the payment of salary of all the partners for the purpose of deduction has to be worked out on the percentage of book profit computed in the manner laid down in Chapter IV-D the plea of the assessee that the method adopted by the assessee justifies the claim is to be accepted. | |
| ■ | It is no doubt true, as pointed out in the assessment order, that after working out the depreciation and expenses, practically, there might not be anything available at the hands of the firm for crediting any interest to the capital account, but then, as section 40(b)(iv) stands in contrast to section 40(b)(v), it is difficult to accept the case of the revenue that by reason of this figure alone, the accounts have to be rejected. [Para 12] | |
| ■ | Thus, going by the provisions under section 40(b)(iv), there being, no restriction placed on the working of interest before working out the depreciation, the revenue cannot insist on depreciation being a charge on profit, has to be deducted first before considering any interest payment on the capital of the firm. | |
| ■ | In the circumstances, the order of the Tribunal is to be set aside. [Para 13] |
CASES REFERRED TO
G.R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13 (Mad.) (para 2), CIT v. &. Mahendra Mills [2000] 109 Taxman 225/243 ITR 56 (SC) (para 4), CIT v. Aircel Ltd. [2008] 296 ITR 85 (Mad.) (para 6) and CIT v. Sree Senhavalli Textiles (P.) Ltd. [2003] 259 ITR 77/134 Taxman 725 (Mad.)(para 6).
C.V. Rajan for the Appellant. T. Ravikumar for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J. - The tax case (appeals) are filed at the instance of the assessee by raising the following questions of law relating to the asst. yrs. 1996-97 to 2000-01 :
| "1. | Whether the Tribunal was right in law in holding that the books of the assessee can be rewritten and capital accounts rewritten by the AO for the purposes of s. 40(b) of the IT Act ? | |
| 2. | Whether the Tribunal was right in law in holding that profits of the assessee firm should be reworked by deducting depreciation even though the same was not provided by the assessee in the P&L account/books of account ? and | |
| 3. | Whether the Tribunal was right in law in holding that the method of computation adopted by assessee is not in conformity with the accounting and legal principles ?" |
2. The facts leading to the filing of the tax case (appeals) are as follows :
| (i) | The assessee herein is a partnership firm engaged in the business of photography and videography. In the return of income filed for the asst, yrs. 1996-97 to 2000-01, the assessee claimed deduction under s. 40(b) of the IT Act (for short, "the Act"), towards the payment of interest to the partners on the balances in the capital accounts, which was done in terms of the partnership deed. The assessing authority pointed out that the assessee had apportioned the interest in the P&L a/c, without claiming depreciation and the assessee claimed the same in the adjustment statements enclosed to the return of income. A survey was conducted under s. 133A of the Act on the business premises of the assessee. This led to the reopening of the assessment by issuance of notice under s. 147 of the Act to recompute the profit after deducting depreciation and thereby, rework the capital balances of the partners. The assessee resisted the reopening by contending that the interest payable to the partners was rightly determined on the capital balance computed without providing for depreciation. The assessing authority, however, rejected the claim taking the view that if depreciation is directly deducted to the P&L a/c, the net profit would come down, thus, the profit available for sharing among the partners would be almost 'nil'. The officer pointed out that since depreciation is a charge on the profit of the company, charging of interest has to be on the book profit of the company or firm, which in turn has to necessarily work out the depreciation on the profit of the company. The officer, hence, viewed that crediting in the capital account, even before depreciation, would be contrary to the provisions of the Act. The assessing authority viewed that the method of accounting did not reflect the true profit and to that extent, the accounts were not to be relied on. | |
| (ii) | Aggrieved by this, the assessee went on appeals before the CIT(A). The appellate authority pointed out that the object of s. 40(b) of the Act is basically to prevent siphoning off the firm's funds to the partners in order to reduce the tax liability in the hands of the firm. The claim under this section has to be in conformity with the other provisions of the Act. The CIT(A) pointed out that s. 40A of the Act has overriding effect on s. 40(b) of the Act in respect of matter not covered by s. 40(b) of the Act. Considering the object of s. 40(b) of the Act, the first appellate authority confirmed the view of the officer that without providing for depreciation, the partner's account could not be credited with any interest. The appellate authority further pointed out that s. 40(b) of the Act does not define "profit" in relation to cl. (iv), which is with reference to payment of interest. However, cl. (iv) relating to payment of salary is to be made with reference to the book profit. Explanation 3 to cl. (v) defines "book profit" to mean the net profit, as shown in the P&L a/c for the relevant previous year, computed in the manner laid down in Chapter IV-D. Profit means net profit. Going by this definition, the first appellate authority viewed that the book profit has to be computed only after deducting depreciation allowable under s. 32 of the Act. Even in the absence of definition of profit in relation to cl. (iv), the assistance of Expln 3 could be taken advantage of to find out, how the interest paid to a partner could be worked out. In the circumstances, the first appellate authority held that before apportioning any interest to the partners' accounts, the depreciation has to be worked out first and then only the partners would be entitled to have the interest credited to the capital account. Referring to the decision inG.R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13 (Mad), the first appellate authority held that depreciation being a charge on the profit, if the same is not charged, the P&L a/c would show a distorted picture and only after adjustment of depreciation, whatever is remaining would be available for crediting any interest to the partners' accounts, thus, the first appellate authority dismissed the appeals, | |
| (iii) | Aggrieved by this, the assessee went on appeals before the Tribunal, which once again confirmed the view of the CIT(A) and the Tribunal held that the assessee's practice is improper so far it claimed depreciation in adjustment for income-tax purposes and not charging it to P&L a/c. Insofar as it resulted in inflating the capital account balance by claiming enhanced interest, the Tribunal rejected the said claim. Aggrieved by this, the assessee is on appeals before this Court. |
3. Mr. C.V. Rajan, learned counsel appearing for the assessee drew our attention to the provisions under s. 40(b)(iv) of the Act, which is in contrast to s. 40(b)(v) of the Act and pointed out that when considering the salary paid to a partner and the claim made for deduction, statute has specifically provided for the deduction to be allowed based on the results of book profit at a particular percentage. It is worthwhile to note that in the matter of granting deduction in respect of payment of interest, there is no reference at all for the deduction being allowed at a particular percentage of the book profit. Thus, when payment of interest and payment of salary to the partners are treated differently under the provisions of the Act, it is not open to the Revenue to borrow the provisions as are available under cl. (v), Expln. 3 for the purpose of considering the deduction under s. 40(b)(iv) of the Act.
4. Learned counsel for the assessee relied on the decision in CIT v. &. Mahendra Mills [2000] 109 Taxman 225/243 ITR 56 (SC) for the proposition that in the matter of claiming depreciation, there is no gainsaying for the Revenue to contend that irrespective of claim made by the assessee, the same has to be worked out by the assessing authority to find out the distributable profit at the hands of the company. He further pointed out that there is no dispute on the proposition of law that depreciation is a charge on profit, yet, going by the decision of the apex Court, if the assessee had not claimed deduction of depreciation, there is no question of the assessing authority considering the deduction suo motu, since s. 32 of the Act, allows depreciation as a deduction, subject to provisions of s. 34 of the Act that only if prescribed particulars are available, the depreciation relief could be worked out.
5. Learned counsel, further drew our attention to s. 32, Expln. 5 of the Act, which was introduced under the Finance Act, 2001, w.e.f. 1st April, 2002, wherein the Explanation provided that irrespective of whether an assessee claimed the deduction in respect of depreciation in computing his total income or not, the provision under s. 32 of the Act would apply. Thus, with no such provision available during the material assessment years under consideration viz., 1996-97 to 2000-01 and Expln. 5 effective from 1st April, 2002, the AO erred in his view that the interest credited could be worked out only after considering the depreciation.
6. Learned counsel for the assessee also brought to our attention the decision of this Court in CIT v. Aircel Ltd. [2008] 296 ITR 85 and CIT v. Sree Senhavalli Textiles (P.) Ltd. [2003] 259 ITR 77/134 Taxman 725 (Mad.) on the question of considering the depreciation claim by the assessing authority, when no such claim was made in the accounts. In the background of the said decisions, learned counsel submitted that the denial of deduction under s. 40(b) of the Act is totally illegal and not supported by any provisions of the Act. The consideration of the claim of the assessee by the AO based on book profit is not supported by any provisions of the Act.
7. Countering the claim of the assessee, Mr. T. Ravikumar, learned standing counsel appearing for the Revenue, however, pointed out the factual situation that the assessee has gone in for working out the depreciation deduction after deducting the expenses and interest charged to their capital account, which ultimately, resulted in the net loss. If depreciation is directly debited to the P&L a/c, ultimately, the assessee might not have had sufficient profit available to claim interest on the balance of the capital account. Since the method of accounting followed by the assessee gave a distorted figure, rightly the assessing authority disallowed the assessee's claim.
8. Heard the learned counsel on either side and perused the materials available on record.
9. Before going into the rival contentions, it is necessary that the provisions of the Act relating to ss. 40(b)(iv) and 40(b)(v) of the Act, particularly, Explns. 1 to 4 need to be extracted, which are as follows :
"40. Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession', -
| ** | ** | ** |
in the case of any firm assessable as such, -
| ** | ** | ** |
(iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed insofar as such amount exceeds the amount calculated at the rate of twelve per cent simple interest per annum; or
('twelve' substituted for 'eighteen' by the Finance Act, 2002, w.e.f. 1st June, 2002).
(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed insofar as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :
(1) in case of a firm carrying on a profession referred to in s. 44AA or which is notified for the purpose of that section—
| | (a) on the first Rs. 1,00,000 of the book profit or in case of a loss | Rs. 50,000 or @ 90% of the book profit, whichever is more; |
| (b) on the next Rs. 1,00,000 of the book profit | @ 60%; | |
| (c) on the balance of the book profit | @ 40%; |
(2) in the case of any other firm -
| (a) on the first Rs. 75,000 of the book profit, or in case of a loss | Rs. 50,000 or @ 90% of the book profit, whichever is more; | |
| (b) on the next Rs. 75,000 of the book profit | @ 60%; | |
| (c) on the balance of the book profit | @ 40%; |
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.
Explanation 1. - Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as 'partner in a representative capacity' and 'person so represented', respectively).—
| (i) | interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; | |
| (ii) | interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. |
Explanation 2. - Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.
Explanation 3 - For the purposes of this clause, 'book profit' means the net profit, as shown in the P&L a/c for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.
Explanation 4.- For the purposes of this clause, 'working partner' means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner."
10. A reading of the abovesaid provisions on interest and salary clearly shows the marked difference in the treatment of the said payments in the matter of granting deduction under s. 40 of the Act. Sec. 40(b)(iv) recognises interest payment as deduction up to 18 per cent simple interest. For the purposes of disallowance of deduction on payment of interest, s. 40(b)(iv) states that simple interest paid in excess of 18 per cent, would go for disallowance. The payment of interest, in any event, would be allowed as deduction only if it is authorised and is in accordance with the terms of partnership deed. The payment of interest may be either from the account of book profit or from the net profit. As regards deduction claim on the salary payment to partners, deduction on the payment to all partners is worked out at the percentage of book profit as given in the section itself. Explanation 3 defines what book profit means. It states that "book profit" means the "net profit" as shown in the P&L a/c computed in the manner laid down in Part IV-D relating to "Profits and gain of business or profession", which means the net profit has to be necessarily worked out after giving such deductions and allowances as provided for in ss 28 to 44D. Taking into consideration that the legislature has consciously provided for such differential treatment in the matter of granting deduction and disallowance on the payment of interest and salary, it is difficult for us to accept the plea of the Revenue that s. 40(b) disallowance herein has to be worked out only on the book profit, meaning thereby, the net profit after working out the depreciation. It is no doubt true that depreciation is given as a charge on the profit, but then, when working out s. 40(b) disallowance, particularly with reference to cl. (iv), when there is no specific reference to a book profit as a basis on which an interest has to be paid, unlike in the case of salary, the mere score that depreciation is made a charge on the profit, per se, would not justify the claim of the Revenue that the granting of such relief on the gross profit would lead to distorted figures in the matter of working out the real income of the assessee for the purpose of taxation.
11. In the decision in Aircel Ltd. (supra), following the decision of the apex Court in Mahendra Mills (supra), this Court held that, where an assessee did not avail the benefit of depreciation that benefit could not be forced upon the assessee.
12. As far as the present case is concerned, the question is not as to whether the assessee desired depreciation or not. The question herein is that, at what, point could the interest be worked out and considered to be credited to the capital account of the partners for the purpose of considering the claim for deduction. Given the fact that the partnership deed provided for interest payment and what is disallowed under s. 40(b)(iv) of the Act is the rate of interest exceeding 18 per cent simple interest, as it then stood, in the absence of any clear-cut guidance under the Act as has been provided in the case of salary, through Explanation that the payment of salary of all the partners for the purpose of deduction has to be worked out on the percentage of book profit computed in the manner laid down in Chapter IV-D, we have no hesitation in accepting the plea of the assessee that the method adopted by the assessee justifies the claim. It is no doubt true, as pointed out in the assessment order, that after working out the depreciation and expenses, practically, there might not be anything available at the hands of the firm for crediting any interest to the capital account, but then, as s. 40(b)(iv) of the Act stands in contrast to s. 40(b)(v) of the Act, it is difficult to accept the case of the Revenue that by reason of this figure alone, the accounts have to be rejected.
13. Thus, going by the provisions under s. 40(b)(iv) of the Act, there being, no restriction placed on the working of interest before working out the depreciation, we have no hesitation in accepting the plea of the assessee that the Revenue cannot insist on depreciation being a charge on profit, has to be deducted first, before considering any interest payment on the capital of the firm. In the circumstances, we set aside the order of the Tribunal and allow the tax case (appeals). These tax case (appeals) are allowed. Consequently, connected miscellaneous petitions are closed. There is no order as to costs.
IT : Revenue subsidies like Transport subsidy, power subsidy, insurance subsidy & interest subsidy which are operational subsidies are deductible under section 80-IB/80-IC as they have a first degree nexus with profits of industrial undertakings concerned
Issue before the Court for decision
Whether subsidies which are admittedly revenue receipts- Transport subsidy, power subsidy, insurance subsidy & interest subsidy , if help an industrial undertaking in earning profit and making gains, whether the undertaking is entitled to seek deduction if the undertaking satisfies, otherwise, the conditions prescribed by Section 80-IB or 80-IC, as the case may be ?
The moot question is: Whether there is direct and first degree nexus between the subsidies, on the one hand, and the profit and gains, on the other, of the industrial undertakings concerned?
Held
(A)Transport Subsidy
• Under the Transport Subsidy Scheme,1971, subsidy, on transportation of raw materials as well as finished goods, was promised to be made available to the industrial units concerned in a manner, which would directly affect the cost of production.
• Transportation subsidy, on the raw materials, was not meant to cover all the raw materials, but only that part or portion of the raw materials, which was actually required and used by an industrial unit in its manufacturing programme approved by the Government concerned
• Similarly, transport subsidy, on the finished goods, too, help in reduction of the cost of manufacturing of the industrial unit concerned inasmuch as subsidy on transportation of finished goods was promised to be given on the finished goods actually produced by the industrial unit in accordance with the manufacturing programme approved by the Government concerned.
• Thus, it is transparent that there is a direct nexus between the transport subsidy, on the one hand, and the profits earned, and gains made, by the industrial undertakings, on the other.
• Such a nexus to be termed as first degree nexus between the two, namely, transport subsidy, on the one hand, and the resultant profits and gains, on the other. Therefore, transport subsidy has to be necessarily held to be covered by Section 80-IB or 80-IC.
• Transport subsidy was aimed at reducing the cost of production of the industrial undertakings covered by transport subsidy Scheme.
• Thus, there was a first degree nexus between the transport subsidy, on the one hand, and cost of production, on the other.
• When cost is reduced, it naturally helps in earning of profit and, at times, higher profits.
• Such profits and gains ought to have been treated, and has rightly been treated, by the learned Tribunal, to be profits and gains derived from, or derived by, the industrial undertaking concerned.
(B) Interest Subsidy
• Under the Industrial Policy, 1997, all eligible industrial units (under such scheme) are given interest subsidy to the extent of 3% on the working capital advanced to them by Scheduled banks or Central/ State financial institutions for a maximum period of 10 years from the date of commencement of production.
• The scheme of interest subsidy clearly shows that it reduces the interest payable on working capital advanced to an industrial undertaking by a scheduled bank or Central/State financial institutions.
• There is no dispute that the assessee-respondents concerned have received working capital, whereupon they have been paying interest to the scheduled banks or Central/State financial institutions, as the case may be.
• If the object of the relevant Scheme is borne in mind, it clearly shows that interest subsidy, having aimed at reducing the interest payable on working capital by an industrial undertaking, helps directly in reducing the cost of manufacturing or production activities and establish thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the interest subsidy, on the other, received by the assessee-respondents.
• In consequence thereof, since interest subsidy results into profits and gains derived from, or derived by, an industrial undertaking, there is no reason as to why such profits and gains, earned by an industrial undertaking on the strength of such a subsidy, namely, interest subsidy, be not allowed to be deducted from the taxable income of the industrial undertaking concerned.
(C) Insurance Subsidy
• So far as the insurance subsidy is concerned, it is under the Central Comprehensive Insurance Scheme, 1997.
• Under this Scheme, the insurance premium paid by eligible industrial units (under such scheme), set up in the North Eastern Region, are reimbursed by the nodal insurance company.
• All banks/ financial institutions insist upon taking out comprehensive insurance policy on the business assets and stocks offered as primary/ collateral security for the purpose of obtaining the loan. In fact, this factual aspect has not been disputed by the Revenue.
• The insurance subsidy, thus, helps in reducing the running cost of the industrial unit concerned establishing thereby direct and first degree nexus between the industrial activities of the assessee-respondents concerned, on the one hand, and the subsidy, in the form of insurance subsidy, on the other, received by the assessee-respondents.
• The resultant profits and gains, derived from, or derived by, an industrial undertaking, because of the insurance subsidy, have to be treated as deductible in terms of the provision of Section 80IB or 80IC, as the case may be.
(D) Power Subsidy
• The Industrial Policy, 1997, as extended by the Industrial Policy of Assam, 2003, provides for Power Subsidy to be given to eligible industrial units (under such scheme) for a period of 5 years from the date of commercial production, the power subsidy being available in the form of reimbursement of fully paid power bills with certain ceiling.
• The reimbursement of the fully paid power bills, i.e., electrical charges, will obviously reduce the cost of production of an industrial undertaking contributing thereby to the profits and gains derived from, or derived by, the industrial undertaking concerned and augmenting thereby the income of the industrial undertaking concerned.
• More so, when such a subsidy neutralizes the expenses incurred on consumption of power and this reinforces the eventual income of the business undertaking and establishes thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the subsidy, in the form of power subsidy, on the other, received by the assessee- respondent
Result
• In favour of assessee. Revenue appeals dismissed
■■■
[2013] 34 taxmann.com 34 (Gauhati)
HIGH COURT OF GAUHATI
Commissioner of Income-tax
v.
Meghalaya Steels Ltd.
I.A. ANSARI AND P. K. MUSAHARY, JJ.
IT APPEAL NOS. 7 OF 2010 & 16 OF 2011
MAY 29, 2013
K.P. Pathak, A. Hazarika and B. Chakraborty for the Appellant. R.P. Agarwalla, R. Goenka, U.K. Borthakur, A. Goenka and D. Sahu for the Respondent.
JUDGMENT
I.A. Ansari, J. - By this common judgment and order, we propose to dispose of these two appeals, preferred under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), against the orders, dated 19.03.2010, passed by the learned Income Tax Appellate Tribunal (hereinafter referred to as the 'learned Tribunal'), Guwahati, in Income Tax Appeal (in short, 'ITA') Nos. ITA 52/Gau/2009 and ITA 95/Gau/2007 inasmuch as these two appeals, as would be seen, cover all the four subsidies, namely, transport subsidy, interest subsidy, power subsidy and insurance subsidy, which form the subject-matter of controversy in the present set of appeals. While disposing of the two appeals, as indicated above, the learned Tribunal took the view that the assessee-respondents are entitled to claim deduction either under Section 80IB or under Section 80IC of the Act, though the Revenue contends that the assessee-respondents are not entitled to receive, and could not have been legally given, the benefit of deduction either under Section 80IB or under Section 80IC.
2. Whereas, by the impugned order, dated 19.03.2010, the learned Tribunal has dismissed the appeal No. ITA 52/Gau/2009, preferred by the Revenue, by taking the view that the subsidies, namely, transport subsidy, power subsidy, interest subsidy and insurance subsidy, received by the assessee-respondents, would go on to reduce the corresponding expenses incurred and the resultant profit would be the profits and gains of the business of the industrial undertaking, that all these subsidies are inter-linked, inter-laced and having a direct nexus with the manufacturing activities of the assessee which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales, power, interest, insurance cover of the business of the assessee and, therefore, there is a direct nexus between the subsidy received by the assessee's industrial undertaking and the resulting profits and gains thereof and the assessee is eligible for deduction under Section 80-IB/80-IC of the Act.
3. The learned Tribunal, by its order, passed on the same date (i.e., by the order, dated 19.03.2010), has allowed the appeal No. ITA 95/Gau/2007, preferred by the assessee, by taking the view that the subsidies, in question, would go on to reduce the corresponding expenses incurred and the resultant profit would be the profits and gains of the business of the industrial undertaking, that all these subsidies are inter-linked, inter-laced and having a direct nexus with the manufacturing activities of the assessee which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales, power, interest, insurance cover of the business of the assessee and, therefore, there is a direct nexus between the subsidy received by the assessee's industrial undertaking and the resulting profits and gains thereof and the assessee is eligible for deduction under Section 80-IB/80-IC of the Act.
4. The principal distinction between the two impugned orders, passed on the same date, i.e., on 19.03.2010, may be set out as follows:
| (i) | By the impugned order, passed in No. ITA 52/Gau/2009, the learned Tribunal dismissed the appeal of the Revenue and allowed deduction under Section 80-IB/80-IC of the Act; whereas, by the impugned order, passed in ITA. 95/Gau/2007, the learned Tribunal allowed the appeal of the assessee and, in consequence thereof, allowed deduction under Section 80-IB/80-IC of the Act. | |
| (ii) | While, in ITA. 52/Gau/2009, the subsidies involved were transport subsidy, insurance subsidy, interest subsidy and power subsidy, the ITA 95/Gau/2007 involved transport subsidy, interest subsidy and power subsidy; and | |
| (iii) | While, in ITA 95/Gau/2007, the deductions had been claimed under Section 80-IC of the Act, the deductions, claimed in ITA 52/Gau/2009, were claimed under Section 80-IB of the Act. The learned Tribunal, however, as already indicated hereinbefore, allowed the deductions without expressly saying as to whether the deductions, in the said two appeals, had been allowed under Section 80IB or 80IC of the Act. In other words, the learned Tribunal allowed the deductions in respect of the relevant subsidies, received by the assessee concerned, without specifically determining if the deductions were allowable under Section 80IB or under Section 80IC. |
5. The substantial questions of law, which have been framed for hearing of the IT Appeal No. 7/2010, are as under:
Substantial Question of law as framed in pursuant to Order dated 08.12.2010
Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that transport subsidy, power subsidy and interest subsidy, received by the respondent, are allowable for computation of deduction under Section 80IB of the Income Tax Act, 1961?
Additional Substantial Question of law as framed in pursuant to Order dated 10.04.2013
(1) Whether, on the facts and circumstances of the case, the learned Tribunal was right in holding that the amount of transport subsidy, interest subsidy and power subsidy would go on to reduce the expenses incurred under that particular head and the resultant profits and gains of the business of Industrial Undertaking would be eligible for deduction under Section 80IB of the Income Tax Act, 1961?
(2) If the answer to question no.1 is in the negative, whether, on the facts and in the circumstances of the case, the learned Tribunal was right in holding that the transport subsidy, interest subsidy and power subsidy are inter-linked, inter-laced and having a direct nexus with the manufacturing activities of the assessee, which are inseparable from the expenditure incurred by the assessee on account of transportation, purchase as well as sales of the business of the assessee are allowable for deduction under Section 80IB ?
6. The substantial questions of law, which have been framed for hearing of the IT Appeal No. 16/2011, are as under:
Substantial questions of law as framed pursuant to the order dated 01.08.2011
Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that transport subsidy, insurance subsidy, interest subsidy and power subsidy received by the respondent are allowable for computation of deduction U/s. 80IC of the Income Tax Act, 1961?
Substantial questions of law as framed pursuant to the order dated 10.04.2013
(1) Whether on the facts and in the circumstances of the case, the learned Tribunal was right in holding that the amount of transport subsidy, insurance subsidy, power subsidy and interest subsidy would go on to reduce the expenses incurred under that particular head and the resultant profits and gains of the business of Industrial Undertaking would be eligible for deduction under Section 80IC of the Income Tax Act, 1961 ?
(2) If the answer to question no.1 is in the negative, whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the transport subsidy, insurance subsidy, power subsidy and interest subsidy are inter linked, inter laced and having a direct nexus with the manufacturing activities of the assessee, which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales of the business of the assessee are allowable for deduction under Section 80IC?
7. From a bare reading of the substantial questions of law, which have been framed in the present two appeals, it becomes more than abundantly clear that the questions, raised in the present two appeals, are, in substance, same, the principal difference between the questions raised in these two appeals being that, while in ITA No. 7/2010, the deductions claimed were under Section 80IB of the Act, the deductions claimed, in ITA No. 16/2011, were under Section 80IC of the Act. Therefore, as we shall proceed further, it would become transparent that the substantial questions of law, which have been framed in these two appeals, are, in effect, akin to each other.
8. Before entering into the discussion of the merit of the questions, which have been framed, for determination in the present two appeals, it is apposite that the material facts, giving rise to the present two appeals, be taken note of. With this end in view, the material facts, leading to each of these two appeals, are, in brief, set out as under:
FACTS OF THE CASE IN ITA No. 7/2010:
| (i) | The respondent is an assessee under the Act, the respondent being an industrial undertaking engaged in the business of manufacture of Steel and Ferro Silicon. | |
| (ii) | The respondent submitted, on 19.10.2004, its return of income for the assessment year 2004-2005 disclosing income at Rs. 2,06,970/- after claiming deduction, under Section 80IB of the Act, on the profits and gains of business of the respondent's industrial undertaking. The assessment of the respondent was completed, on 07.12.2006, under Section 143(3) of the Act, on a total income of Rs.1,33,76,535/-. | |
| (iii) | During the previous year, relevant to the assessment year under consideration, 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 |
| (iv) | The Assessing Officer, in his assessment order, dated 07.12.2006, held that the amounts, received by the assessee as subsidies, were revenue receipts in nature and did not qualify for deduction under Section 80IB(4) of the Act. The Assessing Officer accordingly disallowed the respondent's claim for deduction of the amount of Rs. 2,74,09,386/-, under Section 80 IB of the Act, on account of transport subsidy, interest subsidy and power subsidy. | |
| (v) | Against the said assessment order, the assessee-respondent preferred appeal before the Commissioner of the Income Tax (Appeals), Guwahati, (in short, 'the CIT (A)'), who, vide his order, dated 08.03.2007, dismissed the appeal of the respondent by taking the view that the subsidies, received by the assessee-respondent, were not entitled to deduction under Section 80IB inasmuch the subsidies could not be termed as the profits and gains derived from manufacturing business of the respondent and the profits and gains, in order to be eligible for deduction under Section 80IB of the Act, have to be derived from industrial undertaking and, as the immediate source of subsidies was schemes of the Government, it was only incidental to the assessee-respondent's business. The CIT(A) was, however, also of the view that the subsidies, received by the respondent's industrial undertaking, had some commercial connection with the business of the respondent and, hence, such receipts were to be assessed as 'business income' and not as income from other sources. | |
| (vi) | Aggrieved by the aforesaid order of the CIT(A), the respondent preferred appeal before the learned Tribunal. The said appeal was registered, we have already indicated above, as ITA No. 95/Gau/2007. The learned Tribunal has, by its order, dated 19.03.2010, allowed the appeal of the respondent. | |
| (vii) | While so allowing the appeal of the respondent concerned, the learned Tribunal followed its own order, passed in the case of CIT v.Meghalaya Steels Ltd. in ITA No. 46/Gau/2009, for the assessment year 2006-2007, decided on 19.03.2010. The learned Tribunal held that the subsidies, received by the respondent's industrial undertaking, would go on to reduce the corresponding expenses incurred under those particular heads and the resultant profit would be the profits and gains of the business of the industrial undertaking eligible for deduction under Section 80-IB of the Act. The learned Tribunal further held that all the subsidies were inter-linked, inter-laced and have direct nexus with the manufacturing activities of the assessee-respondent's industrial undertaking. | |
| (viii) | Against the order, dated 19.03.2010, so passed by the learned Tribunal, the Revenue is, now, in appeal before us. |
FACTS OF THE CASE IN ITA No. 16/2011
| (i) | The respondent is an assessee under the Act, the respondent being an industrial undertaking engaged in the business of manufacture of coke products. | |
| (ii) | The respondent submitted, on 17.11.2006, its return of income for the assessment year 2006-07 disclosing income at Rs. NIL. The assessment of the respondent was completed, on 31.12.2008, under Section 143(3) of the Act, on a total income of Rs. 87,93,230/-. | |
| (iii) | During the previous year, relevant to the assessment year under consideration, the respondent had received the following amounts on account of subsidies: |
| | Transport subsidy | - | Rs. 6,55,40,049.00 |
| Insurance subsidy | - | Rs. 4,84,836.00 | |
| Interest subsidy | - | Rs. 10,11,771.00 | |
| Power subsidy | - | Rs. 1,86,010.00 | |
| Total | - | Rs. 6,72,22,666.00 |
| (iv) | The Assessing Officer, in his assessment order, dated 31.12.2008, held that the subsidies, so received by the assessee, had no direct nexus with the business of the respondent's industrial undertaking, that the subsidies were income incidental to the business of the respondent's industrial undertaking and, therefore, the subsidies had to be treated as 'other business income' and could not be allowed for the purpose of working out the profits and gains of the respondent's business undertaking within the meaning of Section 80IC. The Assessing Officer accordingly disallowed the respondent's claim of deduction of the amount of 6,72,22,666/-, under Section 80IC of the Act, on account of transport subsidy, insurance subsidy, interest subsidy and power subsidy. | |
| (v) | Against the said assessment order, the assessee-respondent preferred appeal before the Commissioner of the Income Tax (Appeals), Guwahati, (in short, 'the CIT (A)'), who, vide his order, dated 09.06.2009, allowed the appeal of the assessee-respondent by taking the view that the subsidies, received by the respondent, would go on to reduce the expenditure incurred under those respective heads for the purpose of working out profits and gains of the business of the assessee-respondent's industrial undertaking within the meaning of Section 80IC of the Act. | |
| (vi) | Aggrieved by the aforesaid order of the CIT(A), the Revenue preferred appeal before the learned Tribunal. The said appeal was registered, we have already indicated above, as ITA No. 52/Gau/2009. The learned Tribunal, by its order, dated 19.03.2010, dismissed the appeal preferred by the Revenue. | |
| (vii) | While so dismissing the Revenue's appeal, the learned Tribunal followed its own order, passed in the case of CIT v. Meghalaya Steels Ltd.in ITA No. 46/Gau/2009, for the assessment year 2006-2007, decided on 19.03.2010. The learned Tribunal held that the subsidies, received by the assessee-respondent's industrial undertaking, would go on to reduce the corresponding expenses incurred under those particular heads and the resultant profit would be the profits and gains of the business of the industrial undertaking eligible for deduction under Section 80-IC of the Act. The learned Tribunal further held that all the subsidies were inter-linked, inter-laced and have a direct nexus with the manufacturing activities of the respondent's industrial undertaking. | |
| (viii) | Against the order, dated 19.03.2010, passed by the learned Tribunal, the Revenue is, now, in appeal before us. |
9. We have heard Mr. K. P. Pathak, learned Additional Solicitor General, appearing for the appellants. We have also heard Mr. R. P. Agarwalla, learned Senior counsel, for the assessee-respondents.
SUBMISSIONS MADE BY THE APPELLANTS:
10. Presenting the case of the appellant, Mr. K.P. Pathak, learned ASG, submits that the crux of the matter, which falls for determination in the present appeals, is: Whether the assessee-respondents herein were entitled to deductions, either under Section 80IB or under Section 80IC of the Act, in the light of the Schemes of the various subsidies formulated by the Government.
11. The object of granting of the subsidies, in the present cases, was, submits the learned ASG, to encourage setting up of new industries in the backward region and the subsidies were made available to the industries only after the production commenced.
12. It is, therefore, an admitted position, contends the learned ASG, that the subsidies, in question, are revenue receipts and not capital receipts. What is, however, crucial, for decision, in the present appeals, is, the question, according to the learned ASG, whether the revenue receipt, in the form of transport subsidy, or interest subsidy or power subsidy or insurance subsidy,, at the hands of the assessee-respondents herein, goes on to reduce the cost of production of the industrial undertaking concerned and thereby affects the resultant profits and gains derived from, or derived by, the industrial undertaking concerned and whether the amount of subsidy, in question, in a case of present nature, would be permitted to be deducted under the provisions of either under Section 80IB or under Section 80IC of the Act, as the case may be.
13. Candidly submits the learned ASG that, in the present appeals, it is not in dispute that the industrial undertakings of the assessee-respondents herein are eligible industrial undertakings, under the relevant Government Policy/Scheme, to receive the subsidies, which were received by the assessee-respondents. However, what is in question, once again, points out the learned ASG, is whether any of the subsidies, in question, goes on to reduce the cost of production of the industrial undertakings concerned and thereby makes, the assessee-respondents concerned entitled to claim deductions, either under Section 80IB or under Section 80IC of the Act of the amounts of the subsidies, which were received, in the form of revenue receipt, by the assessee-respondents.
14. Referring to the schemes the of subsidies,, the learned ASG submits that the schemes had been introduced by the Government with the main object of promoting industrial growth in the areas, where the schemes had been made available, and this policy had been continued during the relevant year, but, in order to obtain the benefit of deduction of profits and gains, under the Act, arising out of the schemes of subsidies, an industrial undertaking has to satisfy the conditions embodied under Section 80IB or 80IC of the Act, as the case may be.
15. While, in the case of Section 80IB, the fundamental requirement, according to Mr. Pathak, learned ASG, is that the profits and gains have to be 'derived from' the industrial undertaking, the profits and gains have to be 'derived by' the industrial undertaking if one has to claim deduction under Section 80IC. Nevertheless, in either case, submits the learned ASG, in order to become entitled to claim deduction of the amount of subsidy, received by an industrial undertaking, the assessee must be able to show a direct nexus between the subsidy received, on the one hand, and the profits and gains of the industrial undertaking concerned, on the other, inasmuch as there is no material distinction, contends the learned ASG, between the phrase, 'derived from' and the phrase, 'derived by' and any attempt to distinguish the meaning of the said two expressions would be an academic exercise with no substantial gain and it is for this reason that the two phrases, namely, 'derived from' and 'derived by', are used interchangeably.
16. What is, however, according to the learned ASG, imperative to show by an assessee, in order to claim deduction, be it under Section 80IB or under Section 80IC, is that the profits and gains have been, as the case may be, derived from or derived by the industrial undertaking, because of the subsidy received by the assessee. As a corollary thereto, submits the learned ASG, the assessee would have to show, if the assessee has to claim deduction either under Section 80IB or under Section 80IC, that the profits and gains of the industrial undertaking concerned are directly relatable to, and connected with, the subsidies received and, hence, the profits and gains, so derived or so received, are not attributable to the subsidies, which the assessee received, but either 'derived from' or 'derived by', the industrial undertaking concerned.
17. According to the learned ASG, the word, 'derive', which is of material significance, has been the subject-matter of interpretation in various judicial pronouncements without any reference to the suffix 'from' or 'by'. A reference, in this regard, is made by the learned ASG to the case of Pandian Chemicals Ltd. v. Commissioner of Income Tax [2003] 262 ITR 278.
18. Further elaborating his submission, the learned ASG points out that the word 'derive' is of importance and the use of the suffixes, 'from' or 'by' to the word 'derive' are merely a manner of usage rather than an unintelligible differentia. In support of his contention, the learned ASG refers to the case ofNational Organic Chemical Industries Limited v. Collector of Central Excise, Bombay (AIR 1997 SC 690), wherein the Supreme Court held as under:
"The dictionaries state that the word 'derive' is usually follows by the word 'from' and it means get or trace from a source, arise from, originate in, show the origin or formation of'.
It, therefore, suggests that the root word is 'derived' and the suffix 'from' or 'by' or 'directly', etc., are indistinguishable and do not impinge on the interpretation at hand. In other words, there is no greater significance in the word 'from' following the word 'derived' other than the fact that it is the usual linguistic practice……….."
(Emphasis added)
19. The learned ASG has also placed reliance on the decisions rendered by various High Courts as well as the Supreme Court, in Sharavathy Steel Products (P) Ltd v.. ITO [2011], 347 ITR 371, Commissioner of Income-tax v. Maharani Packaging (P) Ltd [2012] 209, reported in Taxman 49 (HP) (Mag), Commissioner of Income Tax in [2010] 193 Taxman 12, Janak Raj Bansal v. CIT [2010], 228 CTR 167, Commissioner of Income Tax Karnal v. Accent for living [2010], reported in 191 Taxman 88, and Pine Packaging (P) Ltd v. CIT, reported in 250 CTR 45, on the controversy if any distinction, between the meaning of the expressions, 'derived from' and 'derived by' really exists.
20. From the decisions referred to above, further submits the learned ASG, it can be safely said that a number of superior judicial authorities have chosen to ignore the word 'from' or 'by', appearing after the word 'derived', while considering the subject-matter involving and/or using the said two expressions.
21. According to the learned ASG, since there is no existing authority or decided case, which establishes any intelligible distinction between the two expressions, namely, 'derived from' and 'derived by, what has to be considered by this Court, in the present appeals, is whether the profits and gains of the industrial undertakings, in question, were 'derived from' or 'derived by' the industrial undertakings concerned and whether the profits and gains, so derived, have a first degree nexus with the subsidies, which were received by the industrial undertakings. In consequence thereof, one can also safely gather, contends the learned ASG, that if no first degree nexus is established between the profits and gains derived by the industrial undertaking, on the one hand, and the subsidy or subsidies received by the industrial undertaking concerned, on the other, the assessee would neither be entitled to deduction under Section 80IB nor would the assessee be entitled to deduction under Section 80IC.
22. In his endeavour to establish his contention, that there does not really exist any distinction or difference between the two expressions, 'derived from' and 'derived by', the learned ASG has chosen to refer also to Chapter VI-A of the Act, particularly, Section 80-IA, Section 80-ID, Section 80-IAB, Section 80-HHE, Section 80-HHF, etc. of the Act and submits that after going through the Sections, as mentioned hereinbefore, it is not at all difficult for a prudent person to come to the conclusion that the phrases, 'derived from' and 'derived by', used in these Sections of the Act, are, by no means, of any material significance and statutorily, it does not matter whether the profits and gains are derived from or derived by an industrial undertaking.
23. The learned ASG submits that considering the fact that the expression, 'derived from', appearing in Section 80IB, as well as the expression, 'derived by', appearing in Section 80IC, are narrower in scope than the expression, 'attributable to', it becomes transparent that if one has to receive the benefit of Section 80IB or Section 80IC, he must show that the source of profits and gains is directly from the manufacturing activities of the assessee and that the profits and gains, so derived, are directly affected by subsidy or subsidies received.
24. Mr. Pathak has also submitted that merely because the scheme, in question, provides for various subsidies, it does not mean that the subsidies have a direct nexus with the profits and gains of the assessee-respondents' industrial undertakings. Had any subsidy been given on the cost of the raw materials actually consumed by the assessee-respondent's industrial undertakings, the subsidy, on raw materials, would have, perhaps, been, according to the learned ASG, eligible for deduction under Section 80IB or 80IC.
25. Referring to the cases of Janak Raj Bansal v. CIT [2010], reported in 228 CTR 167, CIT v. Maharani Packaging (P) Ltd, reported in [2012] 209 TAXMAN 49 (Mag.), Eastman Exports Global Clothing (P) Ltd v. ACIT, reported in [2011] 331 ITR 232, Karnal v. Accent of Living[2010], reported in 191 TAXMAN 88, and M.M. Forgings Ltd v. Addl. CIT [2010], reported in 349 ITR 643, the learned ASG submits that in these cases, the Courts have taken the view that the Duty Drawback is not a profit or gain derived from industrial activity and, hence, Duty Drawback would not be eligible for deduction under Section 80IB.
26. The learned ASG has further pointed out that, in the case of Supriya Gill v. Commissioner of Income Tax [2010], reported in 193 TAXMAN 12, the Himachal Pradesh High Court has held that that freight subsidy, received from the government by the assessee, will not be eligible for deduction, under Section 80-IA of the Act, on the ground that the source of freight subsidy was not the business of the assessee, but a scheme of the Central Government and, therefore, the same could not be treated as a profit 'derived from' business.
27. Pointing out to the case of Sri Umesh M. Joshi, Mumbai v. ITO [ITA No. 4287/Mum/2010, dated 23.12.2011], the learned ASG submits that in this case, the learned Income Tax Appellate Tribunal, Mumbai, confirmed the action of the Assessing Officer in disallowing the assessee's claim for deduction, under section 80-IA of the Act, in respect of sales tax incentives on the ground that the immediate source of the incentives, received by the assessee, was the relevant scheme of the State Government and not the business of the industrial undertaking of the assessee.
28. Referring to the case of CIT v. Gheria Oil Gramudyog Workers Welfare Association, reported in [2011] 330 ITR 117 (HP), the learned ASG submits that in this case, the Court has taken the view that interest subsidy, received by the assessee, under a scheme formulated by the State Government, is not a profit derived from business, because it not an operational profit.
29. Referring to the case of CIT v. Kiran Enterprises [2010], reported in 189 TAXMAN 457, the learned ASG also submits that transport subsidy, received by the assessee, was not a profit derived from business, for, it was not an operational profit and that the source of the subsidy is not the business of the assessee, but a scheme of the Central Government and, hence, the subsidy, received by the assessee, was not entitled to deduction under the Act.
30. Mr. Pathak, learned ASG, contends that the ratio of the judgment, rendered by this High Court, in Pancharatna Cement v. Union of India, reported in (2009) 6 GLR 459, which is relied on by the assessee-respondents, is not an issue in lis, in the present case, and the ratio of the said judgement of this High Court is, therefore, not applicable to the substantial questions of law, framed by this Court, in the present cases.
31. In the cases at hand, submits the learned ASG, none of the subsidies can be said to be reducing the cost of production of the industrial undertakings concerned and no first degree nexus can be said to have been established between the profits and gains derived from, or derived by, the assessee-respondents' industrial undertakings concerned, on the one hand, and the subsidies, received by the assessee-respondents, on the other, and it is for this purpose that a subsidy, in a case of present nature, cannot be regarded as a subsidy, which helps in the profits and gains of the industrial undertaking and, in such a case, the profits and gains, derived from, or derived by, cannot be attributed to the subsidy received and, in a case of this nature, deduction, neither under Section 80IB nor under Section 80IC, would be available to the assessee concerned.
32. Heavily relying upon the case of Liberty India v. CIT, reported in [2009] 317 ITR 218: (2009) 9 SCC 328, the learned ASG submits that the 'profits and gains' derived from, or derived by, the industrial undertakings of the assessee-respondents, are, in effect, the subsidies provided by the Government and, although the profits and gains of the industrial undertakings concerned may be attributable to the subsidies received by the industrial undertakings concerned, the fact of the matter remains that the subsidies are revenue receipts and are liable to be taxed.
33. The issue, in these appeals, if a subsidy is or is not entitled for deduction under Section 80IB or 80IC has, submits the learned ASG, no longer remained res integra inasmuch as the issue is fully covered by the decision in Liberty India (supra). By referring to the case of Liberty India (supra), the learned ASG submits that, in this case, the issue, which fell for consideration, was: Whether the profit from Duty Entitlement Passbook Scheme and Duty Drawback Scheme could be said to be profit derived from the business of industrial undertaking eligible for deduction under Section 80-IB of the Act.?
34. Referring to the case of Liberty India (supra), it is contended by Mr. Pathak, learned ASG, that, in Liberty India (supra), the Supreme Court has unambiguously laid down that the tax incentives, under Chapter VI-A of the Act, are attracted only to the generation of operational profits and that the benefit of deduction will not be available in respect of the receipts, which do not have any direct nexus with the operation of industrial undertaking of the assessee, i.e., whose source is beyond the 'first degree'. The learned ASG refers to paragraph 17 and 18 of the case of Liberty India (supra) and contends that the Supreme Court has already held, in Liberty India (supra), that DEPB and Duty Drawback are incentives, which flow from the Schemes framed by Central Government, and these incentives do not, in any way, establish a nexus between the profits and gains of the industrial undertakings and cannot, therefore, entitle the assessee-respondents to seek exemption under Section 80IB or 80IC. In fact, it has been clearly held, inLiberty India (supra), reiterates Mr. Pathak, that these incentives are revenue receipts, which belong to the category of ancillary profits of the industrial undertakings concerned and shall be taxed accordingly.
35. In other words, submits the learned ASG, the Supreme Court has held, Liberty India (supra), that incentives, originating from a Government Scheme, such as the one in Liberty India (supra), fall beyond the 'first degree' rule and, hence, are not entitled to deduction under Chapter VI-A of the Act. In paragraph 18 of the decision, in Liberty India (supra), the Supreme Court has held, points out Mr. Pathak, as under:
"We are satisfied that remission of duty is on account of the statutory/policy provisions of Custom Act/Scheme(s) framed by the Government of India. In these circumstances, we hold that profits derived by way of such incentives do not fall within the expression" profits derived from industrial undertaking" in section 80-IB."
36. Mr. Pathak, learned ASG, has also submitted that there is no material difference between an incentive scheme, such as, DEPB and Duty drawback, which were dealt with by the Supreme Court, in Liberty India's case (supra), and the subsidies, which have fallen for consideration in the present cases. It cannot be disputed, according to the learned ASG, that the various kinds of subsidies may flow from Governmental schemes and, therefore, the subject-matter, which was dealt with by the Supreme Court, in Liberty India's case (supra), cannot be distinguished from the cases at hand and that theLiberty India's case (supra) is squarely applicable to the cases at hand inasmuch as the subsidies, in the present cases, cannot but be regarded as non-operational profits, having no direct nexus with the activities of the undertakings of the assessee-respondents. Any argument to the contrary, further submits Mr. Pathak, would be perverse and in breach of Article 141 of the Constitution of India.
37. Assailing the contention of the assessee-respondents, that the subsidies, received by the assessee-respondents, in the present cases, go to reduce the expenditure actually incurred by the industrial unit of the assessee-respondents and, hence, the same ought to be regarded as operational profits, Mr. Pathak submits that this contention of the assessee-respondents cannot hold water on the ground that the classification of a particular receipt, by an industrial unit, is required to be done at the time of its receipt and the subsequent classification, in its books of account, under different heads, is immaterial.
38. Illustrating his above contention the learned ASG submits that for a textile industry producing cloth, the main industrial components for profits and gains would be the manufacture and sale of cloth itself. If any profits and gains are derived by the industry by operation of a canteen for its employees in the industry, the same would not be entitled for special deduction under Section 80 IB or Section 80 IC and it is in this context that the Supreme Court has observed, Liberty India's case (supra), "…………profits derived by way of such incentives do not fall within the expression 'profits derived from industrial undertaking in Section 80-IB'.
39. In support of his above contention, the learned ASG has also referred to paragraph 24 of Liberty India's case (supra), wherein the Supreme Court has observed as under:
"In the circumstances, we hold that Duty drawback/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80I/80-IA/80-IB of the Act."
SUBMISSIONS BY THE RESPONDENTS:
40. Interestingly enough, Mr. R.P. Agarwalla, learned Senior counsel, while resisting the appeals, does not dispute the fact that there is a difference between the two expressions, namely, 'derived from' and 'attributable to'. In fact, Mr. Agarwalla submits that there can be no two opinions that the said two expressions carry two different meanings inasmuch as the expression 'derived from' is narrower than the expression 'attributable to'.
41. The meaning of the word 'derived' is, according to Mr. Agarwalla, learned Senior counsel, not a subject matter of controversy, but the attempted question, raised by the Revenue, regarding the expressions 'derived from' and 'derived by' is incorrect. It can be easily comprehended, submits Mr. Agarwalla, learned Senior counsel, that the 'profits and gains', 'derived from' an industrial undertaking means that it is the business of the undertaking, which is the direct source of the 'profit and gains'; whereas the expression 'derived by' means that the business of the undertaking is the recipient of the profits and gains.
42. At any rate, submits Mr. Agarwalla, the question of interpreting the expression 'derived from' or the expression 'derived by' would arise only when this Court finds that the nexus, between the subsidies, in question, on the one hand, the manufacturing process/production of the industrial undertaking, on the other, is not direct, or else, the question of distinguishing the expression 'derived by' from the expression 'derived from' would be, contends Mr. Agarwalla, irrelevant.
43. While resisting the appeal, Mr. R.P. Agarwalla, learned Senior counsel, makes it also clear that it is not material, as far as the assessee-respondents are concerned, whether deduction is required to be allowed under Section 80IB or 80IC of the Act for the subsidies, which the assessee-respondents' industrial undertakings have received during the relevant year inasmuch as the assessee-respondents, in either case, according to Mr. Agarwalla, would be entitled to deductions if the assessee-respondents can show that the subsidies, given in the form of transport subsidy, or interest subsidy, or power subsidy, or insurance subsidy, are aimed at reducing the cost of production of the assessee-respondents' industrial undertakings and thereby directly affect the profits and gains made by the industrial undertakings concerned.
44. Referring to the case of Liberty India v. CIT, reported in [2009] 9 SCC 328, Mr. Agarwalla, learned Senior counsel, submits that the issue, raised in Liberty India (supra), was distinct and different from the issues, which the cases at hand raise inasmuch as the subjects for consideration, in Liberty India (supra), were Duty Entitlement Passbook Scheme (DPEB) and Duty Drawback Scheme, which were schemes providing for incentives to augment export and these schemes were not meant for directly reducing the cost of production of the industrial undertaking. In fact, in Liberty India (supra), submits Mr. R.K. Agarwalla, the assessee concerned, unlike the facts of the case at hand, was not involved in manufacturing activities.
45. From the decision, in Liberty India (supra), it is clear, according to Mr. Agarwalla, that DPEB and Duty Drawback Scheme, being export incentives, were not related to the business of industrial undertaking per se for its manufacturing or production.
46. Entitlement of DPEB and Duty Drawback Scheme arose, in Liberty India (supra) points out Mr. Agarwalla, when the undertaking made export after manufacturing or production and remained restricted only to export component. Consequently, points out Mr. Agarwalla, when there was no export, the question of any entitlement, either under the DPEB or under Duty Drawback Scheme, did not arise and, as a result thereof, the relation of DPEB and/or Duty Drawback Scheme with the manufacturing activities was not proximate or direct. This apart, DPEB entitlement was freely transferable or saleable resulting in profit or loss, which is not the case at hand.
47. Coupled with the above, it is submitted by Mr. Agarwalla that the Supreme Court, in Liberty India (supra), clearly pointed out that so far as the Duty Drawback was concerned, the same envisaged repayment of customs and excise duty paid by an assessee, but the refund of the amount shall not arithmetically be equal to customs duty or central excise duty actually paid by an individual importer or manufacturer.
48. It is, therefore, clear, submits Mr. Agarwal, that the Duty Drawback was not related to the business of industrial undertaking so far as manufacturing or production was concerned and, that is why, the Supreme Court held, in Liberty India (supra), that the profits, derived by way of incentive, such as, DEPB, do not fall within the expression 'profits derived from industrial undertaking' appearing in Section 80IB; whereas the present cases are the ones, wherein the subsidies directly affect the cost of production of the industrial undertakings concerned and are inextricably linked to the assessee-respondents' manufacturing activities.
49. Liberty India (supra) is, thus, according to Mr. Agarwalla, an authority for the proposition, which governs the statutory schemes or provisions of DEPB and Duty Drawback inasmuch as the said scheme relate to the export of an industrial undertaking and is not at all an answer to the question of deduction arising in each and every incentive embodied scheme, more particularly, a scheme, which is directly connected with reduction of cost of production/manufacture of an industrial undertaking. By no means, therefore, contends Mr. Agarwalla, learned Senior counsel, Liberty India (supra) can be said to be a decision applicable to the facts of the present case.
50. Referring to the case of Liberty India (supra), Mr. Agarwalla submits that though the Revenue has heavily relied on the decision, in Liberty India(supra), the fact of the matter remains that the chief question, which has fallen for determination, in the present cases, was not at all a question, which was raised and decided in Liberty India (supra) and, hence, the reference, made by the Revenue to the decision, in Liberty India (supra), or to the observations made therein, which is not in the context of a case of present nature, cannot be said to be the answer to the question(s) raised in the present appeals.
51. In fact, the Supreme Court has, in the past, points out Mr. Agarwalla, cautioned the courts not to mechanically rely upon a decision of the Supreme Court without taking into account the facts of the case, which render colour to the decision of the Court, and that the decision of the Supreme Court is not to be read like a statute and the words or the sentences are not to be read de hors the context in which the question arose. Unless, therefore, an issue is raised and decided by the Supreme Court in a case, the question of applying the decision of the Supreme Court would not, contends Mr. Agarwalla, learned Senior counsel, arise. A reference, in this regard, is made by Mr. Agarwalla, to the case of Commissioner of Income Tax v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297 (SC), wherein the Supreme Court observed as under:
"It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete "law" declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9/AIR 1971 SC 530, this court cautioned (at page 578 of AIR 1971 SC). (Emphasis supplied)
It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment."
52. The question, points out Mr. Agarwalla, which was raised in Liberty India (supra), was: Whether profit from the Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme could be said to be profit derived from the business of the industrial undertaking eligible for deduction under section 80-IB of the Income Tax Act, 1961 (1961 Act) ?
53. Thus, the question, in Liberty India (supra), as can be clearly gathered, was, submits Mr. Agarwalla, learned Senior counsel, whether the profits, which were received from Duty Entitlement Passbook Scheme and Duty Drawback Scheme, could be regarded as profits derived from the business of the industrial undertaking and, if so, whether the profits, so derived, were permissible to be deducted under Section 80IB.
54. The Supreme Court, while answering the above question in the negative, pointed out, submits Mr. Agarwalla, that DEPB is an incentive and it is given under Duty Exemption Remission Scheme and that DEPB is not related to the business of industrial undertaking per se for its 'manufacturing or production' inasmuch as DEPB's entitlement would arise, when the undertaking goes on to 'export' after 'manufacturing or production' and is restricted only to 'export product'. Therefore, it is clear, reiterates Mr. Agarwalla, that if there was no export, there was no DEPB entitlement. Further, the entitlement was based on the artifice of 'deemed import content of export product' and not even based on 'actual import content of the export product'.
55. The decision, in Liberty India (supra), according to Mr. Agarwalla, is an exposition of law in respect of statutory schemes/ provisions of DEPB and Duty Drawback, which were related to export of an industrial undertaking and not at all an exposition on the question of each and every incentive scheme, more particularly, those schemes, which as are inextricably and directly connected to the reduction in the cost of production/manufacture of an industrial undertaking, and the schemes, such as the present ones, did not even fall for consideration in Liberty India's case (supra). Therefore, contends Mr. Agarwalla, the Revenue's reliance, on Liberty India (supra), is wholly misplaced.
56. No wonder, therefore, contends Mr. Agarwalla, that in MEPCO Industries Ltd. v. CIT, D9 319 ITR 208 (SC), which is a later decision, the Court has clearly pointed out that the nature of a subsidy, in each case, is separate and distinct and, therefore, the nature of subsidy has to be examined, in each case, independently. Illustrating this principle, the Supreme Court held, in Mepco Industries Ltd. (supra), as under:
"Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC) was a case which dealt with production subsidy, Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in case, one has to examine the nature of the subsidy. The judgment of this court in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 was on its own facts; so also, the judgment of this court in Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC). The nature of the subsidies in each of the three cases is separate and distinct. There is no strait jacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC), this court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas. In the circumstances, the present case is an example of change of opinion. Therefore, the Department has erred in invoking section 154 of the Act."
(Emphasis is added)
57. In the light of the decision, in Mepco Industries Ltd (supra), one can have no escape from the conclusion, submits Mr. Agarwalla, that the nature of subsidy has to be examined by the Court, in each case, in order to determine if an assessee's undertaking is entitled to deduction under Section 80IB or 80IC of the Act.
58. The exact nature and character of transport subsidy, points out Mr. Agarwalla, were examined and considered by the Supreme Court, in Jai Bhagwan Oil & Flour Mills v. Union of India, reported in [2009] 14 SCC 63, and having examined the nature of the transport subsidy, the Supreme Court, in Jai Bhagwan Oil & Flour Mills (supra), laid down, in emphatic words, that transport subsidy was 'not' meant to augment revenue, by levy and collection of tax or duty, rather, the object was to 'improve' trade and commerce between the remote parts of the country with other parts so as to bring economic development to remote backward regions and this scheme was introduced to make it feasible and attractive for 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 the non-remote areas.
59. The Court has also pointed out, in clear words, in Jai Bhagwan Oil & Flour Mills (supra), submits Mr. Agarwalla, that huge transportation cost, for the purpose of bringing the raw materials to the industrial unit and carrying of 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 the central areas and that is why, transport subsidy was developed as a device so that the industries can become competitive and become economically viable. Thus, 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 transport 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. Mr. Agarwalla has also referred to paragraph 18 of the decision of the Supreme Court, in Jai Bhagwan Oil & Flour Mills (supra), which read as under:
"Any goods which goes in as a raw material required/used in the manufacturing programme of an industrial unit situated in a notified remote area, or any finished goods that is produced in the industrial unit situated in such area and exported out of the State, was eligible for the transport subsidy under the Scheme. The Scheme itself specifically defines "finished goods" as goods actually produced by an industrial unit in accordance with the manufacturing programme as approved by the Central Government and/or the Government of the State where the industrial unit is located."
(Emphasis is added).
60. The Revenue, according to Mr. Agarwalla, has not even attempted to comment, far less distinguish the decision in Jai Bhagwan Oil & Flour Mills(supra). There is, therefore, direct nexus, submits Mr. Agarwalla, between the subsidies and manufacturing activities, in the present cases, entitling the assessee-respondents to receive deductions for the subsidies received.
61. Similarly, submits Mr. Agarwalla, learned counsel for the assessee-respondents, that the issue of power subsidy is directly covered by the decisions, in CIT v. Rajaram Maize Products 251 ITR 427 (SC), and CIT v. Eastern Electro Chemical Industries, reported in (1999) 9 SCC 20, and that the nature and character of interest subsidy and insurance subsidy, being identical to that of power subsidy, interest subsidy and insurance subsidy are also covered by the decisions, in Rajaram Maize Products (supra) and Eastern Electro Chemical Industries (supra).
RIVAL CONTENTIONS VIS-À-VIS LEGAL PROPOSITIONS :
62. Shorn off rhetorical legal arguments, compassionate pleas and emotionally surcharged submissions, what surfaces from beneath the mass of materials placed before this Court, by way of pleadings and otherwise, is that there is no dispute, in this set of appeals, that, in order to claim deduction either under Section 80IB or under Section 80IC, an assessee has to establish that there is a direct, intrinsic and first degree nexus between a subsidy, on the one hand, and the profits and gains, on the other, derived from, or derived by, the industrial undertaking concerned. There is also no dispute that if any of the subsidies, in question, goes on to reduce the cost of production of an industrial undertaking, the resultant profits and gains are deductible under the provisions of Section 80IB or 80IC, as the case may be. Surfacing from beneath this statutory requirement, the legal proposition is that if the subsidy is non-operational in nature, there will be no entitlement of deduction; but the subsidy, if operational, would entitle an assessee to claim deduction.
63. There is no dispute at the bar that the subsidies, which we are required to deal with, are revenue receipts. The question, however, is: these revenue receipts, if help an industrial undertaking in earning profit and making gains, whether the undertaking is entitled to seek deduction if the undertaking satisfies, otherwise, the conditions prescribed by Section 80IB or 80IC, as the case may be ?
64. Though Mr. Pathak, learned ASG, is correct to some extent in contending that there is no substantial distinction between the two expressions, namely, 'derived from' and 'derived by', what we must point out is that the expression 'derived from', occurring in Section 80IB, implies that the profits and gains have to be derived from the activities of the industrial undertaking. In other words, as rightly contended by Mr. Agarwalla, learned Senior counsel, when the expression, 'derived from, has been used in Section 80IB, it means that it is the business of the undertaking, which is the direct source from which the profits and gains are derived. In the case of a subsidy, the expression, 'derived from', appearing in Section 80IB, would, logically extended, mean that the subsidy, provided by the State, directly affects the business activity of the industrial undertaking. In the case at hand, the assessee-respondents contend that the subsidies, provided to them, go on to reduce the cost of production of the industrial undertakings concerned and the resultant effect is generation of more money resulting into higher profits. In the case of 80IC, however, one has to show that it is the industrial undertaking, which is the recipient of profits and gains arising from a subsidy, which the industrial undertaking has received. It is immaterial as to what Section has been invoked by an assessee for the purpose of claiming deduction so long as an assessee is entitled to statutory deduction. Consequently, the deduction must be allowed even if an assessee refers to an incorrect statutory provision for claiming deduction.
65. The fact of the matter remains that, in the case at hand, since the subsidies, in question, are claimed to have helped the undertakings in generating profits and making gains by reducing the operational cost of the activities of the industrial undertaking concerned, the statutory provision for deduction, apposite to a case of present nature, is Section 80IC inasmuch as the recipient of the profits and gains, arising out of the subsidies, is, eventually, an industrial undertaking.
66. What is, therefore, required to be decided, in the present set of appeals, is as to whether there is direct nexus between the subsidies, on the one hand, and the manufacturing activities of the industrial undertaking, on the other. If there is a direct nexus between the two, then, the industrial undertaking is, undisputedly, entitled to claim deduction in respect of the profits and gains, if any, made by the industrial undertaking.
67. In order to sustain its plea, that there is no direct nexus between the subsidies, received by the industrial undertakings of the assessee-respondents, on the one hand, and the manufacturing activities of the industrial undertakings, on the other, the Revenue contends that subsidies, received by the industrial undertakings of the assessee-respondents, are non-operational, in nature, meaning thereby that it does not have any bearing on the manufacturing activities of the industrial undertakings, while the assessee-respondents contend that the subsidies, in question, directly affect the operation of the manufacturing activities of the industrial undertakings and have, therefore, direct bearing on the earning of profits and making of gains by the industrial undertakings concerned. The controversy, thus, lies in a narrow compass, though the arguments addressed are varied and repetitive.
68. The moot question, which, therefore, falls for determination in the present set of appeals is: Whether there is direct and first degree nexus between the subsidies, on the one hand, and the profit and gains, on the other, of the industrial undertakings concerned?
69. While answering the question, posed above, one has to bear in mind, as already indicated above, that there are four distinct subsidies, namely, transport subsidy, interest subsidy, power subsidy and insurance subsidy, which are involved in the present set of appeals.
70. Let us, first, deal with transport subsidy, which would, per force, bring us to the object with which transport subsidy was introduced and the manner in which the scheme of transport subsidy was to operate so that we can determine if there was a direct nexus between transport subsidy, on the one hand, and the resultant profits and gains of the industrial undertakings concerned, on the other.
SCHEME OF TRANSPORT SUBSIDY:
71. A new industrial policy was unfurled by Notification, dated 23rd of July, 1971, issued by the Government of India embodying a scheme for grant of subsidy on the transport of raw materials actually required and used by an industrial unit in its manufacturing programme as approved by the Government of India and/or Government of the State/Union Territory, where the industrial unit is located, and also transportation of finished goods actually produced by an industrial unit in accordance with the manufacturing programme approved by the Government of India and/or Government of the State/Union Territory, where the industrial unit is located.
72. In the present appeals, we are concerned not only with Transport Subsidy Scheme (as embodied in the Industrial Policy announced by Notification, dated 23rd of July, 1971, and extended by Office Memorandum, dated 24.12.1997), but also with subsidy on interest, subsidy on power, and subsidy on insurance. The relevant portion of the Scheme embodied in Clause (iv) of the Notification, dated 23rd of July, 1971, aforementioned, and titled as the Transport Subsidy Scheme, 1971, reads as under:
"(iv) In the case of North-Eastern region comprising the States of Assam, Meghalaya, Nagaland, Manipur, Tripura and the Union Territories of Arunachal Pradesh and Mizoram the transport subsidy will be given on the transport costs between Siliguri and the location of the industrial unit in these states/Union territories. While calculating the transport costs of raw materials the cost of movement by rail from Siliguri to the railway station nearest to the location of the industrial unit and thereafter the cost of movement by road to the location of industrial unit will be taken into account. Similarly, while calculating the transport costs of finished goods the costs of movement by road from the location of industrial unit to the nearest railway station and thereafter the cost of movement by rail to Siliguri will be taken into account. In the case of North Eastern region, for materials moving entirely by road or other mode of transport the transport costs will be limited to the amount which the industrial unit might have paid had the raw materials moved from Siliguri by rail upto the railway station nearest to the location of the industrial unit and thereafter by road. Similarly in the case of movement of finished goods moving entirely by road or other mode of transport in the North Eastern region, the transport costs will be limited to the amount which the industrial unit might have paid had the finished goods moved from the location of the industrial units to the nearest railway station by road and thereafter by rail to Siliguri.
(Emphasis is added)
73. For helping in the growth of industries, development of economy and generation of employment, Sub-Clause (iv) of Clause 6 of the Scheme was amended by Government of India's Notification, dated 28.02.1974, which made it clear that transport subsidy would cover movement of 'raw materials' from one State to another within the North Eastern Region and, further, transport subsidy would cover inter-State movement of 'finished goods' within the region, but the subsidy available would, under the amended Scheme, be 50% of the transport cost on the movement of the goods from the location of the industrial units to the nearest Railway Station by road and, thereafter, by rail and vice-versa.
74. Under the unamended Scheme, transport subsidy was to cover 75% of the air freight on movement of electronic component/products by air to, and from, Calcutta up to the location of the industrial unit and vice-versa. The Scheme, on amendment, clarified that in case of movement of goods moving partly by air and partly by rail/road, the transport subsidy would be admissible @ 75% on air freight from Calcutta up to the airport nearest to the location of the industrial unit and, thereafter, at the rate of 90% for movement by rail/road up to the location of the industrial unit and vice versa.
75. In order to check that no misuse of transport subsidy takes place, Sub-Clause (iii) of Clause 6 of the Scheme made it a duty of the Directorates of Industries, in the State/Union Territories, to carry out periodical checks to ensure that the raw materials and the finished goods, in respect of which transport subsidy had been given, were actually used for the purpose by adopting a system of scrutinizing of consumption of raw materials and the output of the finished goods.
76. Before proceeding further, we may point out that Clause 4 of the Transport Subsidy Scheme contain various definitions. The definitions, relevant for the purpose of this appeal, are of raw material and finished goods as defined by Sub-Clauses (h) and (i) of Clause (4) of the Scheme and, therefore, reproduced below:
(h) 'Raw material' means any raw material actually required and used by an industrial unit in its manufacturing programme as approved by the Government of India and/or by the Government of State/Union Territory in which the industrial unit is located.
| (i) | 'Finished goods' means the goods actually produced by an industrial unit in accordance with the manufacturing programme approved by the Government of India and/or the Government of the State/Union Territory in which the industrial unit is located. |
(Emphasis is added)
77. From the definition of raw material and finished goods, it is crystal clear that the term, raw material, under the Scheme, means any raw material actually required and used by an industrial unit in its manufacturing programme as approved by the Government of India and/or by the Government of State/Union Territory in which the industrial unit is located. Similarly, the definition of finished goods makes it abundantly clear that the term, finished goods, under the Scheme, means the goods actually produced by an industrial unit in accordance with the manufacturing programme approved by the Government of India and/or the Government of the State/Union Territory in which the industrial unit is located.
78. From the definition of raw materials and finished goods, embodied in the Transport Subsidy Scheme, 1971, and the details of the Scheme as contained, particularly, in Sub-Clause (iv) of Clause 6 of the Scheme shows that in the case of North-Eastern Region, the Scheme promised that the transport subsidy would be given on the transport costs, between Siliguri and the location of the industrial unit concerned, on the raw materials actually required and used by the qualified industrial unit in its manufacturing programme as may have been approved by the Government concerned. The Transport Subsidy Scheme, 1971, also promised to make available transport subsidy on finished goods, actually produced by the industrial unit in accordance with the manufacturing programme approved by the Government concerned.
79. What logically follows from the above discussion is that subsidy, on transportation of raw materials as well as finished goods, was promised to be made available to the industrial units concerned in a manner, which would directly affect the cost of production inasmuch as transportation subsidy, on the raw materials, was not meant to cover all the raw materials, but only that part or portion of the raw materials, which was actually required and used by an industrial unit in its manufacturing programme approved by the Government concerned and, similarly, transport subsidy, on the finished goods, too, help in reduction of the cost of manufacturing of the industrial unit concerned inasmuch as subsidy on transportation of finished goods was promised to be given on the finished goods actually produced by the industrial unit in accordance with the manufacturing programme approved by the Government concerned.
80. When the transport subsidy, so received, both, on the transportation of the raw materials as well as transportation of the finished goods, does go to reduce the cost of production of an industrial undertaking, the resultant effect of such a reduction, on the cost of production, would, obviously, help generate profits and, at times, higher profits.
81. Thus, it is transparent that there is a direct nexus between the transport subsidy, on the one hand, and the profits earned, and gains made, by the industrial undertakings, on the other. Such a direct nexus cannot but be termed as first degree nexus between the two, namely, transport subsidy, on the one hand, and the resultant profits and gains, on the other.
82. Unless, therefore, the Revenue succeeds in showing that the transport subsidy has no bearing on the cost of production of the industrial undertakings, the claims for deductions, which have been made by the assessee-respondents as recipient of transport subsidy, cannot but have to be necessarily held to be covered by Section 80IB or 80IC.
83. The nature and character of transport subsidy fell for consideration in Jai Bhagwan Oil & Flour Mills v. Union of India, reported in [2009] 14 SCC 63, wherein, the Supreme Court, taking note of, amongst others, the definition of raw material and the definition of finished goods, observed that the object of the transport subsidy scheme is not augmentation of revenue by levy and collection of tax or duty. The relevant observations, appearing, in this regard, at paragraph 14, read, "The object of the Transport subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty".
(Emphasis provided)
84. From the above cogent and emphatic observation, made by the Supreme Court, in Jai Bhagwan Oil & Flour Mills (supra), as regards the object of transport subsidy, it goes beyond the pale of doubt that transport subsidy Scheme was never meant to be a means of earning revenue by the State or collection of tax or duty by the State.
85. Far from being a source of earning revenue, the object of the Scheme, as pointed out by the Supreme Court, in Jai Bhagwan Oil & Flour Mills(supra), has been to improve trade and commerce between 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 the central (non-remote) areas. The relevant observations, appearing, in this regard, at para 14 of Jai Bhagwan Oil & Flour Mills (supra), read as under:
"14. 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 the central (non-remote) areas."
(Emphasis provided)
86. Explaining as to why the transport subsidy had become necessary, the Supreme Court further observed, in Jai Bhagwan Oil & Flour Mills (supra), as under:
"15. 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 the 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.
| ** | ** | ** |
18. Any goods, which goes in as a raw material required/used in the manufacturing programme of an industrial unit situated in a notified remote area, or any finished goods that is produced in the industrial unit situated in such area and exported out of the State, was eligible for the transport subsidy under the Scheme. The Scheme itself specifically defines "finished goods" as goods actually produced by an industrial unit in accordance with the manufacturing programme as approved by the Central Government and/or the Government of the State where the industrial unit is located."
(Emphasis provided)
87. From a careful reading of the observations, at para 14, 15 and 18 made by the Supreme Court, in Jai Bhagwan Oil & Flour Mills (supra), what becomes abundantly clear is that huge transportation cost, for bringing the raw materials to the industrial unit, located in the North-Eastern Region, and in carrying finished goods to the existing market outside the States of North-Eastern Region, had been making it unviable for any one to establish industries in the North Eastern Region and it was, in order to 'neutrailse' this heavy transportation cost that the transport subsidy scheme was evolved as a device and, therefore, the object of transport subsidy had never been, as concluded by the Supreme Court at para 14, "................... augmentation of revenue, by levy and collection of tax or duty."
88. In the light of what have been discussed above, there can be no escape from the conclusion that transport subsidy was aimed at reducing the cost of production of the industrial undertakings covered by transport subsidy Scheme. Thus, there was a first degree nexus between the transport subsidy, on the one hand, and cost of production, on the other. When cost is reduced, it naturally helps in earning of profit and, at times, higher profits. Such profits and gains ought to have been treated, and has rightly been treated, by the learned Tribunal, to be profits and gains derived from, or derived by, the industrial undertaking concerned.
89. The Revenue, it has been rightly contended by Mr. Agarwalla, learned Senior counsel, has not even attempted to distinguish the decision, in Jai Bhagwan Oil & Flour Mills (supra), in any manner whatsoever, when this decision makes it more than abundantly clear that transport subsidy goes on to reduce the cost of production of the industrial undertaking leading to earning of profits and making of gains by the industrial undertaking.
90. Upon analyzing the cases of Merinoply and Chemicals Ltd. v. CIT, reported in 209 ITR 508 (Cal), and Sarda Plywood Industries Ltd. v. CIT, reported in 238 ITR 354 (Cal), which the assessee-respondents have relied upon, when the facts of these cases and the law, laid down therein are considered, we find that both these decisions, in our respectful opinion, takes a correct view of the law, when it is laid down, in Merinoply and Chemicals (supra), 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 an industry in a backward area and, therefore, there is no room for doubt that the subsidies were inseparably connected with the profitable conduct of the business. The relevant observations, made inMerinoply and Chemicals Ltd. (supra), read as under:
"We do not find any perversity in the Tribunal's finding that the scheme of transportation 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."
(Emphasis is added)
91. Broadly in tune with Merinoply and Chemicals Ltd. (supra), Sarda Plywood Industries Ltd. (supra) holds that transport subsidy is granted only for the purpose of recouping or reimbursing a portion of transport cost, incurred by an owner of a manufacturing unit, set up in a backward area, in order to enable the owner of the manufacturing unit to recoup the loss, which he may suffer by way of additional transport cost. The relevant observations, appearing, in this regard, in Sarda Plywood Industries Ltd. (supra), read as under:
"Keeping in view the facts and circumstances of this case we, therefore, find ourselves in complete agreement with the Division Bench decisions of this court in Jeewanlal (1929) ltd. v. CIT [1983] 142 ITR 448, Merinopoly and Chemicals ltd. v. CIT [1994] 209 ITR 508 and Kesoram Industries and Cotton Mills Ltd. v. CIT [1991] 191 ITR 518, and hold that transport subsidy is granted only for the purpose of recouping or reimbursing a portion of transport costs incurred by an owner of a manufacturing unit set up in a backward area, so as to enable him to recoup the loss which he may suffer by way of additional transport cost."
(Emphasis added)
92. We find ourselves in complete agreement with the position of law laid down in Merinoply and Chemicals Ltd. (supra), Sarda Plywood Industries Ltd. (supra).
93. Before proceeding further, it needs to be pointed out that Mr. Agarwalla, learned counsel for the assessee-respondents, submits that the issue of power subsidy is directly covered by the decisions, in CIT v. Rajaram Maize Products 251 ITR 427 (S.C.), and CIT v Eastern Electro Chemical Industries, reported in [1999] 9 SCC 20, and that the nature and character of interest subsidy and insurance subsidy, being identical to that of power subsidy, interest subsidy and insurance subsidy are also covered by the decisions, in Rajaram Maize Products (supra) and Eastern Electro Chemical Industries (supra).
94. Put shortly, there is an existence of direct nexus between transport subsidy, on the one hand, and the manufacturing/production activities of industrial undertaking, on the other, stands well established. Unless shown otherwise, the industrial undertakings, in the present set of appeals, which have been granted transport subsidy, are entitled to claim deductions in terms of the directions of the learned Tribunal.
POWER SUBSIDY:
95. The Industrial Policy, 1997, as extended by the Industrial Policy of Assam, 2003, provides for Power Subsidy to be given to eligible industrial units (under such scheme) for a period of 5 (five) years from the date of commercial production, the power subsidy being available in the form of reimbursement of fully paid power bills with certain ceiling.
96. The reimbursement of the fully paid power bills, i.e., electrical charges, will obviously reduce the cost of production of an industrial undertaking contributing thereby to the profits and gains derived from, or derived by, the industrial undertaking concerned and augmenting thereby the income of the industrial undertaking concerned. More so, when such a subsidy neutralizes the expenses incurred on consumption of power and this reinforces, if we may borrow the language from the case of Pancharatna Cement Pvt. Ltd. v. Union of India, reported in 317 ITR 259 (Gau), the eventual income of the business undertaking and establishes thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the subsidy, in the form of power subsidy, on the other, received by the assessee-respondents.
97. The issue of power subsidy is well explained by the Supreme Court, in CIT v. Rajaram Maize Products, reported in 251 ITR 427 (SC), and CITv. Eastern Electro Chemical Industries, reported in [1999] 9 SCC 20.
98. Before, however, we deal with the cases of Rajaram Maize Products (supra) and Eastern Electro Chemical Industries (supra), in order to answer the question as to whether power subsidy or subsidy on the electrical charges has a direct nexus with the profits and gains derived from, or derived by, an industrial undertaking, let us take note of the case of Sahney Steel and Press Works Ltd & others v. CIT, reported in 228 ITR 253 (SC).
99. In Sahney Steeel (supra), the Supreme Court has pointed out, while dealing with various subsidies, including subsidy on electricity, that these subsidies were given to encourage setting up of industries in the State of Andhra Pradesh in order to make business of production and sale of goods more profitable. The Supreme Court has also pointed out, in Sahney Steel and Press Works Ltd. (supra), that subsidies were to be paid on establishment of the industry and not for the purpose of setting up of industry and it was aimed at extending helping hand to the person concerned so as to meet competitive level with other established industries. The relevant observations, appearing, in this regard, in Sahney Steel (supra), read as under:
"................... 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. 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.
| ** | ** | ** |
In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives were given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries."
(Emphasis provided)
100. From the observations made, and the law laid down, in Sahney Steel and Press Works Ltd. (supra), it becomes clear that various subsidies, including subsidies on electrical charges, were given by the Government concerned for the purpose of enabling industries to run more profitably by obviously reducing the cost of production. Such a subsidy would, undoubtedly, be, in the light of the decision, in Sahney Steeel (supra), operational in nature. No doubt, such a relief, given by way of electricity subsidy, is not a capital receipt, but revenue receipt and can be taxed, if not, otherwise, deductible in terms of the relevant provisions of the Act. When the cost of production is reduced by granting subsidy on electricity charges, it necessarily helps the industry to run more profitably. Here again, a direct nexus between the power subsidy, on the one hand, and cost of production, on the other, stands well established. Consequently, the profits earned and the gains made from the industrial undertakings concerned will amount to profits and gains derived from, or derived by, the industrial undertakings concerned entitling the assessees to claim deduction under Section 80IB or 80IC, as the case may be.
101. Sahney Steeel (supra) lays down an immensely important aspect of a subsidy vis-Ã -vis liability to pay tax. What Sahney Steeel (supra) clarifies is that when a subsidy is given for the purpose of setting up of an industry, such a subsidy is a capital receipt. When, however, the subsidy is given, for the purpose of operating an industry more profitably, then, the subsidy would be revenue receipt and, being revenue receipt, the same has to be taxed in accordance with law meaning thereby that the profits and gains, derived from, or derived by, an industrial undertaking in a case, where operational cost is reduced by providing subsidy, in any form, the profits and gains earned, because of such subsidy, would be eligible for deduction under Section 80IB or under 80IC, as the case may be.
102. The fact that the subsidies, in the present cases, are revenue receipts, has, in fact, not been disputed. The question is whether these revenue receipts can result in earning of profits and making of gains by an industrial undertaking, because of reduction in the cost of production. This question, in the light of the scheme, as have been analysed above, has to be answered in the affirmative.
103. Reverting to the case of Rajaram Maize Products (supra), we may point out that the Supreme Court has reiterated, in Rajaram Maize Products(supra), its decision, in Sahney Steel and Press Works Ltd. (supra), by taking the view that the subsidies are revenue in nature and taxable accordingly. Though taxable, when the revenue receipt, as pointed out above, does go towards reduction of electric bills and generation of profits by an industrial undertaking, the profits, so earned, are eligible for deduction in terms of Section 80IB or 80IC, as the case may be. The relevant observations, appearing, in this regard, in Rajaram Maize Products (supra), read as under:
"This court in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253, has held that power subsidies are of revenue nature and have to be taxed accordingly. We also find that the terms under which the subsidy was given in the present cases clearly suggest that the subsidy was of a revenue nature in as much as it went towards reduction of the electric bills".
(Emphasis provided)
104. Similar view has been expressed in Eastern Electro Chemical Industries (supra). The relevant observations, appearing in Eastern Electro Chemical Industries (supra), read as under:
"Looking to the facts, circumstances, and the nature of the subsidy, which is a power subsidy based on a percentage of electricity bills, it is clear that the subsidy is to meet a certain percentage of expenditure on power. The receipt is, therefore, revenue in nature and is covered by the decision of this Court in Sahney Steel & Press Works Ltd. v CIT The appeal is allowed accordingly."
(Emphasis provided)
105. From a combined reading of the two decisions, rendered in Rajaram Maize Products (supra) and Eastern Electro Chemical (supra), what becomes transparent is that power subsidy is meant to enable a person meet a certain percentage of expenditure on power and is, therefore, revenue in nature. However, though revenue in nature, the fact remains that it helps in not only growth of the industrial undertaking, but also help an industrial undertaking to earn profits and make gains. Such a subsidy, though revenue in nature and taxable accordingly, is nonetheless covered by the provisions embodied in Section 80IB or 80IC, as the case may be.
106. Situated thus, the principle, deducible from the cases of Sahney Steel (supra), Rajaram Maize (supra) and Eastern Electro (supra), is that when a subsidy, granted by Government, is operational in nature, which helps in generation of profits for any industrial undertaking, such a profit is, indeed, covered by the provisions embodied in Section 80IB or 80IC, as the case may be.
107. An analogy can be drawn between the subsidies, which are subject-matters of discussion, in the present set of appeals, on the one hand, and the Explanation 10 to Section 43(1) of the Act, on the other. Explanation 10 to Section 43(1) reads as under:
"Explanation - 10. - Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee:
Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee."
108. From the Explanation 10 to Section 43(1), what becomes transparent is that if any portion of cost of any asset is met, by any subsidy, grant or reimbursement, then such a subsidy, grant or reimbursement would go on to reduce the cost of such asset and the depreciation to the assessee will be allowed on the reduced cost. Similarly, a subsidy, such as, transport subsidy, or power subsidy, when goes on to reduce the cost of transportation of the goods, actually used, and the finished goods, actually produced, by an Industrial undertaking, and carried to the existing market, resulting into earning of profits by any industrial undertaking, one can reasonably infer and hold, in such a case, that the industrial undertaking, as an assessee, will be entitled to deduction, under Section 80IB or 80IC, as the case may be, on the resultant profit.
109. We, now, turn to the case of Pancharatna Cement Pvt. Ltd. v. Union of India, reported in 317 ITR 259 (Gau), wherein Amitava Roy, J., (as his Lordship, then, was), has, upon consideration of the subsidy involved, took the view that the amount of subsidy, given by way of assistance or grants by the Government, serves as stimulus to the willing industrial establishments to cater to the growth of the region and, thus, reinforce the eventual income of the business of the undertaking. Though the case of Pancharatna Cement (supra) is, as rightly pointed out by the learned ASG, arose out of a writ petition and not an appeal under the Act, the fact remains that the law, laid down therein, is relevant in determining the controversy, which is required to be dealt with in this set of appeals. The relevant observations, appearing at para 32, in Pancharatna Cement (supra), is, therefore, quoted below:
"………It cannot be gainsaid that having regard to the layout of investment and income designed for any commercial or business venture, reimbursement of the expenses incurred to whatever extent, would logically contribute to the profits and gains derived from the related enterprise and thus would augment the overall income. The amounts of subsidies as the facts of the case reveal are by way of Government assistance or grants under the schemes to provide stimulus to the willing industrial establishments to cater to the industrial growth in the region and, therefore, the same (subsidy) are aimed necessarily at neutralizing the expenses incurred and thus reinforce the eventual income of the business undertaking."
(Emphasis provided)
110. We respectfully agree with the above observations, made in Pancharatna Cement Pvt. Ltd. (supra), and the law laid down therein.
INTEREST SUBSIDY:
110a. Under the Industrial Policy, 1997, all eligible industrial units (under such scheme) are given interest subsidy to the extent of 3% on the working capital advanced to them by Scheduled banks or Central/ State financial institutions for a maximum period of 10 (ten) years from the date of commencement of production.
111. The scheme of interest subsidy clearly shows that it reduces the interest payable on working capital advanced to an industrial undertaking by a scheduled bank or Central/State financial institutions. There is no dispute that the assessee-respondents concerned have received working capital, whereupon they have been paying interest to the scheduled banks or Central/State financial institutions, as the case may be.
112. The facts are, therefore, not in dispute on this aspect. The dispute is: Whether the interest subsidy is payable on non-operational or operational subsidy ? If the object of the relevant Scheme is borne in mind, it clearly shows that interest subsidy, having aimed at reducing the interest payable on working capital by an industrial undertaking, helps directly in reducing the cost of manufacturing or production activities and establish thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the interest subsidy, on the other, received by the assessee-respondents and, in consequence thereof, since interest subsidy results into profits and gains derived from, or derived by, an industrial undertaking, there is no reason as to why such profits and gains, earned by an industrial undertaking on the strength of such a subsidy, namely, interest subsidy, be not allowed to be deducted from the taxable income of the industrial undertaking concerned.
INSURANCE SUBSIDY:
113. So far as the insurance subsidy is concerned, it is under the Central Comprehensive Insurance Scheme, 1997. Under this Scheme, the insurance premium paid by eligible industrial units (under such scheme), set up in the North Eastern Region, are reimbursed by the nodal insurance company. It may be mentioned here that all banks/ financial institutions insist upon taking out comprehensive insurance policy on the business assets and stocks offered as primary/ collateral security for the purpose of obtaining the loan. In fact, this factual aspect has not been disputed by the Revenue.
114. The insurance subsidy, thus, helps in reducing the running cost of the industrial unit concerned establishing thereby direct and first degree nexus between the industrial activities of the assessee-respondents concerned, on the one hand, and the subsidy, in the form of insurance subsidy, on the other, received by the assessee-respondents. The resultant profits and gains, derived from, or derived by, an industrial undertaking, because of the insurance subsidy, have to be treated as deductible in terms of the provision of Section 80IB or 80IC, as the case may be.
115. Let us, now, turn to the case of Liberty India (supra).
116. As we have already noticed, the appellants heavily relied on the decision in Liberty India (supra) in order to sustain these appeals by contending that the various subsidies, which have been provided under the Scheme, are non-operational subsidies, there is no direct nexus between the subsidies received and the profits and gains derived from, or derived by, the industrial undertakings concerned.
117. What is, however, of paramount importance to note is that the Revenue does not contend, because it could not have obviously contended, in the light of the decisions in Sahney Steel and Press Works Ltd. (supra), Mepco Industries Ltd. (supra) Jai Bhagwan Oil & Flour Mills (supra), Raja Ram Maize Products (supra) and Eastern Electro Chemical Industries (supra), that the subsidies, in question, do not reduce the cost of production of the industrial undertakings concerned.
118. Bearing in mind, therefore, the fact that the subsidies, provided by the Government, in the cases at hand, do come to reduce the cost of production of manufacturing and thereby help the industrial undertakings concerned in earning profits and making gains, when we turn to the case of Liberty India(supra), we find that the question, raised in Liberty India (supra), was not the question raised in the present set of appeals inasmuch as the question, which had fallen for consideration, in Liberty India (supra) (as formulated by the Supreme Court) was, "Whether profit from the Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme could be said to be profit derived from the business of the industrial undertaking eligible for deduction under Section 80-IB of the Income Tax Act, 1961 (1961 Act) ?"
119. In the backdrop of the question, formulated above, Mr. Agarwalla, learned Senior counsel, is not incorrect, when he points out that the decision, inLiberty India (supra), proceeds on the basic premise that profit is what is received from DPEB and the Duty Drawback scheme and, hence, when the question was as to whether the profits, which are derived from DPEB and Duty Drawback Scheme, and not from the operation of manufacturing activities of an industrial undertaking, would be eligible for deduction under Section 80IB or Section 80IC, the cases at had cannot be treated to be cases, wherein the moot question raised is also the principal question, which was raised and answered in Liberty India (supra).
120. Turning to the question, which was formulated by the Supreme Court, in Liberty India (supra), it needs to be pointed out that the Supreme Court answered the question, formulated in Liberty India (supra), by pointing out that DEPB is an incentive given under Duty Exemption Remission Scheme and it is essentially an export incentive.
121. Thus, the Supreme Court itself made it clear that, in Liberty India (supra), that DEPB and the Duty Drawback schemes are incentives for export. DEPB is not related to business operation of industrial undertaking per se for its 'manufacturing or production'. DEPB's entitlement arises, according to the Supreme Court, in Liberty India (supra), when the undertaking goes on to 'export' after 'manufacturing or production' and is restricted only to 'export product'. Therefore, the position, points out the Supreme Court, in Liberty India (supra) is: If there is no export, there is no DEPB entitlement and its relation to the manufacturing/ production is neither proximate nor direct.
122. Further, rightly points out Mr. Agarwalla, that the entitlement of incentive in DEPB was based on the artifice of 'deemed import content of export product', and not even based on 'actual import content of the export product'; whereas in the cases at hand, a subsidy is made available to the amount actually paid in the form of transport cost, electricity bills, interest or insurance premium. This position is borne out of the following observations made inLiberty India (supra):
"16……….This factual matrix of the case unequivocally shows that DEPB is not related to business of industrial undertaking per se for its 'manufacturing or production'. DEPB's entitlement arises when the undertaking goes on to 'export' after 'manufacturing or production' and is restricted only to 'export product'. Therefore, the position is: if there is no export, there is no DEPB entitlement and the relation to manufacturing/ production is not proximate or direct, it is one step removed. Further, the entitlement is based on the artifice of 'deemed import content of export product', not even based on 'actual import content of the export product'."
(Emphasis provided)
123. From the above observations, appearing in Liberty India (supra), it becomes more than abundantly clear that DEPB and Duty Drawback were not provided by the Government as a means to reduce the cost of production of the industrial undertaking. Viewed from this angle, Mr. Agarwalla, learned Senior counsel, is correct, when he submits that the Supreme Court itself has pointed out, in Liberty India (supra), that neither DEPB nor Duty Drawback Scheme relates to the business of the industrial undertaking per se for its manufacturing or production inasmuch as DEPB entitlement arose as and when an industrial undertaking decided to export after manufacturing or after production of goods and, naturally, therefore, DEPB was restricted to the export of product. In other words, it was the export content of the entire production, which was to receive incentive provided by DEPB. Consequently, as rightly contended Mr. Agarwalla, learned Senior counsel, the Supreme Court pointed out, in Liberty India (supra), that if there was no export, there was no DEPB entitlement nor entitlement under the Duty Drawback Scheme.
124. Logically extended, this would mean that there was no relationship or nexus between the export incentive, on the one hand, and manufacturing/production, on the other. DEPB entitlement was based on the artifice of deemed import content of export product and was not even based on actual import content of the export product; whereas, in the cases at hand, the transport subsidy was made available on the raw material actually consumed in the manufacturing process and finished goods, which were actually produced and taken to the existing market for sale and, similarly, power subsidy, interest subsidy and insurance subsidy are, as already indicated above, made available on the actual amount of the power bill, interest and insurance premium paid by the assessee-respondents concerned. The inference, so drawn, gets reinforced from the fact that DEPB entitlement was freely transferable and saleable resulting in profit or loss.
125. That the case of Liberty India (supra) is not applicable to the cases at hand is also evident from the fact that the object behind DEPB was to neutralize the incidence of customs duty payment on the import duty of the export product and, hence, the DEPB scheme was not aimed at neutralizing the cost of production; rather, as observed by the Supreme Court, it was an incentive for export and entitlement arose, when export was made and not otherwise. The relevant observations, appearing, in this regard, in Liberty India (supra), read as under:
"26. 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. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from Section 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".
(Emphasis supplied)
126. On turning to the question as to what is Duty Drawback scheme, the Supreme Court pointed out that Section 75 of the Customs Act, 1962, and Section 37 of the Central Excise Act, 1944, empowers the Government of India to provide for repayment of customs and excise duty, which may be payable by an assessee, and the refund, under the Duty Drawback Scheme, was of the average amount of duty paid on materials of any particular class or description of goods used in the manufacturing of export goods of a specified class.
127. Most importantly, pointed out the Supreme Court, in Liberty India (supra), that the Rules do not envisage a refund of an amount 'arithmetically equal' to exemption duty or central excise duty actually paid by an individual importer/manufacturer. This is the striking difference between subsidies on transportation cost, power, interest and insurance, in the cases at hand, on the one hand, and Duty Drawback Scheme, on the other, inasmuch as the subsidies, so provided to the assesses concerned, are arithmetically equivalent to the cost of raw materials actually used in the manufacturing process and the finished goods, which is actually taken to the existing market for sale within and outside the north-eastern region and, similarly, the assesses concerned have the right to receive power subsidy, arising out of power bills paid, or interest subsidy or insurance subsidy, equivalent to the amount paid on interest and insurance respectively. These aspects of DEPB and Duty Drawback Scheme give rise to the inference that the decision, in Liberty India (supra), was rendered, in the light of its own facts, and not for universal application. This inference gets strengthened from the following observations made inLiberty India (supra):
"The next question is - what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in Section 75 of the Customs Act and Section 37 of the Central Excise Act."
(Emphasis provided)
128. In short, thus, DEPB and Duty Drawback Scheme were not, as already indicated above, related to the business of industrial undertaking per se for its manufacturing or production. Entitlement for DEPB or Duty Drawback arose, when the undertaking decided to export after manufacturing or production and this incentive was restricted only to the export of goods of a specified class. Consequently, if there was no export, there was no incentive from DEPB or Duty Drawback. This apart, DEPB or Duty Drawback Scheme did not provide refund of exemption from Central Excise Duty actually paid.
129. Thus, the relationship under the DEPB or Duty Drawback Scheme, on the one hand, and the manufacturing or production, on the other, was not proximate and direct. The entitlement was based on the artifice of average amount of duty paid. In the case of transport subsidy, power subsidy and insurance subsidy, the relation between subsidy received, on the one hand, and the profits earned or the gains made, by an industrial undertaking, stand, as already observed at paragraph 127, well established.
130. Analysing further the concept of Duty Drawback Scheme and the DEPB, the Supreme Court took the view that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, the Supreme Court took the view that profits, derived by way of such incentives, do not fall within the expression 'profits derived from industrial undertaking' in Section 80-IB. The relevant observations read:
"18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in Section 80-IB"
131. Liberty India (supra), it may be noted, is, thus, an exposition of law on the schemes of DEPB and Duty Drawback Scheme, which relate to export of goods by an industrial undertaking; whereas the Scheme of transport subsidy, interest subsidy, power subsidy and insurance subsidy, is inextricably and directly connected with the reduction of cost of production and manufacturing of an industrial undertaking entitling thereby the eligible industrial undertakings to claim deduction under Section 80IB or 80IC, as the case may be.
132. The decision, in Liberty India (supra), is, therefore, not, in our considered view, relevant to the schemes of subsidies at hand.
133. Clearly held the Supreme Court, in Liberty India (supra), that incentive profits, as envisaged by DEPB and Duty Drawback Scheme, are not profits derived from eligible business under Section 80-IB inasmuch as DEPB and Duty Drawback belong to the category of ancillary profits of the industrial undertaking meaning thereby that the profits, derived by way of incentives, such as, DEPB and Duty Drawback Scheme, cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression, "profits derived from industrial undertaking under Section 80-IB".
134. Dealing with Sahney Steel & Press Works Ltd. (supra), the Supreme Court, in Mepco Industries (supra), observed as under:
"Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC) was a case which dealt with production subsidy, Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this court in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 was on its own facts; so also, the judgment of this court in Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC). The nature of the subsidies in each of the three cases is separate and distinct. There is no strait jacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC), this court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas. In the circumstances, the present case is an example of change of opinion. Therefore, the Department has erred in invoking section 154 of the Act."
(Emphasis is supplied)
135. Thus, the case of Liberty India (supra) was limited to only two schemes, namely, DEPB and Duty Drawback. Both these Schemes, it deserves to be noticed, related to exports and not meant to reduce the cost of production. Consequently, if no export was made, there was no entitlement to receive the benefit of DEPB or the benefit derivable by Duty Drawback Scheme.
136. No wonder, therefore, that Mepco Industry's case (supra), clearly lays down that in each case, the nature of subsidy needs to be examined by the Court. Consequently, without determining the nature of subsidy, including the object thereof, the impact of the subsidy on the operation of the industrial undertaking cannot be determined. The decision, in Liberty India (supra), cannot, therefore, be applied to all cases and to all kinds of subsidies.
137. In short, Liberty India (supra) was a case of non-operational subsidy inasmuch as the subsidy, provided in Liberty India (supra), did not relate to production; whereas the subsidies, in the present set of cases, are operational in nature inasmuch as the subsidies are related to the production of the industrial undertaking concerned.
138. What crystallizes from the above discussion is that the assessee's income, with the cost of production being reduced, because of the subsidies received, would obviously rise and, in consequence thereof, the profits earned, and the gains made, by the industrial undertaking concerned would also increase. The profits, so increased, would be part of the gross total income of the assessee as defined under Section 80B of the Act subject to deductions, as provided under Chapter VIA of the Act, which includes deductions under Section 80B as well as 80C. If an assessee becomes eligible for deduction under Section 80IB or 80IC, he will not be liable to pay income tax on the increased profit. Conversely put, the subsidies serve no purpose if he has to pay increased tax on the profits, which he has made, because of the operational subsidies received by him.
139. Situated thus, there can be no escape from the conclusion that the subsidies, in question, being operational in nature, help the assessee concerned earn profits and the profits, so earned, because of the subsidies, in question, are deductible in terms of the provisions of Section 80IB of the Act.
140. In the case of CIT v. Andaman Timber Industries Ltd, reported in 242 ITR 204 (Cal), which the learned ASG has relied upon, the issue whether transport subsidy would have the effect of reducing transportation cost was not considered by the Court and, hence, the decision, Andaman Timber Industries Ltd (supra) cannot help in advancing the case of the appellants.
141. Even in CIT v. Sterling Foods, 237 ITR 579 (SC), the issue, under consideration, before the Supreme Court, was whether 'profits from sale of import entitlements' were derived from Industrial undertaking within the meaning of Section 80HH of the Act. Thus, the issue before the Supreme Court, in Sterling Foods (supra), was entirely different from the one at hand.
142. So far as Pandian Chemicals Ltd. v. CIT, reported in 262 ITR 278 (SC), concerned, the issue, considered by the Supreme Court, was whether 'interest income' from fixed deposits can be treated as income derived from industrial undertaking under Section 80HH of the Act. Thus, the issue for consideration, in Pandian Chemicals (supra), was wholly different from what we are dealing with.
143. A finding of fact, reached by a Tribunal, cannot be disturbed in an appeal under Section 26A of the Act unless perversity is alleged. This proposition is not in dispute. No substantial question was raised in the present set of appeals impugning the learned Tribunal's orders, in question, as perverse. Looked at from this angle, these appeals cannot be really sustained. Though Mr. Pathak, learned ASG, has submitted that even a wrong decision on law can be regarded as perverse, the fact remains that there is no allegation, while raising the questions of law by the appellants, that the findings, reached by the learned Tribunal, are perverse, because of wrongly applying the law contained in that behalf and, hence, in such circumstances, the findings cannot be disturbed.
RESISTANCE TO APPEALS IN ABSENCE OF PLEA OF PERVERSITY
144. Resisting the appeals at its threshold, Mr. Agarwalla has pointed out that the question as to whether there is direct nexus between the subsidies, in question, and the operation of the industrial undertakings of the assessee-respondents, has been answered in the affirmative by the learned Tribunal and so long as this finding remains, the learned Tribunal's decision cannot be disturbed at any stage. In the memorandum of appeal, the Revenue, points out Mr. Agarwalla, has not contended at all that the said finding of the learned Tribunal was perverse and, therefore, in the absence of any perversity having been alleged in the finding of the learned Tribunal, the present appeals deserve to be dismissed.
145. Support for his submission is sought to be derived by Mr. Agarwalla from the case of Sudarshan Silk and Sarees v. CIT, reported in (300 ITR 205), wherein the Supreme Court held as under:
"Question as to perversity of the findings recorded by the Tribunal on facts was neither raised nor referred to the High Court for its opinion. The Tribunal is the final court of fact. The decision of the Tribunal on the facts can be gone into by the High Court in the reference jurisdiction only if a question has been referred to it which says that the finding arrived at by the Tribunal on the facts is perverse, in the sense that no reasonable person could have taken such a view. In reference jurisdiction, the High Court can answer the question of law referred to it and it is only when a finding of fact recorded by the Tribunal is challenged on the ground of perversity, in the sense set out above, that a question of law can be said to arise. Since the frame of the question was not as to whether the findings recorded by the Tribunal on facts were perverse, the High Court was precluded from entering into any discussion regarding the perversity of the finding of fact recorded by the Tribunal."
(Emphasis is added)
146. Reacting to the above submission of Mr. Agarwal that the Revenue has not challenged the finding of the learned Tribunal as perverse, the learned ASG has submitted that perversity need not always be factual, but it can also be perversity in law and since the conclusion, reached by the learned Tribunal, in the present cases, on the questions of law, was erroneous by wrongly interpreting the provisions of Section 80IB and 80IC vis-Ã -vis the Scheme of the subsidies, in question, one cannot help, but hold that the learned Tribunal's finding suffers from perversity.
147. The learned ASG contends that the learned Tribunal, for no good reason, has not followed the decision rendered in Liberty India (supra). It is also pointed out by the learned ASG that when an authority draws a conclusion, which cannot be drawn by any reasonable person on the disclosed state of facts, then, a perverse decision is entered and a perverse decision is wrong in law. The learned ASG has referred, in this regard, to the case of Kejriwal Enterprises v. CIT, reported in [2003] 260 ITR 341 (Cal).
148. Referring to the case of Poothender Plantations Pvt. Ltd. v. Agri. Income Tax Officer [1996] 221 ITR 557 (SC), the learned ASG further submits that if the Supreme Court has construed the meaning of a Section, then, any decision to the contrary, given by any other authority, must be held to be erroneous and such error must be treated as an error apparent on the face of the record.
149. While considering the submissions, made by Mr. Agarwalla, learned Senior counsel, that the finding, reached by the learned Tribunal, has not been challenged as perverse, the impugned decision, rendered by the learned Tribunal, would not call for any interference and the reply to this submission by Mr. Pathak, learned ASG, by contending that a wrong or incorrect interpretation of law is perversity, what needs to be borne in mind is that if a finding of fact is based on interpretation of facts or purely on facts, such a finding cannot be interfered with, in an appeal, under Section 260A of the Act, inasmuch as no substantial question of law can, in such a case, be said to have arisen if a finding of fact, based purely on facts, is not challenged as perverse. If, however, a finding of fact is based not purely on facts but is based on mixed consideration of fact and law, such a finding can be interfered with, in an appeal, under Section 260A of the Act provided that a substantial question of law is raised.
150. Clarified the Supreme Court, in CIT v. Manna Ramji & Co., reported in 86 ITR 29 (SC), that when a question is framed essentially on the facts and circumstances of a case, it means the facts and circumstances found by the Tribunal and not on the facts and circumstances as may be found by the High Court. The relevant observations, appearing in this regard, in Manna Ramji (supra), read:
"It may also be mentioned that Mr. Hajarnavis has assailed the findings of fact of the Tribunal. In this respect we are of the view that the Tribunal is the final fact finding authority. It is for the Tribunal to find facts and it is for the High Court and this court to lay down the law applicable to the facts found. Neither the High Court nor this court has jurisdiction to go behind or to question the statement of facts made by the Tribunal. The statement of case is binding on the parties and they are not entitled to go behind the facts of the Tribunal in the statement. When the question referred to the High Court speaks of "on the facts and circumstances of the case", it means on the facts and circumstances found by the Tribunal and not on the facts and circumstances as may be found by the High Court (see Karnani Properties Ltd. v. Commissioner of Income-tax)."
(Emphasis is added)
151. In the cases at hand, which have given rise to the appeals, it is the clear finding of the learned Tribunal that there is a direct nexus between the subsidies, in question, on the one hand, and the profits and gains derived by, or derived from, the industrial undertakings concerned. This finding is a finding, which is not purely a finding of fact inasmuch as this finding has been reached on the interpretation of the Schemes of subsidies, in question, and the questions of law, which were raised in the learned Tribunal. In other words, the finding, as indicated hereinbefore, has been arrived at by the learned Tribunal by taking into account the relevant Schemes of subsidies in light of the questions of law raised in the learned Tribunal.
152. Situated thus, it is clear that the finding, which the learned Tribunal has reached to the effect that there is a direct nexus between the subsidies, in question, on the one hand, and the profits and gains derived by, or derived from, the industrial undertakings concerned, is not a finding on pure facts but is finding based on facts and law. Such a finding can be interfered with, in an appeal under Section 260A of the Act even if such a finding is not alleged as perverse provided that the finding can be shown to have been reached by wrongly applying the law or by resorting to incorrect interpretation of law.
153. The question, therefore, which stares at us is: Whether the present appeals have raised any substantial question of law, and if so, what is, or what are, the substantial question or questions of law?
154. Reverting to the substantial questions of law, which have been formulated in the present set of appeals, it may be pointed out that in the light of the discussions, which we have held above, the impugned decisions of the learned Tribunal do not suffer from any infirmity, legal or factual, and, hence, no question of law, far less substantial questions of law, can be said to have been arisen in any of the present appeals.
155. Because of what we have pointed out above, we have no hesitation in arriving at the conclusion that these appeals are devoid of merit and need to be, therefore, dismissed.
156. In the result and for the discussions held above, these appeals fail and the same shall accordingly stand dismissed.
157. No order as to costs.
IT : Jewellery belonging to family members of assessee, covered under CBDT circular permitting owning of jewellery by ladies, cannot be added as undisclosed investments
IT : Addition cannot be made on account of interest on cash loans, when addition on account of cash loans itself had been deleted
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[2013] 33 taxmann.com 147 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax
v.
Prafulbhai @ Rohitbhai J. Shah*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 60 OF 2013†
MARCH 20, 2013
Section 69B, read with section 69A of the Income-tax Act, 1961 - Undisclosed investments [Jewellery] - During search, jewellery was found, which was added as undisclosed investment - Documents showing cash loans given were also found - Assessing Officer made addition on account of interest on cash loans - Commissioner (Appeals) and Tribunal deleted addition for jewellery belonging to family members as it was covered under CBDT circular permitting owning of jewellery by ladies - Addition on account of interest on cash loans was also deleted as no addition had been made for cash loans itself - Whether, addition on account of jewellery belonging to family members, covered under CBDT circular, was unjustified - Held, yes - Whether addition on account of interest on cash loans was unwarranted, as no addition had been made for cash loans itself - Held, yes [Paras 3 & 5] [In favour of assessee]
FACTS
| ■ | During search, jewellery was found at assessee's residence, which was added as undisclosed investment. Certain documents and loose papers were also seized which disclosed cash loans made by assessee. The Assessing Officer made addition on account of interest on cash loans, although addition on account of cash loans were deleted. | |
| ■ | On first appeal, the Commissioner (Appeals), holding that the jewellery belonged to different family members and customary owning of jewellery by the ladies was permitted as per CBDT circular, deleted the addition. It further held that addition on account of interest on cash loans was not sustainable, when cash loans had been deleted. | |
| ■ | On appeal by revenue, the Tribunal upheld the order of the Commissioner (Appeals). | |
| ■ | On further appeal by revenue : |
HELD
Regarding addition on account of jewellery
| ■ | There is no reason to entertain the issue as the reasonings given by the Commissioner (Appeals) and also the logic assigned by the Tribunal are convincing. This being predominantly the factual aspect which was considered appropriately by both the authorities, no entertainment is necessary. [Para 3] |
Regarding addition on account of interest on cash loans
| ■ | The issue is based on the factual matrix presented before both the authorities. When the amount of cash loans itself had been deleted, the issue of making addition by way of interest on such question would not arise. Moreover, the Tribunal also regarded absence of any material worth the name to indicate any proof of charge of interest on cash loans and hence, the Tribunal committed no error in dealing with the issue in question. The Tax Appeal is, accordingly, dismissed. [Para 5] |
Manav A. Mehta for the Appellant.
ORDER
Ms. Sonia Gokani, J. - Challenging the judgment of the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') dated June 15, 2012, present Tax Appeal is preferred under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), proposing following substantial questions of law :
"A. Whether in the facts and circumstances of the case and in law the Hon'ble ITAT is justified in deleting the addition of Rs. 10,73,550/- being made by the A.O. on account of undisclosed investment in jewellery ?
B. Whether in the facts and circumstances of the case and in law the Hon'ble ITAT is justified in deleting the addition of Rs. 91,17,075/- being made by the A.O. on account of interest calculated on cash loans ?
C. Whether in the facts and circumstances of the case and in law the Hon'ble ITAT is justified in deleting the addition made on account of undisclosed interest income without considering the evidence on record ?"
2. We have heard the learned counsel Mr. Manav Mehta for the Revenue. The first question concerns deletion of addition of Rs. 10,73,550/- made by the Assessing Officer on the ground of undisclosed income in jewellery. When challenged before the CIT (Appeals), it deleted the entire amount by elaborate discussion of the issue. It was during the course of the search that such jewellery has been found at the residence of the assessee. The statements of different family members were recorded. The confirmation/affidavit of the father, mother, wife of the assessee claiming jewellery were also recorded. In such background, the CIT (Appeals) noted that the jewellery belonged to different family members and it also relied on a circular of the CBDT, which permitted customary owning of such jewellery by the ladies. Resultantly, it deleted the entire amount.
3. When challenged before the Tribunal, it concurred with the findings of the CIT (Appeals) by briefly holding that out of the total disclosure made for the block period by the assessee of Rs. 2.76 crore, the remaining jewellery was covered by the Board's Circular and was already reflected in the books of accounts. We see no reason to entertain this issue as we are convinced by the reasonings given by the CIT (Appeals) at length and also the logic assigned by the Tribunal. In any case, this being predominantly the factual aspect and when has been considered appropriately by both the authorities, no entertainment is necessary.
4. As far as questions (B) and (C) are concerned, the same are pursuant to deletion of Rs. 91,17,075/- made by the Assessing Officer on account of interest calculated on the cash loans. During the course of search, certain documents and loose papers were seized and the assessee had made disclosure of huge amount of cash loans given by different persons. Interest on such an amount was added by the Assessing Officer to the income of the assessee. Therefore, the assessee challenged the same before the CIT (Appeals) raising the ground that the addition cannot be sustained when cash loans were deleted. The CIT (Appeals) upheld the say and found no justification in addition on account of interest on such cash loans which was not sustained. The CIT (Appeals) has noted thus :
"7. So far as interest on cash loan is concerned, as the addition on account of cash loans is added, there is no justification for addition on account of interest on such cash loans. However, I observe that the appellant has itself accepted cash loans of Rs. 1,41,10,541/- by way of disclosure in the present year and hence the A.O. should recalculate the interest on such cash loans and make addition to that extent. Accordingly the addition made at Rs. 91,17,075/- made will be modified by him. With this remarks this ground of appeal is partly allowed."
5. When the Revenue challenged the same before the Tribunal, it on discussion of the findings of the CIT (Appeals) deleted entire sum and interest. This issue again is based on the factual matrix presented before both the authorities as could be noted from the discussion made by these authorities. When the amount of cash loans itself had been deleted, the issue of making addition by way of interest on such question would not arise. Moreover, the Tribunal also regarded absence of any material worth the name to indicate any proof of charge of interest on cash loans and hence, the Tribunal committed no error at all in dealing with the issue in question. No question of law, thus, arises. The Tax Appeal is, accordingly, dismissed.
PROMITA IT : Provision of section 194C being made applicable in respect of payment made to individuals with effect from 1-6-2007 will not be applicable for assessment year 2005-06
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[2013] 33 taxmann.com 284 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax -II*
v.
Vishnudutt Sharma
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 177 OF 2013†
APRIL 1, 2013
Section 194C of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payment to - Assessment year 2005-06 - Whether since provisions of section 194C were made applicable in respect of payment made to individuals with effect from 1-6-2007, such provision, therefore, will not be applicable for assessment year 2005-06 - Held, yes - Whether for application of section 194C(2) what is necessary is a relationship between contractor and sub-contractor and not merely hiring of an agency by contractor during course of execution of work - Held, yes [Para 4] [In favour of assessee]
CASES REFERRED TO
Prashant H. Shah v. Asstt. CIT [2012] 52 SOT 69 (URO)/21 taxmann.com 263 (Ahd.) (para 3) and CIT v. Prashant H. Shah [2013] 29 taxmann.com 296 (Guj.) (para 4).
Sudhir M. Mehta for the Appellant.
ORDER
Akil Kureshi, J.- Revenue is in appeal against the judgment of the Income-tax Appellate Tribunal dated 31.7.2012 raising following questions for our consideration:
"(A) Whether the facts and circumstance of the case and in law the Income Tax Appellate Tribunal is justified in deleting an addition of Rs. 2,34,70,294/- made on account of disallowance of expenditure under section 40(a)(ia) of the Income-tax Act for non deduction of tax at source?
(B) Whether section 40(a)(ia) of the Income-tax Act can be invoked only to disallow expenditure of the nature referred to therein, which is shown as 'payable' as on the date of the balance sheet or it can be invoked also to disallow such expenditure which became payable at any time during the relevant previous year and was actually paid within the previous year?"
2. The Tribunal in the impugned judgment relied on the decision in case of Prashant H. Shah v. Asstt. CIT [2012] 52 SOT 69 (URO)/21 taxmann.com 263 (Ahd.) to come to the conclusion that the provisions of section 194C of the Income-tax Act, 1961 were made applicable in respect of individuals with effect from 1.6.2007. Present case concerns the assessment year 2005-2006. Such provision therefore, will not be applicable in the case on hand.
3. In case of Prashant H. Shah (supra), Tribunal had made following conclusions :
"7. We have heard both the sides at some length. We have also perused the material placed before us in the the light of the provisions of the Act as also the case law cited. Before we proceed further, we may like to point out that the provisions of section 194C of the Act and undergone certain vital changes in the recent past. The main purpose of introduction of this section in the Act is to make provisions for deduction of tax at source from payments made to contractors and sub-contractors in certain cases. Income-tax is deductible at source from income comprised in payments made by the persons specified in this section. As per the original section 194C(1) any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract is required to deduct 2% TDS. However, as per section 194C(2), any person being a contractor responsible for paying any sum to any sub-contractor in pursuance of a contract with the sub-contractor for carrying out any work is required to deduct tax @ 1% at the time of payment. Sub-section (2) has later on made a provision according to which an individual or HUF, whose total sale exceeds the monetary limit prescribed under section 44AB shall be liable to deduct income-tax at the time of payment to a sub-contractor. It is further important to mention that vide an amendment with effect from 1.6.2007 an individual or HUF have also been inducted vide sub-clause(k) in section 194C(1) of the IT Act. At this juncture, it is worth to hold that as far as the AY in hand in concerned, i.e., AY 2007-08, this latest amendment of section 194C(1)(k) of the Act being introduced with effect from 01/06/2007 has no applicability. We therefore, hold that if the Revenue Department had made an endeavour to invoke the provisions of section 40(a)(ia) for the infringement of the provisions of section 194C of the Act by holding that the assessee being an individual got covered by sub-section (1), then according to us, it was an incorrect application of law. We therefore hold that for the Asstt. Year under consideration 2007-08 the provisions of sub-clause(k) of 194C(1) are not applicable being introduced w.e.f. 1.6.2007 and the assessee being an individual is consequently out of the clutches of this clause."
4. Counsel for the Revenue candidly pointed out that such decision of the Tribunal came up for consideration before this Court in CIT v. Prashant H. Shah [2013] 29 taxmann.com 296 Tax Appeal No.1591/2011. Tax Appeal was dismissed by an order dated 9.10.2012. Following observations were made :
"(7) In the present appeal, we are principally concerned with the interpretation of section 194C of the Act as such provision stood at the relevant time. Sub-section (1) of section 194C, required that any person responsible for paying any sum to any resident for carrying out any work in pursuant to a contract between the contractor and entities specified in clauses-(a) to (j) would have to, at the time of crediting such sum to the account of the contractor or at the time of payment in cash or by cheque or draft or any other mode, deduct a specified amount of tax at source. Till clause (k) was introduced in sub-section (1), the category of individual, HUF or AOP was not included. Such amendment was made with effect from 1st June, 2007 and obviously, therefore, would not apply to the case on hand. The Tribunal, therefore, correctly came to the conclusion that the case of the assessee was not covered under section 194C(1) of the Act since in the present case the payment was made by the assessee to individuals.
(8) Sub-section (2) of section 194C requires that any person, that is, a contractor responsible for paying any sum to any resident sub-contractor in pursuance of a contract with the sub-contractor for carrying out or for supply of labour for carrying out the whole or any part of the work undertaken by the contractor or for supplying any labour, which the contractor had undertaken to supply has to, at the time of credited such sum to the account of sub-contractor, or at the time of payment in cash or in any other manner, deduct TDS at the specified rate.
(9) For application of sub-section (2) of section 194C, the requirement is that there is a contractor who has undertaken to carry out any work or supply of labour, a part of such work or supply of labour is executed through a sub-contractor and in pursuance of execution of such work, the payment is being made either in cash or in any other manner or the same is being credited in the account of the sub-contractor. Only under such circumstances, the requirement of deducting tax at source on such payment would arise on the part of the contractor.
(10) The Tribunal, upon detailed examination of the nature of relationship between the assessee and the transporter, came to the conclusion that this is not a case of sub-contract. The Tribunal noted that none of the responsibilities of the contractor vis-a-vis the execution of the work were fastened on the transporters. The Tribunal noted that the assessee had indemnified ANS Construction against any legal or financial liability if such liability arises in future out of such contract. The assessee was solely responsible for execution of the work. No part of such liability was fastened on the transporters. The assessee had only availed of the services of such transporters for carrying out the material to the site. The Tribunal, therefore, concluded and rightly so in our opinion that this was not a case of relationship between the assessee contractor and the transporters in the capacity of sub-contractors.
(11) To reiterate, for application of section 194C(2) of the Act what was necessary was a relationship between the contractor and sub-contractor and not merely be hiring of an agency by the contractor during the course of execution of the work. In the present case, such vital requirement of relationship of a contractor and sub-contractor between the assessee and the transporters was missing. The Tribunal, in our view, was perfectly justified in holding that liability to deduct tax at source in the present case do not arise.
(12) Relevant portion of Explanation-III of section 194C only provides that for the purpose of this section, the expression "work" shall also include carriage of goods and passengers by any mode of transport other than by railways. This Explanation applies both to sub-section (1) as well as sub-section (2) of section 194C. Additionally, the Explanation at any rate cannot be pressed in service to bring the case of an assessee within the scope of sub-section (2) of section 194C, if the same is otherwise not includable since the requirement of such sub-section are not fulfilled.
(13) In the result, we do not find any error in the decision of the Tribunal. Tax appeal is, therefore, dismissed."
5. Since the issue is already considered by this Court in case of Prashant H. Shah (supra) this Tax Appeal is also dismissed.
IT : Where assessee agreed to computation of closing stock, but later attributed discrepancy in stock to error in computer programme which was not established, addition of excess stock as undisclosed investments was justified
■■■
[2013] 33 taxmann.com 370 (Gujarat)
HIGH COURT OF GUJARAT
Vipul Kumar Kirtilal Shah
v.
Income-tax Officer, Ward - 1*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 1512 OF 2011†
MARCH 18, 2013
Section 69B of the Income-tax Act, 1961 - Undisclosed investments [Stocks] - Assessment year 2004-05 - During survey, physical stock verification and comparison with stock reflected in books of account revealed excess stock - Assessee agreed to computation and closing stock in his statement - Later, on basis of an undated letter to Assessing Officer, assessee claimed that substantial difference in stock was attributable to non-reflection of opening stock in computer generated stock account - Whether, where assessee substantially agreed to computation of closing stock in statement, but later claimed that discrepancy was due to error in computer generated programme, which was not established, addition on account of excess stock, under section 69B as undisclosed investments, was sustainable - Held, yes [Para 11] [In favour of revenue]
FACTS
| ■ | During course of survey, physical stock verification and comparison with stock reflected in books of account revealed excess stock of Rs. 29.50 lakhs. The assessee agreed to the computation of closing stock in his statement during survey, but added that he would point out to the department within few days, if there was any arithmetical mistake in the computation. | |
| ■ | Later, on the basis of an undated letter written by the assessee to the Assessing Officer, the assessee claimed that substantial portion of difference in stock was attributable to non-reflection of opening stock in the computer generated stock account submitted during survey, due to a problem in the computer programme. The assessee also placed statements of purchase and stock before the Assessing Officer. However, the Assessing Officer did not accept assessee's contentions and made addition under section 69B for whole of excess stock. | |
| ■ | On appeal, the Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer. | |
| ■ | On further appeal by assessee: |
HELD
| ■ | It is found that the assessee had, in his statement during the course of survey, accepted the working of closing stock by the survey team. He had also not raised any dispute about the actual stock reflected according to his accounts. It is true that his admission was somewhat qualified and had stated that if he found any error of arithmetic nature, he would bring the same to the notice of the officers shortly. It may also be true that he did send the earlier noted communication to the Assessing Officer long before the assessment was over. Merely because in his statement he stated that if any discrepancy is to be pointed out, he would do so in three or four days, would not make any subsequent communication redundant for the purpose of assessment. [Para 8] | |
| ■ | However, the central question is whether the assessee discharged his burden of demonstrating even prima facie that there was any serious error in the computer generated stock statement. The letter does not throw any light other than suggesting that due to computer error, the opening stock was not included in the stock statement. However, before this court, it was suggested that computer entries were made manually and that did not include the opening stock as on 1-4-2003. More significantly, it is noticed from the discussion in the assessment order that the assessee was maintaining accounts not only in the computer but also manually. Nowhere in such manually maintained accounts also, such discrepancy was brought on record. If the computer error was as simple as ignoring the opening balance of stock as on 1-4-2003, the same could have been easily demonstrated through manually maintained accounts. From the record, no such attempt was made. [Para 9] | |
| ■ | Significantly, in presence of the assessee, the survey party had carried out physical stock taking. Valuation thereof and method of computation of valuation was never in dispute either before the Revenue authorities or before this Court. The view of the Commissioner (Appeals), that assessee had not brought anything on record to establish the theory that the stock statement generated by the computer omitted to take into account the opening stock at the beginning of the year is acceptable. Even after taking into consideration such opening stock, admittedly, there was discrepancy in the physical stock found at the time of survey, even as per the assessee, to the tune of Rs. 11 lakhs. [Para 10] | |
| ■ | This is, therefore, not a case where assessment is confirmed on the basis of confessional statement, which was later on retracted. This is a situation where Revenue had, during the course for survey, collected sufficient evidence. Assessee substantially agreed to such material on record. Though later, assessee tried to suggest that discrepancy was owing to the error in computer generated programme in ignoring the opening balance of the stock, he failed to even remotely establish the same. [Para 11] | |
| ■ | In the result, no question of law arises. Tax appeal is dismissed. [Para 12] |
CASE REVIEW
Vipulkumar Kirtilal Shah v. ITO [IT Appeal No. 1417 (Ahd.) of 2008, dated 17-6-2011].
Tushar P. Hemani and Ms. Vaibhavi K. Parikh for the Appellant. K.M. Parikh for the Respondent.
ORDER
Akil Kureshi, J. - Assessee is in appeal against the judgement of the Income Tax Appellate Tribunal dated 17.6.2011 raising following questions for our consideration :
| "(i) | Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in upholding the order of the lower authorities by confirming the addition of Rs. 29,50,102/- under section 69B of the Act? | |
| (ii) | Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in not appreciating that there was no excess stock as alleged more so when complete stock reconciliation was given to the Respondent? | |
| (iii) | Whether, in the facts and circumstances of the case, the order of the Income Tax Appellate Tribunal was perverse in as much as (i) the very basis of the impugned order viz. the letter disputing the computation of the excess stock placed at Page No.16 of the paper book filed before the Tribunal, was held not to have been filed before the lower authorities, was very much found on the record (ii) it has not properly appreciated the evidences and documents including the stock reconciliation and corrected trading accounts already placed on record? |
2. Issue pertains to addition made by the Assessing Officer and confirmed by the CIT (Appeals) and the Tribunal under section 69B of the Income Tax Act, 1961 ("the Act" for short). The appellant assessee is engaged in the business of trading in readymade garments. Business premises were subjected to survey operation on 14.10.2003. During the course of physical stock verification and comparing the same with the stock reflected in the books of account of assessee, it was found that as on 14.10.2003 there was excess stock of Rs.29.50 lakhs(rounded off). A detailed statement of the assessee was also recorded. In such statement, he agreed to the computation of the closing stock and comparison thereof with the stock reflected in the accounts maintained by the assessee. He was confronted with the excess stock of Rs. 29.50 lakhs being found, to which he agreed that entire computation is being done correctly and he has no dispute with the same. He accepted all the computation but added that he would once again have a look at such computation and if there is any discrepancy, he would bring it to the notice of the officer within three or four days. In the later portion of his statement, he once again reiterated that he will have a relook at the stock statement and if there is any airthematical mistake emerging, he would point this out to the department.
3. A the centre of the controversy is a disputed undated letter written by the assessee to the Assessing Officer in which he stated that the stock submitted as per the books during the course of survey was without the opening stock. Since the computer programme had some problem at the time of survey, it had given wrong figure. This is the crux of the assessee's stand emerging from such letter. In addition to relying on such letter, assessee also before the Assessing Officer placed additional documents such as a working out of the statement of purchases and stock for financial year 2003-2004 relevant to assessment year 2004-2005 and contended that substantial portion of the difference between the stock reflected in the accounts and that found physically during the course of survey is attributable to non reflection of the opening balance in the computer generated stock account. Assessing Officer however, did not accept such version and concluded that there was excess stock of Rs. 29.50 lakhs detected during the survey. He did not place reliance on the above-noted undated communication.
4. Aggrieved by the decision of the Assessing Officer, assessee approached the Commissioner (Appeals) who once again examined the entire issue but found no reason to interfere. He held and observed as under :
"4.4 I have carefully considered the submissions of the Authorized Representative and the order of the Assessing Officer. The valuation of stock was done on the premises of the appellant, It was done in the presence of the appellant who has signed every page of inventory. The closing stock was worked out on the basis of the details supplied by the appellant, The appellate as per the records made no attempt to reconcile the difference if any. The Assessing Officer's observations that reconciliation could have been done by the appellant with the help of manual books of account is faultless. The appellant failed to do so. The plea taken by him that he has filed a letter seeking time to reconcile the accounts, cannot really be accepted. The letter, a copy of which has been filed before me is an undated application which does not even bear the stamp of the Income tax officer. Its veracity cannot be relied upon. Apart from tying to explain the discrepancy being on account of computer fallibility the appellant has not submitted any evidence in support of his claim. The Assessing Officer was therefore, justified in bring to tax Rs. 29,50,102/- as appellant's deemed income u/s. 69B of the Income tax Act in the current year. Accordingly, addition of Rs. 29,50,102/- made by him is confirmed.
4.5 With regard to treating the income as deemed income under section 69B of the Income tax Act, there is merit in the submissions of the appellant. The basic fact is that survey was conducted on the business premises of the appellant. During the course of survey proceedings, stock of merchandise was found in which the appellant had been dealing with regularly for the last many years. The books of accounts wherein, the details of such stock was dealt with were considered by the survey party. The difference in quantity between the stock entered in the books of accounts and the stock found at the business premises of the appellant was considered to be additional stock. The survey party did not distinguish between the excess stock said to have been invested from undisclosed sources and the stock entered in the books of accounts. This was so because the entire stock was from a common pool found on the business premises of the appellant. Therefore a direct nexus between the business activity of the appellant and the excess stock found during the course of survey was established. Further no evidence has been brought on record which indicates that the appellant has any other source of income which has been utilised by him for acquiring the excess stock found during the course of survey. The reliance of the Assessing Officer on the decision of the Gujarat High Court in the case of Fakir Mohammad Haji Hassan is not correct since the facts of the case are clearly distinguishable from the facts of the case of Fakir Mohammad Haji Hassan. In the said judgement, the Hon'ble High Court had commented that it is not the case of the appellant that he is in the business of smuggling. In the present case, it is the case of the appellant that he is in the business of trading in garments and excess stock of garments has been found at the business premises of the appellant, In view of the above, I hold the Assessing Officer was not justified in invoking the provisions of section 69B in the case of the appellant. Therefore, the amount declared as investment made in stock should be brought to tax as the business of income of the appellant and not as deemed income u/s. 69B of the Income Tax Act."
5. Aggrieved by such decisions of the Revenue authorities, the assessee approached the Tribunal. Tribunal by the impugned judgement refused to interfere observing that the valuation of the stock was done in the premises of the assessee which was not disputed at any point of time. The inventory was signed by him. Statement of the assessee was recorded on the above points who admitted in his statement that he had verified that the complete work of inventory was prepared correctly and he has no objection. The Tribunal also did not place much reliance on the undated communication on the premise that same did not carry any date and there was nothing to show when the same was filed before the Assessing Officer.
6. Before us learned counsel Shri Tushar Hemani for the appellant painstakingly taking us through different documents on record contended that admittedly the undated letter was very much before the Assessing Officer even before the assessment was completed. The assessee had laid out sufficient material to establish that it was only on account of the error that the computer generated record did not include the opening stock. Had this been taken into consideration, the excess stock found at the time of survey would have come down to less than Rs. 11 lakhs. He submitted that all the authorities committed a grave error in discarding the letter through which he had reconciled the figure of stock as per the record and the physical stock.
7. On the other hand, learned counsel Shri Ketan Parikh for the Revenue opposed the appeal contending that the Revenue authorities and the Tribunal have correctly appreciated the evidence on record. No question of law therefore, arises.
8. From the record, we find that the assessee had in his statement during the course of survey accepted the working out of closing stock by the survey team. He had also not raised any dispute about the actual stock reflected according to his accounts. It is true that his admission was somewhat qualified and had stated that if he found any error of airthematic nature, he would bring the same to the notice of the officers shortly. It may also be true that he did send the earlier noted communication to the Assessing Officer long before the assessment was over. We have no hesitation in agreeing with Shri Himani that such document also should have been taken into account. Merely because in his statement he stated that if any discrepancy is to pointed out, he would do in three or four days, would not make any subsequent communication redundant for the purpose of assessment.
9. However, the central question is did the assessee discharge his burden of demonstrating even prima facie that there was any serious error in the computer generated stock statement. We have taken note of the contents of the letter. It does not throw any light other than suggesting that due to computer error, the opening stock was not included in the stock statement. Before us, however, a somewhat different stand was taken. It was suggested that computer entries were made manually and that did not include the opening stock as on 1.4.2003. More significantly, we notice from the record particularly from the discussion in the assessment order that the assessee was maintaining accounts not only in the computer but also manually. Nowhere in such manually maintained accounts also such discrepancy was brought on record. Surely, if the computer error was as simple as ignoring the opening balance of stock as on 1.4.2003, the same could have been easily demonstrated through manually maintained accounts. From the record, we do not find any such attempt was made.
10. Significantly, in presence of the assessee, the survey party had carried out physical stock taking. Valuation thereof and method of computation of valuation has never been in dispute either before the Revenue authorities or before us. In that view of the matter, we concur with the view of the Revenue authorities particularly, with the Commissioner(Appeals) whose relevant observations we have reproduced in the earlier portion of the judgement that assessee had not brought anything on record to establish the theory that the stock statement generated by the computer omitted to take into account the opening stock of the beginning of the year. We may record that even after taking into consideration such opening stock, admittedly, there was discrepancy in the physical stock found at the time of survey, even as per the assessee, to the tune of Rs. 11 lakhs.
11. This is therefore, not a case where assessment is confirmed on the basis of confessional statement which was later on retracted. This is a situation where Revenue had during the course of survey collected sufficient evidence. Assessee substantially agreed to such material on record. Though later on assessee tried to suggest that discrepancy was owing to the error in computer generated programme in ignoring the opening balance of the stock, failed to even remotely establish the same.
12. In the result, no question of law arises. Tax Appeal is dismissed.
It , might happen that susequently , high court or Apex court may quas the 154 order.So , to protect the interest if revenue, It is advised that , recouse to 147 should be taken and addition accordingly made.it , go for 147 as well. Further all returns of this assesse must be scrtunised , whether he has made this claim or not.
2013-TIOL-504-ITAT-DEL
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCHES 'G' NEW DELHI
BENCHES 'G' NEW DELHI
ITA No.3957/Del/2012
Assessment Year: 2010-11
Assessment Year: 2010-11
ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-HARDWAR D 29 & 30
INDUSTRIAL AREA, HARIDWAR
CIRCLE-HARDWAR D 29 & 30
INDUSTRIAL AREA, HARIDWAR
Vs
M/s SBL INDUSTRIES PVT LTD
PLOT NO 3, SECTOR 12, II E
SIDCUL, HARIDWAR
PAN NO:AAICS9462M
PLOT NO 3, SECTOR 12, II E
SIDCUL, HARIDWAR
PAN NO:AAICS9462M
J Sudhakar Reddy, AM and C M Garg, JM
Dated: May 23, 2013
Appellant Rep by: Shri J S Khlawat, Sr.DR
Respondent Rep by: Shri Sanjay Nath, CA
Respondent Rep by: Shri Sanjay Nath, CA
Income Tax - Sections 80IC, 115JB, 143(1) - Whether an incorrect claim of reduction from book profits of amount which the assessee was eligible u/s 80IC was made, it is an incorrect claim apparent from the record, which can be adjusted u/s 143(1).
The assessee company was a manufacturer of homeopathetic medicine. The AO applied the minimum alternate tax (MAT) provision u/s 115JB while processing the return u/s 143(1). The CIT(A) allowed the appeal of the assessee and cancelling the order u/s 143(1).
On Appeal before the Tribunal the DR submitted that the AO is empowered to make adjustments u/s.143(1). He submitted that the processing is done through computer and as the issue was an apparent mistake committed by the assessee while filing its return of income and the central processing unit has made the said adjustment to correct this apparent mistake. The AR submitted that Explanation (a)(ii) to Sec.143(1) supports the case of the assessee as the term incorrect claim apparent from any information in the return is defined. He contended that the AO has limited power u/s.143(1) and that the adjustment made is beyond his powers, as the computation of book profits u/s 115JB with reference to deduction u/s 80IC was a highly debatable issue.
Having heard the parties, the Tribunal held that,
++ a deduction u/s 80IC, is not an item of adjustment in Explanation I to S.115 JB. While so, to claim reduction of the amount deductible u/s 80IC, while computing book profits u/s 115 JB, is not in accordance with the apparent reading of the provisions of S.115 JB. Thus, in our considered opinion, such a claim is an incorrect claim and this is apparent from information in the return as defined in the Explanation (a) to S.143(1)(a)(ii). Hence the AO is correct in making adjustment u/s 143(1). As computation of book profits u/s 115 JB is not done in accordance with the provisions of the Act, and when an incorrect claim of reduction from book profits of amount which the assessee is eligible u/s 80 IC is made, it is an incorrect claim apparent from the record, which can be adjusted u/s 143(1).
The assessee company was a manufacturer of homeopathetic medicine. The AO applied the minimum alternate tax (MAT) provision u/s 115JB while processing the return u/s 143(1). The CIT(A) allowed the appeal of the assessee and cancelling the order u/s 143(1).
On Appeal before the Tribunal the DR submitted that the AO is empowered to make adjustments u/s.143(1). He submitted that the processing is done through computer and as the issue was an apparent mistake committed by the assessee while filing its return of income and the central processing unit has made the said adjustment to correct this apparent mistake. The AR submitted that Explanation (a)(ii) to Sec.143(1) supports the case of the assessee as the term incorrect claim apparent from any information in the return is defined. He contended that the AO has limited power u/s.143(1) and that the adjustment made is beyond his powers, as the computation of book profits u/s 115JB with reference to deduction u/s 80IC was a highly debatable issue.
Having heard the parties, the Tribunal held that,
++ a deduction u/s 80IC, is not an item of adjustment in Explanation I to S.115 JB. While so, to claim reduction of the amount deductible u/s 80IC, while computing book profits u/s 115 JB, is not in accordance with the apparent reading of the provisions of S.115 JB. Thus, in our considered opinion, such a claim is an incorrect claim and this is apparent from information in the return as defined in the Explanation (a) to S.143(1)(a)(ii). Hence the AO is correct in making adjustment u/s 143(1). As computation of book profits u/s 115 JB is not done in accordance with the provisions of the Act, and when an incorrect claim of reduction from book profits of amount which the assessee is eligible u/s 80 IC is made, it is an incorrect claim apparent from the record, which can be adjusted u/s 143(1).
Revenue's appeal allowed
Case followed:
Apollo (2002-TIOL-185-SC-IT)
ORDER
Per: J Sudhakar Reddy:
This is an appeal filed by the Revenue directed against the order of the Commissioner of Income Tax (Appeals)-I, Dehradun dt. 29.03.2012 pertaining to the Assessment Year 2010-11.
2. Facts in brief:- The facts of the case as brought out at paras 1 to 1.1 of the Commissioner of Income Tax (Appeals)'s order which is extracted for ready reference.
"The assessee company is a manufacturer of homeopathetic medicine. The only point for determination in this appeal is whether the Assessing Officer was correct in applying minimum alternate tax (MAT) provision under Section 115 JB of the Income Tax Act, 1961 while processing the return under Section 143(1) of the Income Tax Act, 1961.1.1. Return of income showing total income of Rs.9,81,110/- was e-filed on 04.10.2010. The assessee claimed deduction of Rs.22,26,99,178/- under Section 80-IC of the Income Tax Act, 1961. Even though there was book profit of Rs.22,65,01,252/-, it did not compute MAT payable under Section 115 JB of the Income Tax Act, 1961. The return was processed under Section 143(1) of the Income Tax Act, 1961 by the Centralised Processing Centre (CPC), Bangalore on 17.03.2011. In the intimation issued subsequent to the processing of the return, the book profit was deemed to be the total income and tax thereon @ 15% i.e. Rs.3,39,75,188/- was computed. In other words, the provision of MAT under Section 115 JB of the Income Tax Act, 1961 was applied while processing the return under Section 143(1) of the Income Tax Act, 1961. Aggrieved against this, the assessed has preferred the present appeal."
3. Before the Ld.CIT(A), the assessee contended that the scope of powers of the AO while processing a return under Section 143(1) of the Income Tax Act, 1961 is limited. He can make adjustments only with regard to arithmetical error over an incorrect claim. It was contended that the issue whether a company, which is eligible for deduction u/s 80 IC of the Income Tax Act, 1961, has to pay MAT u/s 115 JB of the Income Tax Act, 1961 or not cannot be decided u/s143(1) of the Income Tax Act, 1961 as it is highly debatable. The CIT(A) accepted the contentions of the assesseee. Aggrieved the revenue is in appeal before us on the following grounds:-
"1. The Ld.CIT(A) has erred in law and on facts in allowing the appeal of the assessee and cancelling the order under Section 143(1) of the Income Tax Act, 1961 passed by the ACIT, CPC, Bangalore.2. The Ld.CIT(A) has erred in law and on facts in holding the issue "Whether MAT is payable by a company claiming deduction under Section 80-IC" is debatable.3. That the Jurisdictional High Court, Uttarakhand in the case of Sidcul Industrial Associations vs. State of Uttarakhand (2011) 199 Taxman, 75 has held that s.115 JB of the Income Tax Act, 1961 will apply to an assessee being a company, even if it is entitled to deductions under Section 80-IC of the Income Tax Act, 1961.4. That even though the Ld.CIT(A) has decided that the case falls under the jurisdiction of Assessing Officer of Haridwar Range, Ld.CIT(A) has erred in not providing any opportunity of being heard to ACIT, Circle-Haridwar on the matter and as such the order is against natural justice.5. The order of the Ld.CIT(A) be set aside and that of the Assessing Officer be restored."
4. The Ld.DR submitted that the AO is empowered to make adjustments u/s.143(1) of the Income Tax Act, 1961. He submitted that the processing is done through computer and as the issue is an apparent mistake committed by the assessee while filing its return of income and the central processing unit has made the said adjustment to correct this apparent mistake. He referred to sec.143(1)(a)(ii) and submitted that if an incorrect claim is made and when such incorrect claim is apparent and from any information in the return, the AO is authorized to make an adjustment.
5. The Ld.Councel for the assessee Mr.Sanjay Nath submitted that Explanation (a)(ii) to Sec.143(1) supports the case of the assessee as the term incorrect claim apparent from any information in the return is defined. He contended that the AO has limited power u/s.143(1) of the Income Tax Act, 1961 and that the adjustment made is beyond his powers, as the computation of book profits u/s 115 JB with reference to deduction u/s 80 IC is a highly debatable issue.
6. Rival submissions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record as well as the orders of the authorities below and case laws cited, we hold as follows.
7. The subject matter before us is the scope and ambit of S.143(1) of the Act.
The relevant portions of S.143(1) are extracted for ready reference.
Sec. 143(1): Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return shall be processed in the following manner:(a) The total income or loss shall be computed after making the following adjustments, namely :-(i) Any arithmetical error in the return; or(ii) An incorrect claim, if such incorrect claim is apparent from any information in the return;…………………………………………………..Explanation :- For the purposes of this sub-section, -(a) An incorrect claim apparent from any information in the return shall mean a claim, on the basis of an entry, in the return,(i) Of an item, which is inconsistent with another entry of the same or some other item in such return;(ii) In respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or(iii) In respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction."
8. A plain reading of the same shows that u/s 143(1)(a)(ii), the AO can compute the total income or loss, after making adjustment of incorrect claim, if such incorrect claim is apparent from any information in the return. Explanation (a) explains what is "an incorrect claim apparent from any information in the return."
9. S.115 JB is a special provision. It imposes minimum tax liability on an assessee company on its book profits. The mode of computation is specified therein. The Hon'ble Supreme Court in the case of Apollo 255 ITR 273 (2002) = (2002-TIOL-185-SC-IT) held that while computing the book profits of a company u/s 115J under the Act, the AO has only the power of examining whether books of accounts are certified by the authorities under the Companies Act and there after as the limited power of making increase or decrease of certain items specifically provided for in the Explanation to S.115J.
10. Applying the proposition laid down by the Hon'ble Supreme Court to S.115 JB, we find that a deduction u/s 80IC, is not an item of adjustment in Explanation I to S.115 JB. While so, to claim reduction of the amount deductible u/s 80IC, while computing book profits u/s 115 JB, is not in accordance with the apparent reading of the provisions of S.115 JB. Thus, in our considered opinion, such a claim is an incorrect claim and this is apparent from information in the return as defined in the Explanation (a) to S.143(1)(a)(ii) of the Act. Hence the AO is correct in making adjustment u/s 143(1). Thus, we are unable to persuade ourselves to agree with the finding of the Ld.CIT(A)-I, Dehradun on this issue. The fact that the return is processed by a computer or by the Officer himself, does not make a difference, as in our opinion computerized processing is only an aid to the AO. As computation of book profits u/s 115 JB of the Act is not done in accordance with the provisions of the Act, and when an incorrect claim of reduction from book profits of amount which the assessee is eligible u/s 80 IC is made, it is an incorrect claim apparent from the record, which can be adjusted u/s 143(1) of the Act. In the result the order of Ld.CIT(A) is set aside and the order of the AO is restored.
11. In the result the appeal of the Revenue is allowed.
(Order pronounced in the Open Court on 23.5.2013.)
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
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