2011 (12) TMI 524 - AT - Income Tax

Claim for deduction u/s 80IA in respect of sales-tax benefit - connotation of the words derived from and attributable to - Held that - We uphold the impugned order of the learned CIT(Appeals) confirming the action of the AO in disallowing the assessee s claim for deduction u/s 80IA(4) in respect of sales-tax benefit the immediate source of which is the relevant scheme of State Govt. and not the eligible business of the industrial undertaking of the assessee CIT(Appeals) has already allowed deduction on account of office and administrative expenses on pro-rata basis from the amount of sales-tax benefit received by the assessee which is liable to be excluded from the profits eligible for deduction u/s 80IA(4). As regards the interest and other expenses the learned counsel for the assessee has not been able to raise any arguments to convince us that the said expenditure was directly or indirectly attributable to the earning of sales-tax benefit. He has not been able to explain as to what could be the expenditure involved under the said heads which can be said to have been incurred for the purpose of earning sales-tax benefit which has been received by the assessee under the scheme of the State Govt. We therefore find no merit in ground No.2 raised by the assessee and dismiss the same.

Issues Involved:
1. Disallowance of the assessee's claim for deduction under Section 80IA in respect of sales-tax benefit.
2. Alternative claim for reducing the net amount of sales-tax benefit after allowing attributable expenses.
3. Alternative claim that sales-tax benefit should be treated as a capital receipt.

Detailed Analysis:

Issue 1: Disallowance of Deduction under Section 80IA for Sales-Tax Benefit
The primary issue concerns the disallowance of the assessee's claim for deduction under Section 80IA in respect of the sales-tax benefit amounting to Rs. 74,75,000. The assessee, engaged in power generation through wind power, included the sales-tax benefit in the profits eligible for deduction under Section 80IA. The Assessing Officer (AO) rejected this inclusion, arguing that the sales-tax benefit was not "profit derived from" the eligible undertaking but rather an incentive from the State Government's scheme. The AO relied on the Supreme Court decisions in *Sterling Food vs. CIT* and *Pandian Chemicals*, concluding that the sales-tax incentive could not be treated as income derived from the eligible undertaking. Consequently, the AO restricted the deduction under Section 80IA to Rs. 3,11,604.

The CIT(Appeals) upheld the AO's decision, referencing the Supreme Court's interpretation that "derived from" has a narrower connotation than "attributable to." The CIT(Appeals) also noted that the sales-tax benefit aimed to reduce the cost of capital employed and was not directly derived from the industrial undertaking.

Issue 2: Alternative Claim for Reducing Net Amount of Sales-Tax Benefit
The assessee argued alternatively that if the sales-tax incentive were excluded from the profits, only the net income (after deducting corresponding expenses) should be excluded. The CIT(Appeals) partially accepted this argument, directing the AO to reduce the net amount of sales-tax incentive to Rs. 70,20,084 after accounting for administrative expenses. The CIT(Appeals) apportioned the administrative expenses in the ratio of income from sales-tax benefits to the total income from the windmill division, concluding that only Rs. 4,54,916 of administrative expenses were attributable to the sales-tax benefit.

Issue 3: Alternative Claim for Treating Sales-Tax Benefit as Capital Receipt
The assessee also claimed that the sales-tax benefit should be treated as a capital receipt. However, the CIT(Appeals) found this claim irrelevant to the issue of eligibility for deduction under Section 80IA. The CIT(Appeals) noted that the assessee had treated the receipt as income in its profit and loss account and return, and any claim for treating it as a capital receipt should have been made through a revised return, which was not the case.

Tribunal's Judgment:
The Tribunal upheld the CIT(Appeals)'s decision, referencing the Supreme Court's judgment in *Liberty India vs. CIT*, which clarified that incentives like DEPB/duty drawback are not profits derived from eligible business but ancillary profits. The Tribunal noted that the immediate source of the sales-tax benefit was the State Government's scheme, not the industrial undertaking of the assessee. Consequently, the sales-tax benefit could not be considered income derived from the eligible undertaking for deduction under Section 80IA.

Regarding the second issue, the Tribunal found no merit in the assessee's claim for additional deductions on account of interest and other expenses, as the assessee failed to demonstrate that these expenses were attributable to earning the sales-tax benefit.

On the third issue, the Tribunal refused to entertain the claim for treating the sales-tax benefit as a capital receipt, as it was not raised before the AO or CIT(Appeals) and was not part of the grounds of appeal.

Conclusion:
The appeal of the assessee was dismissed in its entirety. The Tribunal upheld the disallowance of the deduction under Section 80IA for the sales-tax benefit, confirmed the reduction of the net amount of sales-tax benefit by administrative expenses, and refused to entertain the claim for treating the sales-tax benefit as a capital receipt.

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