2010 (9) TMI 320 - HC - Income Tax

Deduction u/s 80 IB - Freight Subsidy, transport subsidy and refund of excise duty - Held that - The expression derived from occurring In Section 80IB of the Act in relation to the business of an Industrial undertaking is narrower In connotation than the expression attributable to the business of an Industrial activity. This was so held long back in Cambay Electric Supply Industrial Co. v. CIT (1978 -TMI - 5174 - SUPREME Court). Therefore, while attributable to as used In some other sections of the Act, may cover sources of income beyond the first degree, derived from as used in Section 80IB of the Act Is not intended to cover sources beyond the first degree it is keeping this distinction in mind that it must be held that transport subsidy and Interest subsidy cannot be said to be derived from the industrial undertaking of the assessee. At best, It can only be ancillary to the profits and gains relatable to or attributable to the business of the industrial undertaking and not in the category of profit and gains derived from its industrial activity. The payment of central excise duty has a direct nexus with the manufacturing activity and similarly, the refund of the central excise duty also has a direct nexus with the manufacturing activity. The issue of payment of central excise duty would not arise in the absence of any industrial activity. There is, therefore, an inextricable link between the manufacturing activity, the payment of central excise duty and its refund. - Refund of excise duty is allowed as deduction u/s 80IB.

Summary

Issues:
1. Whether the assessee is entitled to a deduction under Section 80IB of the Income Tax Act on transport subsidy and interest subsidy received.
2. Whether the assessee is entitled to a deduction under Section 80IB of the Income Tax Act on the Central Excise duty refund received.

Issue 1:
The assessee claimed deductions under Section 80IB of the Income Tax Act for transport subsidy, interest subsidy, and central excise refund in its return of income for the assessment year 2006-07. The Assessing Officer disallowed the deductions, stating that these items were not profits derived from the business of the assessee. However, the Commissioner of Income Tax (Appeals) allowed the deductions, holding that the items were directly connected to the business. The Tribunal also upheld this view. The High Court analyzed the nature of transport and interest subsidies, emphasizing that for deductions under Section 80IB, there must be a direct nexus between the generation of profits and the source of profits. The Court concluded that the subsidies were not directly related to the industrial activity of the assessee and were only ancillary, thus disallowing the deductions.

Issue 2:
Regarding the Central Excise duty refund claimed by the assessee, it was based on exemption Notifications issued by the Ministry of Finance. The Court noted that the refund was not on account of excess payment but to operationalize the exemption provided. The refund was considered not to bear the character of income, as it was a refund of the amount paid under the exemption modalities. The Court found a direct nexus between the payment of central excise duty, the manufacturing activity, and the refund. It concluded that the refund was a profit directly derived from the industrial activity and allowed the deduction under Section 80IB for the Central Excise duty refund. No other issues were raised, and the appeal was disposed of accordingly.