2009 (11) TMI 543 - HC - Income Tax

Transport subsidy - deduction u/s 80IA - Income derived from industrial undertakings - Held that - the Apex Court held that the duty draw backs could not be deemed to be profits derived from business. It is apparent that the Apex court held that it is only the profits generated i.e. operational profits which are entitled to the benefit under Section 80-1A. In Sterling Food (1999 -TMI - 5740 - SUPREME Court) the Apex Court has also laid down a test as to what is the source of income. In the present case the source of income transport subsidy is not the business of the assessee but the scheme framed by the Central Government. Applying the tests laid down in Liberty India s case (2009 -TMI - 34471 - SUPREME COURT) and Sterling Food s case (1999 -TMI - 5740 - SUPREME Court) it is apparent that the transport subsidy received by the assessee is not a profit derived from business since it is not an operational profit. - Decided in favor of revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question presented before the Himachal Pradesh High Court was:

Whether the transport subsidy received by an industrial undertaking can be considered as income derived from the business of the undertaking, thereby qualifying for deduction under Section 80-IA of the Income-tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework revolves around Section 80-IA of the Income-tax Act, which provides deductions for profits and gains derived from certain eligible businesses, including industrial undertakings. The key term here is "derived from," which has been interpreted by various courts to mean a direct nexus between the income and the business activity.

Several precedents were considered:

• Cambay Electric Supply Industrial Co. Ltd. vs. Commissioner of Income-Tax - This case distinguished between income "attributable to" and "derived from" a business, with the latter requiring a direct connection.
• Commissioner of Income-Tax vs. Pandian Chemicals Ltd. - The court held that interest on deposits with the Electricity Board was not "derived from" the industrial undertaking.
• Commissioner of Income-Tax vs. Sterling Foods - The Supreme Court found that profits from the sale of import entitlements were not "derived from" the business of processing prawns.
• M/s. Liberty India vs. Commissioner of Income Tax - The Supreme Court emphasized that "derived from" indicates a narrower scope than "attributable to," requiring a first-degree source connection.

Court's interpretation and reasoning:

The court emphasized the distinction between "derived from" and "attributable to." The phrase "derived from" was interpreted to require a direct and immediate nexus between the income and the business activity. The court relied heavily on the reasoning in Sterling Foods and Liberty India to conclude that the transport subsidy did not meet this criterion.

Key evidence and findings:

The court noted that the transport subsidy was provided under a scheme by the Central Government to support industries in remote areas lacking rail connectivity. This subsidy was intended to offset transport costs, not as a direct result of business operations.

Application of law to facts:

Applying the legal principles from the precedents, the court found that the transport subsidy was not "derived from" the business of the industrial undertaking. Instead, it was an incidental income resulting from a government scheme, not the business operations themselves.

Treatment of competing arguments:

The appellant argued that the subsidy was inseparably connected to the business, as it recouped transport expenses, thus augmenting profits. However, the court rejected this, emphasizing the need for a direct source of income from the business itself, as laid out in Sterling Foods and Liberty India.

Conclusions:

The court concluded that the transport subsidy did not qualify as income "derived from" the business of the industrial undertaking under Section 80-IA, and thus was not eligible for the deduction.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"The words 'derived from' is narrower in connotation as compared to the words 'attributable to'. In other words, by using the expression 'derived from', Parliament intended to cover sources not beyond the first degree."

"The source of the subsidy is not the business of the assessee but the scheme of the Central Government."

Core principles established:

• The distinction between "derived from" and "attributable to" is crucial in determining eligibility for deductions under Section 80-IA.
• Income must have a direct and immediate nexus with the business activity to qualify as "derived from" the business.
• Subsidies or incentives from government schemes do not automatically qualify as business-derived income.

Final determinations on each issue:

The court affirmed the Tribunal's decision, holding that the transport subsidy was not income "derived from" the industrial undertaking's business and thus not eligible for deduction under Section 80-IA. The appeals were dismissed, and the questions were answered in favor of the revenue.