2009 (10) TMI 577 - HC - Income Tax

Industrial undertaking Special deduction under section 80-IB Condition precedent Profits should be derived from Industrial undertaking Interest subsidy received from state Govt. Not derived from industrial undertaking assessee not entitled to special deduction in respect of such subsidy

Issues Involved:
1. Whether the interest subsidy received by the assessee under a State Government scheme forms part of profits derived from the industrial undertaking and is eligible for deduction under section 80-IB of the Income-tax Act, 1961.
2. Whether the Income-tax Appellate Tribunal erred in following its own decision in an earlier case, ignoring the principles laid down by the Supreme Court and other High Courts.

Issue-wise Detailed Analysis:

Issue 1: Eligibility of Interest Subsidy for Deduction under Section 80-IB

The primary question was whether the interest subsidy received by the assessee under a State Government scheme could be considered as profits derived from the industrial undertaking, making it eligible for deduction under section 80-IB of the Income-tax Act, 1961.

The court examined several precedents to resolve this issue:

- CIT v. Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84 (SC): The Supreme Court distinguished between the terms "attributable to" and "derived from," noting that "attributable to" has a wider import. The court emphasized that the legislature used "derived from" in section 80-IB to restrict the scope of eligible profits.

- CIT v. Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad): The Madras High Court held that interest earned on deposits made with the Electricity Board was not income derived from the industrial undertaking, as the immediate source of interest was the deposit itself, not the business.

- CIT v. Sterling Foods [1999] 237 ITR 579 (SC): The Supreme Court ruled that profits from the sale of import entitlements were not derived from the industrial undertaking but from the Export Promotion Scheme. The court stressed the need for a direct nexus between the profits and the industrial undertaking.

- Liberty India v. CIT [2009] 317 ITR 218 (SC): The Supreme Court reiterated that for profits to be considered derived from an industrial undertaking, they must be operational profits directly linked to the business, not incidental or secondary sources like government schemes.

Applying these principles, the court concluded that the interest subsidy was not operational profit derived from the industrial undertaking but rather from a government scheme. Therefore, it did not qualify for deduction under section 80-IB.

Issue 2: Tribunal's Adherence to Precedents

The second issue questioned whether the Income-tax Appellate Tribunal erred by following its own previous decision instead of adhering to the principles laid down by the Supreme Court and other High Courts.

The court noted that the Tribunal had ignored established legal principles by relying on its earlier decision and not considering the authoritative judgments of higher courts. The Tribunal's approach was found to be flawed as it did not align with the narrower interpretation of "derived from" as mandated by the Supreme Court.

Conclusion:

The court held that the interest subsidy received by the assessee is not a profit derived from the business of the industrial undertaking, as it originates from a government scheme and not from the business operations. Consequently, it is not eligible for deduction under section 80-IB of the Income-tax Act, 1961. The court answered both questions in favor of the Revenue and against the assessee, allowing the appeals.

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