2011 (3) TMI 819 - HC - Income Tax

Deduction u/s 80IA - Transport subsidy - In the case of CIT v. Sterling Foods (1999 -TMI - 5740 - SUPREME Court), had made a distinction between the words derived from and attributable to - Any incidental income or profit to the business of the assessee or to the income of the industrial undertaking is not entitled or eligible for the benefit of section 80HH - Subsidy or transport subsidy is not the immediate source or have direct nexus with the activity of the industrial undertaking. It is an aid by the Government under the Scheme - Held that the source of income transport subsidy is not the business of the assessee but the scheme framed by the Central Government - Decided against the assessee

Issues Involved:
1. Whether the ITAT was correct in law in holding that 'Transport Subsidy' received by the assessee is eligible for deduction under Section 80-1A of the Income Tax Act, 1961.
2. Whether the ITAT was correct in considering 'transport subsidy' in calculating the profits and gains of the business undertaking, relying on the Calcutta High Court's decision in Merinoplly & Chemicals Ltd.
3. Whether the ITAT failed to appreciate the judgments of the Madras High Court, which held that amounts received as cash assistance, duty drawback, import entitlements, and air subsidy do not form part of the profits and gains 'derived' from the industrial undertaking.

Detailed Analysis:

Issue 1: Eligibility of Transport Subsidy for Deduction under Section 80-1A
The primary question is whether 'Transport Subsidy' can be considered as profits derived from an industrial undertaking and thus eligible for deduction under Section 80-1A of the Income Tax Act, 1961. The court referred to the Supreme Court's decision in CIT vs. Cambay Electric Supply Industrial Co. Ltd., which clarified that the term "derived from" has a narrower meaning than "attributable to." The court emphasized that the source of the subsidy is the scheme framed by the Central Government, not the business of the industrial undertaking itself. Therefore, the transport subsidy cannot be considered as profits derived from the business of the industrial undertaking.

Issue 2: Consideration of Transport Subsidy in Calculating Profits and Gains
The ITAT relied on the Calcutta High Court's decision in Merinoplly & Chemicals Ltd., which held that transport subsidies are inseparably connected with the business carried on by the assessee and are meant to augment profit and make the industry viable economically. However, the court noted that this decision did not address whether such subsidies are income derived from the business of the industrial undertaking eligible for deduction under Section 80HH/80IA/80IB. The court further referred to the Supreme Court's decision in Sterling Foods, which held that there must be a direct nexus between the profits and gains and the industrial undertaking for them to be considered as derived from the business.

Issue 3: Applicability of Madras High Court Judgments
The court discussed the Madras High Court's decisions in CIT vs. Vishwanathan & Co. and Pandian Chemicals Ltd., which held that amounts received as cash assistance, duty drawback, import entitlements, and air subsidy are not considered as profits and gains derived from the industrial undertaking. The court emphasized that these judgments followed the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd., reinforcing that the term "derived from" requires a direct nexus between the income and the industrial undertaking.

Conclusion:
The court concluded that the transport subsidy received by the assessee cannot be considered as profits derived from the business of the industrial undertaking. The source of the subsidy is the scheme framed by the Central Government, not the business operations of the assessee. Therefore, the questions were answered in favor of the revenue and against the assessee, and the appeals were accordingly allowed.

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