2013 (7) TMI 175 - HC - Income Tax

Deduction u/s 80IB and 80IC - Transport subsidy - Held that - transportation of the raw materials as well as transportation of the finished goods, does go to reduce the cost of production of an industrial undertaking, the resultant effect of such a reduction, on the cost of production, would, obviously, help generate profits and, at times, higher profits - it is transparent that there is a direct nexus between the transport subsidy, on the one hand, and the profits earned, and gains made, by the industrial undertakings, on the other - Following decision of Jai Bhagwan Oil & Flour Mills v. Union of India 2009 (5) TMI 630 - SUPREME COURT OF INDIA , Merinoply and Chemicals Ltd. v. CIT 1993 (8) TMI 29 - CALCUTTA High Court and Sarda Plywood Industries Ltd. v. CIT 1999 (1) TMI 16 - CALCUTTA High Court - Decided in favour of Assessee. Deduction u/s 80IB and 80IC - Power subsidy - Held that - The reimbursement of the fully paid power bills, i.e., electrical charges, will obviously reduce the cost of production of an industrial undertaking contributing thereby to the profits and gains derived from, or derived by, the industrial undertaking concerned and augmenting thereby the income of the industrial undertaking concerned - payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives were given to the industries to run more profitably for a period of five years from the date of the commencement of production - subsidies on electrical charges, were given by the Government concerned for the purpose of enabling industries to run more profitably by obviously reducing the cost of production - such a relief, given by way of electricity subsidy, is not a capital receipt, but revenue receipt and can be taxed, if not, otherwise, deductible in terms of the relevant provisions of the Act - When the cost of production is reduced by granting subsidy on electricity charges, it necessarily helps the industry to run more profitably. Here again, a direct nexus between the power subsidy, on the one hand, and cost of production, on the other, stands well established - profits earned and the gains made from the industrial undertakings concerned will amount to profits and gains derived from, or derived by, the industrial undertakings concerned entitling the assessees to claim deduction under Section 80IB or 80IC - Following the decision of CIT v. Rajaram Maize Products 2001 (8) TMI 13 - SUPREME Court and CIT v Eastern Electro Chemical Industries 1999 (8) TMI 921 - SUPREME COURT - Decided in favour of Assessee. Deduction u/s 80IB and 80IC - Interest subsidy - Held that - The scheme of interest subsidy clearly shows that it reduces the interest payable on working capital advanced to an industrial undertaking by a scheduled bank or Central/State financial institutions. There is no dispute that the assessee-respondents concerned have received working capital, whereupon they have been paying interest to the scheduled banks or Central/State financial institutions - If the object of the relevant Scheme is borne in mind, it clearly shows that interest subsidy, having aimed at reducing the interest payable on working capital by an industrial undertaking, helps directly in reducing the cost of manufacturing or production activities and establish thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the interest subsidy, on the other, received by the assessee-respondents and, in consequence thereof, since interest subsidy results into profits and gains derived from, or derived by, an industrial undertaking, there is no reason as to why such profits and gains, earned by an industrial undertaking on the strength of such a subsidy, namely, interest subsidy, be not allowed to be deducted from the taxable income of the industrial undertaking concerned - Decided in favour of Assessee. Deduction u/s 80IB and 80IC - Insurance subsidy - Held that - Under this Scheme, the insurance premium paid by eligible industrial units (under such scheme), set up in the North Eastern Region, are reimbursed by the nodal insurance company - The insurance subsidy, thus, helps in reducing the running cost of the industrial unit concerned establishing thereby direct and first degree nexus between the industrial activities of the assessee-respondents concerned, on the one hand, and the subsidy, in the form of insurance subsidy, on the other, received by the assessee-respondents. The resultant profits and gains, derived from, or derived by, an industrial undertaking, because of the insurance subsidy, have to be treated as deductible in terms of the provision of Section 80IB or 80IC - Decided in favour of Assessee. Case relied on by Respondents - Liberty India v. CIT 2009 (8) TMI 63 - SUPREME COURT - Case of Liberty India was limited to only two schemes, namely, DEPB and Duty Drawback. Both these Schemes, it deserves to be noticed, related to exports and not meant to reduce the cost of production. Consequently, if no export was made, there was no entitlement to receive the benefit of DEPB or the benefit derivable by Duty Drawback Scheme - Liberty India was a case of non-operational subsidy inasmuch as the subsidy, provided in Liberty India, did not relate to production; whereas the subsidies, in the present set of cases, are operational in nature inasmuch as the subsidies are related to the production of the industrial undertaking concerned.

Summary

Issues Involved:
1. Whether transport subsidy, power subsidy, interest subsidy, and insurance subsidy received by the respondents are allowable for computation of deduction under Sections 80IB and 80IC of the Income Tax Act, 1961.
2. Whether the subsidies reduce the expenses incurred under specific heads and if the resultant profits and gains are eligible for deduction under Sections 80IB and 80IC.
3. Whether there is a direct nexus between the subsidies received and the manufacturing activities of the industrial undertaking.
4. Whether the Tribunal's findings on the direct nexus between the subsidies and the profits derived from the industrial undertaking are perverse.

Detailed Analysis:

1. Allowability of Subsidies for Deduction under Sections 80IB and 80IC:
The Tribunal held that transport subsidy, power subsidy, interest subsidy, and insurance subsidy received by the assessee-respondents reduce the corresponding expenses incurred, and the resultant profit would be the profits and gains of the business of the industrial undertaking. The Tribunal concluded that these subsidies are inter-linked, inter-laced, and have a direct nexus with the manufacturing activities of the assessee, making them eligible for deduction under Sections 80IB and 80IC of the Act.

2. Reduction of Expenses and Resultant Profits:
The Tribunal's orders, dated 19.03.2010, in ITA Nos. 52/Gau/2009 and 95/Gau/2007, emphasized that the subsidies reduce the corresponding expenses under specific heads (transportation, power, interest, and insurance). The resultant profits and gains are thus considered part of the business profits of the industrial undertaking and are eligible for deduction under the relevant sections of the Act.

3. Direct Nexus Between Subsidies and Manufacturing Activities:
The Tribunal found that the subsidies have a direct nexus with the manufacturing activities of the industrial undertaking. The subsidies are aimed at reducing the cost of production, thereby directly contributing to the profits and gains of the business. This direct nexus qualifies the profits derived from such subsidies for deduction under Sections 80IB and 80IC.

4. Perverse Findings:
The Tribunal's findings were not challenged as perverse by the Revenue in their appeals. The Supreme Court in various cases has clarified that unless a finding of fact is alleged to be perverse, it cannot be disturbed in an appeal under Section 260A. The Tribunal's finding that there is a direct nexus between the subsidies and the manufacturing activities stands unchallenged as perverse, making the Tribunal's decision binding.

Transport Subsidy:
The Transport Subsidy Scheme, 1971, aimed to reduce the transportation costs of raw materials and finished goods, directly affecting the cost of production. The Supreme Court in Jai Bhagwan Oil & Flour Mills v. Union of India emphasized that the objective of the transport subsidy is to improve trade and commerce in remote areas by reducing transportation costs, thereby making the industrial units competitive and economically viable. This establishes a direct nexus between transport subsidy and the profits derived from the industrial undertaking.

Power Subsidy:
The Industrial Policy, 1997, and its extension in 2003, provided power subsidies to eligible industrial units, reimbursing fully paid power bills. This reimbursement reduces the cost of production, contributing to the profits and gains of the industrial undertaking. The Supreme Court in CIT v. Rajaram Maize Products and CIT v. Eastern Electro Chemical Industries held that power subsidies are revenue in nature and reduce the cost of production, thus directly affecting the profits and gains derived from the industrial undertaking.

Interest Subsidy:
Interest subsidy under the Industrial Policy, 1997, reduces the interest payable on working capital advanced to industrial units, thereby reducing the cost of production and establishing a direct nexus with the profits and gains derived from the industrial undertaking.

Insurance Subsidy:
Insurance subsidy under the Central Comprehensive Insurance Scheme, 1997, reimburses the insurance premium paid by eligible industrial units, reducing the running cost of the industrial unit and establishing a direct nexus with the profits and gains derived from the industrial undertaking.

Conclusion:
The Tribunal's decision that the subsidies (transport, power, interest, and insurance) reduce the cost of production and have a direct nexus with the manufacturing activities of the industrial undertaking is upheld. The subsidies contribute to the profits and gains derived from the industrial undertaking, making them eligible for deduction under Sections 80IB and 80IC of the Income Tax Act. The appeals by the Revenue are dismissed, and the Tribunal's findings stand affirmed.