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2009 (10) TMI 10 - HC - Income TaxScope of term derived from industrial undertaking freight subsidy held that - one needs to read Sections 80I, 80-IA and 80-IB as having a common Scheme - profits are to be computed as if such eligible business is the only source of income of the assessee - apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words derived from industrial undertaking as against profits attributable to industrial undertaking - the transport subsidy received by the assessee is not a profit derived from business since it is not an operational profit. The source of the subsidy is not the business of the assessee but scheme of the Central Government - decided in favour of the revenue and against the assessee
Issues Involved:
1. Whether the ITAT was right in law in holding that 'Freight Subsidy' received from the Government by the assessee is allowed to be included as profits derived from the industrial undertaking and eligible for deduction under Section 80-1A of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Eligibility of Freight Subsidy under Section 80-1A The primary question of law addressed in this judgment is whether the freight subsidy received by the assessee from the Government can be considered as profits derived from the industrial undertaking and thus be eligible for deduction under Section 80-1A of the Income Tax Act, 1961. Relevant Legal Provisions and Background: The court examined Section 80-1A, which provides for deductions in respect of profits and gains derived from specific business activities, including industrial undertakings. The term "derived from" is critical here, as it has a narrower meaning compared to "attributable to." Case Law Analysis: 1. Cambay Electric Supply Industrial Co. Ltd. vs. Commissioner of Income-Tax, Gujarat-II (1978) 113 ITR 84: - The Supreme Court differentiated between "derived from" and "attributable to," emphasizing that "derived from" has a narrower scope. - This precedent was used to argue that freight subsidy, not being directly derived from the industrial activity, does not qualify under Section 80-1A. 2. Merinoply and Chemicals Ltd. vs. Commissioner of Income-tax (1994) 209 ITR 508: - The Calcutta High Court held that transport subsidies are inseparably connected with the business carried on by the assessee, thus could be considered as augmenting profits. - However, this view was not universally accepted. 3. Commissioner of Income-Tax vs. Pandian Chemicals Ltd. (1998) 233 ITR 497: - The Madras High Court ruled that interest earned on deposits with the Electricity Board could not be considered as income derived from the industrial undertaking, reinforcing the narrow interpretation of "derived from." 4. Commissioner of Income-Tax vs. Sterling Foods (1999) 237 ITR 579: - The Supreme Court held that the sale of import entitlements, while related to the business, was not directly derived from the industrial undertaking. 5. Commissioner of Income Tax vs. Andaman Timber Industries Ltd. (2000) 242 ITR 204: - The Calcutta High Court concluded that transport subsidy is not derived from the industrial activity, aligning with the narrow interpretation of "derived from." 6. Liberty India vs. Commissioner of Income-tax (2007) 293 ITR 520: - The Punjab and Haryana High Court held that duty drawbacks cannot be considered as income derived from specified business, a view upheld by the Supreme Court in Liberty India vs. Commissioner of Income Tax, JT 2009 (11) SC 571. Final Judgment: The court concluded that the freight subsidy received by the assessee is not a profit 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, it cannot be included in the profits eligible for deduction under Section 80-1A. Conclusion: The appeals were allowed in favor of the revenue, and it was held that the freight subsidy does not qualify for deduction under Section 80-1A of the Income Tax Act, 1961. The court emphasized the importance of the direct nexus between the income and the industrial activity, which was found lacking in the case of freight subsidies.
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