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2009 (11) TMI 542 - HC - Income TaxFreight Subsidy - deduction u/s 80-IA - 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.
Issues Involved
1. Whether the ITAT was right in law in holding that 'Freight Subsidy' received from the Government by the assessee is eligible for deduction under Section 80-1A of the Income Tax Act, 1961. 2. Whether the ITAT was right in considering 'freight subsidy' in the profits and gains of the business undertaking based on the decision of the Calcutta High Court in the Merinoplly & Chemicals Ltd. case. 3. Whether the ITAT failed to appreciate the ratio of judgments of the Madras High Court in the cases of CIT vs. Jameel Leathers and CIT vs. Vishwanathan & Co., which held that certain subsidies are not amounts derived from the industrial undertaking. Detailed Analysis Issue 1: Eligibility of 'Freight Subsidy' for Deduction under Section 80-1A The primary question was whether the 'Freight Subsidy' received by the assessee could be included as profits derived from the industrial undertaking and thus be 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 freight subsidy, although connected to the industrial undertaking, was not considered as profits "derived" from it. The court concluded that the source of the freight subsidy was a scheme framed by the Central Government and not the business activity of the industrial undertaking itself. Therefore, the freight subsidy could not be included as profits eligible for deduction under Section 80-1A. Issue 2: Consideration of 'Freight Subsidy' in Profits and Gains The ITAT had relied on the decision of the Calcutta High Court in Merinoplly & Chemicals Ltd., where it was held that transport subsidies are inseparably connected with the business carried on by the assessee. However, the court distinguished this case by emphasizing that the issue in Merinoplly was whether the receipt was of a revenue nature and inseparably connected with the business, not whether it was income derived from the business of the industrial undertaking. The court reiterated that for the purposes of Section 80-1A, the term "derived from" requires a direct nexus between the profits and the industrial undertaking, which was not present in the case of freight subsidy. Issue 3: Ratio of Judgments of the Madras High Court The court examined the judgments of the Madras High Court in CIT vs. Jameel Leathers and CIT vs. Vishwanathan & Co., which held that amounts received on account of cash assistance, duty drawback, import entitlements, and air subsidy are not amounts derived from the industrial undertaking. These judgments followed the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. The court found that these precedents were applicable to the present case and supported the view that the freight subsidy could not be considered as profits derived from the industrial undertaking. Conclusion In conclusion, the court held that the freight subsidy received by the assessee could not be included as profits derived from the industrial undertaking for the purposes of deduction under Section 80-1A of the Income Tax Act, 1961. The appeal was allowed in favor of the revenue, and the questions were answered against the assessee.
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