2009 (11) TMI 543 - HC - Income Tax

Transport subsidy - deduction u/s 80IA - Income derived from industrial undertakings - 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.

Summary

Issues Involved:
1. Whether transport subsidy received can be considered as income derived from an industrial undertaking under Section 80-IA of the Income-tax Act.

Detailed Analysis:

Issue 1: Whether transport subsidy received can be considered as income derived from an industrial undertaking under Section 80-IA of the Income-tax Act.

Relevant Legal Provisions: The judgment primarily revolves around Section 80-IA of the Income-tax Act, which provides deductions for profits and gains derived from eligible businesses, including industrial undertakings. The key term under scrutiny is "derived from," which has a narrower scope compared to "attributable to."

Case Law Analysis: The court examined several precedents to interpret the term "derived from." In *Cambay Electric Supply Industrial Co. Ltd. vs. Commissioner of Income-Tax*, the Supreme Court emphasized the difference between "attributable to" and "derived from," noting that the latter is narrower in scope. The court held that the expression "derived from" implies a direct nexus between the profits and the business activity.

Precedents Cited: The judgment cited multiple cases to support its reasoning:
- Merinoply and Chemicals Ltd. vs. Commissioner of Income-tax: The Calcutta High Court held that transport subsidies are inseparably connected with the business but did not directly derive from it.
- Ashok Leyland Ltd. vs. Commissioner of Income-Tax: The Supreme Court ruled that profits from the sale of imported spare parts were attributable to the priority industry but did not directly derive from it.
- Commissioner of Income-Tax vs. Pandian Chemicals Ltd.: The Madras High Court concluded that interest earned on a deposit with the Electricity Board was not income derived from an industrial undertaking.
- Commissioner of Income-Tax vs. Sterling Foods: The Supreme Court held that profits from the sale of import entitlements did not directly derive from the industrial undertaking but from the Export Promotion Scheme.
- Commissioner of Income Tax vs. Andaman Timber Industries Ltd.: The Calcutta High Court ruled that transport subsidies are not derived from the activity of the industrial undertaking but are attributable to it.

Supreme Court's Position in Liberty India: The Supreme Court in *Liberty India vs. Commissioner of Income Tax* clarified that Section 80-IA/80-IB provides profit-linked incentives, not investment-linked incentives. The term "derived from" is intended to cover sources not beyond the first degree. The court held that duty drawbacks and DEPB credits do not qualify as profits derived from business but are incentives from government schemes.

Application to Present Case: The court applied the principles from *Liberty India* and *Sterling Foods* to conclude that transport subsidy is not an operational profit derived from the business of the industrial undertaking. Instead, it is an incentive from a government scheme aimed at aiding industries in remote areas. The source of the subsidy is the government scheme, not the business activity of the assessee.

Conclusion: The court held that transport subsidy received by the assessee does not qualify as income derived from an industrial undertaking under Section 80-IA. The appeals were dismissed, and the questions were answered in favor of the revenue and against the assessee.