2016 (3) TMI 375 - SC - Income Tax

Deduction under Section 80-IB and 80-IC on profits and gains of business of the respondent s industrial undertaking - Held that - The judgment in Sterling Foods 1999 (4) TMI 1 - SUPREME Court lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found on the facts before it that by reason of an export promotion scheme an assessee was entitled to import entitlements which it could thereafter sell. Obviously the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking but related only to an event which was post manufacture namely export. On an application of the aforesaid test to the facts of the present case it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business and reimbursement of such subsidies. However Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that therefore the immediate source not being from the business of the assessee the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself the fact that the immediate source of the subsidies is the Government would make no difference as it cannot be disputed that the said subsidies are only in order to reimburse wholly or partially costs actually incurred by the assessee in the manufacturing and selling of its products. The profits and gains spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood it is clear that profits and gains are derived from the business of the assessee namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the assessee by the Government concerned. A Delhi High Court judgment was also cited before us being CIT v. Dharampal Premchand Ltd. 2008 (11) TMI 231 - DELHI HIGH COURT from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80-IB of the Act in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB of the Act. It only remains to consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the respondent would be income from other sources referable to Section 56 of the Income Tax Act any deduction that is to be made can only be made from income from other sources and not from profits and gains of business which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business are under the head income from other sources which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b) specifically states that income from cash assistance by whatever name called received or receivable by any person against exports under any scheme of the Government of India will be income chargeable to income tax under the head profits and gains of business or profession . If cash assistance received or receivable against exports schemes are included as being income under the head profits and gains of business or profession it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head profits and gains of business or profession and not under the head income from other sources . For the reasons given by us we are of the view that the Gauhati Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC.

Summary

Issues Involved:
1. Deduction under Sections 80-IB and 80-IC of the Income Tax Act, 1961.
2. Classification of subsidies as revenue receipts and their eligibility for deduction.
3. Interpretation of "profits and gains derived from business" versus "income from other sources".

Detailed Analysis:

1. Deduction under Sections 80-IB and 80-IC of the Income Tax Act, 1961:
The core issue revolves around whether subsidies received by the respondent qualify for deductions under Sections 80-IB and 80-IC. The respondent, engaged in the manufacture of Steel and Ferro Silicon, claimed deductions on subsidies received for transport, interest, and power. The Assessing Officer disallowed these deductions, classifying the subsidies as revenue receipts. The ITAT allowed the respondent's appeal, which was upheld by the Gauhati High Court. The Revenue appealed to the Supreme Court, arguing that subsidies were not directly derived from the business.

2. Classification of Subsidies as Revenue Receipts and Their Eligibility for Deduction:
The Supreme Court examined whether subsidies could be considered as "profits and gains derived from business." The Revenue contended that subsidies, being government grants, lacked a direct nexus with the business of the assessee. They cited various judgments, including Liberty India v. Commissioner of Income Tax, to argue that subsidies should be classified as "income from other sources." The respondent countered that subsidies were intended to reduce costs directly related to manufacturing and selling, thus qualifying as business profits.

3. Interpretation of "Profits and Gains Derived from Business" Versus "Income from Other Sources":
The Court analyzed the language of Sections 80-IB and 80-IC, focusing on the phrase "profits and gains derived from business." It distinguished between "profits attributable to" and "profits derived from" business, emphasizing that the latter requires a direct nexus. The Court referred to Cambay Electric Supply Industrial Company Limited v. Commissioner of Income Tax and Sterling Foods, Mangalore, to elucidate this distinction. It concluded that subsidies reimbursing costs directly related to manufacturing and selling products have a direct nexus with the business, thus qualifying for deductions under Sections 80-IB and 80-IC.

Conclusion:
The Supreme Court upheld the Gauhati High Court's judgment, affirming that subsidies received by the respondent for transport, interest, and power were directly related to the business's manufacturing and selling costs. Consequently, these subsidies qualify for deductions under Sections 80-IB and 80-IC. The Court dismissed the Revenue's appeals, holding that the subsidies should be classified under "profits and gains of business or profession" rather than "income from other sources." The judgments of the Gauhati, Calcutta, and Delhi High Courts were deemed correctly decided, while the Himachal Pradesh High Court's contrary interpretation was held to be incorrect.