2016 (8) TMI 112 - HC - Income Tax

Deduction u/s 801A - non deduction of amount of subsidy given by the government to the farmers, for the purpose of allowing deduction u/s 801A - Held that - The issue is squarely covered by the decision of the Hon ble Supreme Court in case of Commissioner of Income Tax versus Meghalaya Steels Ltd. 2016 (3) TMI 375 - SUPREME COURT wherein the Hon ble Supreme Court by placing reliance on the decision in case of CIT versus 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 of an industrial undertaking. There should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. Therefore the Tribunal has rightly held that the assessee is entitled for deduction under Section 801A of the Income Tax Act, 1961 without deducting the amount of subsidy given by the Government to the farmers and accordingly allowed the claim of the asseessee. We therefore answer the question in favour of the assessee and against the revenue.

Summary

Issues:
Interpretation of deduction under Section 801A of the Income Tax Act based on subsidy received from the Government.

Analysis:
The case involved a Trust engaged in manufacturing detergents, SSP fertilizers, and packing items, claiming a deduction under Section 801A of the Income Tax Act for a subsidy received from the Government. The Assessing Officer initially rejected the claim, stating the subsidy had no direct nexus with the profits derived from the business. The CIT(A) upheld this decision. However, on appeal, the Tribunal reversed the findings, allowing the deduction and directing the Assessing Officer not to deduct the subsidy amount. The revenue challenged this decision, arguing that the subsidy was not related to the profits of the industrial undertaking and therefore not eligible for the deduction.

During the proceedings, the revenue contended that the subsidy, being sourced from the Government and not the business itself, should not be considered for the deduction. They argued that the subsidy did not have a direct nexus with the industrial undertaking's profits, making the Trust ineligible for the deduction under Section 801A. On the other hand, the Trust's advocate supported the Tribunal's decision, citing a Supreme Court case that emphasized the importance of a direct nexus between profits and the industrial undertaking for claiming deductions.

The High Court, after hearing arguments from both sides, upheld the Tribunal's decision. It emphasized that the subsidy was part of the sale proceeds realized from the fertilizers, directly linked to the industrial activities. Referring to a Supreme Court case, the Court highlighted the need for a direct nexus between profits and the industrial business, not merely incidental. Therefore, it concluded that the Trust was entitled to the deduction under Section 801A without deducting the subsidy amount, ruling in favor of the Trust and against the revenue.

In conclusion, the High Court dismissed the appeal, affirming the Tribunal's decision to allow the deduction under Section 801A of the Income Tax Act based on the subsidy received from the Government.