2016 (10) TMI 396 - HC - Income Tax

Entitlement to deduction under Section 80IC on Transport subsidy received - whether subsidies goes to reduce the expenditure actually incurred and hence they ought to be regarded as operational profits? - Held that - It is not the case of Revenue that in the present case, the referred transport subsidy has no bearing on the cost of production of the industrial undertaking of the respondent assessee. In this view of the matter and for the law declared by the Hon ble Supreme Court in Commissioner of Income Tax v. Meghalaya Steels Limited 2016 (3) TMI 375 - SUPREME COURT the decision by the Assessing Officer as approved by the Appellate Commissioner to the effect that the transport subsidy cannot be said to be derived from industrial undertaking and would not fall in the category of profits and gains derived from industrial activities could only be disapproved. In view of above, the answers to the basic questions involved in the matter are required to be in the affirmative. We may observe that in question No.(i) as formulated, only Section 80-IC has been mentioned, probably with reference to the question as formulated in the memo of appeal, whereas essentially the claim had been with reference to Section 80-IB (4) of the Act of 1961. With this clarification, answers to the questions involved in this matter are in the affirmative, that is to say that the Tribunal was legally justified in regarding the transport subsidy as part of operational profits; and was justified in holding the assessee entitled to deduction under Section 80-IB of the Act of 1961 on the transport subsidy.

Summary

Issues:
1. Interpretation of deduction under Section 80IC of the Income Tax Act, 1961 on transport subsidy.
2. Legality of considering subsidies as operational profits under Section 80-IB of the Act of 1961.

Issue 1: Interpretation of deduction under Section 80IC of the Income Tax Act, 1961 on transport subsidy.

The case involved an appeal by the Revenue under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal (ITAT) regarding the deduction under Section 80IC of the Act on a transport subsidy received by the assessee. The respondent, an agro-based manufacturing company, claimed a deduction of ?35,04,657 under Section 80-IB for a transport subsidy received from the Government. The Assessing Officer and the Commissioner of Income Tax disallowed the deduction, treating it as taxable income. The ITAT allowed the appeal based on the decision in Commissioner of Income Tax v. Meghalaya Steels Limited, which held that transport subsidy was eligible for deduction under Section 80-IB or Section 80-IC. The Gauhati High Court emphasized the nexus between transport subsidy and cost reduction in production, leading to profits, and approved the ITAT's decision.

Issue 2: Legality of considering subsidies as operational profits under Section 80-IB of the Act of 1961.

The Gauhati High Court established that transport subsidies directly impacted the cost of production for industrial undertakings, resulting in profits and gains. The court emphasized the nexus between transport subsidy and manufacturing activities, stating that unless proven otherwise, industrial undertakings receiving transport subsidies were entitled to claim deductions under Section 80IB or 80IC. The Supreme Court affirmed this position, clarifying that profits and gains under these sections are derived from the business itself, including costs reimbursed by the Government. As the transport subsidy in this case affected the cost of production, the Assessing Officer's decision to disallow the deduction was deemed incorrect. The ITAT's decision to allow the deduction, based on the approved precedent, was upheld by the High Court.

In conclusion, the High Court dismissed the appeal, affirming that the transport subsidy was part of operational profits and that the assessee was entitled to a deduction under Section 80-IB of the Income Tax Act, 1961. The judgment highlighted the direct nexus between transport subsidy, cost reduction in production, and profits, as established by previous legal precedents and the Supreme Court's clarification on the applicability of Section 80-IB and 80-IC.