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TMI Blog2011 (3) TMI 819X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeals are the same and reads as follows: 1.Whether the ITAT was right in law in holding that Transport Subsidy received from the Govt. by the assessee is allowed to be included as profits derived from the industrial undertaking and eligible for deduction under Section 80-1A of the Income Tax Act, 1961, when it has been clearly laid down by the Supreme Court in its decision in the case of CIT vs. Cambay Electric supply Industrial Co. Ltd., 113 ITR 84 that the words derived from referred to in the section 80-1A has narrower meaning than attributable to and the freight subsidy cannot be treated as profits derived from the industrial undertaking though it may be attributable to the industrial undertaking? 2.Whether the ITAT was right in law holding that transport subsidy was rightly taken into consideration by the assessee in working out the profits and gains of the profits and gains of the business undertaking relying on the decision of Calcutta High Court in the case of Merinoplly Chemicals Ltd. 209 ITR 508 where the point in issue was whether a receipt on account of transport/freight subsidy was of a revenue nature and was inseparably connected with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l undertaking referred to in sub-clause (a) or sub-clause(d) of clause (iv) of subsection(2), twenty-five per cent of the profits and gains derived from such industrial undertakings; (b)in the case of an industrial undertaking referred to in sub-clause (b) or sub clause (c) of clause (iv) of subsection (2), hundred per cent of the profits and gains derived from such industrial undertaking for the initial five assessment years and thereafter twenty-five per cent of the profits and gains derived from such industrial undertaking. xxxxxxxxxx (7)Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General it has used the expression "derived from", as for instance in S. 80-J. In our view, since the expression of wider import, namely, "attributable to" has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. Relying on these observations of the Apex court it is contended on behalf of the Revenue that since in Section 80-1A the word derived has been used, the transport subsidy cannot be said to be derived from the business of the industrial undertakings. A Division Bench of the Calcutta High Court dealt with a similar question in Merinoply and Chemicals ltd. vs. Commissioner of Income-tax, (1994) 209 ITR 508. One of the questions before the Calcutta High Court was whether transport subsidies were inseparably con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is given when the Legislature uses the expression, derived from . Though the assessee has necessarily to make the deposit with the Electricity Board for running the industry and the power supply will not be made without the deposit in favour of the Electricity Board, the income derived from the deposit with the Electricity Board cannot be said to have been derived from the industrial undertaking. The immediate source of interest is the deposit itself, and the effective source of the genealogy of the source of the interest income is the deposit and not business, as the industrial undertaking is removed by one step from the source of income for the interest. Hence, the interest income cannot be held to be derived from the industrial undertaking. The Madras High Court had placed reliance on the judgment of the Karnataka High Court in Sterling Foods vs. CIT, (1984) 150 ITR 292. The judgment of the Karnataka High Court was upheld by the Apex Court in Commissioner of Income-Tax vs. Sterling Foods, (1999)237 ITR 579. In this case the assessee had sold the import entitlements and had thus derived profit. The question which arose was whether the receipts from the sale of import entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration is whether the amount of transport subsidy is a profit for the purpose of deduction under section 80HH of the Income-tax Act. As referred to above, their Lordships in their latest decision in the case of CIT v. Sterling Foods (1999)237 ITR 579 (SC), had made a distinction between the words derived from and attributable to . The words attributable to have wider import than the words derived from and when the Legislature has used the words derive from in Section 80HH, we cannot enlarge the scope of benefit intended by the legislature in section 80HH. Profits and gains which are derived from an industrial undertaking are only eligible for deduction under section 80HH. Any incidental income or profit to the business of the assessee or to the income of the industrial undertaking is not entitled or eligible for the benefit of section 80HH. The industrial undertaking should be the direct and immediate source of income for the purpose of deduction under section 80HH. Subsidy or transport subsidy is not the immediate source or have direct nexus with the activity of the industrial undertaking. It is an aid by the Government under the Scheme. Though it is incidental to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wback has to be treated as derived from the industrial undertaking. In fact the matter is no longer res integra. The judgment of the Punjab and Haryana High court in M/s.Liberty India has been upheld by the Apex Court in M/s.Liberty India vs. Commissioner of Income Tax, JT 2009 (11) SC 571. The Apex Court after considering the legal provisions held as follows: 13. Before analyzing Section 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Section 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract Section 80-IB(6). It is the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (see CIT v. Kirloskar Oil Engines Ltd. reported in [1986] 157 ITR 762). 15. Continuing our analysis of Sections 80-IA/80-IB it may be mentioned that sub-section (13) of Section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) of Section 80-IA, so far as may be, applicable to the eligible business under Section 80-IB. Therefore, at the outset, we stated that one needs to read Sections 80I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-section(5) of Section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub- section (5) of Section 80- IA, which are also required to be read into Section 80- IB. [see Section 80-IB(13)]. We may reiterate that Sections 80I, 80-IA a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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