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TMI Blog2015 (8) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in its decision in the cases of Cambay Electric Supply Industrial Co. Ltd. Vs. CIT 1978 (TR/SC) 50:/1978) 1/3 ITR 84/SC) that the words derived from referred to in the section 80IC has narrower meaning than attributable to and the freight subsidy cannot be treated as profit derived from Industrial Undertaking though it may be attributable to Industrial Undertaking? (ii) Whether in the facts and circumstances of the case, the ITAT was right in law in holding that the freight subsidy was rightly taken into consideration by the assessee in working out the profits and gains of the business undertaking relying on the decision of Calcutta High Court in the case of Merino Ply and Chemicals Ltd. Vs. CIT (1004) 122 CTR (Cal) 262 : (1994) 209 ITR 508 (Cal.) 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 business and not whether it was income derived from the business of the industrial undertaking and eligible for deduction u/s 80HH/80IA/80IB of the Income Tax Act, 1961? (iii) Whether in the facts and circumstances of the case, the ITAT was right in law in not appreciating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on behalf of the respondents stated that the respondents/assessee do not even contend to the contrary. They have not claimed that the freight subsidy received from the Himachal Pradesh Government by the assessee is allowed to be included as profit derived from an industrial undertaking and, therefore, eligible as a deduction under Section 80-IC of the Income Tax Act, 1961. The assessee had claimed a set off against the expenses which was granted. The questions have probably been raised due to a passing observation in a part of a sentence in the order of the Tribunal. The sentence in the Tribunal's order reads as under:- "However, transport subsidy is to be adjusted against those expenses for which it is given while working out the profit of the industrial undertaking to be eligible for deduction u/s 80IC of the Act." The concluding words "to be eligible for deduction u/s 80IC of the Act" probably led to the appellant raising the first three questions. Transport subsidy is not admissible under Section 80IC of the Act. There is no grievance in respect of the first part of the sentence. In view of Mr. Jain's submission, it is not necessary to take the matter any further. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains. (4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:- (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in Section 33-B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.-The provisions of Explanations 1 and 2 to sub-section (3) of Section 80-IA shall apply for the purposes of clause (ii) of this sub-section as they apply for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, that the sales tax is in respect of the business but not from the business. 9. Mrs. Savita Saxena's reliance upon a judgment of the Supreme Court in Liberty India vs. Commissioner of Income Tax, (2009) 317 ITR 218 is well founded. In that case, the Supreme Court considered whether profit from the Duty Entitlement Pass Book Scheme can be said to be the profit from the business of the industrial undertaking eligible for deduction under Section 80-IB of the Act. Section 80-IB is similar to Section 80IC. Section 80IB(1) reads as under:- "80-IB. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.-(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11), (11-A) and (11-B) (such business) being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit/Duty drawback receipt comes within the first degree sources? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from s. 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food (supra). Therefore, in the present cases, in which 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. (1985) 44 CTR (Bom) 98 : (1986) 157 ITR 762 (Bom)] 15. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from s. 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under s. 80- IB. They belong to the category of ancillary profits of such Undertakings." (emphasis supplied) 10. On a parity of reasoning and on an analysis of section 80- IC, it must be held that any industrial undertaking or enterprise would be entitled to deduction under sub-section (1) only to the extent of profits derived from such an industrial undertaking and not on account of any rebate or incentive made available to it by the Government. The ratio in the last sentence in paragraph-15 is that the words "derived from industrial undertaking" are distinct from the words "profits attributable to industrial undertaking". The sales tax rebate falls within the ambit of the latter expression and not the former. What has been held by the Supreme Court in respect of the DEPB incentive applies equally to sales tax rebate in respect of section 80-IC. The sales tax rebate is an incentive which flows from the scheme framed by the Himachal Pradesh Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplies squarely to the provisions of section 80-IC. The sales tax rebate cannot be held to constitute a profit and gain derived from the assessee's business. 12. Ms. Saxena's reliance upon the judgment of the Himachal Pradesh High Court in Commissioner of Income Tax vs. Kiran Enterprises, (2010) 327 ITR 520 is also well founded. The question in that case was whether the freight subsidy received from the Government is allowed to be included as profit derived from the industrial undertaking and eligible for deduction under section 80- IA. Section 80-IA(1) reads as under:- "80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.-(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of profits and gains derived from such bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was direct nexus between the refund of excise duty and industrial activity. As a matter of fact, in the questions proposed by the Revenue, there is no specific question, that this finding of the authorities below is perverse. There is of course a very broad based and general question that the order passed by the Income-tax Appellate Tribunal is perverse in law and on facts. According to us, such a question is vague. A perusal of the grounds of appeal would substantiate this aspect of the matter. There is no ground taken by the Revenue whereby the substantial findings of fact have been challenged by the Revenue as being perverse. 29. An important aspect of the matter which clearly distinguishes the instant case from the facts of the other cases cited before us is, that the net effect of the accounting methodology employed by the assessee was that it did not, in sum and substance, impact the derivation of profits and gains ascertainable for the purposes of deduction under section 80-IB of the Act. 30. As noted by the Division Bench of this court in Eltek SGS P. Ltd., [2008] 300 ITR 6, the language of section 80-IB is materially different from those obtaining in the cases cit ..... 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