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TMI Blog2009 (11) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that the profit is derived from the business of such Industrial Undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. MODVAT credit - MODVAT credit is available to the assessee because it purchases raw material for manufacture of the machinery. This is an integral part of the business of the Company. It gets MODVAT credit on the excise paid on such inputs. This is adjusted against the excise payable on the final product. At the end of the year some MODVAT credit was lying in the name of the assessee. This is its income derived from the business itself. If it was not manufacturing the machinery it could not have obtained the MODVAT credit. It is not entitled to sell the MODVAT credit. It can only adjust it against the final product sold. Therefore, if there is a credit of MODVAT at the end of the year this would be income derived from the business of the Company. Hence, the assessee is entitled to claim deduction under Section 80IB. Amount received by the assessee as erection and commissioning charges - This is also an integral part of the business. When a customer buys plant and mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether such income is derived from the business of the Company or not. Section 80IB which provides for deduction in respect of profits and gains from certain industrial undertakings in so far as it is relevant for our purpose reads as follows: 80IB .(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 the 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 this section. It is, therefore, clear that only the profits and gains derived from the business are entitled for deduction under the said section. The basic authority on the point is Cambay Electric Supply Industrial Co. Ltd. vs. Commissioner of Income-Tax, Gujarat-II, (1978) 113 ITR 84. In that case the Apex Court was dealing with the provisions of Section 80-E of the Act prior to its amendment in 1967. The assessee was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: All in all, the payment of transport subsidies are meant to augment the profit and make the industry viable economically. We do not find any perversity in the Tribunal s finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an incidental expenditure of the assessee s business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business and in arriving at such a decision on the facts the Tribunal committed no error. In Ashok Leyland Ltd. vs. Commissioner of Income-Tax, (1997) 224 ITR 122, the industry was carrying out a priority industry and the question which arose before the Apex Court was whether the profits and gains arising from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some import entitlements granted by the Central Government under the Export Promotion Scheme. The assessee was entitled to use the import entitlements itself or sell the same to others. The assessee sold the import entitlements. The question before the Apex court was whether the amount received for sale of import entitlement was income derived from business. The Apex Court held as follows: We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government where under the export entitlements become available. There must be, for the application of the words derived from, a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration there from cannot, in our view, be held to constitute a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : That takes us to the amounts received by the assessee under Modvat credits and International Price Rationalization. In respect of both these payments, it will have to be found that they are directly relatable to the industrial undertaking alone and to no other activity other than the business activity of the assessee as regards the forgings. Truly speaking, the amount received by way of Modvat credits could not have been received by the assessee had the assessee not purchased the raw materials for running its industry of manufacturing the forgings. It is only on account of the purchase of the raw materials that it was required to pay the excise duty thereupon in respect of which, the assessee has earned Modvat credits. Therefore, that credit will have to be held as directly relatable to the industrial undertaking and the activity of the assesseecompany and that would have to be held in favour of the assessee. Thus, the income from the Modvat credits would be entitled to be held as allowable deduction under section 80HH of the Act .. The Apex Court in M/s.Liberty India vs. Commissioner of Income Tax, JT 2009 (11) SC 571 after considering the legal provisions held as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 Section 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. reported in [1986] 157 ITR 762). 15. Continuing our analysis of Sections 80-IA/ 80IB it may be mentioned that sub-section (13) of Section 80IB provides for applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of the business and the source of income should be business itself. Keeping in view the aforesaid principles, we first take up the question relating to MODVAT credit. MODVAT credit is available to the assessee because it purchases raw material for manufacture of the machinery. This is an integral part of the business of the Company. It gets MODVAT credit on the excise paid on such inputs. This is adjusted against the excise payable on the final product. At the end of the year some MODVAT credit was lying in the name of the assessee. This is its income derived from the business itself. If it was not manufacturing the machinery it could not have obtained the MODVAT credit. It is not entitled to sell the MODVAT credit. It can only adjust it against the final product sold. Therefore, if there is a credit of MODVAT at the end of the year this would be income derived from the business of the Company. Hence, the assessee is entitled to claim deduction under Section 80IB. Coming to the question of the amount received by the assessee as erection and commissioning charges, we are of the view that this is also an integral part of the business. When a customer buys plant and mac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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