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TMI Blog2022 (2) TMI 818X X X X Extracts X X X X X X X X Extracts X X X X ..... tal receipt. All the judgments cited before us also lay down the same ratio. Even otherwise subsidy is included in the definition of Income u/s 2 (24) (xviii) with effect from 1/4/2016. Accordingly, we hold that Sales tax incentive money received being the amount retained by the company in accordance with Section 41 of the West Bengal sales tax act, 1944 read with the West Bengal incentive scheme, 1999 was a capital receipt not chargeable to tax under the income tax act. - ITA No. 2439/Mum/2011 - - - Dated:- 16-2-2022 - Shri Vikas Awasthy, JM And Shri Prashant Maharishi, AM For the Appellant : Shri Nitesh Joshi, AR For the Respondent : Shri Milind Chavan, DR ORDER PER PRASHANT MAHARISHI, AM: 01. This appeal is recalled by order of the coordinate bench in Miscellaneous Application number 136/M/2021 in ITA number 2439/M/2011 for assessment year 2003 04 passed on 17/9/2021 wherein as per paragraph number 12 it has been held that additional ground raised by the assessee number 3 with respect to the taxability of sales tax incentive whether is an income chargeable to tax and, if yes, whether same is eligible for deduction u/s 80 IB of the income tax act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores and price concession subsidy of ₹ 105.40 crores which have been included in the computation of claim u/s 80 IB of the act were rejected. Accordingly the 80 IB profit as per revised return of ₹ 253,196,667 was converted into a loss of ₹ 833,951,044/ . 06. Based on the above facts the assessee is aggrieved that the Sales tax remission of ₹ 3.31 crores and fertilizer price concession from government of ₹ 105.40 crores should be included as an eligible income for deduction u/s 80 IB of the act. 07. The coordinate bench Per its order dated 19/2/2021 dealt with the [5] ground of appeal as per para number 16 wherein assessee challenged the exclusion of fertilizer subsidy provided by the government is a price concession held to be not an eligible income from the industrial undertaking and also as per ground number (b) the sales tax incentive holding that it does not have a direct nexus with the activities of the industrial unit. 08. Assessee also raised additional ground with respect to the taxability of sales tax incentive money of ₹ 33,061,201/ 09. Coordinate bench decided ground no [5] and additional ground of sales tax remission n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, during the course of assessment proceedings for the impugned assessment year, vide letter dated 30.11.2005, section 80IB claim of ₹ 7,59,59,000/- (same as that claimed in original return of HLCL) @ 30% of the profits (this being the 4th year of claim) in respect of erstwhile HLCL was made. The audit report in Form No. 10CCB along with audited accounts of the new industrial undertakings duly certified by the chartered accountant was also filed. Before the revised return of income was filed by the assessee-company, notice u/s 148-dated 31.03.2005 was issued by the AO of the erstwhile HLCL. The AO having gone through the assessment records of AY 2002-03 of HLCL (earlier assessment year) noted that sales tax remission and price concession (subsidy) forming part of section 80IB claimed were rejected by the AO in that year. Observing that during year under consideration, both the items i.e. sales tax remission of ₹ 3.31 crores and price concession (subsidy) of ₹ 105.40 crores have been included in the computation of claim u/s 80IB of the Act, the AO disallowed the above sums by following the order of his predecessor for the earlier assessment year. 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for the assessee to receive those amounts and the existence of such a scheme was not an essential part of the industrial undertaking. Further dismissing the contentions of the assessee that the terms profits and gains derived from any business is wide enough to cover profits having indirect nexus with the industrial undertaking, the Ld. CIT(A) observed that the income from fertilizer concession is clearly relatable only to the Government scheme and not to the industrial undertaking per se; the contentions that the incentive provisions should be construed liberally would not mean that the incentives be allowed in respect of ineligible units. Referring to the order of the AO, wherein the case of M/s Hind Lever chemicals Ltd. (AY 2002-03) is brought out to show how the assessee is not eligible for section 80IB deduction in respect of fertilizer concession/subsidy, the Ld. CIT (A) affirmed the order of the AO disallowing the claim of the assessee of deduction u/s 80IB of the Act. 18. Before us, the Ld. counsel reiterating the statement of facts filed before the Ld. CIT(A), submits that for the year under consideration, HLCL (since amalgamated with the assessee-company) fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t s Scheme allowing such benefit, depending upon the location of the industry. Thus, it is stated that the Ld. CIT (A) has rightly confirmed the order of the AO. Regarding the fertilizer subsidy, the Ld. DR submits that the concession by the Government was merely an aid to the assessee and there is no merit in the contentions of the assessee that fertilizer concessions being related to the sale of fertilizer products flew directly from the operations of the industrial undertaking. Referring to the order of the Ld. CIT (A), the Ld. DR submits that it was not the industrial undertaking which yielded the subject income by way of sales tax concession but the scheme of the Government which made it possible for the assessee to receive those amounts and the existence of such scheme was not an essential part of the industrial undertaking. Referring to the order of the AO that in the case of M/s Hind Lever chemicals Ltd. (AY 2002-03) as to how the assessee was not eligible for section 80IB deduction in respect of fertilizer concession/subsidy, the Ld. DR submits that the order of the Ld. CIT (A) in respect of the above ground of appeal be affirmed. 20. We have heard the rival submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notified prices and charged sales tax in the invoices ; in the books of accounts, sales tax collected was shown as sales tax incentive and not deposited the Government as per the Industrial Development Policy of the State; sales tax remission/subsidy is arising only on account of sales from fertilizers to the farmers, which clearly indicates that the sales tax remission has direct nexus with the activities of the industrial undertaking Having examined the materials available on record, we find that the AO has not examined in proper perspective the above contentions of the assessee. As the above contentions have a direct bearing on the above ground of appeal, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO to pass an order afresh on the above 5th ground along with the additional ground raised for the first time before us, after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. As the matter has been restored to the file of the AO, we are not adverting to the case laws relied on by the Ld. Counsel. Thus the 5th ground of appeal along wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived from eligible business of industrial undertaking, or not and therefore, whether it is eligible for deduction u/s 80 IB of the act or not. It is further claimed that if the Sales tax subsidy is held to be an income, and not capital receipt, then whether such sales tax subsidy is also eligible for deduction u/s 80 IB of the act or not by deciding whether same is income derived from the business of industrial undertaking or not. 013. The learned authorised representative referred to the West Bengal incentive scheme 1999 effective for five years from 1/4/1999 31/3/2004. He submitted that the above benefits are available to the assessee as the unit of assessee is setup in Midnapore district. He said that according to the scheme the assessee is eligible for sales tax deferment/remission on sale of finished goods for a period of nine years. He submitted the copy of the scheme, which is placed at item number 11 of the paper book. He also submitted that the purpose of the scheme will decide whether the sum is taxable or not. He submitted that once the above sum is held to be not chargeable to income tax, the question of its deduction is eligible and income u/s 80 IB of the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. In the present case when once the object of subsidy is to industrialize state, it is capital receipt. All the judgments cited before us also lay down the same ratio. Even otherwise subsidy is included in the definition of Income u/s 2 (24) (xviii) with effect from 1/4/2016. Accordingly, we hold that Sales tax incentive money received of ₹ 430,61,201/ being the amount retained by the company in accordance with Section 41 of the West Bengal sales tax act, 1944 read with the West Bengal incentive scheme, 1999 was a capital receipt not chargeable to tax under the income tax act. 018. Accordingly additional ground 3 raised by the assessee is allowed. 019. With respect to the fertilizer subsidy, whether it is income derived from the industrial undertaking or not, the learned authorised representative submitted that issue is squarely covered in favour of the assessee by the decision of honourable Supreme Court in case of Meghalaya steel Ltd 383 ITR 279 (SC). He also referred to paragraph number 14.4 of the order of the learned CIT A to show that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the appellant are under the retention-pricing scheme. Accordingly, the government decides the maximum retail price and the difference between costs less maximum retail price is paid to the appellant by the way of product subsidy. These are in fact part of the cost recovered from the government and it is directly related to the sale of fertilizer to the farmers. For example, the cost of fertilizer production and its distribution to the manufacturer is ₹ 300 and if it is sold to the farmers at the maximum retail price of ₹ 200 and the balance price of ₹ 100/- is recovered from the government by way of the above subsidy. Thus, the manufacturers are paid the above subsidy to enable them to sell the fertilizers at or below the indicated maximum retail price to the farmers. The issue is whether that ₹ 100/- received from Government is part of profit derived from the business of eligible undertaking or not. 022. We find that now the issue squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of Meghalaya steel (supra) wherein it has been held as Under:- 9. We have heard learned counsel for the parties. Befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2- Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eenth Schedule. 80-IC Special provisions in respect of certain undertakings or enterprises in certain special category States (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 (2), 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, as specified in sub-section (3). 10. There is no dispute between the parties that the businesses referred to in Section 80-IB are businesses which are eligible businesses under both the aforesaid Sections. The parties have only locked horns on the meaning of the expression any profits and gains derived from any business . 11. The aforesaid provisions were inserted by the Finance Act, 1999 with effect from 1.4.2000. The Finance Minister in his budget speech for the year 1999-2000 spoke about industrial development in the North Eastern Region as follows:- Mr. Speaker, Sir, I am conscious of the fact that, despite all our announcements, the industrial development in North Eastern Region has not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (15) of the Act was relied upon by the Court for the purpose of ascertaining what was the reason for introducing that clause. The speech made by the Finance Minister while moving the amendment introducing Sub-section (2) clearly states what were the circumstances in which Sub-section (2) came to be passed, what was the mischief for which Section 52 as it then stood did not provide and which was sought to be remedied by the enactment of Sub-section (2) and why the enactment of Sub-section (2) was found necessary. It is apparent from the speech of the Finance Minister that Sub-section (2) was enacted for the purpose of reaching those cases where there was under-statement of consideration in respect of the transfer or to put it differently, the actual consideration received for the transfer was 'considerably more' than that declared or shown by the assessee, but which were not covered by Sub-section (1) because the transferee was not directly or indirectly connected with the assessee. The object and purpose of Sub-section (2), as explicated from the speech of the Finance Minister, was not to strike at honest and bona fide transactions where the consideration for the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpression 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. (Para 8) 14. In CIT v. Sterling Foods [1999] 104 Taxman 204, this Court had to decide whether income derived by the assessee by sale of import entitlements on export being made, was profit and gain derived from the respondent's industrial undertaking under Section 80HH of the Indian Income Tax Act. This Court referred to the judgment in Cambay Electric Supply Industrial Co. Ltd.'s case (supra) and emphasized the difference between the wider expression attributable to as contrasted with derived from . In the course of the judgment, this Court stated that the industrial undertaking itself had to be the source of the profit. The business of the industrial undertaking had directly to yield that profit. Having said this, this Court finally held:- 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 Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder sub-section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words derived from industrial undertaking as against profits attributable to industrial undertaking . 35. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc.. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. 36. Therefore, in our v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The profits and gains spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried 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. 22. However, in CIT v. Andaman Timber Industries Ltd., [2000] 242 ITR 204/109 Taxman 135 (Cal.), the same High Court arrived at an opposite conclusion in considering whether a deduction was allowable under Section 80HH of the Act in respect of transport subsidy without noticing the aforesaid earlier judgment of a Division Bench of that very court. A Division Bench of the Calcutta High Court in Cement Mfg Co. Ltd.'s case (supra) by a judgment dated 15.1.2015, distinguished the judgment in Andaman Timb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable.' 23. We are of the view that the judgment in Merinoply Chemicals Ltd.'s case (supra) and the recent judgment of the Calcutta High Court have correctly appreciated the legal position. 24. We do not find it necessary to refer in detail to any of the other judgments that have been placed before us. The judgment in Jai Bhagwan Oil and Flour Mills' case (supra) is helpful on the nature of a transport subsidy scheme, which is described as under: The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head income from other sources , which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b)* specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head profits and gains of business or profession . If cash assistance received or receivable against exports schemes are included as being income under the head profits and gains of business or profession , it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head profits and gains of business or profession , and not under the head income from other sources . 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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