CIT vs. Meghalaya Steels Ltd (Supreme Court)

The assessee claimed deduction under Section 80-IB of the Income Tax Act on the profits and gains of business of the industrial undertaking. The assessee included the following subsidies in the profits and gains, namely, Transport subsidy, Interest subsidy and Power subsidy.The Assessing Officer held that the amounts received by the assessee as subsidies were revenue receipts and did not qualify for deduction under Section 80-IB(4) of the Act and, accordingly, the assessee’s claim for deduction on account of the three subsidies aforementioned were disallowed. This was upheld by the CIT(A) though reversed by the ITAT. The High Court also upheld the claim of the assessee (see (CIT v. Meghalaya Steels Ltd. [2013] 356 ITR 235). On appeal by the department to the Supreme Court HELD dismissing the appeal:

(i) A series of decisions have made a distinction between “profit attributable to” and “profit derived from” a business. In one of the early judgments, namely, Cambay Electric Supply Industrial Company Limited v. Commissioner of Income Tax, Gujarat II, (1978) 2 SCC 644, this Court had to construe Section 80-E of the Income Tax Act, which referred to profits and gains attributable to the business of generation or distribution of electricity. This Court held that it cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”.

(ii) In Liberty India v. Commissioner of Income Tax 317 ITR 218 (SC)/ 2009 (9) SCC 328, what this Court was concerned with was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralize the incidence of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself.

(iii) As regards CIT v. Dharampal Premchand Ltd 317 ITR 353 (Del) from which an SLP preferred in the Supreme Court was dismissed, this judgment also concerned itself with Section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB of the Act.

(iv) As regards the contention that as the subsidies that are received by the assessee would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act, it is not correct 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”.

(Liberty India v. Commissioner of Income Tax reported in 2009 (9) SCC 328, Supriya Gill v. CIT (2010) 193 Taxman 12 (Himachal Pradesh), CIT v. Sterling Foods, 237 ITR 579 (1999), Jai Bhagwan Oil and Flour Mills v. Union of India and Others (2009) 14 SCC 63, Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax, A.P. – I, Hyderabad, (1997) 7 SCC 764 C.I.T. v. Cement Manufacturing Company Limited, and CIT v. Dharampal Premchand Ltd., 317 ITR 353 referred).