CIT vs. Meghalaya Steels Ltd (Supreme Court)

DATE: March 9, 2016 (Date of pronouncement)
DATE: March 12, 2016 (Date of publication)
AY: 2004-05
FILE: Click here to download the file in pdf format
S. 80-IB(4): Subsidies (such as transport subsidy, Interest subsidy and power subsidy) paid to the assessee with the object of reducing the cost of production constitutes "profits derived from the business of the industrial undertaking" and is eligible for deduction u/s 80-IB. Liberty India 317 ITR 218 (SC) is distinguishable on facts

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).

4 comments on “CIT vs. Meghalaya Steels Ltd (Supreme Court)
  1. vinay kumar singh says:

    very helpful

  2. Arun Verma says:

    Very helpful decision and would reduce litigation to a great extent. Whether the principles laid down in this decision can be extended to receipt of sale of Certified Emission Reduction Units (carbon credits) by power generating companies since the same emanate from the business of power generation. These units are inextricably linked to power generation. If no power generated, no such units are granted. Please advise.

  3. Right judgement indeed by hon SC, interesting mr chidambaram is the advocate, good show chiddhu.

  4. I can say with certainty that revenue officers are very poor in understanding English Language, hence all trouble, so unnecessary work load falls in Supreme court,

    by the very meaning ‘cash assistance’ it is some obvious loss the producer incurred, if not why govt need to give so called ‘cash assistance’ sir,

    I was listening to Mr Hamid Ansari great lecture to Allahabad High court recently, where in he said how to reduce the pending cases, by saying in those days the judges gave ‘short, sweet, brief’ orders, if that way it is given what these great revenue worthies can understand, when they cannot differentiate with cash and ‘assistance’!

    Obviously, court need to warn the revenue , ‘if you fellows cannot understand simple English Language in your tax laws, better hire competent English to your vernacular language interpreters at t of the cost of the government of india, instead waste the court time as also the tax payers and money by way of litigation fees, if next time same occurs govt need to meet the litigation fees of the tax payers too.

    such wringing in would perhaps help these revenue worthies understand what court means;

    i am sad what kind of government we got from this great democracy in fact it sounds ‘democrazy’!

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