2022 (7) TMI 498 - HC - Income Tax

Court rules VAT remission as business income eligible for deduction under Income Tax Act

COMMISSIONER OF INCOME TAX, CENTRAL-2, KOLKATA Versus M/s. BARAK VALLEY CEMENTS LTD.

The High Court held that Value Added Tax (VAT) remission qualifies as a business receipt under Section 80IC of the Income Tax Act, constituting business ... Deduction u/s 80IC - whether the remission of Value Added Tax (VAT) extended to the respondent/assessee pursuant to a scheme formulated by the State Government can be claimed as a deduction under Section 80IC ? - HELD THAT:- the facts of the case in Merinoply & Chemicals Ltd. [1993 (8) TMI 29 - CALCUTTA HIGH COURT] are more or less identical to the case on hand. In the said case the assessee was a manufacturer of plywood and has its unit in a backward area and was entitled to certain benefits under a scheme formulated by the State Government. However, on facts, the assessee therein claimed the transport expenditure to be incidental expenditure of the assessee’s business and while considering the said plea, it was pointed out that the subsidy recoups and that the purpose of recoupment is to make up the possible profit for operating in a backward area and the subsidises were inseparably connected with the profitable conduct of the business and, therefore, the assessee was entitled to the benefit of Section 80IC - The Hon’ble Supreme Court in Meghalaya Steels Ltd. (supra) held that the decision in Merinoply & Chemicals Ltd. [1993 (8) TMI 29 - CALCUTTA HIGH COURT] correctly appreciated the legal position. Undisputed facts of the case on hand is that the assessee had set up their business in a backward area. Consequently, they were entitled to the benefit of a scheme under which the assessee upon collection of VAT from the customer on sale is entitled to a remission of 99 per cent as issued by the Commercial Tax Department. This remission obviously is a business receipt because the assessee is allowed to retain the amount for the growth of the business and, therefore, the VAT remission in the hands of undertaking is very much business income. The Hon’ble Supreme Court in Sahney Steel and Press Works Ltd. [1997 (9) TMI 3 - SUPREME COURT] pointed out that when subsidy is given for the purpose of operating an industry more profitably, the subsidy would be revenue receipt and being revenue receipt, it has to be taxed in accordance with law meaning thereby that the profits and gains derived from or derived by, an industrial undertaking in a case, where operational cost is reduced by providing subsidy, in any form, the profits and gains earned, because of such subsidy, would be eligible for deduction under Section 80IC or 80IB, as the case may be. Hon’ble Supreme Court in CIT Vs. Rajaram Maize Products [2001 (8) TMI 13 - SC ORDER] and CIT Vs. Eastern Electro Chemcial Industry [1999 (8) TMI 921 - SC ORDER] held that when a subsidy granted by the Court, is operational in nature, which helps in generation of profits for any industrial undertaking, such a profit, is indeed, covered by the provisions embodied under Section 80IB or 80IC of the Act. In the light of the above discussions, we are of the view that the tribunal had rightly allowed the appeals filed by the assessee and no grounds have been made out to interfere with the said order. Accordingly, the appeal fails and the same is dismissed and the substantial questions of law are answered against the revenue. Issues:1. Eligibility of VAT remission for deduction under Section 80IC of the Income Tax Act, 1961.2. Interpretation of previous decisions regarding VAT remission for deduction under Section 80IC.3. Applicability of subsidy-related decisions to the case of VAT remission.Issue 1: Eligibility of VAT remission for deduction under Section 80IC:The appeal questioned whether remission of Value Added Tax (VAT) could be claimed as a deduction under Section 80IC of the Income Tax Act. The tribunal had allowed the deduction based on the contention that VAT remission formed part of the profits of the eligible unit. The appellant argued that VAT remission should not be considered profit derived from an industrial undertaking. The High Court referred to the Supreme Court's decision in Commissioner of Income Tax Vs. Meghalaya Steels Ltd., which clarified that subsidies operational in nature, reducing operational costs and leading to increased profits, are eligible for deduction under Section 80IC. The court found that the VAT remission in this case was a business receipt, allowing the assessee to retain the amount for business growth, hence constituting business income.Issue 2: Interpretation of previous decisions regarding VAT remission:The appellant relied on the decision in Liberty India Vs. CIT, arguing that VAT remission is not directly related to the business of an industrial undertaking. However, the court distinguished this argument by emphasizing that VAT remission, unlike export incentives, is directly linked to business income as it allows the assessee to retain a portion of VAT collected from customers. The court also referenced the decision in Merinoply & Chemicals Ltd. Vs. CIT, which upheld that subsidies connected with the profitable conduct of a business are eligible for deduction under Section 80IC. The court found similarities between the facts of the present case and the Merinoply case, supporting the allowance of VAT remission as a deduction under Section 80IC.Issue 3: Applicability of subsidy-related decisions to VAT remission:The court addressed the appellant's reliance on the case of Commissioner of Income Tax, Patiala Vs. M/s. H.M. Steels Ltd., which involved a sales tax rebate. The court distinguished VAT remission from a rebate on sales tax, highlighting the difference in the schemes. Additionally, the court referred to the decision in Sahney Steel and Press Works Ltd. Vs. CIT, emphasizing that subsidies aimed at operating an industry more profitably are considered revenue receipts eligible for deduction under Section 80IC. The court concluded that the tribunal had correctly allowed the appeals filed by the assessee, dismissing the appeal and answering the substantial questions of law against the revenue.This detailed analysis of the judgment provides a comprehensive overview of the issues involved and the court's reasoning in deciding the appeal related to VAT remission and its eligibility for deduction under Section 80IC of the Income Tax Act, 1961.