TaxTMI 
TaxTMI 
2011 (3) TMI 819
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....cannot be treated as profits 'derived' from the industrial undertaking though it may be 'attributable' to the industrial undertaking? 2.Whether the ITAT was right in law holding that 'transport subsidy' was rightly taken into consideration by the assessee in working out the profits and gains of the profits and gains of the business undertaking relying on the decision of Calcutta High Court in the case of Merinoplly & Chemicals Ltd. 209 ITR 508 where the point in issue was whether a receipt on account of transport/freight subsidy was of a revenue nature and was inseparably connected with the business and not whether it was income derived from the business of the industrial undertaking eligible for deduction u/s 80HH/80IA/80IB etc ? 3. Whether the ITAT was right in not appreciating the ratio of judgments of the Madras High Court given in its decision in the cases of CIT as Vishwanathan & Co. 261 ITR 737 which are applicable in this case wherein it has been clearly held that the amounts received on account of cash assistance, duty drawback, import entitlements and air subsidy etc. are not the amounts which form part of the profits and gains 'derived' from the indus....
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....; (7)Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." It would not be out of place to mention that after the amendment made in Section 80-1A by the Finance Act, 1999 w.e.f. 1.4.2000, Section 80-1A was split into two parts and now Section 80-1A applies to undertakings and enterprises engaged in infrastructure development and Section 80-1B applies to other eligible business. The provisions of Section 80-1B are paramateria with Section 80-1A as they previously existed. In the State of Himachal Pradesh there is scarcity of rail net work. A scheme has been framed by the Central Governm....
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....en used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity." Relying on these observations of the Apex court it is contended on behalf of the Revenue that since in Section 80-1A the word 'derived' has been used, the transport subsidy cannot be said to be derived from the business of the industrial undertakings. A Division Bench of the Calcutta High Court dealt with a similar question in Merinoply and Chemicals ltd. vs. Commissioner of Income-tax, (1994) 209 ITR 508. One of the questions before the Calcutta High Court was whether transport subsidies were inseparably connected with the business carried on by the assessee or not. In that case 50% of the transportation cost of raw material and finished goods was paid to the new Units set up in the backward areas. The Court held 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 ....
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....genealogy of the source of the interest income is the deposit and not business, as the industrial undertaking is removed by one step from the source of income for the interest. Hence, the interest income cannot be held to be derived from the industrial undertaking." The Madras High Court had placed reliance on the judgment of the Karnataka High Court in Sterling Foods vs. CIT, (1984) 150 ITR 292. The judgment of the Karnataka High Court was upheld by the Apex Court in Commissioner of Income-Tax vs. Sterling Foods, (1999)237 ITR 579. In this case the assessee had sold the import entitlements and had thus derived profit. The question which arose was whether the receipts from the sale of import entitlements were eligible for relief under Section 80HH. The assessee was engaged in the business of processing prawns and other sea food which it exported. Due to export of items of its products it earned 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 am....
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....ive from" in Section 80HH, we cannot enlarge the scope of benefit intended by the legislature in section 80HH. Profits and gains which are derived from an industrial undertaking are only eligible for deduction under section 80HH. Any incidental income or profit to the business of the assessee or to the income of the industrial undertaking is not entitled or eligible for the benefit of section 80HH. The industrial undertaking should be the direct and immediate source of income for the purpose of deduction under section 80HH. Subsidy or transport subsidy is not the immediate source or have direct nexus with the activity of the industrial undertaking. It is an aid by the Government under the Scheme. Though it is incidental to the activities of the assessee, the source is the Government. Any aid or assistance by the Government to a particular type of industry cannot be treated as profit derived from the industrial undertaking." It would however be pertinent to mention that the Calcutta High court has not noted its earlier Division Bench decision in Merinoply's case. The Punjab and Haryana High Court in two cases, Liberty India vs. Commissioner of Income-tax, (2007) 293 ITR 52....
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....needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Section 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract Section 80-IB(6). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under sub-section (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses men....
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....of Section 80-IA, so far as may be, applicable to the eligible business under Section 80-IB. Therefore, at the outset, we stated that one needs to read Sections 80I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-section(5) of Section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub- section (5) of Section 80- IA, which are also required to be read into Section 80- IB. [see Section 80-IB(13)]. We may reiterate that Sections 80I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of Sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section(2), would be entitled to deduction under sub-section (1) only to the extent of profits derived from su....