TaxTMI 
TaxTMI 
2009 (10) TMI 10
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....l for respondents in ITA Nos.2 of 2005 and 56 of 2006. Mr. K.D. Sood, counsel for respondents in ITA Nos. 65 of 2006 and 66 of 2006. None for the respondents in ITA Nos. 75 of 2006 and 4 of 2007. JUDGMENT The judgment of the court was delivered by Deepak Gupta, J. - These appeals are being disposed of by a single judgment as the question of law involved in all the appeals is the same and reads as follows: "1.Whether the ITAT was right in law in holding that 'Freight Subsidy' received from the Govt. by the assessee is allowed to be included as profits derived from the industrial undertaking and eligible for deduction under Section 80-1A of the Income Tax Act, 1961, when it has been clearly laid down by the Supreme Court in its decision in the case of CIT vs. Cambay Electric supply Industrial Co. Ltd., 113 ITR 84 that the words "derived from" referred to in the section 80-1A has narrower meaning than "attributable to" and the freight subsidy cannot be treated as profits 'derived' from the industrial undertaking though it may be 'attributable' to the industrial undertaking?" It would be pertinent to mention that we are concerned with the assessment relating to the....
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....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 Government whereby freight/transport subsidy is provided to the industries set-up in remote areas where rail facilities are not available and some percentage of the transport expenses incurred by the industrial undertakings to transport raw material to the factory and to transport finished goods from their industries is subsidized by the Central Government. The question which arises....
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.... 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 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 de....
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.... 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 amount received for sale of import entitlement was income derived from business. The Apex Court held as follows: "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 Export Promotion Scheme of the Central Government where under the export entitlements become available. ....
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....e 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, LibertyIndia vs. Commissioner of Income-tax, (2007) 293 ITR 520 & Commissioner of Income-tax vs. Five Star Rugs, (1007) 293 ITR 553, was dealing with the question as to whether duty drawbacks received by an assessee could be said to be derived from the profits and gains of the industrial undertaking. Following the judgment of the Apex Court in Sterling Foods case , the Punjab and Haryana High Court held that the income of the assessee from duty draw back cannot be said to be income derived f....
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....tracts 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 mentioned in sub-sections (3) to (11A) [as they stood at the relevant time]. One more aspect needs to be highlighted. Each of the eligible business in subsections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concept of "Segment Reporting" stands introduced in the Indian Accounting Standards (IAS) by the Institute of Chartered Accountants of India (ICAI). 14. Analysing Chapter VI-A, we find t....