TaxTMI 
TaxTMI 
2026 (5) TMI 1319
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....Act. During the assessment proceedings, the AO noticed that the assessee had received an amount of Rs. 25,91,626 as "Power Generation Incentive" under the Generation Based Incentive (GBI) scheme of the Central Government, in addition to income from sale of power. The assessee claimed that such incentive formed part of the business income derived from the eligible undertaking and accordingly included the same for deduction u/s 80-IA of the Act. 4. The AO examined the claim of the assessee and observed that the provisions of section 80-IA of the Act allow deduction only in respect of profits and gains directly derived from the eligible undertaking and not for all receipts connected with the business. The AO relied on the distinction between the expressions "derived from" and "attributable to" as laid down by the Hon'ble Supreme Court in the cases of Cambay Electric Supply Co. Ltd. (113 ITR 84), Sterling Foods (237 ITR 53) and Pandian Chemicals Ltd. (262 ITR 278). It was noted that the term "derived from" has a narrow meaning and requires a direct nexus with the business activity, whereas receipts which are only incidental or arise from external sources do not qualify. Applying the....
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....e exists a clear and direct nexus between the business activity and the incentive income. 6.4 It was further submitted that the condition of foregoing accelerated depreciation under the scheme does not change the character of the receipt. This condition is only to avoid double benefit and does not mean that the incentive is not related to the business. The AO has wrongly interpreted this aspect. 6.5 The assessee also distinguished the judicial precedents relied upon by the AO such as Sterling Foods(supra), Pandian Chemicals (supra) and Cambay Electric(supra). It was submitted that those decisions were rendered in the context of different provisions and on different facts, where the income did not have a direct nexus with business activity. In the present case, the incentive is directly linked to generation of electricity and hence those decisions are not applicable. Reliance was placed on judicial precedents including the decision of the Hon'ble Supreme Court in CIT vs. Meghalaya Steels Ltd. reported in 383 ITR 217, wherein it was held that subsidies having a direct nexus with business operations are eligible for deduction. It was submitted that the test of "direct nexus" is ....
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....tion 80HH considered in some of the judgments relied upon by the AO. The assessee further submitted that the condition of not claiming accelerated depreciation was merely to avoid double benefits and did not alter the fact that the incentive emanated from the core business. Reliance was placed on Delhi High Court in CIT v. Eltek SGS (P) Ltd. (300 ITR 6), Bombay High Court in CIT v. Jagdishprasad M. Joshi (318 ITR 420) and Supreme Court in CIT v. Meghalaya Steels Ltd. (383 ITR 217) to argue that Government subsidies linked directly to manufacturing or production are eligible for deduction under sections 80-IB/80-IC, and by parity of reasoning, under section 80-IA. 7.3 I have considered the rival contentions, the scheme under which the GBI was granted, and the judicial authorities cited. It is undisputed that the assessee received the amount in question under the "Generation Based Incentive Scheme" framed by the Ministry of New and Renewable Energy, which was introduced to encourage investment in wind power projects by providing Rs. 0.50 per unit of electricity fed into the grid for a specified period, subject inter alia to the condition that the assessee foregoes accelerate....
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....e Generation Based Incentive is not an income derived from the business of power generation but is a policy-driven incentive granted by the Government. The learned DR contended that the immediate source of the income is the Government scheme and not the business activity of the assessee. It was further argued that the condition of foregoing accelerated depreciation clearly demonstrates that the incentive is linked to policy choices and not to operational profits. The learned DR relied on the decisions of the Hon'ble Supreme Court in Liberty India, Pandian Chemicals, and Sterling Foods to contend that such incentives fall outside the ambit of "derived from" and are only "attributable to" the business. Therefore, the action of the AO in excluding the same from eligible profits was justified. 9. We have heard the rival contentions of both the parties and perused the materials available on record. The short issue for our consideration is whether the "Generation Based Incentive (GBI)" of Rs. 25,91,626/- received by the assessee is eligible for deduction u/s 80-IA of the Act. 9.1 It is an undisputed fact that the assessee is engaged in the business of power generation and is otherw....
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.... with and subject to the provisions of this section, be allowed. 12. It is not in dispute that the rental income is part of the business income of the assessee. The main issue for our consideration is whether the rental income earned by the assessee is derived from the cargo business and thereby eligible for deduction u/s. 80IA. The concept of "income derived from" in contrast to other related concept like "income attributable to" has been a subject matter of discussion in various decision of the Apex Court. Highlights of some of the principles laid down by these judicial pronouncements are - (i) Receipts which are incidental to the actual conduct of the business of industrial undertaking yet the same may not fall within the expression of 'derived from' - Cambay Electrical Supply Co. Ltd. 113 ITR 84 (ii) The nexus between the income and the industrial undertaking was should be direct and not incidental, otherwise it would not fall within the expression 'profits derived from industrial undertaking' - Sterling Foods 237 ITR 53 (SC) & Pandian Chemicals Ltd. 262 ITR 278(SC) (iii) When Section 80-IA/80-IB refers to profits derived from eligible busine....
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....be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an assessee was entitled to import entitlements which it could thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that t....
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....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. 21. The Calcutta High Court in Merinoply & Chemicals Ltd. v. CIT [1994] 209 ITR 508, held that transport subsidies were inseparably connected with the business carried on by the assessee. In that case, the Division Bench held:- "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 expendi....
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....pex Court in the case of Liberty India could be availed after the manufacturing activity was over and exports were made. But, we are concerned in this case with the transport and interest subsidy which has a direct nexus with the manufacturing activity inasmuch as these subsidies go to reduce the cost of production. Therefore, the judgment in the case of Liberty India v. Commissioner of Income Tax has no manner of application. The Supreme Court in the case of Sahney Steel and Press Works Ltd. & Others versus Commissioner of Income Tax, reported in [1997] 228 ITR at page 257 expressed the following views:- ". . . . . Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by m....
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....gments which Shri Ganesh cited on the netting principle. We find it unnecessary to further substantiate the reasoning in our judgment based on the said principle. 27. A Delhi High Court judgment was also cited before us being Dharam Pal Prem Chand Ltd.'s case (supra) 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. 28. *** 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80- IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods (supra) and Liberty India's cases (supra) to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove. 30. All the aforesaid appeals are, therefore, dismissed with no order as to costs." 14. From the plain reading of the above judicial pronouncement of Hon'b....