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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.7622 OF 2014

COMMISSIONER OF INCOME TAX        …APPELLANT               

VERSUS

M/S. MEGHALAYA STEELS LTD.        …RESPONDENT

WITH

CIVIL APPEAL NO.8493 OF 2012 CIVIL APPEAL NO.8494 OF 2012 CIVIL APPEAL NO.8496 OF 2012 CIVIL APPEAL NO.2560 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.36578 OF 2013) CIVIL APPEAL NO.2561 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.36579 OF 2013) CIVIL APPEAL NO.2562 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.36581 OF 2013) CIVIL APPEAL NO.2563 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.37831 OF 2013) CIVIL APPEAL NO.2564 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.37833 OF 2013) CIVIL APPEAL NO.2565 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.37834 OF 2013) CIVIL APPEAL NO.2566 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.6867 (CC 224/2014) CIVIL APPEAL NO.2567 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.6869 (CC 1543/2014)

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CIVIL APPEAL NO.2568 OF 2016 (ARISING OUT OF SLP (CIVIL) NO.11094 OF 2014)

CIVIL APPEAL NO.2569 OF 2016 (ARISING OUT OF SLP (CIVIL) NO.11095 OF 2014)

CIVIL APPEAL NO.2570 OF 2016 (ARISING OUT OF SLP (CIVIL) NO.12710 OF 2014)

CIVIL APPEAL NO.3624 OF 2015 CIVIL APPEAL NO.2571 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.24620 OF 2014) CIVIL APPEAL NO.2572 OF 2016

(ARISING OUT OF SLP (CIVIL) NO.11319 OF 2015) CIVIL APPEAL NO.3623 OF 2015 CIVIL APPEAL NO.5238 OF 2015 CIVIL APPEAL NO.5239 OF 2015 CIVIL APPEAL NO.5236 OF 2015 CIVIL APPEAL NO.6040 OF 2015 CIVIL APPEAL NO.6039 OF 2015 CIVIL APPEAL NO.7623 OF 2014 CIVIL APPEAL NO.7624 OF 2014

J U D G M E N T  

R.F. Nariman, J.

1. Delay condoned in filing the special leave petitions.

2. Leave granted in SLP (C) Nos. 36578/2013, 36579/2013,  

36581/2013,  37831/2013,  37833/2013,  37834/2013,  SLP(C)  

No.………CC  No.224/2014),  SLP(C)  No.………CC  

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No.1543/2014),  SLP(C)  Nos.11094/2014,  11095/2014,  

12710/2014, 24620/2014, 11319/2015.

3. This group of appeals arises from the State of Meghalaya  

and concerns deductions to be made under Sections 80-IB and  

80-IC of the Income Tax Act, 1961.  Civil Appeal No.7622 of  

2014 has been treated as the lead matter in which a judgment  

of the Gauhati High Court dated 29.5.2013 has been delivered,  

which has been followed in all the other appeals.  

4. Civil  Appeal  No.7622  of  2014  concerns  itself  with  two  

income tax appeals filed by the Revenue against the judgment  

of the Income Tax Appellate Tribunal, ITA No.7/2010 arising out  

of the applicability of Section 80-IB, and ITA No.16/2011 arising  

out  of  the applicability of  Section 80-IC.  For the purpose of  

these  matters,  the  facts  in  ITA  No.7/2010  are  narrated  

hereinbelow.  

5. The  respondent  is  engaged  in  the  business  of  

manufacture  of  Steel  and  Ferro  Silicon.  On  9.10.2014,  the  

Respondent submitted its return of income for the year 2004-

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2005  disclosing  an  income  of  Rs.2,06,970/-  after  claiming  

deduction under Section 80-IB of the Income Tax Act on the  

profits  and  gains  of  business  of  the  respondent’s  industrial  

undertaking.   The  respondent  had  received  the  following  

amounts on account of subsidies:-

Transport subsidy - Rs.2,64,94,817.00

Interest subsidy - Rs.2,14,569.00

Power subsidy - Rs.7,00,000.00

Total - Rs.2,74,09,386.00

6. The  Assessing  Officer,  in  the  assessment  order  dated  

7.12.2006, 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  respondent’s  claim  for  deduction  of  an  amount  of  

Rs.2,74,09,386/-  on  account  of  the  three  subsidies  afore-

mentioned  were  disallowed.   The  respondent-assessee  

preferred an appeal before the Commissioner of Income Tax  

(Appeals),  Guwahati,  who,  vide  his  order  dated  8.3.2007,  

dismissed  the  appeal  of  the  respondent.   Aggrieved  by  the  

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aforesaid order, the respondent preferred an appeal before the  

ITAT which, by its order dated 19.3.2010, allowed the appeal of  

the respondent.  The Revenue carried the matter thereafter to  

the High Court, under Section 260A of the Act, which resulted  

in the impugned judgment dated 29.5.2013, which decided the  

matter against the Revenue.  Revenue is therefore before us in  

appeal against this judgment.  

7. Shri  Radhakrishnan, learned senior advocate appearing  

on behalf of the Revenue, argued before us that any amount  

received by way of subsidy was an amount whose source was  

the Government  and not  the business of  the assessee.   He  

further argued that there is a world of difference between the  

expression profits and gains “derived from” any business, and  

profits “attributable to” any business, and that since the section  

speaks of profits and gains “derived from” any business, such  

profits and gains must have a close and direct nexus with the  

business of  the assessee.  Subsidies that  are  allowed to the  

assessee have no close and direct nexus with the business of  

the assessee but have a close and direct  nexus with grants  

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from the Government.  This being the case, according to him,  

the respondent  did not  qualify for  deductions under Sections  

80-IB  and  80-IC  of  the  Act.   In  the  course  of  his  lengthy  

submissions,  he  made  reference  to  a  number  of  judgments  

including  the  judgment  reported  as  Liberty  India  v.  

Commissioner of Income Tax reported in 2009 (9) SCC 328,  

which has been followed by the Himachal Pradesh High Court  

in  Supriya  Gill  v.  CIT (2010)  193  Taxman  12  (Himachal  

Pradesh).   He  submitted  that  the  aforesaid  judgment  of  the  

Himachal  Pradesh  High  Court  has  taken  a  diametrically  

opposite  view  to  the  judgment  of  the  Gauhati  High  Court,  

impugned in the present appeals, and deserves to be followed,  

as  it,  in  turn,  has  followed  Liberty  India’s  judgment  and  

another Supreme Court judgment reported as  CIT v. Sterling  

Foods, 237 ITR 579 (1999).  He also relied upon Sections 80-A  

and 80-AB in order to demonstrate the scheme of deductions  

allowable  under  Part-VI-A  of  the  Income  Tax  Act.   He  also  

referred us to Sections 56 and 57 (iii) of the Act to buttress his  

submission that subsidies being in the nature of   “income from  

other sources” could not be allowed to be deducted from profits  

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and gains of business, which fell under a different sub-heading  

in  Section  14  of  the  Act.   According  to  him,  there  is  one  

interpretation  and  one  interpretation  alone  of  Sections  80-IB  

and 80-IC, which cannot be deviated from with reference to any  

so-called object of the said sections.  

8.  Countering  these  submissions,  Shri  P.  Chidambaram  

Learned Senior Counsel appearing on behalf of the assessee,  

referred to the Budget Speech of  the Minister of  Finance for  

1999-2000 to buttress his  submission that  the idea of  giving  

these subsidies was to give a 10 year tax holiday to those who  

come from outside Meghalaya to set up industries in that State,  

which is a backward area.  He referred to several judgments,  

including the judgment reported in Jai Bhagwan Oil and Flour  

Mills v. Union of India and Others (2009) 14 SCC 63 and  

Sahney  Steel  and Press  Works  Ltd.  v.  Commissioner  of  

Income  Tax,  A.P.  -  I,  Hyderabad, (1997)  7  SCC  764  to  

buttress his submission that subsidies were given only in order  

that items which would go into the cost of manufacture of the  

products made by the respondent should be reduced, as these  

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subsidies  were  reimbursement  for  either  the  entire  or  partial  

costs  incurred  by  the  respondent  towards  transporting  raw  

materials to its factory and transporting its finished products to  

dealers,  who then sell  the finished products.  Further,  power  

subsidy,  interest  subsidy  and  insurance  subsidy  were  also  

reimbursed, either wholly or partially, power being a necessary  

element  of  the  cost  of  manufacture  of  the  respondent’s  

products,  and  insurance  subsidy  being  necessary  to  defray  

costs  for  both  manufacture  and  sale  of  the  said  products.  

Further,  interest  subsidy would also go towards reducing the  

interest  element  relatable  to  cost,  and  therefore  all  four  

subsidies being directly relatable to cost of manufacture and/or  

sale  would  therefore  necessarily  fall  within  the  language  of  

Sections 80-IB and 80-IC, as they are components of cost of  

running a business from which profits and gains are derived.  

He  sought  to  distinguish  the  judgments  cited  by  Shri  

Radhakrishnan,  in  particular  the  judgment  of  this  Court  in  

Liberty India, on the ground that the said judgment did not deal  

with a subsidy relatable to cost of manufacture but dealt with a  

DEPB drawback scheme, which related to export of goods and  

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not manufacture of goods, thereby rendering the said decision  

inapplicable to the facts of the present case.  Shri S. Ganesh,  

learned  senior  counsel  appearing  on  behalf  of  some  of  the  

respondent-assessees,  reiterated  the  submissions  made  by  

Shri P. Chidambaram and added that as all the subsidies went  

towards  cost  of  manufacture  or  sale  of  the  products  of  the  

respondent, such subsidies being amounts of cost which were  

actually incurred by the respondent and thereafter reimbursed  

by the State, the principle of netting off recognized in several  

decisions of this Court ought to be applied, and on application  

of the said principle, it is clear that the subsidy received by the  

respondent  was  only  to  depress  cost  of  manufacture  and/or  

sale and would therefore be “derived from” profits and gains  

made from the business of the assessee.  He also relied upon a  

judgment of the Calcutta High Court dated 15.1.2015, in C.I.T.  

v.  Cement  Manufacturing  Company  Limited, which  has  

followed the Gauhati High Court, and a judgment of the Delhi  

High Court  in  CIT v.  Dharampal  Premchand Ltd.,  317 ITR  

353.  

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9. We have heard learned counsel for the parties.  Before  

embarking on a discussion of the relevant case law, we think it  

is necessary to set out Sections 80-IB and 80-IC insofar as they  

are relevant for the determination of the present case.  

“80-IB Deduction in respect of profits and gains  from certain industrial undertakings other than  infrastructure development undertakings

(1)  Where the gross total  income of  an assessee  includes  any  profits  and  gains  derived  from  any  business  referred  to  in  sub-sections  (3)  to (11),  (11A) and (11B) (such business being hereinafter  referred to as the eligible business), there shall, in  accordance with and subject to the provisions of this  section, be allowed, in computing the total income  of the assessee, a deduction from such profits and  gains of an amount equal to such percentage and  for such number of assessment years as specified  in this section.

(2) This section applies to any industrial undertaking  which fulfils all the following conditions, namely:- (i)  it  is  not  formed  by  splitting  up,  or  the  reconstruction, of a business already in existence: Provided  that  this  condition  shall  not  apply  in  respect of an industrial undertaking which is formed  as a result of the re-establishment, reconstruction or  revival by the assessee of the business of any such  industrial  undertaking  as  is  referred  to  in  section  33B,  in  the  circumstances  and  within  the  period  specified in that section; (ii) it is not formed by the transfer to a new business  of  machinery  or  plant  previously  used  for  any  purpose;

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(iii) it manufactures or produces any article or thing,  not being any article or thing specified in the list in  the  Eleventh  Schedule,  or  operates  one  or  more  cold storage plant or plants, in any part of India: Provided that the condition in this clause shall,  in  relation to a small scale industrial undertaking or an  industrial undertaking referred to in sub-section (4)  shall apply as if the words "not being any article or  thing specified in the list in the Eleventh Schedule"  had been omitted. Explanation 1- For the purposes of clause (ii), any  machinery or plant which was used outside India by  any person other  than the assessee shall  not  be  regarded as machinery or plant previously used for  any purpose, if the following conditions are fulfilled,  namely:- (a)  such machinery or  plant  was not,  at  any time  previous  to  the  date  of  the  installation  by  the  assessee, used in India; (b) such machinery or plant is imported into India  from any country outside India; and (c)  no  deduction  on  account  of  depreciation  in  respect  of  such  machinery  or  plant  has  been  allowed or is allowable under the provisions of this  Act in computing the total income of any person for  any period prior to the date of the installation of the  machinery or plant by the assessee. Explanation 2-  Where in the case of  an industrial  undertaking,  any  machinery  or  plant  or  any  part  thereof  previously  used  for  any  purpose  is  transferred to a new business and the total value of  the machinery or plant or part so transferred does  not exceed twenty per cent of the total value of the  machinery or plant used in the business, then, for  the purposes of clause (ii)  of this sub-section, the  condition specified therein shall be deemed to have  been complied with; (iv)  in  a  case  where  the  industrial  undertaking  manufactures  or  produces  articles  or  things,  the  undertaking  employs  ten  or  more  workers  in  a  

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manufacturing  process  carried  on  with  the  aid  of  power,  or  employs  twenty  or  more  workers  in  a  manufacturing process carried on without the aid of  power.

(4)  The  amount  of  deduction  in  the  case  of  an  industrial  undertaking  in  an  industrially  backward  State  specified  in  the  Eighth  Schedule  shall  be  hundred per cent of  the profits and gains derived  from such industrial undertaking for five assessment  years beginning with the initial assessment year and  thereafter  twenty-five  per  cent  (or  thirty  per  cent  where the assessee is a company) of the profits and  gains derived from such industrial undertaking: Provided that the total period of deduction does not  exceed  ten  consecutive  assessment  years  (or  twelve  consecutive  assessment  years  where  the  assessee  is  a  co-operative  society)  subject  to  fulfillment  of  the  condition  that  it  begins  to  manufacture  or  produce  articles  or  things  or  to  operate its cold storage plant or plants during the  period beginning on the 1st day of April, 1993 and  ending on the 31st day of March, 2004: Provided further that in the case of such industries  in the North-Eastern Region, as may be notified by  the Central  Government, the amount of  deduction  shall be hundred per cent of profits and gains for a  period of ten assessment years, and the total period  of  deduction shall  in such a case not exceed ten  assessment years.  Provided  also  that  no  deduction  under  this  sub- section shall  be allowed for  the assessment  year  beginning  on  the  1st  day  of  April,  2004  or  any  subsequent  year  to  any undertaking or  enterprise  referred to in sub-section (2) of section 80-IC. Provided  also  that  in  the  case  of  an  industrial  undertaking in the State of Jammu and Kashmir, the  provisions of the first proviso shall have effect as if  for the figures, letters and words 31st day of March,  

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2004,  the  figures,  letters  and  words  31st  day  of  March, 2012 had been substituted: Provided  also  that  no  deduction  under  this  sub- section shall be allowed to an industrial undertaking  in  the  State  of  Jammu  and  Kashmir  which  is  engaged in  the manufacture or  production of  any  article or thing specified in Part C of the Thirteenth  Schedule.”

“80-IC Special  provisions in respect  of certain  undertakings  or  enterprises  in  certain  special  category States

(1)  Where the gross total  income of  an assessee  includes  any  profits  and  gains  derived  by  an  undertaking  or  an  enterprise  from  any  business  referred  to  in  sub-section  (2),  there  shall,  in  accordance with and subject to the provisions of this  section, be allowed, in computing the total income  of the assessee, a deduction from such profits and  gains, as specified in sub-section (3).”

10. There  is  no  dispute  between  the  parties  that  the  

businesses referred to in Section 80-IB are businesses which  

are eligible businesses under both the aforesaid Sections.  The  

parties  have  only  locked  horns  on  the  meaning  of  the  

expression “any profits and gains derived from any business”.  

11. The aforesaid  provisions  were  inserted  by  the  Finance  

Act 1999 with effect from 1.4.2000. The Finance Minister in his  

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budget speech for the year 1999-2000 spoke about industrial  

development in the North Eastern Region as follows:-

“Mr. Speaker, Sir, I am conscious of the fact that,  despite  all  our  announcements,  the  industrial  development in North Eastern Region has not come  up to our expectations.  To give industrialisation a  fillip in this area of the country, I propose a 10 year  tax  holiday  for  all  industries  set  up  in  Growth  Centres,  Industrial  Infrastructure  Development  Corporations, and for other specified industries, in  the  North  Eastern  Region.  I  would  urge  the  industrial entrepreneurs from this part of the country  to  seize the opportunity  and set  up modern,  high  value added manufacturing units in the region.”

12. The reference to the 10 year tax holiday for the industries  

set up in the North Eastern Region is an obvious reference to  

the second proviso to sub-section (4) of Section 80-IB set out  

hereinabove.  The speech of  a Minister  is  relevant insofar  it  

gives  the  background  for  the  introduction  of  a  particular  

provision in the Income Tax Act. It is not determinative of the  

construction of the said provision, but gives the reader an idea  

as  to  what  was  in  the  Minister’s  mind  when  he  sought  to  

introduce the said provision.  As an external aid to construction,  

this  Court  has,  in  K.P.  Varghese  v.  Income  Tax  Officer,  

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Ernakulam  and  Anr., (1982)  1  SCR  629,  referring  to  a  

Minister’s speech piloting a Finance Bill, stated as under:-

“Now  it  is  true  that  the  speeches  made  by  the  Members  of  the  Legislature  on  the  floor  of  the  House when a Bill for enacting a statutory provision  is being debated are inadmissible for the purpose of  interpreting the statutory provision but  the speech  made by the Mover of the Bill explaining the reason  for  the  introduction  of  the  Bill  can  certainly  be  referred  to  for  the  purpose  of  ascertaining  the  mischief  sought  to  be remedied by the legislation  and the object and purpose for which the legislation  is enacted. This is in accord with the recent trend in  juristic  thought  not  only  in  Western  countries  but  also in India that interpretation of a statute being an  exercise  in  the  ascertainment  of  meaning,  everything  which  is  logically  relevant  should  be  admissible. In fact there are at least three decisions  of  this  Court,  one  in  Loka  Shikshana  Trust  v.  Commissioner  of  Income-Tax  [1975]  101  ITR  234(SC) the other in Indian Chamber of Commerce  v.  Commissioner  of  Income-tax  [1975]  101  ITR  796(SC) and the third in Additional Commissioner of  Income-tax  v.  Surat  Art  Silk  Cloth  Manufacturers  Association [1980] 121 ITR 1(SC) where the speech  made by the Finance Minister while introducing the  exclusionary clause in Section 2 Clause (15) of the  Act was relied upon by the Court for the purpose of  ascertaining  what  was  the  reason  for  introducing  that  clause.  The  speech  made  by  the  Finance  Minister  while  moving  the  amendment  introducing  Sub-section  (2)  clearly  states  what  were  the  circumstances in which Sub-section (2) came to be  passed, what was the mischief for which Section 52  as  it  then  stood  did  not  provide  and  which  was  sought  to  be remedied by the enactment  of  Sub- section (2) and why the enactment of Sub-section  

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(2)  was  found necessary.  It  is  apparent  from the  speech of the Finance Minister that Sub-section(2)  was  enacted  for  the  purpose  of  reaching  those  cases  where  there  was  under-statement  of  consideration in respect of the transfer or to put it  differently, the actual consideration received for the  transfer was 'considerably more' than that declared  or  shown  by  the  assessee,  but  which  were  not  covered by Sub-section (1) because the transferee  was  not  directly  or  indirectly  connected  with  the  assessee. The object  and purpose of  Sub-section  (2),  as explicated from the speech of the Finance  Minister, was not to strike at honest and bonafide  transactions where the consideration for the transfer  was correctly disclosed by the assessee but to bring  within the net of taxation those transactions where  the  consideration  in  respect  of  the  transfer  was  shown at a lesser figure than that actually received  by the assessee,  so that  they do not  escape the  charge of tax on capital gains by under-statement of  the consideration. This was real object and purpose  of  the  enactment  of  Sub-section  (2)  and  the  interpretation of this sub-section must fall in line with  the advancement  of  that  object  and purpose.  We  must therefore accept as the underlying assumption  of Sub-section (2) that there is under-statement of  consideration  in  respect  of  the  transfer  and  Sub- section  (2)  applies  only  where  the  actual  consideration  received  by  the  assessee  is  not  disclosed and the consideration declared in respect  of the transfer is shown at a lesser figure than that  actually received.”

13. 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  

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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:

“As  regards  the  aspect  emerging  from  the  expression "attributable to" occurring in the phrase  "profits and gains attributable to the business of" the  specified industry (here generation and distribution  of electricity) on which the learned Solicitor General  relied,  it  will  be  pertinent  to  observe  that  the  Legislature  has  deliberately  used  the  expression  "attributable  to"  and  not  the  expression  "derived  from".  It  cannot  be  disputed  that  the  expression  "attributable to" is certainly wider in import than the  expression  "derived  from".  Had  the  expression  "derived from" been used it could have with some  force  been  contended  that  a  balancing  charge  arising from the sale of old machinery and buildings  cannot  be  regarded  as  profits  and  gains  derived  from the conduct of the business of generation and  distribution of electricity. In this connection it may be  pointed out that whenever the Legislature wanted to  give a restricted meaning in the manner suggested  by  the  learned  Solicitor  General  it  has  used  the  expression "derived from", as for instance in s. 80J.  In  our  view since the expression of  wider  import,  namely,  "attributable  to”  has  been  used,  the  Legislature intended to cover receipts from sources  other  than  the  actual  conduct  of  the  business  of  generation and distribution of electricity.” (Para 8)

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14. In  Commissioner  Of  Income  Tax,  Karnataka  v.  

Sterling Foods, Mangalore, (1999) 4 SCC 98, this Court had  

to decide whether income derived by the assessee by sale of  

import entitlements on export being made, was profit and gain  

derived  from  the  respondent’s  industrial  undertaking  under  

Section 80HH of the Indian Income Tax Act. This Court referred  

to  the  judgment  in  Cambay  Electric  Supply  (supra)  and  

emphasized  the  difference  between  the  wider  expression  

“attributable to” as contrasted with “derived from”.  In the course  

of the judgment, this Court stated that the industrial undertaking  

itself had to be the source of the profit.  The business of the  

industrial  undertaking had directly  to  yield  that  profit.  Having  

said this, this Court finally held:-

“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  Govt.  whereunder  the  export  entitlements  become available. There must be for the application  of the words "derived from", a direct nexus between  the profits and gains and the industrial undertaking.  In the instant case the nexus is not direct but only  incidental.  The  industrial  undertaking  exports  processed sea food. By reason of such export, the  Export Promotion Scheme applies. Thereunder, the  

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assessee is entitled to import entitlements, which it  can sell.  The sale consideration therefrom cannot,  in our view, be held to constitute a profit and gain  derived from the assessees' industrial undertaking.”  (Para 13)

15. Similarly,  in  Pandian  Chemicals  Limited  v  

Commissioner of Income Tax, 262 ITR 278, this Court dealt  

with the claim for a deduction under Section 80HH of the Act.  

The  question  before  the  Court  was  as  to  whether  interest  

earned on a deposit  made with  the Electricity  Board for  the  

supply  of  electricity  to  the  appellant’s  industrial  undertaking  

should  be  treated  as  income  derived  from  the  industrial  

undertaking under Section 80HH.  This Court held that although  

electricity  may be required for  the purposes of  the industrial  

undertaking,  the  deposit  required  for  its  supply  is  a  step  

removed from the business of the industrial undertaking.  The  

derivation  of  profits  on  the  deposit  made with  the  Electricity  

Board  could  not  be  said  to  flow  directly  from  the  industrial  

undertaking itself.   On this basis,  the appeal was decided in  

favour of Revenue.  

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16. The sheet  anchor of  Shri  Radhakrishnan’s submissions  

is the judgment of this Court in Liberty India v. Commissioner  

of Income Tax, (2009) 9 SCC 328.  This was a case referring  

directly  to  Section  80-IB  in  which  the  question  was whether  

DEPB credit or Duty drawback receipt could be said to be in  

respect of profits and gains derived from an eligible business.  

This Court first  made the distinction between “attributable to”  

and “derived from” stating that the latter expression is narrower  

in  connotation as compared to the former.  This court  further  

went on to state that  by using the expression “derived from”  

Parliament  intended  to  cover  sources  not  beyond  the  first  

degree.  This Court went on to hold:-

“34.  On an 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  such  industrial undertaking after specified date(s). Hence,  apart  from  eligibility,  sub-section  (1)  purports  to  restrict  the  quantum  of  deduction  to  a  specified  percentage of profits. This is the importance of the  words  "derived  from  industrial  undertaking"  as  against  "profits  attributable  to  industrial  undertaking".

35.  DEPB is  an  incentive.  It  is  given  under  Duty  Exemption Remission Scheme. Essentially, it is an  

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export incentive. No doubt, the object behind DEPB  is  to  neutralize  the  incidence  of  customs  duty  payment  on the import  content  of  export  product.  This  neutralization  is  provided  for  by  credit  to  customs duty against export product. Under DEPB,  an exporter may apply for credit as percentage of  FOB  value  of  exports  made  in  freely  convertible  currency. Credit is available only against the export  product and at rates specified by DGFT for import of  raw materials, components etc.. DEPB credit under  the  Scheme  has  to  be  calculated  by  taking  into  account  the deemed import  content  of  the export  product  as  per  basic  customs  duty  and  special  additional duty payable on such deemed imports.  

36.  Therefore,  in  our  view,  DEPB/Duty  Drawback  are incentives which flow from the Schemes framed  by  Central  Government  or  from  S.  75  of  the Customs Act, 1962, hence, incentives profits are  not profits derived from the eligible business under  Section  80-IB.  They  belong  to  the  category  of  ancillary profits of such Undertakings.” (Paras 34,35  and 36)

17. An analysis of all the aforesaid decisions cited on behalf  

of the Revenue becomes necessary at this stage.  In the first  

decision,  that  is  in  Cambay  Electric  Supply  Industrial  

Company Limited v Commissioner of Income Tax, Gujarat  

II, this Court held that since an expression of wider import had  

been used, namely “attributable to” instead of “derived from”,  

the legislature intended to cover  receipts from sources other  

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than  the  actual  conduct  of  the  business  of  generation  and  

distribution of  electricity.   In  short,  a  step removed from the  

business of the industrial undertaking would also be subsumed  

within the meaning of the expression “attributable to”. Since we  

are directly concerned with the expression “derived from”, this  

judgment  is  relevant  only  insofar  as  it  makes  a  distinction  

between  the  expression  “derived  from”,  as  being  something  

directly from, as opposed to “attributable to”, which can be said  

to include something which is indirect as well.  

18. The  judgment  in  Sterling  Foods lays  down  a  very  

important test in order to determine whether profits and gains  

are derived from business or an industrial  undertaking.  This  

Court has stated that there should 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  

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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  

the Government gave them and that, therefore, the immediate  

source  not  being  from  the  business  of  the  assessee,  the  

element  of  directness  is  missing.   We are  afraid  we cannot  

agree.  What is to be seen for the applicability of Sections 80-IB  

and 80-IC is whether the profits and gains are derived from the  

business.  So long as profits and gains emanate directly from  

the business itself,  the fact that  the immediate source of  the  

subsidies is the Government would make no difference, as it  

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cannot be disputed that the said subsidies are only in order to  

reimburse,  wholly  or  partially,  costs  actually  incurred  by  the  

assessee in the manufacturing and selling of its products. The  

“profits and gains” spoken of by Sections 80-IB and 80-IC have  

reference to net profit.  And net profit can only be calculated by  

deducting from the sale price of an article all elements of cost  

which go into manufacturing or selling it.  Thus understood, it is  

clear that profits and gains are derived from the business of the  

assessee,  namely  profits  arrived  at  after  deducting  

manufacturing  cost  and  selling  costs  reimbursed  to  the  

assessee by the Government concerned.  

19. Similarly, the judgment in Pandian Chemicals Limited v  

Commissioner  of  Income  Tax is  also  distinguishable,  as  

interest  on a deposit  made for  supply of  electricity  is  not  an  

element of  cost  at  all,  and this being so,  is therefore a step  

removed from the business of the industrial undertaking.  The  

derivation of profits on such a deposit made with the Electricity  

Board  could  not  therefore  be  said  to  flow  directly  from  the  

industrial undertaking itself, unlike the facts of the present case,  

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in  which,  as  has  been  held  above,  all  the  subsidies  

aforementioned went towards reimbursement of actual costs of  

manufacture and sale of  the products of  the business of  the  

assessee.  

20. Liberty India being the fourth judgment in this line also  

does not help Revenue.  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  

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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 Merino Ply & Chemicals Ltd.  

v. CIT, 209 ITR 508 [1994], 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  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  deficit  for  operating  in  a  backward  area.  Therefore, it is beyond all manner of doubt that the  subsidies  were  inseparably  connected  with  the  profitable conduct of the business and in arriving at  such a decision on the facts the Tribunal committed  no error.”

22. However,  in  CIT v.  Andaman Timber Industries Ltd.,  

242 ITR 204 [2000], the same High Court arrived at an opposite  

conclusion in considering whether a deduction was allowable  

under Section 80HH of the Act in respect of transport subsidy  

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without  noticing  the  aforesaid  earlier  judgment  of  a  Division  

Bench of that very court.  A Division Bench of the Calcutta High  

Court in  C.I.T. v. Cement Manufacturing Company Limited,  

by a judgment dated 15.1.2015, distinguished the judgment in  

CIT  v.  Andaman  Timber  Industries  Ltd.  and  followed  the  

impugned judgment of the Gauhati High Court in the present  

case.  In  a  pithy  discussion  of  the  law  on  the  subject,  the  

Calcutta High Court held:

“Mr. Bandhyopadhyay, learned Advocate appearing  for  the  appellant,  submitted  that  the  impugned  judgment is contrary to a judgment of this Court in  the case of CIT v. Andaman Timber Industries Ltd.  reported in (2000) 242 ITR, 204 wherein this Court  held  that  transport  subsidy  is  not  an  immediate  source  and  does  not  have  direct  nexus  with  the  activity of an industrial undertaking.  Therefore, the  amount  representing  such  subsidy  cannot  be  treated  as  profit  derived  from  the  industrial  undertaking.  Mr. Bandhypadhyay submitted that it  is  not  a profit  derived from the undertaking.   The  benefit under section 80IC could not therefore have  been granted.  

He also relied on a judgment of the Supreme court  in  the  case  of  Liberty  India  v.  Commissioner  of  Income Tax, reported in (2009) 317 ITR 218 (SC)  wherein it was held that subsidy by way of customs  duty  draw  back  could  not  be  treated  as  a  profit  derived from the industrial undertaking.  

We have not been impressed by the submissions  advanced by Mr. Bandhyopadhyay.  The judgment  

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of  the  Apex  Court  in  the  case  of  Liberty  India  (supra) was in relation to the subsidy arising out of  customs draw back and duty Entitlement Pass-book  Scheme (DEPB).  Both the incentives considered by  the Apex 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 making the business of production  and  sale  of  goods  in  the  State  more  profitable.”  

23. We are of the view that the judgment in  Merino Ply &  

Chemicals Ltd. and the recent judgment of the Calcutta High  

Court have correctly appreciated the legal position.  

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24. We do not find it necessary to refer in detail to any of the  

other  judgments  that  have  been  placed  before  us.  The  

judgment in Jai Bhagwan case (supra) is helpful on the nature  

of a transport subsidy scheme, which is described as under:

“The object of the Transport Subsidy Scheme is not  augmentation of  revenue, by levy and collection of   tax or duty. The object of the Scheme is to improve  trade and commerce between the remote parts of  the country with other parts, so as to bring about  economic  development  of  remote  backward  regions.  This  was  sought  to  be  achieved  by  the  Scheme,  by  making  it  feasible  and  attractive  to  industrial entrepreneurs to start and run industries in  remote parts, by giving them a level playing field so  that they could compete with their  counterparts in  central (non-remote) areas.  The  huge  transportation  cost  for  getting  the  raw  materials to the industrial unit and finished goods to  the existing market outside the state, was making it  unviable for industries in remote parts of the country  to  compete  with  industries  in  central  areas.  Therefore,  industrial  units  in  remote  areas  were  extended  the  benefit  of  subsidized  transportation.  For  industrial  units  in  Assam  and  other  north- eastern States, the benefit was given in the form of  a subsidy in respect of a percentage of the cost of  transportation  between  a  point  in  central  area  (Siliguri in West Bengal) and the actual location of  the industrial  unit  in  the remote area,  so that  the  industry  could  become  competitive  and  economically viable.” (Paras 14 and 15)

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25. The decision in Sahney Steel and Press Works Ltd. v.  

Commissioner of Income Tax, A.P. - I, Hyderabad (1997) 7  

SCC  764,  dealt  with  subsidy  received  from  the  State  

Government  in  the  form of  refund  of  sales  tax  paid  on  raw  

materials,  machinery,  and  finished goods;  subsidy  on  power  

consumed by the industry; and exemption from water rate.  It  

was held that such subsidies were treated as assistance given  

for the purpose of carrying on the business of the assessee.  

26. We  do  not  find  it  necessary  to  further  encumber  this  

judgment with the judgments 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  CIT v. Dharampal Premchand Ltd., 317 ITR 353 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  

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the purpose of claiming deduction under Section 80-IB of the  

Act.  

28. It only remains to consider one further argument by Shri  

Radhakrishnan.  He has argued that as the subsidies that are  

received  by  the  respondent,  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.  Shri Radhakrishnan is not correct in  

his submission 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  

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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”.   

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  and Liberty  India 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.  

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……………………………J. (Kurian Joseph)

……………………………J. (R.F. Nariman)

New Delhi; March 09, 2016.

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