Exemption
available under Chapter VI-A in respect of profits of industrial undertakings
is available only in respect of income qualifying the litmus test of “profits
or gain derived from undertaking”. The revenue and assessees have been locking
their horns over the issue of Subsidies for years together as to whether or not
they are covered by term ““profits or gain derived from undertaking”
In this article
while an attempt has been made to construe real meaning of words “profit
derived from”, it also deals with purpose test of subsidy and its relevance
after recent amendments in Finance Act 2015 and Finance Bill 2016.
It will
be relevant to look into the issue through a few court rulings:
1. Cambay Electric Supply Industrial Company
Limited v. Commissioner
of Income Tax, Gujarat II, (1978) 2 SCC 644 (Supreme Court)
In this case 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. It was held that the
expression "attributable to" is certainly wider in import than the
expression "derived from". 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. Whenever the Legislature wanted to
give a restricted meaning it has used the expression "derived from"
to cover receipts from sources other than the actual conduct of the business.
2. Commissioner Of Income Tax, Karnataka v. Sterling
Foods, Mangalore, (1999) 4
SCC 98 (Supreme Court)
The issue is this case was whether income derived by the assessee
undertaking engaged in export of processed sea food by sale of import
entitlements was profit and gain derived from the industrial undertaking . This Court referred to its
judgment in Cambay Electric
Supply (supra) and
emphasized the difference between the wider expression "attributable
to" as contrasted with "derived from". Supreme also stated the
industrial undertaking itself had to be the source of the profit. The business
of the industrial undertaking had directly to yield that profit. Hence the
source of the import entitlements can not 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 assessee is entitled to import
entitlements under export promotion scheme, which it can sell. The sale
consideration therefrom cannot be held to constitute a profit and gain derived
from the assessees' industrial undertaking.
3. Pandian Chemicals Limited v. Commissioner
of Income Tax, 262 ITR 278(Supreme Court)
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. Supreme 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.
4. Liberty India v. Commissioner of Income Tax, (2009) 9 SCC 328(Supreme Court)
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. Again Supreme 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. The court further went on to state that by using the expression
"derived from" Parliament intended to cover sources not beyond the
first degree. DEPB is an incentive. It is given under Duty Exemption Remission
Scheme. Essentially, it is an 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. Therefore 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.
5. Calcutta High Court in Merino Ply & Chemicals Ltd. v. CIT, 209 ITR 508 [1994],
It was held that transport
subsidies were inseparably connected with the business carried on by the
assessee. 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
In CIT v. Andaman
Timber Industries Ltd., 242
ITR 204 [2000], however Calcutta High Court arrived at an opposite conclusion
in considering whether a deduction was allowable under in respect of transport
subsidy without noticing its own judgment in Merino Plywood(supra). 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 Meghalya Steels
which is the subject matter of
discussion in this Article.
6. Sahney Steel and Press Works Ltd. v. Commissioner
of Income Tax, A.P. - I, Hyderabad, (1997) 7 SCC 764 (Supreme Court)
It was held by the apex Court
on power subsidy that 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.
On refund of sales tax it was
held that 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 by
making the business of production and sale of goods in the State more
profitable
7. Delhi High Court in Dharampal Prem Chand 317 ITR 353
It was held by Delhi High
Court 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. SLP of the department against this decisions has been
dismissed by Supreme Court.
8. Contrary Judgements of Himachal Pradesh High
Court in Kiran Enterprises (2010) 327 ITR 520 and Supriya Gill [ITA 27 &
28/2010 dtd 16-6-2010]
The question was whether the freight subsidy is income
derived from the business of the industrial undertaking and can be included in
the profit eligible for deduction under section 80-IA. The Court held that the
source of transport subsidy is not the business of the assessee but the scheme
framed by the Central Government. Held that the subsidy received by the
assessee was not a profit derived from the business since it was not an
operational profit and that the source of the subsidy is not the business of
the assessee but the scheme of the Government
9. Adverse
Judgement of Punjab and Haryana High Court in H.M. Steels Ltd. [ITA 352/2013
dated 04-08-2015]
P&H High Court expressed agreement with view taken by
Himachal High Court and also held that sales tax rebate is not profit derived from eligible business
and hence entitled for deduction.
10.
Purpose Test
of Subsidy
a) Ponni Sugars & Chemicals Ltd. [2008] 174 TAXMAN 87 (SC [16-09-2008](Supreme
Court)
The assessee-company had received subsidy under
the incentive subsidy scheme, 1980. The incentives conferred under the scheme
were two fold; first, in nature of a higher free sale sugar quota and second,
in allowing the manufacturer to collect excise duty on the sale price of the
free sale sugar in excess of the normal quota, but to pay to the Government
only the excise duty payable on the price of levy sugar. As per the scheme, the
assessee was obliged to utilize the subsidy only for repayment of term loans
undertaken by it for setting up new units/expansion of existing business.
Held by apex Court that the character of the receipt in the
hands of the assessee has to be determined with respect to the purpose for which
the subsidy is given. In other words, in such cases one has to apply the
‘purpose test’. The point of time when the subsidy is paid is not relevant. The
source is immaterial; the form of subsidy is also immaterial. The main
eligibility condition in the scheme in the instant case was that the incentive
must be utilized for repayment of loans taken by the assessee for setting up of
new units or for substantial expansion of its existing units. If the object of
the subsidy scheme was to enable the assessee to run the business more
profitably, then the receipt was on revenue account. On the other hand, if the
object of the assistance under the subsidy scheme was to enable the assessee to
set up a new unit or to expand its existing units, then the receipt of the
subsidy was on capital account. Therefore, it is the object for which the
subsidy/assistance is given which determines the nature of the incentive
subsidy. The form of the mechanism through which the subsidy is given is
irrelevant.
In the
instant case also, receipt of the subsidy was capital in nature as the assessee
was obliged to utilize the subsidy only for repayment of term loans undertaken
by it for setting up of new units/expansion of its existing business.
b)
Jammu and
Kashmir High Court in Shree Balaji Alloys
The assessee, pursuant to the New
Industrial Policy announced for the State of J&K, received excise refund
and interest subsidy, etc which it claimed to be a capital receipt. In the
alternative, it was claimed that the same was eligible for deduction u/s 80-IB.
The AO, CIT (A) and Tribunal rejected the claim and held the receipts to be
revenue on the ground that the subsidy (i) was for established industry and not
to set up a new one, (ii) it was available after commercial production, (iii)
it was recurring in nature, (iv) it was not for purchasing capital assets and
(v) it was for running the business profitably. On appeal by the assessee, HELD
reversing the lower authorities:
If the object of the subsidy scheme is to
enable the assessee to run the business more profitably then the receipt is on
revenue account. On the other hand, if the object of the subsidy scheme is to
enable the assessee to set up a new unit or to expand the existing unit then
the receipt of the subsidy was on capital account. It is the
object for which the subsidy/assistance is given which determines the nature of
the incentive subsidy.The
form or the mechanism through which the subsidy is given is irrelevant;
Since the object of the subsidy scheme was (a) to accelerate industrial
development in J&K and (b) generate employment in J&K. Such incentives, designed to achieve a public purpose, cannot, by
any stretch of reasoning, be construed as production or operational incentives
for the benefit of assesses alone. It cannot be
construed as mere production and trade Incentives;
The fact that the incentives were available only after
commencement of commercial production cannot be viewed in isolation.
Question whether the subsidy receipts are
eligible u/s 80-IB as being derived from industrial undertaking was not
decided.
Purpose Test is no longer relevant
As per clause (xviii) inserted in section 2(24)
by Finance Act 2015 wef AY 2016-17, definition of income includes:
assistance in the form of a
subsidy or grant or cash incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called) by the Central Government or a State
Government or any authority or body or agency in cash or kind to the assessee
other than the
subsidy or grant or reimbursement which is taken into account for determination
of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43;
Finance Bill 2016 further excludes the subsidy or grant by the Central Government
for the purpose of the corpus of a trust or institution established by the
Central Government or a State Government from the scope of 2(24)(xviii)
Hence wef AY 2016-17, all
subsidies except specifically excluded shall be revenue in nature and shall no
longer retain capital character.
Hence the issue whether subsidy is
derived from eligible business for determining its eligibility for deduction
under Chapter VI-A becomes all the more important for assessee.
11.
Supreme
Court in Meghalya Steels decided on 09-03-2016
In this case the issue before
apex court was whether transport subsidy, interest subsidy and power subsidy
can be said to be “ profits derived from industrial undertaking”
It was held by apex court
confirming the decisions of Gauhati High Court that all these 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 Revenue 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. However it was held by apex Court that 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 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.
Head of Income for Subsidies also
decided by Supreme Court in Meghalya Steels decided on 09-03-2016
It is also held by Supreme
Court in Meghalya Steels that 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 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".
Comments on
Himachal Pradesh High Court Judgement [Supreme Court in Meghalya Steels decided
on 09-03-2016]
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.
Comments on Delhi, Calcutta
and Gauhati High Court Judgements: [Supreme Court in Meghalya Steels
decided on 09-03-2016]
The Supreme Court in its concluding para has said that following
judgements have correctly construed section 80-IB and Section 80-IC
i)
Delhi High Court in Dharam pal Prem Chand [Thus
the isuue of excise subsidy also attains finality]
ii)
Calcutta High Court in Merino Ply and Chemicals
[Transport Subsidy]
iii)
Gauhati High Court in Meghalya Steels [Interest,
Power, Transport Subsidy]
Conclusion: The Judgment of Supreme Court
shall put to rest the long drawn controversy over reletability of subsidies to
profits derived from eligible business. Since Finance Act 2015 has defied the
purpose test of subsidies wef AY 2016-17, the judgement in author’s view is
shot in the arm just before the
commencement of AY 2016-17 before planning for last installment of AY 2016-17.
No comments:
Post a Comment