THE issues before the Bench are - Whether transport subsidy, power subsidy, insurance subsidy and interest subsidy, received by the assessee, are allowable for computation of deduction u/s 80IB of the Act; Whether the amount of these subsidies would go on to reduce the expenses incurred under that particular head and the resultant profits and gains of the business of Industrial Undertaking would be eligible for deduction u/s 80IB of the Act and Whether the subsidies are inter-linked, inter-laced and having a direct nexus with the manufacturing activities of the assessee, which are inseparable from the expenditure incurred by the assessee on account of transportation, purchase as well as sales of the business of the assessee are allowable for deduction u/s 80IB. And the verdict goes in favour of the assessee.
The respondent assessee is an industrial undertaking engaged in the business of manufacture of Steel and Ferro Silicon. The assessee submitted, on 19.10.2004, its return of income for the AY 2004-2005 disclosing income at Rs. 2,06,970/- after claiming deduction, u/s 80IB of the Act, on the profits and gains of business of the respondent's industrial undertaking. During the previous year, relevant to the AY under consideration, the respondent had received the certain amounts on account of subsidies, viz. Transport subsidy; Interest subsidy; and Power subsidy.
The AO, in his assessment order, held that the amounts, received by the assessee as subsidies, were revenue receipts in nature and did not qualify for deduction u/s 80IB(4) of the Act. The AO accordingly disallowed the respondent's claim for deduction of the amount of Rs. 2,74,09,386/-, u/s 80 IB of the Act, on account of transport subsidy, interest subsidy and power subsidy.
Similarly for AY 2006-07, assessee had received the amounts on account of Transport subsidy; Insurance subsidy; Interest subsidy and Power subsidy. The AO, in his assessment order, held that the subsidies, so received by the assessee, had no direct nexus with the business of the respondent's industrial undertaking, that the subsidies were income incidental to the business of the respondent's industrial undertaking and, therefore, the subsidies had to be treated as ‘other business income' and could not be allowed for the purpose of working out the profits and gains of the respondent's business undertaking within the meaning of Section 80IC. The AO accordingly disallowed the respondent's claim of deduction of the amount of 6,72,22,666/-, u/s 80IC of the Act, on account of transport subsidy, insurance subsidy, interest subsidy and power subsidy.
The Tribunal held that the subsidies, in question, would go on to reduce the corresponding expenses incurred and the resultant profit would be the profits and gains of the business of the industrial undertaking, that all these subsidies are inter-linked, inter-laced and having a direct nexus with the manufacturing activities of the assessee which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales, power, interest, insurance cover of the business of the assessee and, therefore, there is a direct nexus between the subsidy received by the assessee's industrial undertaking and the resulting profits and gains thereof and the assessee is eligible for deduction u/s 80-IB/80-IC of the Act.
While so allowing the appeal of the respondent concerned, the Tribunal followed its own order, passed in the case of C.I.T. V/s. Meghalaya Steels Ltd. in I.T.A. No. 46/Gau/2009, for the AY 2006-2007, decided on 19.03.2010. The Tribunal held that the subsidies, received by the respondent's industrial undertaking, would go on to reduce the corresponding expenses incurred under those particular heads and the resultant profit would be the profits and gains of the business of the industrial undertaking eligible for deduction u/s 80-IB of the Act. The Tribunal further held that all the subsidies were inter-linked, inter-laced and have direct nexus with the manufacturing activities of the assessee respondent's industrial undertaking.
Against the above order of the Tribunal, the Revenue is, now, in appeal before High Court.
Having heard the matter, the High Court held that,
++ in order to claim deduction either u/s 80IB or u/s 80IC, an assessee has to establish that there is a direct, intrinsic and first degree nexus between a subsidy, on the one hand, and the profits and gains, on the other, derived from, or derived by, the industrial undertaking concerned. There is also no dispute that if any of the subsidies, in question, goes on to reduce the cost of production of an industrial undertaking, the resultant profits and gains are deductible under the provisions of Section 80IB or 80IC, as the case may be. Surfacing from beneath this statutory requirement, the legal proposition is that if the subsidy is non-operational in nature, there will be no entitlement of deduction; but the subsidy, if operational, would entitle an assessee to claim deduction;
++ there is no dispute at the bar that the subsidies are revenue receipts. The question, however, is: these revenue receipts, if help an industrial undertaking in earning profit and making gains, whether the undertaking is entitled to seek deduction if the undertaking satisfies, otherwise, the conditions prescribed by Section 80IB or 80IC, as the case may be;
++ though the Revenue is correct to some extent in contending that there is no substantial distinction between the two expressions, namely, ‘derived from' and ‘derived by', what we must point out is that the expression ‘derived from', occurring in Section 80IB, implies that the profits and gains have to be derived from the activities of the industrial undertaking. In other words, as rightly contended by the assessee, when the expression, ‘derived from, has been used in Section 80IB, it means that it is the business of the undertaking, which is the direct source from which the profits and gains are derived. In the case of a subsidy, the expression, ‘derived from', appearing in Section 80IB, would, logically extended, mean that the subsidy, provided by the State, directly affects the business activity of the industrial undertaking. In the case at hand, the assessee-respondents contend that the subsidies, provided to them, go on to reduce the cost of production of the industrial undertakings concerned and the resultant effect is generation of more money resulting into higher profits. In the case of 80IC, however, one has to show that it is the industrial undertaking, which is the recipient of profits and gains arising from a subsidy, which the industrial undertaking has received. It is immaterial as to what Section has been invoked by an assessee for the purpose of claiming deduction so long as an assessee is entitled to statutory deduction. Consequently, the deduction must be allowed even if an assessee refers to an incorrect statutory provision for claiming deduction;
++ the fact of the matter remains that, in the case at hand, since the subsidies, in question, are claimed to have helped the undertakings in generating profits and making gains by reducing the operational cost of the activities of the industrial undertaking concerned, the statutory provision for deduction, apposite to a case of present nature, is Section 80IC inasmuch as the recipient of the profits and gains, arising out of the subsidies, is, eventually, an industrial undertaking;
++ what is, therefore, required to be decided, in the present set of appeals, is as to whether there is direct nexus between the subsidies, on the one hand, and the manufacturing activities of the industrial undertaking, on the other. If there is a direct nexus between the two, then, the industrial undertaking is, undisputedly, entitled to claim deduction in respect of the profits and gains, if any, made by the industrial undertaking;
++ the moot question, which, therefore, falls for determination in the present set of appeals is: Whether there is direct and first degree nexus between the subsidies, on the one hand, and the profit and gains, on the other, of the industrial undertakings concerned;
++ transport subsidy - From the definition of raw materials and finished goods, embodied in the Transport Subsidy Scheme, 1971, and the details of the Scheme as contained, particularly, in Sub-Clause (iv) of Clause 6 of the Scheme shows that in the case of North-Eastern Region, the Scheme promised that the transport subsidy would be given on the transport costs, between Siliguri and the location of the industrial unit concerned, on the raw materials actually required and used by the qualified industrial unit in its manufacturing programme as may have been approved by the Government concerned. The Transport Subsidy Scheme, 1971, also promised to make available transport subsidy on finished goods, actually produced by the industrial unit in accordance with the manufacturing programme approved by the Government concerned;
++ what logically follows from the above discussion is that subsidy, on transportation of raw materials as well as finished goods, was promised to be made available to the industrial units concerned in a manner, which would directly affect the cost of production inasmuch as transportation subsidy, on the raw materials, was not meant to cover all the raw materials, but only that part or portion of the raw materials, which was actually required and used by an industrial unit in its manufacturing programme approved by the Government concerned and, similarly, transport subsidy, on the finished goods, too, help in reduction of the cost of manufacturing of the industrial unit concerned inasmuch as subsidy on transportation of finished goods was promised to be given on the finished goods actually produced by the industrial unit in accordance with the manufacturing programme approved by the Government concerned;
++ when the transport subsidy, so received, both, on the transportation of the raw materials as well as transportation of the finished goods, does go to reduce the cost of production of an industrial undertaking, the resultant effect of such a reduction, on the cost of production, would, obviously, help generate profits and, at times, higher profits;
++ thus, it is transparent that there is a direct nexus between the transport subsidy, on the one hand, and the profits earned, and gains made, by the industrial undertakings, on the other. Such a direct nexus cannot but be termed as first degree nexus between the two, namely, transport subsidy, on the one hand, and the resultant profits and gains, on the other;
++ unless, therefore, the Revenue succeeds in showing that the transport subsidy has no bearing on the cost of production of the industrial undertakings, the claims for deductions, which have been made by the assessee-respondents as recipient of transport subsidy, cannot but have to be necessarily held to be covered by Section 80IB or 80IC;
++ there can be no escape from the conclusion that transport subsidy was aimed at reducing the cost of production of the industrial undertakings covered by transport subsidy Scheme. Thus, there was a first degree nexus between the transport subsidy, on the one hand, and cost of production, on the other. When cost is reduced, it naturally helps in earning of profit and, at times, higher profits. Such profits and gains ought to have been treated, and has rightly been treated, by the Tribunal, to be profits and gains derived from, or derived by, the industrial undertaking concerned;
++ put shortly, there is an existence of direct nexus between transport subsidy, on the one hand, and the manufacturing/production activities of industrial undertaking, on the other, stands well established. Unless shown otherwise, the industrial undertakings, in the present set of appeals, which have been granted transport subsidy, are entitled to claim deductions in terms of the directions of the Tribunal;
++ power subsidy - The Industrial Policy, 1997, as extended by the Industrial Policy of Assam, 2003, provides for Power Subsidy to be given to eligible industrial units (under such scheme) for a period of 5 (five) years from the date of commercial production, the power subsidy being available in the form of reimbursement of fully paid power bills with certain ceiling;
++ the reimbursement of the fully paid power bills, i.e., electrical charges, will obviously reduce the cost of production of an industrial undertaking contributing thereby to the profits and gains derived from, or derived by, the industrial undertaking concerned and augmenting thereby the income of the industrial undertaking concerned. More so, when such a subsidy neutralizes the expenses incurred on consumption of power and this reinforces, if we may borrow the language from the case of Pancharatna Cement Pvt. Ltd. Vs. Union of India, reported in 317 ITR 259 (Gau), the eventual income of the business undertaking and establishes thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the subsidy, in the form of power subsidy, on the other, received by the assessee-respondents;
++ in Sahney Steel and Press Works Ltd & others Vs. CIT ( 2002-TIOL-11-SC-IT ) , the Supreme Court has pointed out, while dealing with various subsidies, including subsidy on electricity, that these subsidies were given to encourage setting up of industries in the State of Andhra Pradesh in order to make business of production and sale of goods more profitable. The Supreme Court has also pointed out, that subsidies were to be paid on establishment of the industry and not for the purpose of setting up of industry and it was aimed at extending helping hand to the person concerned so as to meet competitive level with other established industries;
++ from the observations made, and the law laid down, in Sahney Steel and Press Works Ltd., it becomes clear that various subsidies, including subsidies on electrical charges, were given by the Government concerned for the purpose of enabling industries to run more profitably by obviously reducing the cost of production. Such a subsidy would, undoubtedly, be, in the light of the decision, in Sahney Steeel (supra), operational in nature. No doubt, such a relief, given by way of electricity subsidy, is not a capital receipt, but revenue receipt and can be taxed, if not, otherwise, deductible in terms of the relevant provisions of the Act. When the cost of production is reduced by granting subsidy on electricity charges, it necessarily helps the industry to run more profitably. Here again, a direct nexus between the power subsidy, on the one hand, and cost of production, on the other, stands well established. Consequently, the profits earned and the gains made from the industrial undertakings concerned will amount to profits and gains derived from, or derived by, the industrial undertakings concerned entitling the assessees to claim deduction u/s 80IB or 80IC, as the case may be;
++ power subsidy is meant to enable a person meet a certain percentage of expenditure on power and is, therefore, revenue in nature. However, though revenue in nature, the fact remains that it helps in not only growth of the industrial undertaking, but also help an industrial undertaking to earn profits and make gains. Such a subsidy, though revenue in nature and taxable accordingly, is nonetheless covered by the provisions embodied in Section 80IB or 80IC, as the case may be;
++ interest subsidy - Under the Industrial Policy, 1997, all eligible industrial units (under such scheme) are given interest subsidy to the extent of 3% on the working capital advanced to them by Scheduled banks or Central/ State financial institutions for a maximum period of 10 (ten) years from the date of commencement of production;
++ the scheme of interest subsidy clearly shows that it reduces the interest payable on working capital advanced to an industrial undertaking by a scheduled bank or Central/State financial institutions. There is no dispute that the assessee-respondents concerned have received working capital, whereupon they have been paying interest to the scheduled banks or Central/State financial institutions, as the case may be;
++ the facts are, therefore, not in dispute on this aspect. The dispute is: Whether the interest subsidy is payable on non-operational or operational subsidy. If the object of the relevant Scheme is borne in mind, it clearly shows that interest subsidy, having aimed at reducing the interest payable on working capital by an industrial undertaking, helps directly in reducing the cost of manufacturing or production activities and establish thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the interest subsidy, on the other, received by the assessee-respondents and, in consequence thereof, since interest subsidy results into profits and gains derived from, or derived by, an industrial undertaking, there is no reason as to why such profits and gains, earned by an industrial undertaking on the strength of such a subsidy, namely, interest subsidy, be not allowed to be deducted from the taxable income of the industrial undertaking concerned;
++ insurance subsidy - So far as the insurance subsidy is concerned, it is under the Central Comprehensive Insurance Scheme, 1997. Under this Scheme, the insurance premium paid by eligible industrial units (under such scheme), set up in the North Eastern Region, are reimbursed by the nodal insurance company. It may be mentioned here that all banks/ financial institutions insist upon taking out comprehensive insurance policy on the business assets and stocks offered as primary/ collateral security for the purpose of obtaining the loan. In fact, this factual aspect has not been disputed by the Revenue;
++ the insurance subsidy, thus, helps in reducing the running cost of the industrial unit concerned establishing thereby direct and first degree nexus between the industrial activities of the assessee-respondents concerned, on the one hand, and the subsidy, in the form of insurance subsidy, on the other, received by the assessee-respondents. The resultant profits and gains, derived from, or derived by, an industrial undertaking, because of the insurance subsidy, have to be treated as deductible in terms of the provision of Section 80IB or 80IC, as the case may be;
++ what crystallizes from the above discussion is that the assessee's income, with the cost of production being reduced, because of the subsidies received, would obviously rise and, in consequence thereof, the profits earned, and the gains made, by the industrial undertaking concerned would also increase. The profits, so increased, would be part of the gross total income of the assessee as defined u/s 80B of the Act subject to deductions, as provided under Chapter VIA of the Act, which includes deductions u/s 80B as well as 80C. If an assessee becomes eligible for deduction u/s 80IB or 80IC, he will not be liable to pay income tax on the increased profit. Conversely put, the subsidies serve no purpose if he has to pay increased tax on the profits, which he has made, because of the operational subsidies received by him;
++ situated thus, there can be no escape from the conclusion that the subsidies, in question, being operational in nature, help the assessee concerned earn profits and the profits, so earned, because of the subsidies, in question, are deductible in terms of the provisions of Section 80IB of the Act;
++ the finding, which the Tribunal has reached to the effect that there is a direct nexus between the subsidies, in question, on the one hand, and the profits and gains derived by, or derived from, the industrial undertakings concerned, is not a finding on pure facts but is finding based on facts and law. Such a finding can be interfered with, in an appeal u/s 260A of the Act even if such a finding is not alleged as perverse provided that the finding can be shown to have been reached by wrongly applying the law or by resorting to incorrect interpretation of law;
++ in the result and for the discussions held above, these appeals fail and the same shall accordingly stand dismissed
Facts of the case
The respondent assessee is an industrial undertaking engaged in the business of manufacture of Steel and Ferro Silicon. The assessee submitted, on 19.10.2004, its return of income for the AY 2004-2005 disclosing income at Rs. 2,06,970/- after claiming deduction, u/s 80IB of the Act, on the profits and gains of business of the respondent's industrial undertaking. During the previous year, relevant to the AY under consideration, the respondent had received the certain amounts on account of subsidies, viz. Transport subsidy; Interest subsidy; and Power subsidy.
The AO, in his assessment order, held that the amounts, received by the assessee as subsidies, were revenue receipts in nature and did not qualify for deduction u/s 80IB(4) of the Act. The AO accordingly disallowed the respondent's claim for deduction of the amount of Rs. 2,74,09,386/-, u/s 80 IB of the Act, on account of transport subsidy, interest subsidy and power subsidy.
Similarly for AY 2006-07, assessee had received the amounts on account of Transport subsidy; Insurance subsidy; Interest subsidy and Power subsidy. The AO, in his assessment order, held that the subsidies, so received by the assessee, had no direct nexus with the business of the respondent's industrial undertaking, that the subsidies were income incidental to the business of the respondent's industrial undertaking and, therefore, the subsidies had to be treated as ‘other business income' and could not be allowed for the purpose of working out the profits and gains of the respondent's business undertaking within the meaning of Section 80IC. The AO accordingly disallowed the respondent's claim of deduction of the amount of 6,72,22,666/-, u/s 80IC of the Act, on account of transport subsidy, insurance subsidy, interest subsidy and power subsidy.
The Tribunal held that the subsidies, in question, would go on to reduce the corresponding expenses incurred and the resultant profit would be the profits and gains of the business of the industrial undertaking, that all these subsidies are inter-linked, inter-laced and having a direct nexus with the manufacturing activities of the assessee which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales, power, interest, insurance cover of the business of the assessee and, therefore, there is a direct nexus between the subsidy received by the assessee's industrial undertaking and the resulting profits and gains thereof and the assessee is eligible for deduction u/s 80-IB/80-IC of the Act.
While so allowing the appeal of the respondent concerned, the Tribunal followed its own order, passed in the case of C.I.T. V/s. Meghalaya Steels Ltd. in I.T.A. No. 46/Gau/2009, for the AY 2006-2007, decided on 19.03.2010. The Tribunal held that the subsidies, received by the respondent's industrial undertaking, would go on to reduce the corresponding expenses incurred under those particular heads and the resultant profit would be the profits and gains of the business of the industrial undertaking eligible for deduction u/s 80-IB of the Act. The Tribunal further held that all the subsidies were inter-linked, inter-laced and have direct nexus with the manufacturing activities of the assessee respondent's industrial undertaking.
Against the above order of the Tribunal, the Revenue is, now, in appeal before High Court.
Having heard the matter, the High Court held that,
++ in order to claim deduction either u/s 80IB or u/s 80IC, an assessee has to establish that there is a direct, intrinsic and first degree nexus between a subsidy, on the one hand, and the profits and gains, on the other, derived from, or derived by, the industrial undertaking concerned. There is also no dispute that if any of the subsidies, in question, goes on to reduce the cost of production of an industrial undertaking, the resultant profits and gains are deductible under the provisions of Section 80IB or 80IC, as the case may be. Surfacing from beneath this statutory requirement, the legal proposition is that if the subsidy is non-operational in nature, there will be no entitlement of deduction; but the subsidy, if operational, would entitle an assessee to claim deduction;
++ there is no dispute at the bar that the subsidies are revenue receipts. The question, however, is: these revenue receipts, if help an industrial undertaking in earning profit and making gains, whether the undertaking is entitled to seek deduction if the undertaking satisfies, otherwise, the conditions prescribed by Section 80IB or 80IC, as the case may be;
++ though the Revenue is correct to some extent in contending that there is no substantial distinction between the two expressions, namely, ‘derived from' and ‘derived by', what we must point out is that the expression ‘derived from', occurring in Section 80IB, implies that the profits and gains have to be derived from the activities of the industrial undertaking. In other words, as rightly contended by the assessee, when the expression, ‘derived from, has been used in Section 80IB, it means that it is the business of the undertaking, which is the direct source from which the profits and gains are derived. In the case of a subsidy, the expression, ‘derived from', appearing in Section 80IB, would, logically extended, mean that the subsidy, provided by the State, directly affects the business activity of the industrial undertaking. In the case at hand, the assessee-respondents contend that the subsidies, provided to them, go on to reduce the cost of production of the industrial undertakings concerned and the resultant effect is generation of more money resulting into higher profits. In the case of 80IC, however, one has to show that it is the industrial undertaking, which is the recipient of profits and gains arising from a subsidy, which the industrial undertaking has received. It is immaterial as to what Section has been invoked by an assessee for the purpose of claiming deduction so long as an assessee is entitled to statutory deduction. Consequently, the deduction must be allowed even if an assessee refers to an incorrect statutory provision for claiming deduction;
++ the fact of the matter remains that, in the case at hand, since the subsidies, in question, are claimed to have helped the undertakings in generating profits and making gains by reducing the operational cost of the activities of the industrial undertaking concerned, the statutory provision for deduction, apposite to a case of present nature, is Section 80IC inasmuch as the recipient of the profits and gains, arising out of the subsidies, is, eventually, an industrial undertaking;
++ what is, therefore, required to be decided, in the present set of appeals, is as to whether there is direct nexus between the subsidies, on the one hand, and the manufacturing activities of the industrial undertaking, on the other. If there is a direct nexus between the two, then, the industrial undertaking is, undisputedly, entitled to claim deduction in respect of the profits and gains, if any, made by the industrial undertaking;
++ the moot question, which, therefore, falls for determination in the present set of appeals is: Whether there is direct and first degree nexus between the subsidies, on the one hand, and the profit and gains, on the other, of the industrial undertakings concerned;
++ transport subsidy - From the definition of raw materials and finished goods, embodied in the Transport Subsidy Scheme, 1971, and the details of the Scheme as contained, particularly, in Sub-Clause (iv) of Clause 6 of the Scheme shows that in the case of North-Eastern Region, the Scheme promised that the transport subsidy would be given on the transport costs, between Siliguri and the location of the industrial unit concerned, on the raw materials actually required and used by the qualified industrial unit in its manufacturing programme as may have been approved by the Government concerned. The Transport Subsidy Scheme, 1971, also promised to make available transport subsidy on finished goods, actually produced by the industrial unit in accordance with the manufacturing programme approved by the Government concerned;
++ what logically follows from the above discussion is that subsidy, on transportation of raw materials as well as finished goods, was promised to be made available to the industrial units concerned in a manner, which would directly affect the cost of production inasmuch as transportation subsidy, on the raw materials, was not meant to cover all the raw materials, but only that part or portion of the raw materials, which was actually required and used by an industrial unit in its manufacturing programme approved by the Government concerned and, similarly, transport subsidy, on the finished goods, too, help in reduction of the cost of manufacturing of the industrial unit concerned inasmuch as subsidy on transportation of finished goods was promised to be given on the finished goods actually produced by the industrial unit in accordance with the manufacturing programme approved by the Government concerned;
++ when the transport subsidy, so received, both, on the transportation of the raw materials as well as transportation of the finished goods, does go to reduce the cost of production of an industrial undertaking, the resultant effect of such a reduction, on the cost of production, would, obviously, help generate profits and, at times, higher profits;
++ thus, it is transparent that there is a direct nexus between the transport subsidy, on the one hand, and the profits earned, and gains made, by the industrial undertakings, on the other. Such a direct nexus cannot but be termed as first degree nexus between the two, namely, transport subsidy, on the one hand, and the resultant profits and gains, on the other;
++ unless, therefore, the Revenue succeeds in showing that the transport subsidy has no bearing on the cost of production of the industrial undertakings, the claims for deductions, which have been made by the assessee-respondents as recipient of transport subsidy, cannot but have to be necessarily held to be covered by Section 80IB or 80IC;
++ there can be no escape from the conclusion that transport subsidy was aimed at reducing the cost of production of the industrial undertakings covered by transport subsidy Scheme. Thus, there was a first degree nexus between the transport subsidy, on the one hand, and cost of production, on the other. When cost is reduced, it naturally helps in earning of profit and, at times, higher profits. Such profits and gains ought to have been treated, and has rightly been treated, by the Tribunal, to be profits and gains derived from, or derived by, the industrial undertaking concerned;
++ put shortly, there is an existence of direct nexus between transport subsidy, on the one hand, and the manufacturing/production activities of industrial undertaking, on the other, stands well established. Unless shown otherwise, the industrial undertakings, in the present set of appeals, which have been granted transport subsidy, are entitled to claim deductions in terms of the directions of the Tribunal;
++ power subsidy - The Industrial Policy, 1997, as extended by the Industrial Policy of Assam, 2003, provides for Power Subsidy to be given to eligible industrial units (under such scheme) for a period of 5 (five) years from the date of commercial production, the power subsidy being available in the form of reimbursement of fully paid power bills with certain ceiling;
++ the reimbursement of the fully paid power bills, i.e., electrical charges, will obviously reduce the cost of production of an industrial undertaking contributing thereby to the profits and gains derived from, or derived by, the industrial undertaking concerned and augmenting thereby the income of the industrial undertaking concerned. More so, when such a subsidy neutralizes the expenses incurred on consumption of power and this reinforces, if we may borrow the language from the case of Pancharatna Cement Pvt. Ltd. Vs. Union of India, reported in 317 ITR 259 (Gau), the eventual income of the business undertaking and establishes thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the subsidy, in the form of power subsidy, on the other, received by the assessee-respondents;
++ in Sahney Steel and Press Works Ltd & others Vs. CIT ( 2002-TIOL-11-SC-IT ) , the Supreme Court has pointed out, while dealing with various subsidies, including subsidy on electricity, that these subsidies were given to encourage setting up of industries in the State of Andhra Pradesh in order to make business of production and sale of goods more profitable. The Supreme Court has also pointed out, that subsidies were to be paid on establishment of the industry and not for the purpose of setting up of industry and it was aimed at extending helping hand to the person concerned so as to meet competitive level with other established industries;
++ from the observations made, and the law laid down, in Sahney Steel and Press Works Ltd., it becomes clear that various subsidies, including subsidies on electrical charges, were given by the Government concerned for the purpose of enabling industries to run more profitably by obviously reducing the cost of production. Such a subsidy would, undoubtedly, be, in the light of the decision, in Sahney Steeel (supra), operational in nature. No doubt, such a relief, given by way of electricity subsidy, is not a capital receipt, but revenue receipt and can be taxed, if not, otherwise, deductible in terms of the relevant provisions of the Act. When the cost of production is reduced by granting subsidy on electricity charges, it necessarily helps the industry to run more profitably. Here again, a direct nexus between the power subsidy, on the one hand, and cost of production, on the other, stands well established. Consequently, the profits earned and the gains made from the industrial undertakings concerned will amount to profits and gains derived from, or derived by, the industrial undertakings concerned entitling the assessees to claim deduction u/s 80IB or 80IC, as the case may be;
++ power subsidy is meant to enable a person meet a certain percentage of expenditure on power and is, therefore, revenue in nature. However, though revenue in nature, the fact remains that it helps in not only growth of the industrial undertaking, but also help an industrial undertaking to earn profits and make gains. Such a subsidy, though revenue in nature and taxable accordingly, is nonetheless covered by the provisions embodied in Section 80IB or 80IC, as the case may be;
++ interest subsidy - Under the Industrial Policy, 1997, all eligible industrial units (under such scheme) are given interest subsidy to the extent of 3% on the working capital advanced to them by Scheduled banks or Central/ State financial institutions for a maximum period of 10 (ten) years from the date of commencement of production;
++ the scheme of interest subsidy clearly shows that it reduces the interest payable on working capital advanced to an industrial undertaking by a scheduled bank or Central/State financial institutions. There is no dispute that the assessee-respondents concerned have received working capital, whereupon they have been paying interest to the scheduled banks or Central/State financial institutions, as the case may be;
++ the facts are, therefore, not in dispute on this aspect. The dispute is: Whether the interest subsidy is payable on non-operational or operational subsidy. If the object of the relevant Scheme is borne in mind, it clearly shows that interest subsidy, having aimed at reducing the interest payable on working capital by an industrial undertaking, helps directly in reducing the cost of manufacturing or production activities and establish thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the interest subsidy, on the other, received by the assessee-respondents and, in consequence thereof, since interest subsidy results into profits and gains derived from, or derived by, an industrial undertaking, there is no reason as to why such profits and gains, earned by an industrial undertaking on the strength of such a subsidy, namely, interest subsidy, be not allowed to be deducted from the taxable income of the industrial undertaking concerned;
++ insurance subsidy - So far as the insurance subsidy is concerned, it is under the Central Comprehensive Insurance Scheme, 1997. Under this Scheme, the insurance premium paid by eligible industrial units (under such scheme), set up in the North Eastern Region, are reimbursed by the nodal insurance company. It may be mentioned here that all banks/ financial institutions insist upon taking out comprehensive insurance policy on the business assets and stocks offered as primary/ collateral security for the purpose of obtaining the loan. In fact, this factual aspect has not been disputed by the Revenue;
++ the insurance subsidy, thus, helps in reducing the running cost of the industrial unit concerned establishing thereby direct and first degree nexus between the industrial activities of the assessee-respondents concerned, on the one hand, and the subsidy, in the form of insurance subsidy, on the other, received by the assessee-respondents. The resultant profits and gains, derived from, or derived by, an industrial undertaking, because of the insurance subsidy, have to be treated as deductible in terms of the provision of Section 80IB or 80IC, as the case may be;
++ what crystallizes from the above discussion is that the assessee's income, with the cost of production being reduced, because of the subsidies received, would obviously rise and, in consequence thereof, the profits earned, and the gains made, by the industrial undertaking concerned would also increase. The profits, so increased, would be part of the gross total income of the assessee as defined u/s 80B of the Act subject to deductions, as provided under Chapter VIA of the Act, which includes deductions u/s 80B as well as 80C. If an assessee becomes eligible for deduction u/s 80IB or 80IC, he will not be liable to pay income tax on the increased profit. Conversely put, the subsidies serve no purpose if he has to pay increased tax on the profits, which he has made, because of the operational subsidies received by him;
++ situated thus, there can be no escape from the conclusion that the subsidies, in question, being operational in nature, help the assessee concerned earn profits and the profits, so earned, because of the subsidies, in question, are deductible in terms of the provisions of Section 80IB of the Act;
++ the finding, which the Tribunal has reached to the effect that there is a direct nexus between the subsidies, in question, on the one hand, and the profits and gains derived by, or derived from, the industrial undertakings concerned, is not a finding on pure facts but is finding based on facts and law. Such a finding can be interfered with, in an appeal u/s 260A of the Act even if such a finding is not alleged as perverse provided that the finding can be shown to have been reached by wrongly applying the law or by resorting to incorrect interpretation of law;
++ in the result and for the discussions held above, these appeals fail and the same shall accordingly stand dismissed
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