Thursday, 13 August 2015

Whether sales tax rebate can be said to be part of profit and gain derived from business entitled for Sec 80IC benefits - NO: HC

THE issue before the Bench is - Whether sales tax rebate can be said to be a part of profit and gain derived from business entitled for Sec 80IC benefits. NO is the verdict.
Facts of the case

The
ITAT held that the income from Sales Tax Deferment Rebate received by the assessee is
allowed to be included as profits derived from industrial undertaking and eligible for deduction u/s 80IC, when the assessee received it from the Himachal Govt. for the benefit of any incentive of Sales Tax leviable on the sale of manufactured goods under Himachal Pradesh General Sales Tax Act, 1968 and the income derived from such rebate is not an income derived from industrial undertaking.

Having heard the parties, the Court held that,

++ the operative words are "profits and gains derived by an undertaking or an enterprise from any business referred to in subsection (2)." The profits and gains must, therefore, be derived "from" the business. The word "from" means, inter alia, a starting point, a point of attachment or a source or origin. A sales tax rebate cannot be said to be derived from any business. A sales tax rebate can be said to be in respect of a business or in favour of a business or in relation to a business, a facility to a business and incentive to a business. The rebate does not originate from the business. The source or origin of the rebate is from the policy or notification granting the same. The source or origin is not the business. If the legislature intended including the sales tax rebate within the ambit of section 80-IC, the section it would have included any profits and gains derived not from but in respect of a business.

++ if there was no sales tax liability in respect of any business, there would have been no question of the sales tax being from the business. If sales tax is made applicable to the business, it would not be from the business but in respect of the business. It would follow then that when the sales tax is revoked, the benefit cannot be from the business either but in respect of the business. If sales tax is abolished, it cannot be said that the last rate of sales tax would be the profit or gain from the business. It follows therefore, that the sales tax is in respect of the business but not from the business.

++ Supreme Court in the case of Liberty India vs. Commissioner of Income Tax 2009-TIOL-100-SC-IT considered whether profit from the Duty Entitlement Pass Book Scheme can be said to be the profit from the business of the industrial undertaking eligible for deduction under Section 80-IB of the Act. Section 80-IB is similar to Section 80IC. It was held that 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 s. 80- IB. They belong to the category of ancillary profits of such Undertakings.

++ on a parity of reasoning and on an analysis of section 80- IC, it must be held that any industrial undertaking or enterprise would be entitled to deduction under sub-section (1) only to the extent of profits derived from such an industrial undertaking and not on account of any rebate or incentive made available to it by the Government. The ratio in the last sentence in paragraph-15 is that the words "derived from industrial undertaking" are distinct from the words "profits attributable to industrial undertaking". The sales tax rebate falls within the ambit of the latter expression and not the former. What has been held by the Supreme Court in respect of the DEPB incentive applies equally to sales tax rebate in respect of section 80-IC. The sales tax rebate is an incentive which flows from the scheme framed by the Himachal Pradesh Government and is, therefore, not a profit derived from the business but is an ancillary profit of the business.

++ the sales tax rebate cannot be held to constitute a profit and gain derived from the assessee's business.

++ in Commissioner of Income Tax vs. Kiran Enterprises 2009-TIOL-679-HC-HP-IT, the question was whether the freight subsidy received from the Government is allowed to be included as profit derived from the industrial undertaking and eligible for deduction under section 80- IA. It was held that the source of transport subsidy is not the business of the assessee but the scheme framed by the Central Government. It was 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 was not the business of the assessee but the scheme of the Government.

++Question No.(iv) is, therefore, answered in favour of the Revenue. The assessee is not entitled to the benefit of section 80- IC in respect of the sales tax rebate obtained by it.

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