ITA 6/2010 BEFORE HON’BLE THE CHIEF JUSTICE MR.MADAN B.LOKUR HON’BLE MRS. JUSTICE ANIMA HAZARIKA (Madan B. Lokur, CJ) Admit. 2. The following substantial questions of law arise for consideration out o f the order appealed against passed by the Income Tax Appellate Tribunal (for sh ort, hereinafter called as the Tribunal ): - i) Whether on the facts and in the circumstances of the case, the Income Ta x Appellate Tribunal was justified and correct in law in holding that the assess ee is entitled to a deduction under Section 80IB of the Income Tax Act, 1961on t he transport subsidy and interest subsidy received by it? ii) Whether on the facts and in the circumstances of the case, the Income Ta x Appellate Tribunal was justified and correct in law in holding that assessee i s entitled to a deduction under Section 80IB of the Income Tax Act, 1961on the C entral Excise duty refund received by it? 3. The assessee filed its return of income relevant for the assessment year 2006-07. It had shown, inter alia, the following income in its profit and loss account: - i) Transport Subsidy & Rs.1, 58,44,889.00 ii) Interest Subsidy on capital & Rs. 6, 855.00 iii) Central Excise Refund & Rs. 2,66,53,834.00 While computing its net profit as well as taxable income, the assessee took into account the above items as income for claiming deductions under Section 80IB of the Income Tax Act, 1961 (for short, hereinafter called as the Act ). 4. The Assessing Officer held that since the three items mentioned above we re not profits and gains derived from its business, they cannot be included in t he expression profits and gains derived from any business occurring under Sect ion 80IB(1) of the Act and so the deductions claimed by the assessee were not al lowable. 5. Feeling aggrieved, the assessee preferred an appeal and that was allowed by the Commissioner of Income Tax (Appeals) who held that all the three items w ere directly and integrally connected with the business of the assessee. Consequ ently, the assessee was held entitled to the deductions as claimed. On a further appeal by the Revenue, the Tribunal affirmed the view of the Commissioner of In come Tax (Appeals) and that is how the Revenue is now before us. 6. It is necessary at the outset to appreciate what the transport subsidy a nd the interest subsidy is all about. 6.1 Transport subsidy: The Government of India, through a notification issue d by it, announced a Scheme called Transport Subsidy Scheme, 1971 on 23rd July , 1971. The purpose of the Scheme was to grant a subsidy on the transport of raw materials and finished goods to and from certain selected areas with a view to promoting growth of industries in those areas. One of the areas so selected incl udes the North Eastern Region comprising the States of Assam, Meghalaya, Manipur , Nagaland and Tripura. 6.2 Clause 6 of the Scheme deals with the details thereof and provides that a transport subsidy would be given to industrial units located in the selected a reas in respect of raw materials, which are brought into and finished goods, whi ch are taken out of such areas. The subsidy on the transport cost of raw materia ls would be given on the basis of the cost of transport between Siliguri and the location of the industrial unit in these States and the calculation would be ba sed on the cost of movement by railway from Siliguri to the railway station near est to the location of the industrial unit and thereafter the cost of movement b y road to the location of the industrial unit. Similarly, the subsidy on the tra nsport cost of finished goods would be given on the basis of the movement by roa d from the location of the industrial unit to the nearest railway station and th ereafter the cost of movement by railway to Siliguri would be taken into account . 7.1 Interest subsidy: A Notification dated 19th February, 1999 was issued by the Government of India announcing a scheme of Interest Subsidy on the working capital loan for industrial units in the North Eastern Region comprising the Sta tes of Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland and Tripu ra with a view to accelerating industrial development in the Region. 7.2 The extent of admissible subsidy is provided in paragraph 5 of the Schem e whereby all manufacturing industrial units in the North Eastern Region would b e given an interest subsidy to the extent of 3% of the working capital advanced to them by a Scheduled Bank or by Central/State Financial Institutions for a max imum period of 10 years from the date of commencement of production. 8. The Scheme of Chapter VI-A of the Act, more particularly Section 80IB th ereof, came up for consideration only last year in Liberty India vs. Commissione r of Income Tax, [2009] 317 ITR 218. The Supreme Court noted that the Act broadl y provides for two types of tax incentives namely investment-linked incentives a nd profit-linked incentives. Chapter VI-A provides for incentives in the form of tax deduction which belong to the category of profit-linked incentives. In othe r words, what attracts incentives under Section 80IB of the Act is the generatio n of operational profits. The Supreme Court noted that Section 80IB of the Act p rovides for allowing of a deduction in respect of profits and gains derived from the business of the assessee and thereby Parliament intended to cover sources o f profits and gains not beyond the first degree. In other words, there must be a direct nexus between the generation of profits and gains and the source of prof its and gains, the latter being directly relatable to the business of the assess ee. Any other source, not falling within the first degree, could in a sense be d escribed as ancillary to the business of the assessee. 9. How does one explain or describe a subsidy? In Sahney Steel & Press Work s Ltd. vs. CIT (1997) 228 ITR 253, the Supreme Court explained the concept of a subsidy (generally) as a helping hand provided to industries in their early da ys to enable them to come to a competitive level with other established industri es. (See paragraph 13 of the Report). Subsequently, in paragraph 31 of the Repor t the Supreme Court, while dealing with subsidies granted after setting up of ne w industries and after commencement of production, described such subsidies as an assistance given for the purpose of carrying on the business of the assessee. 10. In the case before us, there is no dispute that the subsidies granted ar e revenue receipts and have been granted after setting up of the new industries and after commencement of production. In a sense, therefore, as contended by lea rned counsel for the assessee, the transport subsidy would have the effect of re ducing the inward and outward transport costs for the purposes of determining th e cost of production as well as for sales. However, this does not have any direc t nexus with the profits or gains derived by the assessee from its industrial ac tivity - the benefit to the assessee is only ancillary to its industrial activit y. Since the subsidies are not directly relatable to the industrial activity of the assessee, they do not fall within the first degree contemplated by the Act a nd as explained by the Supreme Court in Liberty India. 11. Learned counsel for the assessee referred to Commissioner of Income Tax vs. Rajaram Maize Products, [2002] 251 ITR 427. However, we cannot see how the a ssessee can derive any support from this decision. In that case, the question wa s whether the power subsidy received was of a revenue nature or not. That is not the issue before us because admittedly the subsidies in this case are of a reve nue nature. 12. The expression derived from occurring in Section 80IB of the Act in re lation to the business of an industrial undertaking is narrower in connotation t han the expression attributable to the business of an industrial activity. Thi s was so held long back in Cambay Electric Supply Industrial Co. v. CIT [1978] 1 13 ITR 84. Therefore, while attributable to as used in some other sections of the Act, may cover sources of income beyond the first degree, derived from as used in Section 80IB of the Act is not intended to cover sources beyond the firs t degree. It is keeping this distinction in mind that it must be held that trans port subsidy and interest subsidy cannot be said to be derived from the indust rial undertaking of the assessee. At best, it can only be ancillary to the profi ts and gains relatable to or attributable to the business of the industrial un dertaking and not in the category of profit and gains derived from its industr ial activity. 13. The first question, therefore, is answered in the negative, in favour of the Revenue and against the assessee. 14. Insofar as the second question is concerned, the central excise duty ref und claimed by the assessee is on the basis of an exemption Notifications issued by the Ministry of Finance (Department of Revenue) being Notification No.32/99 and Notification No. 33/99 both dated 8th July, 1999. In terms of these Notifica tions, a manufacturer is required to first pay the central excise duty and there after claim a refund on fulfillment of certain conditions. In the next month, af ter verification of the claim, the central excise duty so deposited is refunded to the assessee if the conditions laid down in the Notifications are fulfilled. In the present case, there is no dispute that the assessee was entitled to the c entral excise duty refund. 15. The Central Board of Excise and Customs in its Circular dated 19th Decem ber, 2002 clarified that the refund is not on account of excess payment of excis e duty but is basically designed to give effect to the exemption and to operatio nalize the exemption given by the Notifications. In that sense, the central exci se duty refund does not appear to bear the character of income since what is ref unded to the assessee is the amount paid under the modalities provided by the De partment of Revenue for giving effect to the exemption Notifications. There is also nothing to suggest that the assessee has recovered or passed on the excise duty element to its customers. 16. Even assuming the refund does amount to income in the hands of the asses see, it is a profit or gain directly derived by the assessee from its industrial activity. The payment of central excise duty has a direct nexus with the manufa cturing activity and similarly, the refund of the central excise duty also has a direct nexus with the manufacturing activity. The issue of payment of central e xcise duty would not arise in the absence of any industrial activity. There is, therefore, an inextricable link between the manufacturing activity, the payment of central excise duty and its refund. In the circumstances, we are of the opini on that Question No.2 must be answered in the affirmative in favour of the asses see and against the Revenue. 17. No other issue arises for consideration. The appeal is disposed of in te rms of the above.