S. 80-IB/80-IC: Subsidies that reduce the cost of production have a direct nexus with, and are "derived from", the industrial undertaking

CIT vs. Meghalaya Steels Ltd (Gauhati High Court)

 

The assessee set up an industrial undertaking which was eligible for deduction u/s 80-IB/ 80-IC. It received transport subsidy, interest subsidy, power subsidy and insurance subsidy pursuant to a scheme of the Government which was claimed to be eligible for deduction u/s 80-IB/80-IC. The AO & CIT(A) relied on Pandian Chemicals 262 ITR 278 (SC), Sterling Foods 237 ITR 579 & Liberty India 317 ITR 218 (SC) and rejected the claim on the ground that these subsidies were not "derived from" the undertaking as their immediate source was the Government's scheme and not the undertaking. However, the Tribunal allowed the claim on the ground that the subsidies reduced the corresponding expenses incurred and had a direct nexus with the manufacturing activities of the assessee. On appeal by the department to the High Court, HELD dismissing the appeal:

A subsidy given for the purpose of setting up of an industry is a capital receipt. A subsidy given for the purpose of operating an industry more profitably is revenue receipt. A distinction has to be drawn between a "non-operational subsidy" which does not relate to manufacture/ production and an "operational subsidy" which is intended to reduce the cost of manufacture/ production of the industrial undertaking. To determine whether the subsidy can be said to have been "derived from" the undertaking so as to be eligible for deduction u/s 80-IB & 80-IC it has to be seen whether there is a direct nexus between the said subsidy and the manufacturing process. A study of the schemes under which the said transport, interest, power & insurance subsidies were given shows that there were all intended to reduce the cost of production of the industrial undertaking. There is accordingly a direct nexus between the said subsidies and the profits of the industrial undertaking which is a "first degree nexus". The object of these subsidies is to increase profits and if they are taxed, the object will not be met. Liberty India 317 ITR 218 (SC) does not apply because the DEPB and Duty Drawback Schemes are "non-operational" incentives intended to encourage "export". DEPB and Duty Drawback is not provided as a means to reduce the cost of production of the industrial undertaking and so it has no nexus with the undertaking.