# COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA STEELS LTD

- **Citation:** [2016] 1 S.C.R. 952
- **Court:** Supreme Court of India
- **Decided:** 2016-03-09
- **Case number:** Civil Appeal No.7622 of2014
- **Bench:** Kurian Joseph, ROHINTON FALi NARJMAN
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-v-m-s-meghalaya-steels-ltd-30961
- **Pages:** 21

## Headnote

Income Tax Act; 1961: ss.80IB, 80IC - Deduction under -
Subsidies - Transport/Interest/Power/Insurance subsidy - Held:
C Eligible for deduction - These subsidies 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.
D
E
F
G
H
Dismissing the appeals, the Court
HELD: 1. The judgment in *Sterling Foods lays down a
very important test in order to determine Whether profits and
gains are derived from business or an industrial undertaking.
This Court has stated that there should be a direct nexus
between such profits and gains and the industrial undertaking
or business. Such nexus cannot be only incidental. It therefore
found, on the facts before it, that by reason of an export promotion
scheme, an assessee was entitled to import entitlements which
it could thereafter sell. Obviously, the sale consideration
therefrom could not be said to be directly from profits and gains
by the industrial undertaking but only attributable to such
industrial undertaking inasmuch as sue!! import entitlements
did not relate to manufacture or sale of the products of. the
undertaking, but related only to an event which was post
manufacture namely, export. On an application of the said test
to the facts of the present case, it can be said that as all the four
subsidies in the present case are revenue receipts which are
reimbursed io 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
"·
952
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
953
STEELS LTD.
subsidies. The immediate source of the subsidies was the fiict . A
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, is not correct. What is to be
seen for the applicability of Sections 80-IB and 80-IC is whether
the profits and gains are derived from the business. So Jong as
B
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. [Para 18)
[967-A-H]
2. It is incorrect to state that assistance by way of subsidies
which are reimbursed on the incurring of costs relatable to a
business, are under the head "income from other sources", which
is a residuary head of income that can be availed only if income
does not fall under any of the other four heads of income. 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 particufar
business would also have to be included u

## Text

_Characters 0–39,828 of 48,289. This is a partial read: ask again with offset=39828 for what follows._

A
B
[2016] 1 S.C.R. 952
COMMISSIONER OF INCOME TAX
v.
M/S. MEGHALAYA STEELS LTD.
(Civil Appeal No.7622 of2014)
MARCH 09, 2016
[KURIAN JOSEPH AND ROHINTON FALi NARJMAN, JJ.]
Income Tax Act; 1961: ss.80IB, 80IC - Deduction under -
Subsidies - Transport/Interest/Power/Insurance subsidy - Held:
C Eligible for deduction - These subsidies 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.
D
E
F
G
H
Dismissing the appeals, the Court
HELD: 1. The judgment in *Sterling Foods lays down a
very important test in order to determine Whether profits and
gains are derived from business or an industrial undertaking.
This Court has stated that there should be a direct nexus
between such profits and gains and the industrial undertaking
or business. Such nexus cannot be only incidental. It therefore
found, on the facts before it, that by reason of an export promotion
scheme, an assessee was entitled to import entitlements which
it could thereafter sell. Obviously, the sale consideration
therefrom could not be said to be directly from profits and gains
by the industrial undertaking but only attributable to such
industrial undertaking inasmuch as sue!! import entitlements
did not relate to manufacture or sale of the products of. the
undertaking, but related only to an event which was post
manufacture namely, export. On an application of the said test
to the facts of the present case, it can be said that as all the four
subsidies in the present case are revenue receipts which are
reimbursed io 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
"·
952
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
953
STEELS LTD.
subsidies. The immediate source of the subsidies was the fiict . A
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, is not correct. What is to be
seen for the applicability of Sections 80-IB and 80-IC is whether
the profits and gains are derived from the business. So Jong as
B
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. [Para 18)
[967-A-H]
2. It is incorrect to state that assistance by way of subsidies
which are reimbursed on the incurring of costs relatable to a
business, are under the head "income from other sources", which
is a residuary head of income that can be availed only if income
does not fall under any of the other four heads of income. 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 particufar
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". [Para 28) (971-H; 972-A-C]
*CIT v. Sterling Foods 237 ITR 579 (1999) - relied
on.
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SUPREME COURT REPORTS
[2016] I S.C.R.
A
Pandian Chemicals Limited v Commissioner of Income
Tax 262 ITR 278 - distinguished.
B
c
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Merino Ply & Chemicals Ltd.
v. CIT, 209 ITR 508
(1994] - approved.
Liberty India v. Commissioner of Income Tax 2009 (9)
sec 328 - held inapplicable.
Supriya Gill v. CIT (2010) 193 Taxman 12; Jai
Bhagwan Oil and Flour Mills v. Union of India and
Others 2009 (7) SCR 409 :(2009) 14 SCC 63; Sahney
Steel and Press Works Ltd. v. Commissioner of Income
Tax, A.P.-1, Hyderabad, 1997 (4) Suppl. SeR 189 :
(1997) 7 SCC .764; CIT v. Dharampal Premchand
Ltd. 317 ITR 353; KP. Varghese v. Income Tax Officer,
Ernakulam and Anr. (1982) 1 SeR 629; Cambay
Electric Supply Industrial Company Limited v.
Commissioner of Income Tax, Gujarat 111978 (3) SCR
660 : (1978) 2 sec 644; Commissioner Of Income
Tax, Karnataka v. Sterling Foods, Mangalore 1999 (2)
SCR 699 : (1999) 4 sec 98; C./. T.
V. Cement
Manufacturing Company Limited; CIT v. Andaman
Timber Industries Ltd., 242 ITR 204 (2000] - referred
to.
Case Law Reference
2009 f~) sec 328
h.eld inapplicable.
Para7
(2010) 193 Taxman 12
referred to.
Para7
237 ITR 579 (1999)
relied on.
Para7
2009 ('Z) seR 409
referred to.
Para8
1997 (4) Suppl. SCR 189
referred to.
Para8
317 ITR 353
referred to.
Para8
(1982) 1 SCR 629
referred to.
Para 12
1978 (~) SCR 660
referred to.
Para 13
1999 (2) SCR 699
referred to.
Para 14
262 ITR 278
distinguished.
Para 15
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
955
209 ITR 508 [1994]
242 ITR 204 [2000]
STEELS LTD.
approved.
referred to.
Para 21
Para 22
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7622
of2014
A
From the Judgment and Order dated 29.05.2013 of the High Court
B
Gauhati in ITA No. 7 of2010
2015
WITH
C. A. NOS. 8493, 8494 AND 8496 OF 2012
C. A. NOS. 7623 AND 7624 OF 2014
C. A. NOS. 3624, 3623, 5238, 5239, 5236, 6-040 AND 6039 OF
C.A. NOS. 2560, 2561, 2562, 2563, 2564, 2565, 2566, 2567, 2568, .
2569, 2570, 2571and2572 OF 2016
K. Radhakrishnan, D. L. Chidananda, Sadhna Sandhu, Gargi
Khanna, Arijit Prasad, Vikas Malhotra, Rupesh Kumar, Rashmi Malhotra,
Guru Krishna Kumar, S. A:Haseen, B. V. Balaram Das, Anil Katiyar
for the Appellant.
S. Ganesh, K. V. Mohan, K. V.-Balakrishnan, Kavita Jha, Rajinder
Mathl!r, Rani Chhabra, K. Sampath, R.P. Garg, V. Raj Kumar, Sunil
Murarka, Kuna! Chatterji, Maitrayee Banerjee for the Respondent.
The Judgment of the Court was delivered by
R.F. NARIMAN, J, I .Delay ~ondoned in filing the special leave
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petitions.
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2. Leave granted in SLP (C) Nos. 36578/2013, 36579/2013, 36581/
2013, 37831/2013, 37833/2013, 37834/2013, SLP(C) No .......... cc
No.224/2014 ), SLP(C) No .......... CC No.1543/2014), SLP(C)
Nos.11094/_2014, 11095/2014, 12710/2014, 24620/2014, 11319/2015.
.
3. This group of appeals arises from the State of Meghalaya and
concerns deductions to be made under Sections 80-IB and 80-IC of the
Income Tax Act, 1961. Civil App~al No.7622 of2014 has been treated
as the lead matter in which a judgment of the Gauhati High Court dated
29.5.2013 has been delivered, which has been followed in all the other
appeals.
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SUPREME COURT REPORTS
(2016] l S.C.R.
4. Civi!Appeal.No.7622 of2014 concerns itself with two income
tax appeals filed by the Revenue against the judgment of the Income
Tax Appellate Tribunal, ITANo.7/2010 arising out of the applicability of
Section 80-IB, and !TA No.16/2011 arising out of the applicability of
Section 80•IC. For the purpose of these matters, the facts in !TA No.7/
2010 are narrated herein below.
5. The respondent is engaged in the business of manufacture of
Steel and Ferro Silicon. On 9.10.2014, the Respondent submitted its return
of income forthe year2004-2005 disclosing an income ofRs.2,06,970/-
after claiming deductioi:i under Section 80-IB of the Income Tax Act on
the profits and gains of business of the respondent's industrial undertaking.
C
The respondent had received the following amounts on account of
subsidies:-
D
Transport subsidy -
Interest_ subsidy -
Power subsidy -
TotalRs.2,64,94,817 .00
Rs.2, 14,569.00
Rs.7,00,000.00
Rs.2, 74,09,386.00
6. The Assessing Officer, in the assessment order dated 7 .12.2006,
held that the amounts received by the assessee as subsidies were revenue
E receipts and did not qualify for deduction under Section 80-IB( 4) of the
Act and, accordingly, the respondent's claim for deduction of an amount
of Rs.2,74,09,386/- on account of the three subsidies afore-mentioned
were disallowed. The respondent-assessee preferred an appeal before
the Commissioner of Income Tax (Appeals), Guwahati, who, vide his
order dated 8.3.2007, dismissed the appeal of the respondent. Aggrieved
F
by the aforesaid order, the respondent preferred an appeal before the
ITAT which, by its order dated 19.3.2010, allowed the appeal of the
respondent. The Revenue carried the matter thereafter to the High
Court, under Section 260A of the Act, which resulted in the impugned
judgment dated 29.5.2013, which decided the matter against the Revenue.
G Revenue is therefore before us in appeal against this judgment.
H
7. Shri Radhakrishnan, leamed senior advocate appearing on
behalf of the Revenue, argued before us that any amount received by
way of subsidy was an amount whose source was the Government and
not the business of the assessee. He further argued that there is a world
of difference between the expression profits and gains "derived from"
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
STEELS LTD. [R.F. NARIMAN, J.]
any business, and profits "attributable to" any business, and that since
the section speaks of profits and gains "derived from" any business,
such profits and gains must have a close and direct nexus with the
business of the assessee. Subsidies that are allowed to the assessee
have no close and direct nexus with the business of the assessee but
have a close and direct nexus with grants from the Government. This
being the case, according to him, the respondent did not qualify for
deductions under Sections 80-IB and 80-IC of the Act. In the course of
his lengthy submissions, he made reference to a number of judgments
including the judgment reported as Liberty India v. Commissioner of
Income Tax reported in 2009 (9) SCC 328, which has been followed by
the Himachal Pradesh High Court in Supriya Gill v. CIT (20 I 0) 193
Taxman 12 (Himachal Pradesh). He submitted that the aforesaid
judgment of the Himachal Pradesh High Court has taken a diametrically
opposite view to the judgment of the Gauhati High Court, impugned in
the present appeals, and deserves to be followed, as it, in turn, has followed
Lil!erty India's judgment and another Supreme Court judgment reported
as CIT v. Sterling Foods, 23 7 !TR 579 ( 1999). He also relied upon
Sections 80-A and 80-AB in order to demonstrate the scheme of
deductions allowable under Part-VI-A of the Income Tax Act. He also
referred us to Sections 56 and 57 (iii) of the Act to buttress his submission
that subsidies being in the nature of "income from nfher sources" could
not be allowed to be deducted from profits and gains of business, which
fell under a different sub-heading in Section 14 of the Act. According to
him, there is one interpretation and one interpretation alone of Sections
80-IB and 80-IC, which cannot be deviated from with reference to any
so-called object of the said sections.
8. Countering these submissions, Shri.P. Chidambaram Learned
Senior Counsel appearing on behalf of the assessee, referred to the
Budget Speech of the Minister of Finance for 1999-2000 to buttress his
submission that the idea of giving these subsidies was to give a I 0 year
tax holiday to those who come from outside Meghalaya to set up industries
in that State, which is a backward area. He referred to several judgments,
including the judgment reported in Jai Bhagwan Oil and Flour Mills
v. Union of India and Others (2009) 14 SCC 63 and Sahney Steel
·and Press Works Ltd. v. Commissioner of Income Tax, A.P. - I,
Hyderabad, ( 1997) 7 SCC 764 to buttress his submission that subsidies
were given only in order that items which would go into the cost of
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SUPREME COLiRT REPORTS
[2016] 1 S.C.R.
manufacture of the products made by the respondent should be reduced,
as these subsidies were reimbursement for either the entire or partial
costs incurred by the respondent towards transporting raw materials to
its factory and transporting its finished products to dealers, who then sell
the finished products. Further, power subsidy, interest subsidy and
insurance subsidy were also reimbursed, either wholly or partially, power
being a necessary element of the cost of manufacture of the respondent's
products, and insurance subsidy being necessary to defray costs for
both manufacture and sale of the said products. Further, interest subsidy
would also go towards reducing the interest element relatable to cost,
and therefore all four subsidies being directly relatable to cost of
manufacture and/or sale would therefore necessarily fall within the
language of Sections 80-IB and 80-IC, as they are components of cost
of running a business from which profits and gains are derived. He
sought to distinguish the judgments cited by Shri Radhakrishnan, in
particular the judgment of this Court in Liberty India, on the ground
that the said judgment did not deal with a subsidy relatable to cost of
manufacture but dealt with a DEPB drawback scheme, which related
to export of goods and not manufacture of goods, thereby rendering the
said decision inapplicable to the facts of the present case. Shri S. Ganesh,
learned senior counsel appearing on behalf of some of the respondentassessees, reiterated the submissions made by Shri P. Chidambaram
and added that as all the subsidies went towards cost of manufacture or
sale of the products of the respondent, such subsidies being amounts of
cost which were actually incurred by the respondent and thereafter
reimbursed by the State, the principle ofnetting off recognized in several
decisions of this Court ought to be applied, and on application of the said
principle, it is clear that the subsidy received by the respondent was only
to depress cost of manufacture and/or sale and would therefore be
"derived from" profits and gains made from the business of the assessee.
He also relied upon a judgment of the Calcutta High Court dated
15.1.2015, in C.I.T. v. Cement Manufacturing Company Limited,
which has followed the Gauhati High Court, and a judgment of the Delhi
High Court in CIT v. Dharampal Premchand Ltd., 317 ITR 353.
9. We have heard learned counsel for the parties. Before
embarking on a discussion of the relevant case law, we think it is
necessary to set out Sections 80-IB and 80-IC insofar as they are relevant
for the determination of the present case.
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
STEELS LTD. [R.F. NARIMAN, J.]
"80-IB Deduction in respect of profits and gains from certain
industrial undertakings other than infrastructure
development undertakings
(I) Where the gross total income of an assessee includes any
profits and gains derived from any business referred to in subsections (3) to (11), (I IA) and (l IB) (such bu>iness being
hereinafter referred to as the eligible business), tnere shall, in
accordance with and subject to the provisions ofth;s section, be
allowed, in computing the total income of the assersee, a deduction
from such profits and gains of an amount equal to ·such percentage
and for such number of assessment years as specified in this
section.
(2) This section applies to any industrial undertaking which fulfils
all the following conditions, namely:-
(i) it is not formed by splitting up, or the reconstruction, ofa business
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already in existence:
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Provided thatthis condition shall not apply in respect ofan industrial
undertaking which is formed as a result of the re-establishment,
reconstruction or revival by the assessee of the business of any
such industrial undertaking as is referred to in section 33B, in the
circumstances and within the period specified in that section;
E
(ii) it is not formed by the transfer to a new business of machinery
or plant previously used for any purpose;
(iii) it manufactures or produces any article or thing, not being any
article or thing specified in the list in the Eleventh Schedule, or
operates one or more cold storage plant or plants, in any part of
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India:
~.
Provided that the condition in this clause shall, in relation to lt
small scale industrial undertaking or an industrial undertaking
referred to in sub-section (4) shall apply as ifthe words "not heing
any article or thing specified in the list iri the Eleventh Schedule"
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had been omitted.
Explanation 1- For the purposes of clause (ii), any machinery or-"
plant which was used outside India by any person other than the
assessee shall not be regarded as machinery or plant previously
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SUPREME COURT REPORTS
[2016] l S.C.R.
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used for any purpose, if the following conditions are fulfilled,
namely:-
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( a) such machinery or plant was not, at any time previous to the
date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any country
outside India; and
( c) no deduction on account of depreciation in respect of such
machinery or plant has been allowed or is allowable under the
provisions of this Act in computing the total income of any person
for any period prior to the date of the installation of the machinery
or plant by the assessee.
Explanation 2- Where in the case of an industrial undertaking,
any machinery or plant or any part thereof previously used for
any purpose is transferred to a new business and the total value
of the machinery or plant or part so transferred does not exceed
twenty per cent of the total value of the machinery or plant used
in the business, then, for the purposes of clause (ii) of this subsection, the condition specified therein shall be deemed to have
been complied with;
(iv) in a case where the industrial undertaking manufactures or
produces articles or things, the undertaking employs ten or more
workers in a manufacturing process carried on with the aid of
power, or employs twenty or more workers in a manufacturing
process carried on without the aid of power.
( 4) The amount of deduction in the case ofan industrial undertaking
in an industrially backward State specified in the Eighth Schedule
shall be hundred per cent of the profits and gains derived from
such industrial undertaking for five assessment years beginning
with the initial assessment year and thereafter twenty-five per
cent (or thirty per cent where the assessee is a company) of the
profits and gains derived from such industrial undertaking:
Provided that the total period of deduction does not exceed ten
consecutive assessment years (or twelve consecutive assessment
years where ~he assessee is a co-operative society) subject to
fulfillment of the condition that it begins to manufacture or produce
articles or things or to operate its cold storage plant or plants
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
961
STEELS LTD. [R.F. NARIMAN, J.]
during the period beginning on the 1st day of April, 1993 and ending
A
on the 31st day of March, 2004:
Provided further that in the case of such industries in the NorthEastern Region, as may be notified by the Central Government,
the amount of deduction shall be hundred per cent of profits and
gains for a period of ten assessment years, and the total period of B
deduction shall in such a case not exceed ten assessment years.
Provided also that no deduction under this sub-section shall be
allowed for the assessment year beginning on the 1st day of April,
2004 .or any subsequent year to any undertaking or enterprise
referred to in sub-section (2) of section 80-IC.
c
Provided also that in the case of an industrial undertaking in the
State of Jammu and Kashmir, the provisions of the first proviso
shall have effect as if for the figures, letters a11d words 31st day
of March, 2004, the figures, letters and words 31st day of
March, 2012 had been substituted:
o
Provided also that no deduction under this sub-section shall be
allowed to an industrial undertaking in the State of Jammu and
Kashmir which is engaged in the .manufacture or production of
any article or thing specified in Part C of the Thirteenth Schedule."
"80-IC Special provisions in respect of certain undertakings
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or enterprises in certain special category States
(1) Where the gross total income 6f an assessee includes any
profits and gains derived by an undertaking or an enterprise from
any business referred to in sub-section (2), there shall, in
accordance with and subject to the prnvisions of this section, be
F
allowed, in computing the total income of the assessee, a μeduction
from such profits and gains, as specified in sub-section (3)."
10. There is no dispute between the parties that the businesses
referred to in Section 80-IB are businesses which are eligible businesses
under both the aforesaid Sections. The parties have only locked horns
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on the meaning of the expression "any profits and gains derived from
any business".
11. The aforesaid provisions were inserted by the ·Finance Act
1999 with effect from 1.4.2000. The Finance Minister in his budget speech
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[2016] I S.C.R.
forthe year 1999-2000 spoke about industrial development in the North
Eastern Region as follows:-
"Mr. Speaker, Sir, I am conscious of the fact that, despite all our
announcements, the industrial development in North Eastern Region
has not come up to our expectations. To give industrialisation a
fillip in this area of the country, I propose a IO year tax holiday for
all industries set up in Growth Centres, Industrial Infrastructure
Development Corporations, and for other specified industries, in
the North Eastern Region. I would urge the industrial entrepreneurs
from th is part of the country to seize the opportunity and set up
modem, high value added manufacturing units in the region."
12. The reference to the IO year tax holiday for the industries set
up in the North Eastern Region is an obvious reference to the second
proviso to sub-section (4) of Section 80-IB set out hereinabove. The
speech of a Minister is relevant insofar it gives the background for the
introduction of a particular provision in the Income Tax Act. It is not
determinative of the construction of the said provision, ·but gives the
reader an idea as to what was in the Minister's mind when he sought to
introduce the said provision. As an external aid to construction, th is
Court has, in K.P. Varghese v. Income Tax Officer, Ernakulam and
Anr.,(1982) I SCR629, referring to a Minister's speech piloting a Finance
Bill, stated as under:-
"Now it is true that the speeches made by the Members of the
Legislature on the floor of the House when a Bill for enacting a
statutory provision is being debated are inadmissible for the purpose
of interpreting the statutory provision but the speech made by the
Mover of the Bill explaining the reason for the introduction of the
Bill can certainly be referred to for the purpose of ascertaining
the mischief sought to be remedied by the legislation and the object
and purpose for which the legislation is enacted. This is in accord
with the recent trend in juristic thought not only in Western countries
but also in India that interpretation of a statute being an exercise
in the ascertainment of meaning, everything which is logically
relevant should be admissible. In fact there are at least three
decisions of this Court, one in Loka Shikshana Trust v.
Commissioner oflncome-Tax [ 1975] 10 I !TR 234(SC) the other
in Indian ChamberofCommerce v. Commissioner oflncome-tax
[1975] IOI ITR 796(SC) and the third in Additional Commissioner
COMMISSIONER OF INCOME TAX v. MIS. MEGHALAYA
STEELS LTD. [R.F. NARlMAN, J.]
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oflncome-tax v. Surat Art Silk Cloth Manufacturers Association
(1980] 1·21 !TR !(SC) where the speech made by the Finance
Minister while introducing the exclusionary clause in Section 2
Clause (15) of the Act was relied upon by the Court for the purpose
of ascertaining what was the reason for introducing that clause.
The speech made by the Finance Minister while moving the
amendment introducing Sub-section (2) clearly states what were
the circumstances in which Sub-section (2) came to be passed,
what was the mischief for which Section 52 as it then stood did
not provide and which was sought to be remedied by the enactment
of Sub-section (2) and why the enactment of Sub-section (2) was
found necessary. It is apparent from the speech of the Finance
Minister that Sub-section(2) was enacted for the purpose of
reaching those cases where there was under-statement of
consideration in respect of the transfer or to put it differently, the
actual consideration received for the transfer was 'considerably
more' than that declared or shown by the assessee, but which
were not covered by Sub-section ( 1) because the transferee was
not directly or indirectly connected with the assessee. The object
and purpose of Sub-section (2), as explicated from the speech of
the Finance Minister, was not to strike at honest and bonafide
transactions where the consideration for the transfer was correctly
disclosed by the assessee but to bring within the net of taxation
those transactions where the consideration in respect of the transfer
was shown at a lesser figure than that actually.received by the
assessee, so that they do not escape the charge of tax on capital
gains by under-statement of the consideration. This was real object
and purpose of the enactment of Sub-section (2) and the
interpretation of this sub-section must fall in line with the
advancement of that object and purpose. We must therefore
accept as the underlying assumption of Sub-section (2) that there
is under-statement ofconsideration in respect of the transfer and
Sub-section (2) applies only where the actual consideration received
by the assessee isnot disclosed and the consideration declared in
respect of the transfer is shown at a lesser figure than that actually
received."
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13. A series of decisions have made a distinction between "profit
attributable to" and "profit derived from" a business. In one of the early
judgments, namely, Cambay Electric Supply Industrial Company
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Limited v. Commissioner of Income Tax, Gujarat II, ( 1978) 2 SCC
644, this 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. This Court held:
"As regards the aspect emerging from the expression "attributable
to" occurring in the phrase "profits and gains attributable to the
business of' the specified industry (here generation and distribution
of electricity) on which the learned Solicitor General relied, it will
be pertinent to observe that the Legislature has deliberately used
the expression "attributable to" and not the expression "derived
from". It cannot be disputed that the expression "attributable to"
is certainly wider in import than the expression "derived from".
Had the expression "derived from" been used it could have with
some force been contended that a balancing charge arising from
the 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. In thi~ connection it may
be pointed out that whenever the Legislature wanted to give a
restricted meaning in the manner suggested by the learned Solicitor
General it has used the expression "derived from", as for instance
ins. 80J. In our view since the expression of wider import, namely,
"attributable to" has been used, the Legislature intended to cover
receipts from sources other than the acfual conduct of the business
of generation and distribution of electricity." (Para 8)
14. In Commissioner Of Income Tax, Karnataka v. Sterling
Food~ Mangalore, ( 1999) 4 SCC 98, this Court had to decide whether
income derived by the assessee by sale of import entitlements on export
being made, was profit and gain derived from the respondent's industrial
undertaking under Section 80HH of the Indian Income Tax Act. This
Court referred to the judgment in Cambay Electric Supply (supra) and
emphasized the difference between the wider expression "attributable
to" as contrasted with "derived from".· In the course of the judgment,
G this Couri stated that the industrial undertaking itself had to be the source ·
of the profit., The business of the industrial undertaking had directly to
yield that profit. Having said this, this Court finally held:-
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"We do not think that the source of the import entitlements can be
said to be the industrial undertaking of the assessee. The source
of the import entitlements can, in the circumstances, only l;>e said
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
STEELS LTD. [R.F. NARIMAN, J.]
to be the Export Promotion Scheme of the Central Govt.
whereunder the export entitlements become available. There must
be forthe application o.fthe 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
industrial undertaking exports processed sea food. By reason of
such export, the Export Promotion Scheme applies. Thereunder,
the assessee is entitled to import entitlements, which it can sell.
The sale consideration therefrom cannot, in our view, be held to
constitute a profit and gain derived from the assessees' industrial
undertaking." (Para 13)
15. Similarly, in Pandian Chemicals Limited v Commissioner
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of Income Tax, 262 ITR 278, this Court dealt with the claim for a
deduction under Section 80HH of the Act. The question before the
Court was as to whether interest earned on a deposit made with the
Electricity Board forthe supply of electricity to the appellant's industrial
undertaking should be treated as income derived from the industrial
undertaking under Section 80HH. This 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
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undertaking itself. On this basis, the appeal was decided in favour of
Revenue.
16. The sheet anchor ofShri Radhakrishnan's submissions is the
judgment of this Court in Liberty India v. Commissioner oflncome
Tax, (2009) 9 SCC 328. This was a case referring directly to Section
80-IB in which 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. This 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. This court further
went on to state that by using th~ ~xμression "derived from" Parliament
intended to cover sources not beyond the first degree. This Court went
on to hold:-
"34. Oh an analysis of Sections 80-IA and 80-IB it becomes clear
that any industrial undertaking, which becomes eligible on satisfying
sub-section(2), would be entitled to deduction under sub-section
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(I) only to the extent of profits derived from such industrial
undertaking after specified date(s). Hence, apart from eligibility,
sub-section (I) purports to restrict the quantum of deduction to a
specified percentage of profits. This is the importance of the words
"derived from industrial undertaking" as against "profits attributable
to industrial undertaking''.
35. 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.
36. Therefore, in our view, 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 Section
80-!B. They belong to the category of ancillary profits of such
Undertakings." (Paras 34,35 and 36)
17. An analysis of all the aforesaid decisions cited on behalf of
the Revenue becomes necessary at this stage. In the first decision, that
is in Cambay Electric Supply Industrial Company Limited v
Commissioner of Income Tax, Gujarat II, this Court held that since
an expression of wider import had been used, namely "attributable to"
instead of"derived from'', the legislature intended to cover receipts from
sources other than the actual conduct of the business of generation and
distribution of electricity. In short, a step removed from the business of
the industrial undertaking would also be subsumed within the meaning of
the expression "attributable to". Since we are directly concerned with
the expression "derived from", th is judgment is relevant only insofar as
it makes a distinction between the expression "derived from", as being
COMMISSIONER OF INCOME TAX v. MIS. MEGHALAYA
STEELS LTD. [R.F. NARIMAN, J.]
something directly from, as opposed to "attributable to", which can be
said to include something which is indirect as well.
18. The judgment in Sterling Foods lays down a very important
test in order to determine whether profits and gains are derived from
business or an industrial undertaking. This Court has stated that there
should be a direct nexus between such profits and gains and the industrial
undertaking or business. Such nexus cannot be only incidental. It therefore
found, on the facts before it, that by reason of an export promotion
scheme, an assessee was entitled to import entitlements which it could
thereafter sell. Obviously, the sale consideration therefrom cou Id not be
said to be directly from profits and gains by the industrial undertaking
but only attributable to such industrial undertaking inasmuch as such
import entitlements did not relate to manufacture or sale of the products
of the undertaking, but related only to an event which was post
manufacture namely, export. On an application of the aforesaid test to
the facts of the present case, it can be said that as all the four 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, Shri Radhakrishnan 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. We are
afraid we cannot agree. What is to be seen for the applicability of
Sections 80-IB and 80-IC is whether the profits and gains are derived
from the business. 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-lC have reference to net profit. A11<1 n~t profit can only be calculated
by deducting from the sale price JI Jn 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.
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19. Similarly, the judgment in Pandian Chemicals Limited v
Commissioner of Income Tax is also distinguishable, as interest on a
deposit made for supply of electricity is not an elemc11t of cost at all, and
this being so, is therefore a step removed from the business of the
industrial undertaking. The derivation of profits on such a deposit made
with the Electricity Board could not therefore be said to flow directly
from the industrial undertaking itself, unlike the facts of the present case,
in which, as has been held above, all the subsidies aforementioned went
towards reimbursement of actual costs of manufacture and sale of the
products of the business of the assessee.
20. Liberty India being the fourth judgment in this line also does
not help Revenue. What this Court was concerned with was an export
incentive, which is very far removed from reimbursement of an element
of cost. A DEPB drawback scheme is not related to the business of an
industrial undertaking for manufacturing or selling its products. DEPB
entitlement arises only when the undertaking goes on to export the said
product, that is after it manufactures or produces the same. Pithily put, if
there is no export, there is no DEPB entitlement, and therefore its relation
to manufacture of a product and/or sale within India is not proximate or
direct but is one step removed. Also, the object behind DEPB entitlement,
as has been held by this Court, is to neutralize the incidence of customs
duty payment on the import content of the export product which is
provided for by credit to customs duty against the export product. In
such a scenario, it cannot be said that such duty exemption scheme is
derived from profits and gains made by the industrial undertaking or
business itself.
21. The Calcutta High Court in Merino Ply & Chemicals Ltd.
v. CIT, 209 !TR 508 [1994], held that transport subsidies were
inseparably connected with the business carried on by the assessee. In
that case, the Division Bench held:-
"We do not find any perversity in the Tribunal's finding that the
scheme of transport subsidies is inseparably connected with the
business carried on by the assessee. It is a fact that the assessee
was a manufacturer of plywood, it is also a fact that the assessee
has its unit in a backward area and is entitled to the benefit of the
scheme. Further is the fact that 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
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA
STEELS LTD. [R.F. NARIMAN, J.)
the recoupment is to make up possible profit deficit for operating
in a backward area.