COMMISSIONER OF INCOME TAXversusM/S. MEGHALAYA STEELS LTD.

                            [2016] 1 S.C.R. 952



A                 COMMISSIONER OF INCOME TAX
                                    v.
                    M/S. MEGHALAYA STEELS LTD.
                      (Civil Appeal No.7622 of2014)
B                           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.
           Dismissing the appeals, the Court
D
        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
E
  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
F 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
G 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
H    "·
                                    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 c
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
                                                                     D
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          E
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,             F
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         G
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.                                                               H
954                 SUPREME COURT REPORTS               [2016] I S.C.R.


A          Pandian Chemicals Limited v Commissioner of Income
           Tax 262 ITR 278 - distinguished.
           Merino Ply & Chemicals Ltd. v. CIT, 209 ITR 508
           (1994] - approved.
           Liberty India v. Commissioner of Income Tax 2009 (9)
B          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
c          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.
D          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
 E         to.
                              Case Law Reference
      2009 f~) sec 328            h.eld inapplicable.      Para7
      (2010) 193 Taxman 12        referred to.             Para7
 F
      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
 G
      (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
 H
  COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA                            955
                   STEELS LTD.

209 ITR 508 [1994]             approved.                Para 21           A
242 ITR 204 [2000]             referred to.             Para 22
         CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7622
of2014
     From the Judgment and Order dated 29.05.2013 of the High Court       B
Gauhati in ITA No. 7 of2010
                                  WITH
       C. A. NOS. 8493, 8494 AND 8496 OF 2012
       C. A. NOS. 7623 AND 7624 OF 2014                                   c
       C. A. NOS. 3624, 3623, 5238, 5239, 5236, 6-040 AND 6039 OF
2015
      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           D
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         E
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
petitions.                                                                F
      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    G
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.
                                                                          H
956                   SUPREME COURT REPORTS                     (2016] l S.C.R.


A           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.
B
             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 ofthe respondent's industrial undertaking.
 C    The respondent had received the following amounts on account of
      subsidies:-
            Transport subsidy -                  Rs.2,64,94,817 .00
             Interest_ subsidy -                 Rs.2, 14,569.00
D            Power subsidy -                     Rs.7,00,000.00
            Total-                               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.
             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"
 H
   COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA                                  957
            STEELS LTD. [R.F. NARIMAN, J.]

any business, and profits "attributable to" any business, and that since         A
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
                                                                                 B
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              c
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
                                                                                 D
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          E
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              G
 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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958                   SUPREME COLiRT REPORTS                    [2016] 1 S.C.R.


A     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
 B
      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
 c    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
 D
      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 respondent-
      assessees, reiterated the submissions made by Shri P. Chidambaram
 E    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
 F
       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
 G     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.
 H
COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA                                  959
         STEELS LTD. [R.F. NARIMAN, J.]

  "80-IB Deduction in respect of profits and gains from certain               A
  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 sub-
  sections (3) to (11), (I IA) and (l IB) (such bu>iness being                B
  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.                                                                    c
  (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
  already in existence:                                                       o
  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           F
   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"       G
   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
                                                                               H
960            SUPREME COURT REPORTS                     [2016] l S.C.R.


A     used for any purpose, if the following conditions are fulfilled,
      namely:-
      (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
B     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
 c    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
D     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 sub-
      section, the condition specified therein shall be deemed to have
      been complied with;
      (iv) in a case where the industrial undertaking manufactures or
 E    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
 F    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:
 G
      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
 H
   COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA                               961
            STEELS LTD. [R.F. NARIMAN, J.]

      during the period beginning on the 1st day ofApril, 1993 and ending     A
      on the 31st day of March, 2004:
      Provided further that in the case of such industries in the North-
      Eastern 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            E
      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         G
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
                 !                                                            H
962                   SUPREME Ct.,\.:RT REPORTS                  [2016] I S.C.R.


A     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
 B          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."
 c
              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
 D
      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
 E    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
 F           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
 G           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
 H           [1975] IOI ITR 796(SC) and the third in Additional Commissioner
  COMMISSIONER OF INCOME TAX v. MIS. MEGHALAYA                                 963
           STEELS LTD. [R.F. NARlMAN, J.]

      oflncome-tax v. Surat Art Silk Cloth Manufacturers Association           A
      (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
                                                                               B
      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           c
      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
                                                                               D
      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        E
      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
                                                                               F
       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        G
      respect of the transfer is shown at a lesser figure than that actually
       received."
       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                   H

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964                  SUPREME COURT REPORTS                    (2016] I S.C.R.


A 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
 B         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"
 c         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
 D         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
 E         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
 F 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:-
            "We do not think that the source of the import entitlements can be
            said to be the industrial undertaking of the assessee. The source
 H
            of the import entitlements can, in the circumstances, only l;>e said
   COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA                               965
            STEELS LTD. [R.F. NARIMAN, J.]

      to be the Export Promotion Scheme of the Central Govt.                  A
      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
                                                                              B
      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
                                                                              c
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 D
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 ·E
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
                                                                              F
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       G
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        H
966                   SUPREME COURT REPORTS                     [20 I 6] I S.C.R.



A           (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''.
B
            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
c           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
 D          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
 E          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
 F    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
 G    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
 H
   COMMISSIONER OF INCOME TAX v. MIS. MEGHALAYA                                967
            STEELS LTD. [R.F. NARIMAN, J.]

something directly from, as opposed to "attributable to", which can be         A
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     B
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
                                                                               c
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           D
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         E
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    F
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      G
 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.
                                                                               H
968                   SUPREME COURT REPORTS                      [2016] 1 S.C.R.


A            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
 B
      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
 c 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
 D 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
 E 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.
 F    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
 G           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
 H
   COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA                               969
            STEELS LTD. [R.F. NARIMAN, J.)

      the recoupment is to make up possible profit deficit for operating      A
      in a backward area. Therefore, it is beyond all manner of doubt
      that the subsidies were inseparably connected with the profitable
      conduct of the business and in arriving at such a decision on the
      facts the Tribunal committed no error."
       22. However, in CIT v. Andaman Timber Industries Ltd.,                 B
242 !TR 204 [2000), the same High Court arrived at an opposite conclusion
in considering whether a deduction was allowable under Section SOHH
of the Act in respect of transport subsidy without noticing the aforesaid
earlier judgment of a Division Bench of that very court. A Division
Bench of the Calcutta High Court in C.I.T. v. Cement Manufacturing
Company Limited, by a judgment dated 15.1.2015, distinguished the
                                                                              c
judg1Dent in CIT v. Andaman Timber Industries Ltd. and followed
the impugned judgment of the Gauhati High Court in the present case.
In a pithy discussion of the law on the subject, the Calcutta High Court
held:
      "Mr. Bandhyopadhyay, learned Advocate appearing for the                 D
      appellant, submitted that the impugned judgment is contrary to a
      judgment of this Court in the case of CIT v. Andaman Timber
      Industries Ltd. reported in (2000) 242 ITR, 204 wherein this Court
      held that transport subsidy is not an immediate source and does
      not have direct nexus with the activity of an industrial undertaking.   E
      Therefore, the amount representing such subsidy cannot be treated
      as profit derived from the industrial undertaking. Mr.
      Bandhypadhyay submitted that it is not a profit derived from the
      undertaking. The benefit under section SO!C could not therefore
      have been granted.
                                                                              F
      He also relied on a judgment of the Supreme court in the case of
      Liberty India v. Commissioner oflncome Tax, reported in (2009)
      317 !TR 218 (SC) wherein it was held that subsidy by way of
      customs duty draw back could not be treated as a profit derived
      from the industrial undertaking.
                                                                              G
      We have not been impressed by the submissions advanced by
      Mr. Bandhyopadhyay. The judgment of the Apex Court in the
      case of Liberty India (supra) was in relation to the subsidy arising
      out of customs draw back and duty Entitlement Pass-book Scheme
      (DEPB). Both the incentives considered by the Apex Court in
                                                                              H
970                  SUPREME COURT REPORTS                    [2016] l S.C.R.


A           the case of Liberty India could be availed after the manufacturing
            activity was over and exports were made. But, we are concerned
            in this case with the transport and interest subsidy which has a
            direct nexus with the manufacturing activity inasmuch as these
            subsidies go to reduce the cost of production. Therefore, the
            judgment in the case of Liberty India v. Commissioner oflncome
 B
            Tax has no manner of application. The Supreme Court in the
            case of Sahney Steel and Press Works Ltd. & Others versus
            Commissioner oflncome Tax, reported in [ 1997] 228 ITR at page
            257 expressed the following views:-
               " .... Similarly, subsidy on power was confined to 'power
c              consumed for production'. In other words, if power is
               consumed for any other purpose like setting up the plant and
               machinery. the incentives will not be given. Refund of sales
               tax will also be in respect of taxes levied after commencement
               of production and up to a period of five years from the date of
D              commencement of production. It is difficult to hold these
               subsidies as anything but operation subsidies. These subsidies
               were given to encourage setting up of industries in the State of
               Andhra Pradesh by making the business of production and sale
               of goods in the State more profitable."

 E          23. We are of the view that the judgment in Merino Ply &
      Chemicals Ltd. and the recent judgment of the Calcutta High Court
      have correctly appreciated the legal position.
             24. We do not find it necessary to refer in detail to any of the
      other judgments that have been placed before us. The judgment in Jai
 F    Bhagwan case (supra) is helpful on the nature of a transport subsidy
      scheme, which is described as under:
            "The object of the Transport Subsidy Scheme is not augmentation
            of revenue, by levy and collectio11 of tax or duty. The object of
            the Scheme is to improve trade and commerce between the remote
 G          parts of the country with other parts, so as to bring about economic
            development ofremote backward regions. This was sought to be
            achieved by the Scheme, by making it feasible and attractive to
            industrial entrepreneurs to start and run industries in remote parts,
            by giving them a level playing field so that they could compete
            with their counterparts in central (non-remote) areas.
 H
   COMMISSIONER OF INCOME TAX v. M/S. MEGHALAYA                                 971
            STEELS LTD. [R.F. NARIMAN, J.]

      The huge transportation cost for getting the raw materials to the         A
      industrial unit and finished goods to the existing market outside
      the state, was making it unviable for industries in remote parts of
      the country to compete with industries in central areas. Therefore,
      industrial units in remote areas were extended the benefit of
      subsidized transportation. For industrial units in Assam and other
                                                                                B
      north-eastern States, the benefit was given in the form of a subsidy
      in respect of a percentage of the cost of transportation between a
      point in central area (Siliguri in West Bengal) and the actual location
      of the industrial unit in the remote area, so that the industry could
      become competitive and economically viable." (Paras 14 and 15)
       25. The decision in Sahney Steel and Press Works Ltd. v.
                                                                                c
Commissioner of Income Tax, A.P. - I, Hyderabad (I 997) 7 SCC
764, dealt with subsidy received from the State Government in the form
of refund of sales tax paid on raw materials, machinery, and finished
goods; subsidy on power consumed by the industry; and exemption from
water rate. It was held that such subsidies were treated as assistance          D
given for the purpose of carrying on the business of the assessee.
        26. We do not find it necessary to further encumber this judgment
with the judgments which Shri Ganesh cited on the netting principle. We
find it unnecessary to further substantiate the reasoning in our judgment
based on the said principle.                                                    E
      27. A Delhi High Court judgment was also cited before us being
CITv. Dharampal Premchand Ltd., 317 !TR 353 from which an SLP
preferred in the Supreme Court was dismissed. This judgment also
concerned itself with Section 80-IB of the Act, in which it was held that
refund of excise duty should not be excluded in arriving at the profit          F
derived from business for the purpose of claiming deduction under Section
80-IB of the Act.
       28. It only remains to consider one fu11her argument by Shri
Radhakrishnan. He has argued that as the subsidies that are received
by the respondent, would be income from other sources referable to              G
Section 56 of the Income Tax Act, any deduction that is to be made, can
only be made from income from other sources and not from profits and
gains of business, which is a separate and distinct head as recognised by
Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in
his submission that assistance by way of subsidies which are reimbursed
                                                                                H
972                   SUPREME COURT REPORTS                    [2016] 1 S.C.R.


A 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
B
      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 ofbusiness or profession", it is obvious that
      subsidies which go to reimbursement of cost in the production of goods
c     of a particular 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".
             29. For the reasons given by us, we are of the view that the
      Gauhati, Calcutta and Delhi High Courts have correctly construed
D     Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having
      wrongly interpreted the judgments in Sterling Foods and Liberty India
      to arrive at the opposite conclusion, is held to be wrongly decided for the
      reasons given by us hereinabove.
            30. All the aforesaid appeals are, therefore, dismissed with no
 E    order as to costs.
      Devika Gujral                                            Appeals dismissed.