Judgment:
1. We find it convenient to dispose of these two appeals filed by the Revenue by means of this consolidated order. Appeal of the Revenue for the asst. yr. 2000-01 is directed against the order dt. 3rd Nov., 2003 of the CIT(A), Shimla, and the other appeal is for the asst. yr.
1997-98 and is directed against the order dt. 1st Oct., 2003, of the CIT(A), Palampur. The only dispute, common in both the appeals, involved in these appeals, is relating to calculation of deduction under Section 80-IA.3. Dealing first with Revenue's appeal in ITA No. 152/Chd/2004 for the asst. yr. 2000-01, the relevant facts are that the assessee is a partnership concern having set up an industrial unit at Paonta Sahib for the manufacture of calcite powder and limestone powder. It has claimed deduction under Section 80-IA for the entire income. On scrutiny of accounts, the AO observed that a sum of Rs. 10,55,869 had been credited by the assessee under the head 'freight subsidy' and deduction under Section 80-IA was calculated after taking into account the said subsidy. The AO relying upon the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC), held that the assessee was not entitled to deduction in respect of freight subsidy. The AO also referred to the decision of Supreme Court in the case of CIT v. Sterling Foods (1999) 237 ITR 579 (SC), in support of the view.
4. Before the CIT(A), it was pointed out that the freight subsidy received by the assessee was to compensate the assessee for having set up an industrial unit in the backward area so as to make the unit viable and derive reasonable profits from running of the unit. Reliance has also been placed on the decision of the Supreme Court in the case of Sahney Steel & Press Works Ltd. v. CIT (1997) 228 ITR 253 (SC), wherein it was held that subsidy given was to assist the unit to run profitably and are operational subsidies and are accordingly of revenue character. Reliance was also placed on the following decisions of the Tribunal : (i) Rollatainers Ltd, v. Dy. CIT (2000) 69 TTJ (Del) 8 : (2000) 111 Taxman 221 (Del)(Mag) (iii) India Gelatin & Chemicals Ltd. v. ITO (1989) 45 Taxman 22 (Ahd)(Mag)Associated Flexible & Wires (P) Ltd. v. Dy. CIT (1999) 64 TTJ (Pune) 839 : (1999)70 ITD 374(Pune) (v) Rajasthan Petro Synthetic Ltd. v. Dy. CIT (1997) 60 ITD 682 (Del) (vi) Sarda Plywood Industries Ltd. v. CIT (1999) 238 ITR 354 (Cal) and; The CIT(A), after considering the various judgments referred to in his order, held that the transport subsidy was directly linked with the income of the assessee from the industrial unit and that the assessee was entitled to deduction in respect of the said subsidy.
5. Revenue is aggrieved. The learned Departmental Representative contended that the issue in this case is covered by the decision of Supreme Court in the case of CIT v. Sterling Foods (supra) and that of the Madras High Court in the case of CIT v. Viswanathan & Co. (2003) 261 ITR 737 (Mad). The decision of Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (supra) has also been relied upon in support of the contention.
6. The learned counsel for the assessee, on the other hand, relied upon the order of the CIT(A). It has been contended that the Government reimburses the assessee 75 per cent of the cost of transport charges incurred for transportation of raw material, etc. As a result of the grant of subsidy granted by the Government, the expenditure on transportation is reduced and, therefore, the transport subsidy granted by the Government does not have any separate existence. The said expenditure is linked with the expenditure and accordingly is not to be treated as separate source of income. It was accordingly pleaded that the appeal of the Revenue may be dismissed.
7. We have given our careful consideration to the rival contentions.
The issue involved in this case is as to whether the transport subsidy received by the assessee under the Transport Subsidy Scheme, 1971 was includible in determining the profits derived from the business of the industrial undertaking for the purposes of deduction under Section 80-IA. The Government of India had introduced the Transport Subsidy Scheme in the year 1971 in selected areas with poor infrastructure for raw material brought into and finished goods taken out of such areas.
In Himachal Pradesh, transport subsidy is given on the freight cost between the location of industrial unit in the State and the nearest railhead. The purpose of this scheme is to encourage entrepreneurs to locate industrial units in Himachal Pradesh in view of the Government policy to promote the industrial development of the backward areas. The aim is to reduce the disparity in the development amongst the various States and also create employment opportunities. It has to be appreciated that the Transport Subsidy Scheme, 1971 aims to indemnify the loss incurred by the industrial unit for the very fact that it is located in the backward area and therefore, it has to incur extra cost to make up for the natural disadvantages of poor infrastructure, hilly terrain, long distance of raw material source and marketing centers resulting in substantive transport cost. As per the Scheme, 75 per cent of the cost incurred by the unit or the specified rates, whichever is lower, is reimbursed to the assessee. The assessee has received the transport subsidy to the extent of Rs. 10,55,869.69. The said amount has been taken into consideration in computing the profits and gains of the industrial undertaking. The AO has relied upon the decisions of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (supra) and CIT v. Sterling Foods (supra) in support of the finding that the subsidy received by the assessee does not fall within the ambit of profits and gains derived from the industrial undertaking.
The CIT(A) has compared the provisions of Sections 80HH and 80-IA and pointed out a distinction between the two provisions of the Act.
According to the CIT(A), deduction under Section 80-IA is available to the assessee in respect of any business of the industrial undertaking.
The CIT(A) has also relied upon the decision of the Calcutta High Court in the case of Merinoply & Chemicals Ltd. v. CIT (1994) 209 ITR 508 (Cal), where their Lordships have held that the transport subsidy is inseparably connected with the business carried on by the assessee.
Their Lordships of the Calcutta High Court have held in the aforementioned decision that transport expenditure is an incidental expenditure of assessee's business and it is that expenditure which the subsidy recoups and the purpose of the recoupment is to make up the possible profit deficit for operating in a backward area. This decision has been followed by the same High Court in the case of Sarda Plywood Industries Ltd. v. CIT (supra).
8. In our considered view, the distinction drawn by the CIT(A) between Sections 80HH and 80-IA is appreciable if we compare the language of the two provisions. We, therefore, reproduce Sections 80HH and 80--IA as applicable to asst. yr. 2000-01 as under : "80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof." "80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or an enterprise referred to in Sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years commencing at any time during the periods as specified in Sub-section (2) and thereafter, twenty-five per cent of the profits and gains for further five assessment years." It is evident from the language of the two provisions that there is a distinction rightly pointed out by the CIT(A) in the two provisions of the statute. Section 80HH provides that, where the gross total income of the assessee includes any profits and gains derived from an industrial undertaking.....
Section 80-IA provides that where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking. So, the words any business of an industrial undertaking in Section 80-IA assume importance for the sake of issue involved in this appeal. In this case, assessee has received transport subsidy for recouping the expenditure incurred as a result of setting up an industrial unit in the backward area. The grant of subsidy is directly connected with the business of the undertaking. If no expenditure is incurred by the assessee, there will be no recouping of the expenditure. The assessee is entitled to reimbursement of the expenses only when the expenditure is incurred. In other words, the cost incurred by the assessee on the freight outward and inward is reduced as part of it is borne by the Government of India by subsidising the cost. In Sahney Steel & Press Works Ltd. v. CIT (supra), their Lordships of the Supreme Court have held that subsidies given to assist the unit to run profitably are operational subsidies and are of revenue character. Their Lordships accordingly held that the subsidy granted by the Government of the said nature is of revenue character and includible as income of the assessee. Thus, there is no doubt in our mind that the transport subsidy granted to the assessee was with a view to run the unit profitably and the nature of the subsidy is operational and cannot be segregated from the business of the industrial undertaking. Taking the totality of the facts and circumstances of, this case into consideration, we are of the view that the transport subsidy granted to the assessee was rightly taken by the assessee into consideration in working out the profits and gains of business of the undertaking. As already pointed out, the grant of subsidy is linked with the incurring of the expenditure and, therefore, the receipt is not a separate source of income. The receipt is the business income of the undertaking and the same has rightly been taken into consideration as income of the undertaking under the said head of income. Our view is supported by the decision of Calcutta High Court in the case of Merinoply & Chemicals Ltd. (supra). We accordingly see no infirmity in the order of the CIT(A) in having deleted the disallowance made by the AO. We, therefore, dismiss the appeal of the Revenue.
9. Similar is the ground raised in Revenue's appeal for the asst. yr.
1997-98 in ITA No. 15l/Chd/2004. The CIT(A) has allowed relief of Rs. 1,22,613 on account of transport subsidy for the purpose of computation of profits derived from business of the undertaking. For the reasons discussed in Revenue's appeal for the asst. yr. 2000-01, the order of the CIT(A) does not call for any interference. The same is accordingly upheld.10. In the result, both the appeals filed by the Revenue are hereby dismissed.