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Commissioner of Income Tax v. M/s Meghalaya Steels Ltd.

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 7622 of 2014)Decided 9 Mar 2016
Civil Appeal No. 7622 of 2014
Justice Kurian Joseph · Justice Rohinton Fali Nariman

Background

A Meghalaya-based steel and ferro-silicon manufacturer received government transport, interest and power subsidies and claimed tax deductions on its profits under Sections 80-IB/80-IC, which apply to profits "derived from" an eligible industrial business located in backward regions like the North-East. The Income Tax Department disallowed the deduction, arguing the subsidies came from the government, not directly from the business, so they could not be "derived from" the industrial undertaking. This single lead appeal was heard together with roughly 25 connected appeals raising the identical question across several High Courts.

Decision Breakdown

The Court held that because all four subsidies (transport, interest, power and insurance) directly reimbursed costs that were actually incurred in manufacturing and selling the company's products, there was a direct, not merely incidental, nexus between the subsidies and the business's profits, satisfying the "derived from" test. It distinguished the Revenue's main precedent, Liberty India, on the ground that DEPB/duty-drawback export incentives (which are available only after manufacture is complete and relate to exports, not production cost) are different in kind from subsidies that reduce the actual cost of manufacture. It approved the reasoning of the Gauhati, Calcutta and Delhi High Courts and held that a contrary Himachal Pradesh High Court ruling had wrongly read the precedents. All the Revenue's appeals were dismissed, with no order as to costs.

Lesson Learnt

Government subsidies that directly offset the actual cost of running a business (e.g., transport, power or interest subsidies tied to production) can qualify as profits "derived from" that business for tax-deduction purposes, unlike more indirect incentives (such as export credits) that arise only as a downstream consequence of the business's activity.

Official source (sci.gov.in)View Judgment (PDF)

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