28 三月 2016

Subsidies to reimburse cost incurred in manufacturing and selling products – Profits ‘derived’ from business

Interpreting the term ‘profits derived from business’ the Supreme Court on 9-3-2016 held that as 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. The revenue department argued that deduction under Section 80–IB (for industrial undertaking set up in industrially backward States) was in respect of ‘profits and gains derived from such industrial undertaking’. Since the source of the amount by way of subsidy – transport subsidy, power subsidy and interest subsidy - was the government and not the business of the assesse, it was to be taxed as income from other sources and could not be included under Section 80–IB.

However, the Supreme Court opined that there is direct nexus between the subsidies which are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products. Therefore profits ‘derived’ for the purpose of Section 80-IB would be profits arrived at after deducting manufacturing cost and selling costs reimbursed to the assessee by the Government concerned.


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