Rajasthan State Mines & Minerals Ltd v. Assistant Commissioner Of Income Tax, Circle-6, Statute Circle, Ncr Building, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 146 / 2016 Rajasthan State Mines & Minerals Ltd. registered office at C-89,90, Lal Kothi Scheme, Jaipur through its Senior Manager Finance &Accounts Sh. Rajendr Rao S/o Sh. Pratap Singh Rao R/o 273,Sector-9, Behind Crystal Plaza, Udaipur. ----Appellant Versus Assistant Commissioner of Income Tax, Circle-6, Statute Circle, NCR Building, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar with Ms. ArchanaFor Respondent(s) : Mr. Anuroop Singhi with Mr. Aditya Vijay _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 13/12/2017 1. By way of this appeal, the appellant has assailed thejudgment and order of the tribunal whereby tribunal has partlyallowed the appeal of the assessee dismissing the appeal of thedepartment. 2.This court while admitting the appeal on 31.1.2017 framedfollowing substantial question of law:- “(i) Whether under the facts andcircumstances of the case, the learnedIncome Tax Appellate Tribunal has notlegally erred in not allowing the claim ofRs.1,01,45,849/-onaccountofamortization of cost paid towards the acquisition of wasting asset i.e. miningland/leasehold land u/s 37 of the Act? (ii) Whether on the facts andcircumstances of the case the license touse the land for mining is not covered bythe definition of intangible asset u/s 2(11)of the Act entitling depreciation allowanceu/s 32(1)(ii) of the Act? (iii) Whether on the facts andcircumstances of the case and in law theexpenditure incurred on computerization ofMines Department of the Government ofRajasthan of Rs.50 lacs does not qualify tobe an expenditure expended “wholly andexclusively for the purpose of business”allowable u/s 37 of the Act?” 3.Subsequently vide order dt. 31.10.2017 one additional substantial question of law was added which reads as under:- (iv) Whether under the facts andcircumstances of the case the learnedIncome Tax Appellate Tribunal has notlegally erred in not allowing the benefitofdeductionu/s80IAonRs.3,44,23,812/- received on accountof minimum guarantee covenant underthe agreement by holding the same tobe not ”derived” from the business ofpower generation undertaking?” 4.The facts of the case are that the case of the assessee wasselected for scrutiny assessment u/s 143(3) under CASS. Noticeu/s 143(2) dt. 27.8.2011 sent through registered post and servedupon the assessee. In response to notice, the A/R of the assesseefiled application for adjournment and the case was adjourned sinedie. Thereafter, issued notice u/s 142(2) alongwith query letter dt.30.4.2012, served upon the assessee and the case was fixed forhearing on 17.5.2012. 4.1Further in response to notice u/s 142(1) and query letter theA/R of the assessee submitted a copy of return of income,computation sheet, balance sheet and audit report etc.Subsequent to change incumbent , issued notice u/s 142(1) &143(2) alongwith query letter dt. 25.9.2012, served throughregistered post and the case was fixed for hearing on 8.10.2012.Further, in response to notice u/s 142(1) and 143(2) and queryletter. Assessee derives income from mining, processing andtrading of minerals, consultancy services, power generation &allied products. There is no change in the nature of business ascompared to preceding year/s. 5.Counsel for the appellant Mr. Jhanwar has taken us to theAccounting Standard (AS) 6 and how to get a depreciation, he hastaken us to Introduction clause (1) (ii) which reads as under:- Introduction 1. This Statement deals with depreciationaccounting and applies to all depreciableassets, except the following items towhich special considerations apply:— 5.Counsel for the appellant Mr. Jhanwar has taken us to theAccounting Standard (AS) 6 and how to get a depreciation, he hastaken us to Introduction clause (1) (ii) which reads as under:- Introduction 1. This Statement deals with depreciationaccounting and applies to all depreciableassets, except the following items towhich special considerations apply:— (ii) wasting assets including expenditureon the exploration for and extractionofminerals, oils, natural gas and similarnon-regenerative resources; 5.1 Then, he has taken us to definition of depreciable assets under Clause 3.2 (iii) which reads as under:- Definitions 3.2 Depreciable assets are assets which (iii) are held by an enterprise for use inthe production or supply of goods andservices, for rental to others, or foradministrative purposes and not for the purpose of sale in the ordinary course ofbusiness.” 5.2 He contended that in view of the Accounting Standard theobservations which are made by the tribunal that this is capitalexpenses, the depreciation refusal is contrary to law for which hehas relied upon the decision of Supreme Court in M/s. MadrasIndustrial Investment Corporation Ltd. vs. The Commissioner ofIncome Tax, Tamil Nadu-I, Madras reported in (1997) 255 ITR 802 (SC) wherein Supreme Court held as under:- 15. The Tribunal, however, held that sincethe entire liability to pay the discount hadbeen incurred in the accounting year inquestion, the assessee was entitled todeduct the entire amount of Rs. 3,00,000in that accounting year. This conclusiondoes not appear to be justified looking tothe nature of the liability. It is true thatthe liability has been incurred in theaccounting year. But the liability is acontinuing liability which stretches over aperiod of 12 years. It is, therefore, aliability spread over a period of 12 years.,Ordinarily, revenue expenditure which isincurred wholly and exclusively for thepurpose of business must be allowed inits entirely in the year in which it isincurred. It cannot be spread over anumber of years even if the assessee haswritten it off in his books over a period ofyears. However, the facts may justify anassessee who has incurred expenditure ina particular year to spread and claim itover a period of ensuing years. In fact,allowing the entire expenditure in oneyear might give a very distorted picture ofthe profits of a particular year. Thus in thecase of Hindustan Aluminium CorporationLtd. v. Commissioner of Income-Tax,Calcutta-I : [1983]144ITR474(Cal) theCalcutta High Court upheld the claim ofthe assessee to spread out a lump sumpayment to secure technical assistanceand training over a number of years and allowed a proportionate deduction in theaccounting year in question. 16. Issuing debentures at a discount isanother such instance where, althoughthe assessee has incurred the liability topay the discount in the year of issue ofdebentures, the payment is to secure abenefit over a number of years. There is acontinuing benefit to the business of thecompany over the entire period. Theliability should, therefore, be spread overthe period of the debentures. 17. The appellant, therefore, had, in itsreturn, correctly claimed a deduction onlyin respect of the proportionate part ofdiscount of Rs. 12,500 over the relevantaccounting period in question. In thisconnection, we agree with the reasoningand conclusion of the Madhya PradeshHigh Court in the case of M.P. FinancialCorporation v. Commissioner of Income-tax (supra). The view that we have takenis also in conformity with accountingpractice of showing the discount in"discount on debentures account" whichis written off over the period of thedebentures. 17. The appellant, therefore, had, in itsreturn, correctly claimed a deduction onlyin respect of the proportionate part ofdiscount of Rs. 12,500 over the relevantaccounting period in question. In thisconnection, we agree with the reasoningand conclusion of the Madhya PradeshHigh Court in the case of M.P. FinancialCorporation v. Commissioner of Income-tax (supra). The view that we have takenis also in conformity with accountingpractice of showing the discount in"discount on debentures account" whichis written off over the period of thedebentures. 18. The appellant is, therefore, entitled todeduct a sum of Rs. 12,500 out of thediscount of Rs. 3,00,000 in the relevantassessmentyear.Thebalanceexpenditure of Rs. 2,87,500 cannot bededucted in the assessment year inquestion. Question No. 2 (as reframed)therefore, which is the subject matter ofappeal before us, is answered in thenegative in so far as it relates to thededuction of Rs. 2,87,500 in theassessment year in question though forreasons entirely different from thosegiven by the High Court. The second partof the reframed question is answered inthe affirmative But only a proportionatepart of the discount can be deducted inthe assessment year in question as setout earlier. The appeal is disposed ofaccordingly and the judgment of the HighCourt is set aside. There will be no orderas to costs in the circumstances of thecase. 5.3Regarding question 3, Mr. Jhanwar has taken us to theprovisions of Section 37 of the Income Tax Act which reads asunder:- Section 37. (1) Any expenditure (notbeing expenditure of the naturedescribed in sections 30 to 36 and notbeing in the nature of capital expenditureor personal expenses of the assessee),laid out or expended wholly andexclusively for the purposes of thebusiness or profession shall be allowed incomputing the income chargeable underthe head "Profits and gains of businessor profession". 6. He has relied upon the following decisions:- 6.1In S.A. Builders Ltd. vs. Commissioner of Income Tax(Appeals), Chandigarh and Anr. [2007] 288 ITR 1 (SC) it has beenheld as under :- “22. In our opinion, the decisions relating toSection 37 of the Act will also be applicable toSection 36(1)(iii) because in Section 37 alsothe expression used is "for the purpose ofbusiness". It has been consistently held indecisions relating to Section 37 that theexpression "for the purpose of business"includes expenditure voluntarily incurred forcommercial expediency, and it is immaterial ifa third party also benefits thereby. 25. The expression "commercial expediency" isan expression of wide import and includessuch expenditure as a prudent businessmanincurs for the purpose of business. Theexpenditure may not have been incurredunder any legal obligation, but yet it isallowable as a business expenditure if it wasincurred on grounds of commercialexpediency. 34. We agree with the view taken by the DelhiHigh Court in CIT v. Dalmia Cement (Bhart)Ltd. : [2002]254ITR377(Delhi) that once it isestablished that there was nexus between the 25. The expression "commercial expediency" isan expression of wide import and includessuch expenditure as a prudent businessmanincurs for the purpose of business. Theexpenditure may not have been incurredunder any legal obligation, but yet it isallowable as a business expenditure if it wasincurred on grounds of commercialexpediency. 34. We agree with the view taken by the DelhiHigh Court in CIT v. Dalmia Cement (Bhart)Ltd. : [2002]254ITR377(Delhi) that once it isestablished that there was nexus between the expenditure and the purpose of the business(which need not necessarily be the business ofthe assessee itself), the Revenue cannotjustifiably claim to put itself in the arm-chairof the businessman or in the position of theboard of directors and assume the role todecide how much is reasonable expenditurehaving regard to the circumstances of thecase. No businessman can be compelled tomaximize its profit. The income tax authoritiesmust put themselves in the shoes of theassessee and see how a prudent businessmanwould act. The authorities must not look at thematter from their own view point but that of aprudent businessman. As already statedabove, we have to see the transfer of theborrowed funds to a sister concern from thepoint of view of commercial expediency andnot from the point of view whether theamount was advanced for earning profits. 35. We wish to make it clear that it is not ouropinion that in every case interest onborrowed loan has to be allowed if theassessee advances it to a sister concern. It alldepends on the facts and circumstances of therespective case. For instance, if the Directorsof the sister concern utilize the amountadvanced to it by the assessee for theirpersonal benefit, obviously it cannot be saidthat such money was advanced as a measureof commercial expediency. However, moneycan be said to be advanced to a sister concernfor commercial expediency in many othercircumstances (which need not be enumeratedhere). However, where it is obvious that aholding company has a deep interest in itssubsidiary, and hence if the holding companyadvances borrowed money to a subsidiary andthe same is used by the subsidiary for somebusiness purposes, the assessee would, in ouropinion, ordinarily be entitled to deduction ofinterest on its borrowed loans. 6.2 In Commissioner of Income Tax vs. Rajasthan Spg. andWvg. Mills Ltd. [2005] 272 ITR 487 (RAJHC), it has been held asunder :- 22. The principle was considered by theSupreme Court in Empire Jute Co. Ltd. v. CIT :[1980]124ITR1(SC) . In the said case, theCourt observed that there may be cases whereexpenditure, even if incurred for obtaining anadvantage of enduring benefit may, none theless, be on revenue account and the test ofenduring benefit may break down. It is notevery advantage of enduring nature acquiredby an assessee that brings the case within theprinciple laid down in this test. What ismaterial to consider is the nature of theadvantage in a commercial sense and it is onlywhere the advantage is in the capital field thatthe expenditure would be disallowable on anapplication of this test. If the advantageconsists merely in facilitating the assessee'strading operations or in enabling themanagement in the conduct of the assessee'sbusiness to be carried on more efficiently ormore profitably while leaving the fixed capitaluntouched, the expenditure would be onrevenue account, even though the advantagemay endure for an indefinite future. The testof enduring benefit is, therefore, not a certainor conclusive test and it cannot be appliedblindly and mechanically without regard to theparticular facts and circumstances of a givencase. The test of acquisition of capital asset wasreferable to acquisition of such asset to thetrade and not de hors its ownership vesting inthe trade of the assessee or in the assessee.In the present case, there is no dispute on thepoint that the assessee did not acquire anycapital asset for his trade or himself. Even the test of acquiring enduring benefitwas held to be not applicable where suchacquisition does not result in expansion ofprofit-making apparatus of the assessee. Thecase of Empire Jute Co. Ltd (supra) was thecase in which the assessee, by incurring thedisputed expenses purchased the loom hoursresulting in increased loom hours for theassessee during the currency of contractperiod, which was to augment production andproductivity of assessee per loom. Even applying the test of enduring benefit, theSupreme Court held it to be a revenueexpenditure. It was considered that bypurchase of loom hours, no new asset wascreated. There was no expansion of the profit making apparatus of the assessee. The incomeearning machine remained the same as it wasprior to the purchase of loom hours. 23. In the present case also, by incurringexpenditure for construction of building for theinstitute, the profit-making apparatus of theassessee was not expanded. Its incomeearning machinery remained the same.Assessee has, by contributing to constructionof building, only facilitated the training of hisworkers at hand without necessitating theirtraining at distant place causing more expenseof time and money. Therefore, it cannot besaid that assessee acquired any enduringbenefit in the capital field. Therefore, the testof enduring benefit also cannot help theRevenue in the case at hand. As it was abenefit which was only to run business of theassessee more efficiently by getting hisworkmen trained, the ratio in Empire Jute Co.Ltd.'s case (supra) clearly applies to it. 24. The decision of the Supreme Court inRoyal Calcutta Turf Club (supra) is also pointerto this conclusion. In the Royal Calcutta TurfClub's case (supra) the Supreme Court hasheld that the expenditure incurred for trainingthe Indian boys as jockeys was notexpenditure in the nature of capital but was arevenue expenditure, therefore, the benefitwhich the assessee deriving dwells in future.The Court observed as under : "... the conclusion is that the amount indispute was laid out wholly and exclusively forthe purpose of the respondent's businessbecause if the supply of jockeys of efficiencyand skill failed, the business of the respondentwould no longer be possible. Thus, the moneywas spent for the preservation of therespondent's business." By laying out the expenditure for bringing intoexistence a building to be owned by the Stateand to be run by the State for the benefit ofthe industry for the purpose of training itsworkmen was clearly related to the running ofthe business of the assessee more efficientlyand smoothly by securing the assessee'sworkmen trained, skilled and efficient. 25. We have no hesitation in coming to theconclusion that, in the facts and circumstanceswhich exist in the case, the expenses incurredby the assessee towards construction of the building for Manak Manikya Lal Verma TextileInstitute, Bhilwara were expenses wholly andexclusively incurred for the purpose ofbusiness of the assessee and was not In thenature of capital expenditure, therefore, thesame is allowable as revenue expenses underSection 37(1) of the IT Act, 1961. The Tribunalwas justified in reaching this conclusion. Nointerference can be made on this count. 6.3In Commissioner of Income Tax vs. Hindustan Zinc Ltd.[2010] 322 ITR 478 (RAJHC) it has been held as under :- 25. We have no hesitation in coming to theconclusion that, in the facts and circumstanceswhich exist in the case, the expenses incurredby the assessee towards construction of the building for Manak Manikya Lal Verma TextileInstitute, Bhilwara were expenses wholly andexclusively incurred for the purpose ofbusiness of the assessee and was not In thenature of capital expenditure, therefore, thesame is allowable as revenue expenses underSection 37(1) of the IT Act, 1961. The Tribunalwas justified in reaching this conclusion. Nointerference can be made on this count. 6.3In Commissioner of Income Tax vs. Hindustan Zinc Ltd.[2010] 322 ITR 478 (RAJHC) it has been held as under :- 11. In Rajasthan Spg. & Wvg. Mills Ltd.'s case(supra), the Division Bench of this Court afterdue consideration of the various decisions ofthe Hon'ble Supreme Court and High Courtsincluding the decision of the Supreme Court inAssociated Cement Companies Ltd.'s case(supra), decision of the Bombay High Court inBombay Dyeing & Manufacturing Co. Ltd.'scase (supra) and the decision of the Hon'bleSupreme Court in the matter of CIT v. MadrasAuto Service (P) Ltd. : [1998]233ITR468(SC) ,opined as under: From the aforesaid judgments of the SupremeCourt, it is apparent that merely because theamount spent has been used for constructionof a building or structure of permanent natureis not the decisive test for holding theexpenses to be capital outlay or revenueoutlay. The two tests emerging from theaforesaid decisions are that firstly where thebuilding or construction of any permanentstructure is brought into existence that is byitself not sufficient to hold the expenses to becapital nature invariably. Where suchconstruction does not result in acquisition ofany capital assets to the trade of the assesseeor the property does not become the propertyof the assessee, it does not result inacquisition of capital assets of enduring natureby the assessee. Secondly, it is also clearlydiscernible that if such expenses are incurredfor the purposes of business for deriving anybenefit whether to preserve the business or tofacilitate the running of the business moresmoothly or to make the business more profitable or to secure any other advantage forthe assessee's business or incurringexpenditure by seeking exemption from orreduction in incurring of other expenses whichwould have been ordinarily allowable asrevenue expenditure of the assessee'sbusiness, such expenses are to be treated ashaving been incurred wholly and exclusivelyfor the business of the assessee and revenueexpenditure. Such expenses cannot beconstrued as a capital expenses. 12. Adverting to the facts of the present case,admittedly, the assessee's super smelter plantrequires adequate quantity of water for itsoperation and unless and until, water isavailable, the super smelter plant would notfunction and would not be able to produce anyitems. Admittedly, the Ghosunda Dam hasbeen constructed by the State Governmentand the assessee has made expenditure for itsalteration so as to ensure sharing of the waterwith the State Government without having anyright or ownership in the dam or the water.Even, the assessee's share of water is alsodetermined by the State Government. Thus,the expenditure incurred by the assessee forcommercial expediency relates with carryingon of business and falls within such matterexpenditure as prudent businessman mayincur for the purpose of the business. Theoperational expenses incurred by the assesseesolely intended for furtherance of theenterprise can be no means be treated asexpenditure of capital nature. 13. Keeping in view the object and purpose ofthe expenditure and totality of the facts andcircumstances of the case noticed above, inour considered opinion, the benefit received bythe assessee company on account of theexpenditure incurred cannot be said to be anadvantage in the capital field. We are inagreement with the view taken by the CIT(A)and affirmed by the learned Tribunal that theobject and effect of the expenditure made bythe assessee is to facilitate its trade operationand enable the management to conductbusiness more efficiently or more profitably.Therefore, the question No. 1 (supra) deservesto be answered in affirmative i.e. in favour ofthe assessee and against the Revenue. 14. Regarding the guest house expenses, it isthe common ground between the parties that the matter is squarely covered by thedecisions of the Hon'ble Supreme Court inBritannia Industries Ltd.'s case (supra). In thesaid case, the Hon'ble Supreme Court whileconsidering the question as to whether theexpression "premises and buildings" referredto in Sections 30 and 32 and used for thepurposes of business operation would includewithin its scope and ambit, the expression"residential accommodation in nature of guesthouse" used in Sub-sections (3), (4) and (5)of Section 37 of the Act of 1961, observed asunder: While the two expressions can be similarlyinterpreted, a distinction has been sought tobe introduced for the purposes of Section 37by specifying the nature of building to be aguest house. In our view, the intention of thelegislature appears to be clear andunambiguous and was intended to exclude theexpenses towards rents, repairs and alsomaintenance of premises/accommodationused for the purposes of a guest house of thenature indicated in Sub-section (4) of Section37. When the language of a statute is clearand unambiguous, the Courts are to interpretthe same in its literal sense and not to give ita meaning which would cause violence to theprovisions of the statute. If the legislature hadIntended that deduction would be allowable inrespectofalltypesofbuildings/accommodations used for thepurposes of business or profession, then itwould not have felt the need to amend theprovisions of Section 37 so as to make adefinite distinction with regard to buildingsused as guest houses as defined in Sub-section (5) of Section 37 and the provisions ofSections 31 and 32 would have been sufficientfor the said purpose. 6.4 In The Commissioner of Income Tax vs. Chemicals andPlastics India Ltd. [2007] 292 ITR 115 (MADHC) it has been heldas under: 8. The approach, hence, needs to be that of apractical and prudent businessman rather thanfrom the Revenue's strict classification of a right. As the Supreme Court held in thedecision reported in : [1997]223ITR101(SC)(Sri Venkata Satyanarayana Rice MillContractors Co. v. CIT), what is to be seen isnot whether a payment was compulsory forthe assessee to make or not. The correct testis that of a commercial expediency. The ApexCourt held that considering the variousdecisions held that any contribution made bythe assessee to a fund which is directlyconnected or related the carrying on of theassessee's business or which results in benefitto the assessee's business, has to be regardedas a deduction allowable under Section 37 ofthe Income Tax Act, 1961. Although the caserelated to a contribution to a public welfarefund, the ratio decidendi will guide thedecision in this case too. right. As the Supreme Court held in thedecision reported in : [1997]223ITR101(SC)(Sri Venkata Satyanarayana Rice MillContractors Co. v. CIT), what is to be seen isnot whether a payment was compulsory forthe assessee to make or not. The correct testis that of a commercial expediency. The ApexCourt held that considering the variousdecisions held that any contribution made bythe assessee to a fund which is directlyconnected or related the carrying on of theassessee's business or which results in benefitto the assessee's business, has to be regardedas a deduction allowable under Section 37 ofthe Income Tax Act, 1961. Although the caserelated to a contribution to a public welfarefund, the ratio decidendi will guide thedecision in this case too. 9. In may be noted that the decision reportedin : [2004]266ITR170(Mad) (CIT v. MadrasRefineries Ltd.), while considering a claim ofthe expenditure incurred by an assesseeproviding drinking water facility as well asestablishing or improving the school meant forthe residents in the locality, a Division Benchof this Court, held that the amount spent couldnot be regarded as being wholly outside theambit of the business concerns of theassessee. The Division Bench held as follows: The concept of business was not static. It hasevolved over a period of time to include withinits fold the concrete expression of care andconcern for the society at large and the peopleof the locality in which the business is located,in particular. Being known as a good corporatecitizen brings goodwill of the local community,as also with the regulatory agencies and thesociety at large, thereby creating anatmosphere in which the business can succeedin a greater measure with the aid of suchgoodwill. 10. The facts in this case before us stand on astronger footing, since the contribution madeby the company is for the Chamber ofCommerce whose activities are closely linkedwith the welfare of the Corporate entities whoare members therein and whose interest aretaken care of by the Chamber of Commerce,irrespective of whether the expense incurred iscompulsory or otherwise. Hence, considering the fact that the payment is made for thepurpose of the business, it satisfies thecommercial expediency test to accept the caseof the assessee. In the circumstances, we donot find any justification to accept the case ofthe Revenue that the Provisions of Section 37have to be viewed in a very strict manner. Itmay be noted that Section 37 itself isconcerned with 'an expenditure laid at orextended wholly or exclusively for the purposeof business or profession' to qualify fordeduction. With the necessity no longer a validtest, we reject the Revenue's appeal. 6.5Regarding question no.4, he also taken us to the provisionsof Sub section (I) & (iv) of Section 80I(A) of the Income Tax Actwhich reads as under:- 80-IA.(1) Where the gross total income of anassessee includes any profits and gainsderived by an undertaking or an enterprisefrom any business referred to in sub-section(4) (such business being hereinafter referredto as the eligible business), there shall, inaccordance with and subject to the provisionsof this section, be allowed, in computing thetotal income of the assessee, a deduction ofan amount equal to hundred per cent of theprofits and gains derived from such businessfor ten consecutive assessment years.Section (4) This section applies to— (i) any enterprise carrying on the business of(i) developing or (ii) operating and maintainingor(iii)developing,operatingandmaintainingany infrastructure facility whichfulfils all the following conditions, namely :— (a) it is owned by a company registered inIndia or by a consortium of such companies orby an authority or a board or a corporation orany other body established or constitutedunder any Central or State Act; (i) any enterprise carrying on the business of(i) developing or (ii) operating and maintainingor(iii)developing,operatingandmaintainingany infrastructure facility whichfulfils all the following conditions, namely :— (a) it is owned by a company registered inIndia or by a consortium of such companies orby an authority or a board or a corporation orany other body established or constitutedunder any Central or State Act; (b) it has entered into an agreement with theCentral Government or a State Government ora local authority or any other statutory bodyfor (i)developing or (ii)operating andmaintaining or (iii) developing, operating andmaintaining a new infrastructure facility; 6.6In support of his contentions, he relied on the decision of theSupreme Court in Commissioner of Income Tax vs. MeghalayaSteels Ltd. [2016] 383 ITR 217 (SC) it has been held as under : 18. The judgment in Sterling Foods lays down avery important test in order to determinewhether profits and gains are derived frombusiness or an industrial undertaking. ThisCourt has stated that there should be a directnexus between such profits and gains and theindustrial undertaking or business. Such nexuscannot be only incidental. It therefore found,on the facts before it, that by reason of anexport promotion scheme, an Assessee wasentitled to import entitlements which it couldthereaftersell.Obviously,thesaleconsideration therefrom could not be said to bedirectly from profits and gains by the industrialundertaking but only attributable to suchindustrial undertaking inasmuch as such importentitlements did not relate to manufacture orsale of the products of the undertaking, butrelated only to an event which was postmanufacture namely, export. On an applicationof the aforesaid test to the facts of the presentcase, it can be said that as all the foursubsidies in the present case are revenuereceipts which are reimbursed to the Assesseefor elements of cost relating to manufacture orsale of their products, there can certainly besaid to be a direct nexus between profits andgains of the industrial undertaking or business,and reimbursement of such subsidies. However,Shri Radhakrishnan stressed the fact that theimmediate source of the subsidies was the factthat the Government gave them and that,therefore, the immediate source not being fromthe business of the Assessee, the element ofdirectness is missing. We are afraid we cannotagree. What is to be seen for the applicabilityof Sections 80-IB and 80-IC is whether theprofits and gains are derived from thebusiness. So long as profits and gains emanatedirectly from the business itself, the fact thatthe immediate source of the subsidies is the Government would make no difference, as itcannot be disputed that the said subsidies areonly in order to reimburse, wholly or partially,costs actually incurred by the Assessee in themanufacturing and selling of its products. The"profits and gains" spoken of by Sections 80-IBand 80-IC have reference to net profit. And netprofit can only be calculated by deducting fromthe sale price of an article all elements of costwhich go into manufacturing or selling it. Thusunderstood, it is clear that profits and gains arederived from the business of the Assessee,namely profits arrived at after deductingmanufacturing cost and selling costsreimbursed to the Assessee by the Governmentconcerned. 24. We do not find it necessary to refer indetail to any of the other judgments that havebeen placed before us. The judgment in JaiBhagwan case (supra) is helpful on the natureof a transport subsidy scheme, which isdescribed as under: 24. We do not find it necessary to refer indetail to any of the other judgments that havebeen placed before us. The judgment in JaiBhagwan case (supra) is helpful on the natureof a transport subsidy scheme, which isdescribed as under: The object of the Transport Subsidy Scheme isnot augmentation of revenue, by levy andcollection of tax or duty. The object of theScheme is to improve trade and commercebetween the remote parts of the country withother parts, so as to bring about economicdevelopment of remote backward regions. Thiswas sought to be achieved by the Scheme, bymaking it feasible and attractive to industrialentrepreneurs to start and run industries inremote parts, by giving them a level playingfield so that they could compete with theircounterparts in central (non-remote) areas. The huge transportation cost for getting theraw materials to the industrial unit and finishedgoods to the existing market outside the state,was making it unviable for industries in remoteparts of the country to compete with industriesin central areas. Therefore, industrial units inremote areas were extended the benefit ofsubsidized transportation. For industrial units inAssam and other northeastern States, thebenefit was given in the form of a subsidy inrespect of a percentage of the cost oftransportation between a point in central area(Siliguri in West Bengal) and the actual locationof the industrial unit in the remote area, so that the industry could become competitiveand economically viable. (Paras 14 and 15) 25. The decision in Sahney Steel and PressWorks Ltd. v. Commissioner of Income Tax,A.P.-I, Hyderabad : (1997) 7 SCC 764, dealtwith subsidy received from the StateGovernment in the form of refund of sales taxpaid on raw materials, machinery, and finishedgoods; subsidy on power consumed by theindustry; and exemption from water rate. Itwas held that such subsidies were treated asassistance given for the purpose of carrying onthe business of the Assessee. 26. We do not find it necessary to furtherencumber this judgment with the judgmentswhich Shri Ganesh cited on the nettingprinciple. We find it unnecessary to furthersubstantiate the reasoning in our judgmentbased on the said principle. 27. A Delhi High Court judgment was also citedbefore us being CIT v. Dharampal PremchandLtd. : 317 ITR 353 from which an SLP preferredin the Supreme Court was dismissed. Thisjudgment also concerned itself with Section 80-IB of the Act, in which it was held that refundof excise duty should not be excluded inarriving at the profit derived from business forthe purpose of claiming deduction UnderSection 80-IB of the Act. 6.7He also relied upon the judgment of Delhi High Court inCommissioner of Income Tax vs. Advance Detergents Ltd. (2011)339 ITR 0081 (DELHC) it has been held as under : 14. Thus, according to the Gujarat High Court,when interest is paid on delayed payment, itcan be treated as higher sale price which isconverse situation to offering of cash discountbecause the transaction remains the same andthere is no distinction as to the source.Looking from this angle, the interest becomespart of the higher sale price and is clearlyderived from the sales made and is notdivorced therefrom. It is, thus, the directresult of the sale of goods and the income isderived from the business of industrialundertaking. 15. Same view is expressed by various otherHigh Courts in the following judgments: (i) Phatela Cotgin Industries (P) Ltd. v. CIT :(2008) 303 ITR 411 (P&H); (ii) CIT v. Flender Macneill Gears Ltd. : (1984)41 CTR (Cal) 60 : (1984) 150 ITR 83 (Cal); (iii) Tata Sponge Iron Ltd. v. CIT : (2007) 292ITR 175 (Ori); (iv) CIT v. Indo Matsushita Carbon Co. Ltd. :(2006) 205 CTR (Mad) 493 : (2006) 286 ITR201 (Mad). 15. Same view is expressed by various otherHigh Courts in the following judgments: (i) Phatela Cotgin Industries (P) Ltd. v. CIT :(2008) 303 ITR 411 (P&H); (ii) CIT v. Flender Macneill Gears Ltd. : (1984)41 CTR (Cal) 60 : (1984) 150 ITR 83 (Cal); (iii) Tata Sponge Iron Ltd. v. CIT : (2007) 292ITR 175 (Ori); (iv) CIT v. Indo Matsushita Carbon Co. Ltd. :(2006) 205 CTR (Mad) 493 : (2006) 286 ITR201 (Mad). 16. There is no reason to depart from theaforesaid view taken consistently by variousHigh Courts, which is in tune with the principlelaid down by the Supreme Court in LibertyIndia (supra). We answer this question infavour of the assessee and against theRevenue. 6.8In Commissioner of Income Tax vs. Moonlight Builders andDevelopers reported in (2008) 307 ITR 197 (Delhi), similar viewwas taken. 6.9He also relied on two decisions of Tribunal where no appealwas preferred. Therefore, they cannot discriminate between twodifferent assessee. 10.Counsel for the respondent contended that on first issueregarding Section 37, the expenses which are made are of capitalnature, therefore, it cannot be taken as revenue expenditure. Inthat view of the matter, the first issue may not be considered.However, regarding second issue, he contended that assessee isnot entitled for depreciation since he has not made any capitalinvestment and this is raw material. 10.1 Regarding issue no.3, he contended that there is concurrentfinding of authorities and the issue is required to be answered infavour of the department. 10.2 Regarding fourth issue, he has relied upon the decision ofMadhya Pradesh High Court, Indore Bench in CIT vs. Alpine SolvexLtd. reported in (2005) 276 ITR 92 wherein it has been held asunder:- 10. It is not in dispute that a sum of Rs.57,83,675 claimed by the assessee to be inthe nature of profit said to be derived fromthe industrial undertaking was not an amountearned directly by sale of their finishedcommoditymanufacturedintheirundertaking/plant. In other words, theamount claimed was alleged to be received byassessee from their supplier and purchasernot as a price/value of the goods but it was inthe nature of compensation/damages onaccount of breach alleged to have beencommitted by them qua assessee inperformance of contract. We cannot thusequate such sum at par with actual profitwhich the assessee earned by sale of thefinished goods. 11. In our opinion, the assessee is entitled toclaim deduction of that amount which theyhave derived as direct profit by sale ofmanufactured goods in their newly set upindustrial undertaking. The object underlinedin these sections is to give incentive to theassessee who earns/derive income from theiractual manufacturing activity, i.e., by sale oftheir products. Any indirect or incidental profitcannot be regarded as profit earned out ofmain business activity. It has to be taxed asan income earned from other sources asdefined under Section 56(1) r/w Section 14(f)ibid. 12. Submission of learned counsel for theassessee was that amount received by theassessee is nothing but profitable price of the 11. In our opinion, the assessee is entitled toclaim deduction of that amount which theyhave derived as direct profit by sale ofmanufactured goods in their newly set upindustrial undertaking. The object underlinedin these sections is to give incentive to theassessee who earns/derive income from theiractual manufacturing activity, i.e., by sale oftheir products. Any indirect or incidental profitcannot be regarded as profit earned out ofmain business activity. It has to be taxed asan income earned from other sources asdefined under Section 56(1) r/w Section 14(f)ibid. 12. Submission of learned counsel for theassessee was that amount received by theassessee is nothing but profitable price of the goods and having direct nexus with thebusiness activity of the assessee. In reply,learned counsel for the Revenue contendedthat assessee in order to create artificial profithas entered into such bogus contracts withtheir purchasers/suppliers with a view toshow bogus profit so that they may earnmore benefit under Section 80HH/80I. In ouropinion, the submission of learned counsel forthe assessee has no merit. As held supra, thewords "derived from" has got to be givenrestricted meaning and hence, we cannotinclude such type of earning (even assumingit to be genuine) within the meaning ofexpression as profit/gains derived fromindustrial undertaking. [See Cochin Co. v. CIT: [1978]114ITR822(Ker), Hindustan LeverLtd. v. CIT : [1980]121ITR951(Bom), NorthEast Gases (P) Ltd. v. CIT Orissa Tyres Ltd. v.CIT : [1991]188ITR342(Orissa) ,CIT v. BiharAlloy Steels Ltd. : [1994]206ITR350(Patna),Godavari Sugar Mills Ltd. v. CIT :[1991]191ITR359(Bom) and CIT v. CochinRefineries Ltd. : [1985]154ITR345(Ker) ]. 10.3 He also relied upon the decision of Supreme Court in CIT vs.Alpine Solvex Ltd. reported in (2003) 259 ITR 719 wherein it hasbeen held as under:- In our opinion, a substantial question of lawdid arise in this case, which is as follows: "Whether on the facts and in thecircumstances of the case and in law the ITATwas justified in holding that the liquidateddamages received by the assessee on accountof breach of contract are nothing but a part ofprofit received from the industrial undertakingon which the assessee is entitled for deductionunder sections 80HH and 80IA?" The High Court, in our opinion, was wrong indismissing the appeal in limine. We, therefore,allow this appeal set aside the High Court'sorder and direct the High Court to hear theappeal on merits.” 11.We have heard counsel for the parties. 12.On the first issue, we are in complete agreement with theview taken by the tribunal, therefore, first issue is required to beanswered in favour of the department and against the assessee. 13.However, on the second issue, on a close scrutiny of Subsection 32 (ii) of the Income Tax Act which reads as under:- Section 32. (1) In respect of depreciation of- (ii) know-how, patents, copyrights, trademarks, licences, franchises or any otherbusiness or commercial rights of similarnature, being intangible assets acquired on or after the 1st day of April, 1998, 13.1. In our considered opinion, the rights which are given to theassessee are of commercial rights which are akin to license formining. 13.2.In that view of the matter, the contention of the assesseeregarding depreciation u/s 32(ii) is required to be accepted,therefore, the second issue is answered in favour of the assesseeand against the department. 14.Regarding issue no.3, taking into consideration the expenseswhich are done in view of decision in SA Builder’s case (supra) andother judgments relied on the assessee, the issue is answered infavour of the assessee. 15.On issue no.4 regarding liquidated damages which are givenare business losses which the undertaking ought to have done, ifthe machines which were delivered to the assessee would have or after the 1st day of April, 1998, 13.1. In our considered opinion, the rights which are given to theassessee are of commercial rights which are akin to license formining. 13.2.In that view of the matter, the contention of the assesseeregarding depreciation u/s 32(ii) is required to be accepted,therefore, the second issue is answered in favour of the assesseeand against the department. 14.Regarding issue no.3, taking into consideration the expenseswhich are done in view of decision in SA Builder’s case (supra) andother judgments relied on the assessee, the issue is answered infavour of the assessee. 15.On issue no.4 regarding liquidated damages which are givenare business losses which the undertaking ought to have done, ifthe machines which were delivered to the assessee would have performed very well, therefore, damages which were given for lossof business which was guaranteed by the supplier, MadhyaPradesh High Court judgment will not apply in the present case.