2004 (5) TMI 13 - HC - Income Tax

Deduction u/s 80HH and 80-I - Tribunal holding that deduction u/s 80HH and section 80-I on the income arising from brass scrap obtained in the process of breaking and dismantling of guns is not an income derived from the industrial undertaking of iron rerolling - In our opinion, there is no nexus with the brass scrap obtained on dismantling of the guns in the main activity of the appellant of steel rerolling. Gun is not the essential raw material of the appellant industrial unit, in any case brass is not at all connected with steel rerolling. Thus, separation of brass cannot be said to be in the process of manufacture or a product or a by-product of the activity of the assessee s industrial undertaking. There is no direct nexus with the separation of the brass from the guns to the main activity, thus, considering the provisions of sections 80HH and 80-I, it cannot be said to be profit and gain derived from industrial undertaking. Thus, deductions on profits and gains under sections 80HH and 80-I are not admissible and have been rightly disallowed by Tribunal.

Summary

Issues Involved:
1. Deduction under sections 80HH and 80-I of the Income-tax Act, 1961.
2. Classification of income from brass scrap as derived from an industrial undertaking.
3. Depreciation rate on truck used for transporting goods of others.

Issue-wise Detailed Analysis:

1. Deduction under sections 80HH and 80-I of the Income-tax Act, 1961:
The primary issue revolves around whether the income from the sale of brass scrap obtained by breaking and dismantling guns qualifies for deductions under sections 80HH and 80-I of the Income-tax Act. The assessee argued that the brass scrap was derived from an industrial undertaking and thus eligible for the deduction. However, the ITAT reversed the Commissioner of Income-tax (Appeals)'s decision, ruling that the brass scrap did not arise from the industrial undertaking of iron rerolling, and hence, deductions under sections 80HH and 80-I were not applicable.

2. Classification of income from brass scrap as derived from an industrial undertaking:
The court examined whether the income from brass scrap could be considered as profits and gains derived from the industrial undertaking. The assessee's business involved rerolling steel scrap, and the brass scrap was obtained incidentally from dismantling guns purchased from an auction. The court noted that brass was not a raw material used in the rerolling process and had no direct nexus with the industrial undertaking. Citing precedents like CIT v. Sterling Foods and Pandian Chemicals Ltd. v. CIT, the court emphasized the necessity of a "direct nexus" between the profits and the industrial undertaking for the application of sections 80HH and 80-I. The court concluded that the brass scrap did not meet this criterion as it was not integral to the manufacturing process of the industrial undertaking.

3. Depreciation rate on truck used for transporting goods of others:
The ITAT had allowed depreciation on the truck at 25 percent, instead of the claimed 40 percent, because the truck was used for transporting goods of others and hire charges of Rs. 36,000 were received. This aspect was not contested further in the appeal.

Conclusion:
The court upheld the ITAT's decision, ruling that the income from the sale of brass scrap was not derived from the industrial undertaking and thus not eligible for deductions under sections 80HH and 80-I. The appeal was dismissed, and the parties were directed to bear their own costs.