2004 (8) TMI 68 - HC - Income Tax

Deduction u/s 80I - Whether Tribunal was right in giving deduction under section 80-I amounting to Rs. 1,50,733 received as compensation from insurance company against loss of raw material in fire? - Revenue submitted that the expression derived from an industrial undertaking used in section 80-I(1) could not include an amount received on account of insurance claim. - while computing the profits of the industrial undertaking for the purposes of deduction under section 80-I, what has to be excluded is not the gross receipt but the income arising out of this receipt. Such income can only be computed by deducting the cost of raw material destroyed in fire from the gross receipt of insurance claims. The raw material had been admittedly purchased during the year under consideration and its cost debited in the purchase account of the year. - Accordingly, the question is answered in the negative, i.e., in favour of the Revenue and against the assessee. However, in view of the observations made above, the Tribunal will compute the profit attributable to the receipt of insurance claim and exclude only such profit out of the total income for working out the u/s 80-I

Summary

Issues:
1. Deduction under section 80-I for compensation received from insurance company against loss of raw material in fire.
2. Deletion of addition made by Assessing Officer for car maintenance and depreciation.

Issue 1: Deduction under section 80-I for insurance claim:
The assessee received an insurance claim amount of Rs. 1,50,733 for the loss of raw material in a fire incident during the relevant year. The assessee included this amount in profits and claimed a deduction under section 80-I of the Income-tax Act, 1961. The Assessing Officer and the first appellate authority rejected this claim, but the Tribunal, on further appeal, held that the compensation received had a close connection with the profits derived from the industrial undertaking. The Tribunal reasoned that the raw material lost in the fire would have been used in generating income for the industrial undertaking, making the compensation received eligible to be considered as profit derived from the industrial undertaking.

The Revenue contended that the expression "derived from an industrial undertaking" in section 80-I(1) of the Act should not include an amount received from an insurance claim. The Revenue cited various judgments, including Pandian Chemicals Ltd. v. CIT, Andaman Timber Industries Ltd. v. CIT, North East Gases (P) Ltd. v. CIT, and Sterling Foods v. CIT, to support their argument.

In the judgment, the High Court referred to the decisions in Pandian Chemicals, Sterling Foods, North East Gases, and Andaman Timber Industries, highlighting the principle that for income to be considered as "derived from" an industrial undertaking, there must be a direct nexus between the profits and the industrial activity. The Court concluded that the insurance claim amount received by the assessee could not be considered income derived from the industrial undertaking for the purpose of claiming a deduction under section 80-I. However, the Court clarified that while computing the profits of the industrial undertaking, only the income arising from the insurance claim amount should be excluded, not the gross receipt. The Tribunal was directed to compute the profit attributable to the insurance claim receipt and exclude only such profit for working out the deduction under section 80-I.

Issue 2: Deletion of addition for car maintenance and depreciation:
The second issue involved the deletion of an addition made by the Assessing Officer for 1/6th of car maintenance and depreciation amounts. The Tribunal had deleted this addition, which was challenged by the Revenue. However, the judgment primarily focused on the first issue regarding the deduction under section 80-I for the insurance claim amount, as discussed above. The Court's decision on this issue impacted the overall computation of profits for the industrial undertaking and the subsequent deduction under section 80-I of the Act.

In conclusion, the Court ruled in favor of the Revenue and against the assessee regarding the deduction under section 80-I for the insurance claim amount. The judgment provided detailed analysis and interpretation of relevant legal principles and precedents to arrive at this decision, emphasizing the direct nexus required between the income and the industrial undertaking for it to be considered as derived from the said undertaking.