2006 (2) TMI 493 - AT - Income Tax

Deductions - Profits and gains from hotels or industrial undertakings etc. in backward areas

Summary

Issues:
- Denial of deduction under sections 80HH and 80-I of the Income-tax Act, 1961 on book profits.
- Treatment of consultancy charges and interest income as business income eligible for deductions under sections 80HH and 80-I of the Act.

Analysis:

Issue 1: Denial of Deduction under Sections 80HH and 80-I on Book Profits
The assessee, engaged in manufacturing various products, claimed deductions under sections 80HH and 80-I on its entire book profit, including receipts like dividends, interest, rent, and royalty. The Assessing Officer denied the deduction on receipts other than profits from product sales, stating they were not derived from the industrial undertaking. The CIT (Appeals) upheld this view, specifically noting that consultancy charges and interest income were not eligible for deductions under sections 80HH and 80-I. The tribunal observed that the revenue misunderstood the nature of consultancy charges, emphasizing that certain tailor-made products developed through research and licensed to specific consumers could be considered consultancy charges. The tribunal concluded that consultancy charges earned were derived from the industrial undertaking and eligible for deductions under sections 80HH and 80-I.

Issue 2: Treatment of Consultancy Charges and Interest Income as Business Income
Regarding consultancy charges, the revenue argued that the agreement with Hindustan Lever Ltd. only involved royalty payment and not consultancy charges. The tribunal, however, found that the assessee's research and development activities led to the development of specific products for exclusive consumers, qualifying as consultancy charges. The tribunal highlighted the lack of evidence from the revenue to dispute the connection between the consultancy charges and the industrial undertaking. Concerning interest income earned on FDRs pledged with a bank, the tribunal noted conflicting opinions and directed the matter back to the Assessing Officer for reconsideration in light of relevant judicial decisions.

Judgment on Departmental Appeals
The tribunal addressed the departmental appeals related to the computation of deductions under section 80-I and the allowance of deductions on interest income from FDRs. It referenced various High Court judgments supporting the assessee's position, directing the Assessing Officer to recompute the deductions under section 80-I independently. The tribunal also instructed a reevaluation of the interest income issue based on specific judicial decisions, emphasizing the need for a fair hearing before reaching a decision. Consequently, the tribunal partially allowed all five appeals for statistical purposes, maintaining the order of the CIT (Appeals) on certain issues and providing directions for further assessment on others.