2018 (3) TMI 150 - HC - Income Tax

Entitled to claim deduction u/s 80HH and 80I - profit derived by the assessee from the processing of cashew in the factories owned by outsiders - Held that - Section 80I would not be applicable in the case of processing done in other factories not belonging to the assessee and the deduction granted by the Assessing Officer was only with respect to the assessee s own factories. The interference made by the first appellate authority was only to verify whether the assessee s own factories, with respect to which the deduction was disallowed are new industrial undertakings. The claim of the assessee for deduction, with respect to profits and gains derived from the industrial undertakings of its sister concerns, under Section 80I was declined by the AO and affirmed by the first appellate authority. There was no appeal to the Tribunal by the assessee. We are of the opinion that no question of law arises under Section 80I. The assessee is engaged in the processing of cashew nuts and such processing is done in its own factories and also in the factories of other assessee, who are sister concerns. The derivation of income of the assessee is from such processing and it cannot be said to be income which is derived other than from the activity of processing. We find from the order of AO that the rejection was made for the following reason For claiming deduction u/s 80HH, the material factor is the industrial undertaking and not the assessee . We agree with the statement, but it would not result in the dis-allowance. On the contrary, the benefit being conferred on the industrial undertakings within backward areas; the assessee who entrusts the processing to third parties would be entitled to claim the deduction for the profits and gains arising from the processing, if the factory is in a backward area. The emphasis is on the profits and gains derived from an industrial undertaking in backward areas whether it be the assessee s own industrial undertaking or of another. As has been held by the first appellate authority, an assessee carrying on processing of another will not be able to claim such benefit. But an assessee who carries on processing in an industrial undertaking belonging to another, but situated in a backward area would be entitled to claim the benefit under Section 80HH. - Decided in favour of the assessee.

Summary

Issues:
1. Entitlement to claim deduction under Sections 80HH and 80I of the Income Tax Act, 1961 for profits derived from processing cashew in factories owned by outsiders.
2. Interpretation of Section 80I and Section 80HH regarding deduction eligibility for profits derived from industrial undertakings in backward areas.
3. Applicability of Section 80HH to processing activities carried out in sister concerns' industrial undertakings.
4. Comparison of the Division Bench decision in Indian Resins and Polymers with the Supreme Court decision in Pandian Chemicals Ltd. regarding the nexus of profits with industrial undertakings.

Analysis:

1. The Revenue appealed against the Income Tax Appellate Tribunal's decision confirming the first appellate authority's order. The main issue was whether the assessee could claim deductions under Sections 80HH and 80I for profits from processing cashew in factories owned by outsiders. The Assessing Officer and the first appellate authority limited the deduction to profits from the assessee's own industrial undertakings, leading to a denial of the claim for profits from sister concerns' factories.

2. Section 80I allows a 20% deduction for profits from newly established industrial undertakings. The Tribunal found that Section 80I did not apply to processing in factories not owned by the assessee, affirming the denial of the claim for sister concerns' profits. The focus was on verifying if the assessee's factories, both in backward and other areas, qualified as new industrial undertakings, with the conclusion that sister concerns' factories did not meet this criterion.

3. Regarding Section 80HH, the question was whether the Tribunal correctly allowed deductions for processing profits from sister concerns' industrial undertakings in backward areas. The Revenue cited a Supreme Court decision emphasizing a direct nexus with the industrial undertaking for profit derivation, while the assessee relied on a Division Bench decision favoring the deduction claim. The Court found that the profits from processing activities in sister concerns' factories were directly related to the assessee's business and upheld the deduction.

4. The Court compared the Supreme Court's ruling in Pandian Chemicals Ltd., which emphasized a direct nexus for profit derivation, with the Division Bench decision in Indian Resins and Polymers. The Court concluded that the profits from processing activities in sister concerns' factories were directly linked to the assessee's business, allowing the deduction under Section 80HH for both assessment years 1993-94 and 1994-95. The penalty issue was not pressed, and the appeals were rejected with the right to contest the penalty imposition separately.