2010 (2) TMI 29 - AT - Income Tax

Summary

Issues Involved:
1. Allowance of deduction under Section 80-I of the Income Tax Act in respect of service charges received from the Heavy Water Board.

Issue-wise Detailed Analysis:

1. Allowance of Deduction under Section 80-I:

Facts of the Case:
The assessee received service charges of Rs. 6,36,45,631 from the Heavy Water Board for operating and maintaining a heavy water plant. Initially, the assessee claimed a deduction under Section 80-I of the Income Tax Act for these service charges but later revised the claim, treating them as income from other sources. The Assessing Officer (AO) reduced the profits eligible for deduction under Section 80-I by the amount of service charges, treating them as income from other sources.

CIT(A) Decision:
The CIT(A) rejected the assessee's claim for deduction under Section 80-I, holding that the service charges were not derived from the industrial manufacturing activities of the assessee. The CIT(A) observed that the reimbursement of the cost of ammonia and other products was part of the industrial profit on which deduction under Section 80-I was allowable, but the service charges were not dependent on the assessee's manufacturing activities.

Tribunal's Initial Decision:
The Tribunal upheld the CIT(A)'s order, relying on the Supreme Court decision in Pandian Chemicals Ltd. vs. CIT, which emphasized that the income must be directly linked to the industrial undertaking's manufacturing activities to qualify for deduction under Section 80-I.

High Court and Supreme Court Decisions:
The Delhi High Court dismissed the assessee's appeal, holding that no substantial question of law arose. The Supreme Court remanded the matter to the Tribunal for reconsideration, directing an in-depth examination of whether the receipt of service charges was directly linked with the manufacturing activity carried out in the industrial undertaking of the appellant.

Reconsideration by Tribunal:
The Tribunal examined the agreements between Kribhco and the Heavy Water Board, noting the functional interdependence between the ammonia plant and the heavy water plant. However, the Tribunal concluded that the heavy water plant was owned by the Heavy Water Board, and the service charges received by the assessee were for operation and maintenance, not for manufacturing activities. The Tribunal held that the service charges could not be considered profits derived from the industrial undertaking of the assessee.

Legal Precedents and Interpretation:
The Tribunal referred to the Supreme Court decisions in Cambay Electric Supply Industrial Co. Ltd. vs. CIT and Pandian Chemicals Ltd. vs. CIT, which clarified that the term "derived from" implies a direct nexus with the industrial undertaking. The Tribunal also cited the Liberty India Ltd. vs. CIT case, which emphasized that the source of income must be directly linked to the first degree of the industrial undertaking's operations.

Conclusion:
The Tribunal concluded that the service charges received by the assessee for operating and maintaining the heavy water plant were not derived from the industrial undertaking of the assessee. The heavy water plant was owned by the Heavy Water Board, and the service charges were an expenditure for the Heavy Water Board, not profits from the industrial undertaking. Therefore, the service charges did not qualify for deduction under Section 80-I of the Income Tax Act. The appeal filed by the assessee was dismissed.