1984 (7) TMI 149 - AT - Income Tax

Backward Area Balancing Charge Deduction In Respect Deductions In Respect Industrial Undertaking Manufacture And Sale Profits And Gains Trading Liability

Summary

Issues:
- Deduction under section 80HH for profits from sale of scrap and drums.

Detailed Analysis:

The appeal before the Appellate Tribunal ITAT Hyderabad-A involved the deduction allowable under section 80HH of the Income-tax Act, 1961, for profits attributable to the sale proceeds of scrap and drums. The dispute arose when the Commissioner (Appeals) allowed the deduction, but the Income Tax Officer (ITO) disagreed, citing decisions in Cambay Electric Supply Industrial Co. Ltd. v. CIT and CIT v. Cochin Refineries Ltd. The ITO excluded a portion of the profits from the industrial undertaking, leading to the appeal by the department challenging the Commissioner's decision (para 7-9).

The main contention was whether the profits from the sale of scrap and drums were derived from the industrial undertaking, making them eligible for relief under section 80HH. The assessee argued that these profits were part of the overall profit generated from its manufacturing activities, thus qualifying for the deduction. The nature of the business, which involved manufacturing metallic wires, was crucial in determining the eligibility for the deduction (para 10-11).

The interpretation of the term "derived from" in section 80HH was a key point of discussion. The department argued that this term should be narrowly construed to include only direct receipts from the specified business activity. Reference was made to the decisions in Cambay Electric Supply Industrial Co. Ltd. and Cochin Refineries Ltd. to support this argument (para 12-13).

Further, the applicability of sections 41(1) and 41(2) was debated in relation to the sale proceeds of scrap and drums. The department contended that these provisions did not apply to the case at hand, as the sale proceeds were not linked to recoupment of earlier purchases or depreciable assets. The assessee's position was that the sale of scrap was directly derived from the industrial undertaking and should qualify for the deduction under section 80HH (para 15-16).

The Tribunal referred to the decision in New India Fisheries Ltd. v. P.M. Mehra, ITO to address the issue of profits derived from business activities. Ultimately, the Tribunal held that the assessee was entitled to the deduction for profits from the sale of scrap, considering it as directly derived from the industrial undertaking. However, the relief under section 80HH was not allowed for the profits from the sale of drums, as they were not considered directly derived from the manufacturing activity (para 18).

In conclusion, the appeal was allowed in part, with the Tribunal upholding the deduction under section 80HH for profits from the sale of scrap but denying the same for profits from the sale of drums.