2014 (11) TMI 512 - HC - Income Tax

Restriction of benefit u/s 80JJ Income derived from the sale of chicks and services provided - Income derived from after sale services disallowed - Held that - Remuneration for the services rendered to the chicks that were sold to the poultry farms was the source of income - it is only when direct and immediate nexus between the two is established that it can be said to be derived from - If the principal activity that qualifies deduction u/s 80HH of the Act was the manufacture of chemicals, by no stretch of imagination, the interest on the deposits made in the continued supply of power can be treated as part of it - the income derived from after sale services rendered by a hatchery to the poultry farmers, who purchase the chicks from them cannot at all be treated as heterogeneous or unconnected to that of the sale proceeds of the chicks the order of the Tribunal is upheld Decided against revenue.

Summary

Issues Involved:
1. Interpretation of Section 80JJ of the Income Tax Act for deduction of profits and gains from poultry farming.
2. Inclusion of income derived from after-sale services in the benefit under Section 80JJ.
3. Comparison with precedent judgments regarding the definition of "derived from" in tax laws.

Issue 1: Interpretation of Section 80JJ of the Income Tax Act:
The case involved appeals by the Revenue against orders of the Income Tax Appellate Tribunal concerning assessment years 1993-94 and 1994-95. The respondent, a poultry business, included income from both chick sales and services in their returns. Section 80JJ allowed deduction of profits from poultry farming. The dispute arose when the Assessing Officer restricted the deduction to chick sales only for 1993-94. The Commissioner allowed the deduction for both chick sales and services. However, for 1994-95, the Assessing Officer disallowed service income inclusion, leading to another appeal. The Tribunal dismissed both appeals, prompting further appeals under Section 260-A of the Act.

Issue 2: Inclusion of income from after-sale services in Section 80JJ benefit:
The appellant argued that income from after-sale services should not be included in the deduction under Section 80JJ, emphasizing the term "derived from." They cited a Supreme Court judgment to support their stance. Conversely, the respondent contended that services were integral to the poultry farming transaction, unlike the unrelated income in the precedent case. The Tribunal agreed with the respondent, considering services like training, advice, and consultancy as part of poultry farming activities, thus qualifying for the deduction.

Issue 3: Comparison with precedent judgments on "derived from" definition:
The Supreme Court's ruling in a chemical manufacturing case was pivotal in understanding the term "derived from." The Court clarified that a direct nexus is essential for income to be considered derived from a specific activity. In contrast to the chemical case, the income from after-sale services in the poultry farming context had a clear and immediate connection to the primary activity of chick sales. The Court found no grounds to overturn the Tribunal's decision, upholding the inclusion of service income in the Section 80JJ deduction.

In conclusion, the High Court dismissed the appeals, affirming the inclusion of income from after-sale services in the deduction under Section 80JJ of the Income Tax Act. The judgment highlighted the importance of a direct nexus between income and the primary activity for it to be considered "derived from," emphasizing the integral role of services in the poultry farming business.