2015 (4) TMI 480 - HC - Income Tax

Deduction u/s 80IA - Sale of advance licenses issued under Chapter-VII of the Import Export Policy for asst. year 1993-94 - treatment as Income derived from industrial undertaking for calculating allowance u/s.80IA of the I.T. Act - Held that - Section 80-IA provides that the gross total income of an assessee would include any profits and gains derived from any business of an industrial undertaking and not from industrial undertaking as provided for in Section 80HH. In our opinion, the gross total income of an assessee, so far as Section 80-IA is concerned, means any profits and gains derived from any business of an industrial undertaking. By making the slight change in the language, the Legislature, as a matter of fact, has widened the scope of Section 80-IA than Section 80 HH, but while reading the expression the gross income derived from any business, in our opinion, cannot be read to mean and include the income having no nexus with the business of an undertaking or the income that cannot be attributable to the business of an undertaking. There must be, for the application of the words derived from, direct nexus between the profits and gains and the business of an industrial undertaking. In the instant case, the profit derived from sale of the license could be, at the most treated as incidental and not direct. In the present case, it is not the case of the assessee that sale of the license is their business. If the assessee has derived any profits/gains from the sale of license, it at the most could be treated as income from sources other than the actual conduct of the business and the same, in any case, cannot be treated as a part of gross total income from their business of manufacturing rubber moulded goods such as rubber rings and sale of the same. The submission that the sale of license has direct nexus/connection with the business of the undertaking must be rejected. Merely because the license was obtained for procuring the raw material for manufacturing finished products for its exports, does not mean that the sale of advance license has nexus with the business of manufacturing and sale of finished product. - Decided against the appellant.

Summary

Issues Involved:
1. Whether the sale proceeds of advance licenses constitute income derived from an industrial undertaking for calculating allowance under Section 80-IA of the Income Tax Act, 1961.

Comprehensive, Issue-wise Detailed Analysis:

1. Nature of Income for Deduction under Section 80-IA:
The primary issue addressed in these appeals was whether the sale proceeds of advance licenses issued under Chapter VII of the Import Export Policy for the assessment year 1993-94 constituted income derived from an industrial undertaking for calculating allowance under Section 80-IA of the Income Tax Act, 1961. The appellant-assessee, a company engaged in manufacturing rubber moulded goods, declared 'nil' income after adjustments under Sections 80HHC and 80-IA. However, it was later noticed that income from the sale of import licenses, export incentives, and interest was not deducted from the profits, leading to a notice under Section 148 for escaped assessment.

2. Tribunal and Lower Authorities' Findings:
The Assessing Officer, CIT (A), and the Tribunal rejected the assessee's claim, holding that the premium on the sale of advance licenses, export incentives, and interest income cannot be treated as income derived from the business of the industrial undertaking. The Tribunal, relying on the Supreme Court's judgment in Commissioner of Income Tax v. Sterling Foods (1999) 237 ITR 579 (SC), concluded that the receipts from the sale of licenses cannot be included in the income for the purpose of relief under Section 80-IA.

3. Appellant's Argument:
The appellant's counsel argued that Section 80-IA was broader in scope than Section 80-HH, as it allowed deductions for income derived from the business of an undertaking, not just the industrial undertaking itself. They contended that income arising during the course of running the business, including from the sale of licenses, should be eligible for deduction under Section 80-IA. The counsel emphasized that the sale of licenses had a direct nexus with the business, as the company had to procure raw materials from the open market due to delays in issuing licenses.

4. Revenue's Argument:
The Revenue's counsel, supporting the Tribunal's judgment, cited the Supreme Court's decision in Liberty India v. Commissioner of Income-Tax (2009) 317 ITR 218 (SC), arguing that the sale of licenses had no direct connection with the business of the assessee-company. They emphasized the need for a direct nexus between the profit and the business of the undertaking for the application of the words "derived from."

5. Supreme Court Precedents:
The judgment in Sterling Foods (supra) was pivotal, where the Supreme Court held that the source of import entitlements was the Export Promotion Scheme, not the industrial undertaking itself. The Court emphasized the need for a direct nexus between the profits and the industrial undertaking. Similarly, in Liberty India (supra), the Supreme Court reiterated that the words "derived from" are narrower in connotation compared to "attributable to," covering only sources within the first degree of proximity.

6. Analysis of Relevant Provisions:
The Court analyzed Sections 80-IA and 80-HH, noting that Section 80-IA refers to profits derived from any business of an industrial undertaking, whereas Section 80-HH refers to profits derived from the industrial undertaking itself. Despite the broader language in Section 80-IA, the Court concluded that the income must have a direct nexus with the business of the industrial undertaking. The sale of licenses, being incidental, did not meet this criterion.

Conclusion:
The Court dismissed the appeals, holding that the sale proceeds of advance licenses do not constitute income derived from the business of an industrial undertaking for the purposes of Section 80-IA. The substantial question of law was answered in favor of the Revenue and against the assessee-company.