2015 (9) TMI 493 - AT - Income Tax

Claim for deduction under section 80IA disallowed - profits and gains derived by the assessee from the sale of sludge/waste oil - CIT(A) deleted addition - Held that - Profits and gains derived from such business considered to include the sale of sludge, which is the product of the business undertaken by the assessee i.e., manufacture of power and the sludge is generated out of such activity and is held to be directly attributable to the business activity of the assessee. Hence, we are of the firm view that the profits and gains derived by the assessee from the sale of sludge/waste oil is eligible for deduction under section 80IA of the Act and we do not find any infirmity in the order of the Ld. CIT(A) and accordingly, we confirm the same. - Decided against revenue.

Summary

Issues:
- Disallowance of deduction under section 80IA for income from sale of sludge and waste oil
- Interpretation of the term "derived from" in relation to profits and gains of industrial undertaking
- Application of relevant legal precedents in determining eligibility for deduction under section 80IA

Analysis:
The appeal before the Appellate Tribunal ITAT Hyderabad concerned the disallowance of a deduction under section 80IA for income from the sale of sludge and waste oil by the Revenue. The Revenue contended that the income from such sales was not directly related to the business of electricity generation and therefore not eligible for the deduction. The Revenue relied on the decision of the Hon'ble Supreme Court in CIT vs. Pandian Chemicals Ltd. to support its argument that the sale of scrap was not considered profits of an industrial undertaking. The Tribunal was tasked with determining whether the income from the sale of sludge was part of the income derived from the power generation process of the assessee.

The assessee, on the other hand, argued that the sale of sludge and waste oil was directly related to and derived from the power generation process, making it eligible for deduction under section 80IA. The assessee highlighted that the sludge and waste oil were by-products of the power generation activity, emphasizing the technical necessity of replacing lube oil used in engines. The assessee also referenced the decision in Liberty India vs. CIT to distinguish between different provisions of the Income Tax Act concerning deductions.

The Tribunal analyzed the provisions of section 80IA and section 80HH to understand the distinction between profits and gains derived from an industrial undertaking and profits derived from any business carried on by such undertaking. It noted that the decision in Pandian Chemicals Ltd. was based on section 80HH, while the deduction claimed in this case fell under section 80IA for the business of power generation. The Tribunal also considered the decision of the Delhi High Court in CIT vs. Eltek SGS (P) Ltd., which highlighted the differences in language used in different sections of the Income Tax Act.

After careful consideration of legal precedents and the arguments presented, the Tribunal upheld the order of the CIT(A) and dismissed the appeal of the Revenue. It concluded that the profits and gains derived from the sale of sludge and waste oil were directly attributable to the business activity of power generation, making the assessee eligible for deduction under section 80IA. The Tribunal found no infirmity in the CIT(A)'s order and confirmed the decision.

In summary, the Tribunal's judgment clarified the eligibility of income from the sale of sludge and waste oil for deduction under section 80IA, emphasizing the direct nexus between such income and the business of power generation carried out by the assessee. The decision highlighted the interpretation of the term "derived from" in the context of profits and gains of an industrial undertaking, drawing on relevant legal precedents to support its findings.