2016 (11) TMI 372 - HC - Income Tax

Entitlement to deduction under section 80HHC - profits and gains derived from an industrial undertaking - Held that - The word derived from in Section 80HH of the Income-tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant s industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself. See Pandian Chemicals Limited vs. CIT (2003 (4) TMI 3 - SUPREME Court). All assessee s contention cannot be accepted. In facts too, P.R.Prabhakar s case (2006 (7) TMI 121 - SUPREME Court ) as relied by assessee is distinguishable because one of the essential business of the assessee was activity of commission/brokerage and procuring orders of export for others. The question as to whether that income was income derived from export business therefore could not be said to have arisen. In any event P.R.Prabhakar s case (supra) does not refer to the previous judgment in Cambay Electric Supply Industrial Co. Ltd. s case (1978 (4) TMI 1 - SUPREME Court)where this court had clearly stated that the expression derived from had a narrower connotation than the expression attributable to and Pandian Chemicals Limited s case (supra). - Decided against assessee.

Summary

Issues:
1. Interpretation of deduction under section 80HHC for garment export business.
2. Application of the expression "derived from" in relation to income earning activity and export business.
3. Comparison of rulings in previous cases like P.R.Prabhakar vs. CIT.
4. Analysis of judgments in Pandian Chemicals Limited vs. CIT and Liberty India vs. CIT regarding the interpretation of "derived from."

Analysis:
1. The case involved the interpretation of Section 80HHC deduction for a garment export business. The Assessing Officer (AO) initially rejected the assessee's claim, which was upheld by the appellate commissioner. However, the Income Tax Appellate Tribunal (ITAT) allowed the appeal based on a special bench ruling in International Research Park Laboratories Limited vs. CIT, stating that deduction under Section 80HHC can be granted based on the ratio of export turnover to the turnover of the entire business.

2. The revenue contended that subsequent Supreme Court decisions in Pandian Chemicals Limited vs. CIT and Liberty India vs. CIT interpreted the expression "derived from" narrowly. The Supreme Court held that there should be immediate proximity between the income earning activity and the export business for the income to be covered under the provision.

3. The assessee's counsel relied on the ruling in P.R.Prabhakar vs. CIT, where a similar claim for Section 80HHC deduction was allowed for commission income. However, the court noted that P.R.Prabhakar's case did not refer to previous judgments like Cambay Electric Supply Industrial Co. Ltd. vs. CIT and Pandian Chemicals Limited vs. CIT.

4. The court analyzed the judgments in Pandian Chemicals Limited vs. CIT and subsequent cases like Liberty India vs. CIT, where the interpretation of "derived from" was discussed. The court emphasized that the income must have a direct or immediate nexus with the industrial undertaking to qualify for the deduction. Based on the consistent rulings of the Supreme Court, the court held in favor of the revenue, stating that the assessee's contention could not be accepted. The appeal was allowed, answering the question of law in favor of the revenue.