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TMI Blog2006 (7) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... from the industrial undertaking and such profit and gain, as per P L a/c, were only to the extent of Rs. 1,73,601 in the case of the assessee. So the AO restricted such deduction to 25 per cent of the amount of Rs. 1,73,601 against which assessee preferred appeal and it was submitted before the first appellate authority that the amount of Rs. 4 lacs disclosed as income was income from business of the assessee and it was disclosed on account of difference in stock. He further submitted that the assessee was entitled for deduction under s. 80-I in respect of income so disclosed and the AO was not correct in disallowing the claim of the assessee. The learned CIT(A) while considering and accepting the plea of the assessee has concluded to observe that the disclosure of Rs. 4 lacs was essentially on account of excess paper stock found in the premises of the assessee. As stock was related to the manufacturing activities of the assessee, the same has to be considered as income from industrial undertaking. The AO was, therefore, not correct in not considering the amount disclosed by the assessee in the return for the purpose of deduction under s. 80-I. The AO was, therefore, directed to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stock was related to the manufacturing activities of the assessee and the same has to be considered to be the income from industrial undertaking. Now the question before us is whether the deduction claimed under s. 80-I on this amount of Rs. 4 lacs being excess stock found in search/survey and disclosed in the return could be held to be income derived from industrial undertaking or not. To give background of the provision in this regard it would be relevant to point out that earlier s. 80-I was introduced by replacing s. 80E in which initial deduction was allowed out of profits and gains attributable to priority industry. This section was also deleted w.e.f. 1st April, 1973 and the present section was brought on the statute book by Finance No. (2) Act, 1980 w.e.f. 1st April, 1981. The distinguishing feature of the earlier s. 80-I and the existing one is that earlier the expression "profit attributable to priority industry" was on the statute book while in the existing provision legislature has used expression "any profits and gains derived from industrial undertaking or a ship or from hotel........" The controversy had since been going on before the Courts about the scope and act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court in the case of CIT vs. Cement Distributors Ltd. (1994) 119 CTR (Del) 496 : (1994) 208 ITR 355 (Del) has opined that commercial connection are irrelevant from the preposition of derived from and relevant observations are as under- "To be entitled to the relief under s. 80HH of the IT Act, 1961, the source of the particular income on which rebate under that section is sought for, must directly emerge from the running of the industrial undertaking, yielding profits and gains. Rebate is not allowable if the particular income is merely attributable or relatable to an industrial undertaking. Lease of immovable property (including plant and machinery embedded in the soil) is a transfer of a right to enjoy such property, in consideration of a price paid or promised or of money. Lease money for such transfer, having no direct nexus with the profits and gains from the property transferred for use, cannot, therefore, be said to be "profits and gains derived from the industrial undertaking" within the meaning of s. 80HH. It is entirely of a different character and species from profits, gains derived from the running of an industrial undertaking. Fixed lease money is not depe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board and earned interest such interest income cannot be said to have derived from industrial undertaking as immediate source of interest in the deposit and not business. Their Lordships of the Hon'ble High Court have further opined that mere fact that interest amount was assessable as business income itself would not be sufficient unless the source of profit is the undertaking. Therefore, it was held that assessee is not eligible to claim deduction and there were no compelling reason to give wide meaning to the expression "derived from" under s. 80HH to cover every aspect. It will be pertinent to mention that SLP filed by the assessee has since been rejected as reported in (2001) 248 ITR (St) 243 and it reads as under- "Industrial undertaking-Interest on deposit whether income 'derived from' industrial undertaking: 12th Jan., 2001 : Their Lordships S.P. Bharucha and Y.K. Sabharwal JJ. dismissed a SLP filed by the assessee against the order dt. 29th April, 1997 of the Madras High Court in Tax Case No. 1353 of 1985 reported as CIT vs. Pandian Chemicals Ltd. (1998) 147 CTR (Mad) 5 : (1998) 233 ITR 497 (Mad) whereby the High Court answered in favour of the Revenue the question whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), with regard to meaning of words and phrases "derived from" has opined as under- "Words and phrases- "Derived from ", meaning of The words "derived from" in s. 80HH of the IT Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. Held accordingly, that interest derived by the industrial undertaking of the assessee on deposits made with the electricity board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under s. 80HH." 15. After taking into consideration the ratio of the judgements as above and the discussion held, in our considered view, the conclusion drawn by learned CIT(A) is not correct. Since the stock found in excess and disclosed in the income to the extent of Rs. 4 lacs was not on account of income derived from the industrial undertaking, the action of the learned CIT(A) in directing the AO to allow the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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