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TMI Blog2013 (8) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The case laws relied by the assessee are in the context of old Section of 80E/80I, in which the words were "profit attributable to" as distinct from the word "profit derived from" in the present Section of 80HH and 80-I of the Act. Reliance is placed upon the judgment in the case of Honda SIEL Power Products Ltd. vs. Commissioner of Income-tax [2007 (10) TMI 298 - DELHI HIGH COURT], wherein observation made is "Both sections 80HH and 80-I of the Income-tax Act, 1961, use the expression "profit and gains derived from an industrial undertaking". The Supreme Court has drawn a distinction between the expression "derived from" and "attributable to" in Combay Electric Supply Industrial Co. Ltd., vs. CIT, [1978] 113 ITR 84. Only such business profits that have a direct nexus to the essential business activity of the assessee can qualify for deduction under Section 80HH of the Act. Inasmuch as both Sections 80HH and 80-I use the expression "profits and gains derived from an industrial undertaking", the burden is on the assessee to show that the income earned from an activity, the profits from which are claimed to qualify for deduction, has an immediate and direct nexus to the essential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee carried out the research and development activity side by side making use of the entire paraphernalia of the industrial undertaking. The assessee has claimed the exemption of the amount received as royalty/consultancy charges under Section 80HH and Section 80-I of the Act. The Assessing Officer (AO) was of the view that the assessee was not entitled for deduction of receipt under any other head except the profit derived from an industrial undertaking. The CIT(A) was also of the view that the consultancy charges cannot be said to be profit earned and derived from the industrial unit. With regard to the consultancy charges, the CIT(A) observed that this payment has been received for the consultancy provided by the Directors/Employees of the assessee having technical knowledge and it had nothing to do with the industrial unit as such. So, the order of the AO was confirmed by the first appellate authority. However, the Tribunal has allowed the entire claim of the assessee pertaining to the consultancy charges by observing that it is an income derived from the industrial undertaking and is thus, eligible for deduction under Section 80HH and 80-I of the Act. Being aggrieved, the De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecific products which are meant for specific consumption being to be research and developed and these are not sold in the open market. In the instant case, the consultancy provided was not from the mind of any person, but it was through the continuous activity of research and development marking use of the same labour and machinery of the undertaking. So, it has a direct nexus with the industrial undertaking and it was eligible for deduction under Section 80-HH & 80-I of the Act. For this purpose, he relied on the ratio laid down in the following cases:- (i) Commissioner of Income-tax vs. Sterling Food, [1999] 237 ITR 579 (SC); (ii) Mst. Sarju Bai vs. Commissioner of Income-tax, [1947] 15 ITR 137 (All); (iii) National Organic Chemical Industrial Limited vs. Collector of Central Excise, Bombay, AIR 1997 SC 690; (iv) Cambay Electrical Supply Co. Ltd., 113 ITR 84 (SC); (v) Liberty India Ltd. vs. CIT, [2009] 183 Taxman 349 (SC); (vi) Vellore Electric Corpn. Ltd. vs. CIT, [1997] 93 Taxman 401/227 ITR 557 (SC); and (vii) CIT vs. Kothari Products Ltd., [2007] 295 ITR 223. Learned counsel further submits that as per the agreement, which has been brought on records during the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed as deduction under Section 80-HH & 80-I of the Act. In order to adjudicate the question raised before us, it is appropriate to reproduce the provisions of Section 80-HH & 80-I of the Act read as under:- 80HH.-Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970 [ but before the 1st day of April, 1990 ], in any backward area; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area: Provided that this condition shall not apply i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years which expired before the 1st day of April, 1974 . (5) Where the assessee is a person other than a company or a co-operative society, the deduction under sub-section (1) shall not be admissible unless the accounts of the industrial undertaking or the business of the hotel for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant. (6) Where any goods held for the purposes of the business of the industrial under- taking or the hotel are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial under- taking or the hotel and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel does not correspond to the market value of such goods as on the date of the transfer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea, by notification 3 in the Official Gazette, specify in this behalf: Provided that any notification under this sub- section may be issued so as to have retrospective effect to a date not earlier than the 1st day of April, 1983.] (Emphasis Added) 80-I.-Deduction in respect of profits and gains from industrial undertakings after a certain date, etc. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel [or the business of repairs to ocean-going vessels or other powered craft], to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof : Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect [in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel] as if for the words "twenty per cent", the words "twenty-five per cent" had been substituted. (Emphasis Added) In order to get the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no reason to depart from that ordinary meaning here." The Hon'ble Apex Court in the case of Commissioner of Income Tax vs. Sterling Foods (supra), while answering the question have held that for claiming the benefit of Section 80HH, the assessee had to establish that the profits and gains were derived from its industrial undertaking and the industrial undertaking itself had to be the source of the profit and the said industrial undertaking had directly to yield that profit. The Hon'ble Apex Court further held that the industrial undertaking had the direct source of that profit and not a means to earn any other profit. Similarly, in the case of Commissioner of Income-tax vs. Alpine Solvex Ltd. (supra), the Hon'ble Apex Court observed that : "The expression "derived from" used in Section 80HH and 80-I of the Income Tax Act, 1961, has a definite but narrow meaning and it cannot receive a flexible or wider concept. The assessee is entitled to claim deduction of the amount which it derives as direct profit by sale of manufactured goods in its newly set up industrial undertaking. Any indirect or incidental profit cannot be regarded as profit earned out of the main business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. Undoubtedly, the assessee was running the business in the manufacturing of the perfumes. As per the agreement between the assessee and HLL, the assessee was getting the consideration for supplying the perfume. For further research, the assessee can claim the benefit under Section 35 of the Act, which on reproduction read as under:- "35.Expenditure on scientific research.-(1) In respect of expenditure on scientific research, the following deductions shall be allowed-- (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. [Explanation.--Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary [as defined in Explanation 2 below sub-section (5) of section 40A] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it is certified by the ..... 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