Liquidated damages are not profits derived from an industrial undertaking where they arise only as breach compensation.

Liquidated damages received for breach of contract were held not to have the direct nexus required by the words "derived from" in sections 80HH and 80-I of the Income-tax Act. The receipt did not arise from sale of manufactured goods or from the industrial undertaking's manufacturing activity itself; it was only compensation from defaulting contracting parties. Such an incidental receipt could not qualify as profits derived from the industrial undertaking and was taxable as income from another source. The Tribunal's view was therefore set aside in favour of the Revenue.

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Issues: Whether liquidated damages received on account of breach of contract constituted profits and gains derived from the industrial undertaking so as to qualify for deduction under sections 80HH and 80-I of the Income-tax Act, 1961.

Analysis: The expression "derived from" in the deduction provisions has a narrow meaning and requires a direct source link with the industrial undertaking. The amount in question was not realized by sale of manufactured goods, but was compensation or damages received from defaulting contracting parties. Such receipt was not the profit generated by the manufacturing activity itself. The incentive provisions were intended to cover profits from actual manufacturing operations, not indirect or incidental receipts. Accordingly, the amount was taxable as income from another source and could not be treated as profits derived from the industrial undertaking.

Conclusion: The receipt of liquidated damages was not eligible for deduction as profits derived from the industrial undertaking, and the finding of the Tribunal was set aside in favour of the Revenue.

Ratio Decidendi: For purposes of sections granting deduction on profits "derived from" an industrial undertaking, only income having a direct nexus with the manufacturing activity qualifies; compensation or damages for breach of contract is an incidental receipt and does not so qualify.

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