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of <h1>High Court: Liquidated Damages Not Eligible for Tax Deductions</h1> <h3>Commissioner of Income-Tax Versus Alpine Solvex Ltd.</h3> Commissioner of Income-Tax Versus Alpine Solvex Ltd. - [2005] 276 ITR 92, 195 CTR 181, 144 TAXMANN 67 Issues:- Appeal by Revenue under section 260A of Income-tax Act against Tribunal's order- Substantial question of law regarding liquidated damages received by assessee- Interpretation of 'profits and gains derived from an industrial undertaking' under sections 80HH and 80-I of Income-tax ActAnalysis:The judgment pertains to an appeal filed by the Revenue (Commissioner of Income-tax) under section 260A of the Income-tax Act against a Tribunal's order related to the treatment of liquidated damages received by the assessee. The Supreme Court granted leave and remanded the case to the High Court for deciding the appeal on its merits. The substantial question of law focused on whether the liquidated damages received should be considered as part of profits eligible for deduction under sections 80HH and 80-IA of the Income-tax Act.The respondent-assessee, a limited company engaged in the manufacture and sale of 'soya doc' and 'soya oil,' claimed liquidated damages from defaulting parties due to non-performance of contracts. The Assessing Officer initially rejected the claim, stating that the damages were not derived from the industrial undertaking. The Commissioner of Income-tax (Appeals) upheld this decision, leading the assessee to appeal to the Tribunal, which ruled in favor of the assessee.The High Court analyzed the meaning of 'any profits and gains derived from an industrial undertaking' under sections 80HH and 80-I of the Income-tax Act. The court emphasized that the term 'derived from' has a narrow interpretation and cannot encompass indirect or incidental profits. The court clarified that profits must be directly earned from the manufacturing activity, not from compensatory damages due to contract breaches.The court rejected the assessee's argument that the damages were part of the profitable price of goods, emphasizing that such earnings, even if genuine, cannot be considered profits derived from an industrial undertaking. The court held that the liquidated damages received were not equivalent to profits earned from the main business activity of selling manufactured goods. Therefore, the court allowed the appeal by the Revenue, setting aside the Tribunal's order.In conclusion, the High Court's judgment clarified the interpretation of profits and gains derived from an industrial undertaking under the Income-tax Act, emphasizing the need for direct earnings from manufacturing activities to qualify for deductions under relevant sections. The court's decision highlighted the distinction between actual profits from sales and incidental earnings like liquidated damages.
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