2006 (8) TMI 163 - HC - Income Tax

Court Upholds Denial of Tax Deduction for Non-Manufactured Goods, Emphasizing Direct Nexus Requirement for Section 80-IA.

Liberty Shoes Limited Versus Commissioner of Income-Tax.

The Court upheld the Tribunal's decision, dismissing the appellant's claim for deduction under section 80-IA of the Income-tax Act. It concluded that ... Deduction u/s 80-IA - profits derived from the business of sale of PVC, used as manufacturing of footwear - Considered as profits and gains derived from industrial undertaking? - HELD THAT:- Sub-section (5) of section 80-IA of the Act provides for the quantum of benefit available to an industrial undertaking. It clearly provides for a fixed percentage of the profits and gains derived from such industrial undertaking. We have also gone into similar issue in Nahar Exports Ltd. v. CIT [2006 (7) TMI 110 - PUNJAB AND HARYANA HIGH COURT] wherein, following passage from the judgment of the hon'ble Supreme Court in Sterling Foods' case [1999 (4) TMI 1 - SUPREME COURT] was relied upon, which deals with the words 'derived from.' Accordingly, we are of the view that the assessee will not be entitled to deduction u/s 80-IA of the Act in respect of profit derived from the business of trading of products of other concerns as the same cannot be held to be profits and gains derived from industrial undertaking. The questions are, accordingly, answered against the assessee and in favour of the Revenue - Accordingly, the appeal is dismissed. Issues:1. Entitlement to deduction under section 80-IA for profits from sale of goods.2. Interpretation of section 80-IA with regard to the term 'any' business.Analysis:1. The appellant claimed deduction under section 80-IA for profits from the sale of goods not manufactured by them. The Assessing Officer disallowed the claim, which was upheld by the Commissioner of Income-tax (Appeals) and the Tribunal. The Tribunal referred to various apex court judgments to establish that profits must be directly derived from the industrial undertaking to qualify for the deduction. The Tribunal concluded that profits from trading activities did not qualify as profits derived from the industrial undertaking, thus upholding the disallowance. The Court agreed with the Tribunal's interpretation, emphasizing the need for a direct nexus between profits and the industrial undertaking for eligibility under section 80-IA.2. The appellant argued that once covered by the description of an industrial undertaking, any profit earned by the business should be eligible for deduction under section 80-IA. However, the Revenue contended that the exemption was only applicable to profits directly related to the industrial activity of the assessee. The Court referred to the Supreme Court judgment in CIT v. Sterling Foods, which clarified that not all income of the assessee would qualify for the exemption. The Court reiterated that the profits must be derived directly from the industrial undertaking to be eligible for the deduction. The Court upheld the Tribunal's decision and dismissed the appeal, emphasizing the importance of profits being directly linked to the industrial activity for claiming deductions under section 80-IA.In conclusion, the Court held that profits from trading activities of goods not manufactured by the assessee did not qualify as profits derived from the industrial undertaking, thus denying the appellant's claim for deduction under section 80-IA. The judgment underscored the necessity of a direct nexus between profits and the industrial undertaking for eligibility for deductions under the Income-tax Act.