1992 (11) TMI 65 - HC - Income Tax

Section 80HH deduction limited to profits directly derived from industrial unit; ancillary income and other unit losses excluded

HC held that, for deduction under section 80HH, only profits and gains 'derived from' the eligible industrial undertaking are relevant, adopting the ... New Industrial Undertaking - Special Deduction - entitlement to deduction under section 801 in respect of hydrogenation plant - loss incurred - relief u/s 80HH, income from lorry hire, weighment charge, miscellaneous receipts, income from fixed deposits, etc - HELD THAT:- In Sterling Foods' case [1984 (6) TMI 41 - KARNATAKA HIGH COURT], it was held that, under section 80HH, the relevant profits should be 'derived' from the unit in question directly ; therefore, the income earned by the sale of import entitlement is outside the purview of section 80HH, even though the assessee earned the import entitlement by virtue of exporting the products of an industrial undertaking. The ratio of the said decision would equally govern the present case also. Section 80HH provides for the deduction of 20 per cent. from the ' profits and gains ' derived from the industrial undertaking. The gross total income of the assessee would include its income derived from several sources or units. The profits and gains of one unit is only one of the constituents of the gross total income. Every item of additions and deductions to be considered at the stage of computing the taxable income to be arrived at from the gross total income need not necessarily be considered while computing the profits and gains of one unit, for purposes of section 80HH. Under section 80HH, the relevant question is whether there is ' profits and gains ' derived from an industrial undertaking which was ultimately added to the gross income of the assessee. If there is any such profits and gains, the assessee is entitled to the benefit of section 80HH. If the loss sustained by another unit is set off against this profits and gains of an industrial undertaking, the resultant figure would not reflect the profits and gains of the said industrial undertaking in any sense, much less in a commercial sense ; it will be an unnatural and artificial ' profits and gains ' of that industrial undertaking. In Sterling Foods v. CIT [1984 (6) TMI 41 - KARNATAKA HIGH COURT], a Bench of this court, in the context of section 80HH, held that the expression ' derived from ' has a definite but narrow meaning and it cannot receive a flexible or wider concept. Therefore, the very industrial undertaking should be the direct source of profit ; income derived by the assessee from any other source cannot be held to be the income derived from the industrial unit. The ratio of this decision would govern the present case also. Any deduction has to be a deduction pertaining to the very source of earning the profit. Loss sustained elsewhere cannot be fastened to the profits and gains of the industrial undertaking and the result treated as the profits and gains of the industrial undertaking. Reference is answered accordingly. Issues Involved:The judgment involves the interpretation of sections 80J and 80HH of the Income-tax Act, 1961 regarding the entitlement to deductions for losses incurred in one industrial unit against profits of another unit.Question 1:The Tribunal's decision on the deduction under section 80J for a loss-making hydrogenation plant when the total income was positive was challenged. The Appellate Tribunal upheld the assessee's claim that the solvent plant's profits should not be offset by the hydrogenation plant's losses for section 80HH purposes.Question 2:The Tribunal's ruling on excluding income from lorry hire, weighment charges, and other activities from the computation of relief under section 80HH for the solvent plant was contested. The Appellate Tribunal allowed the benefit of section 80HH for the exclusive income of the solvent plant.Question 3:The dispute arose regarding the treatment of losses from the hydrogenation plant against the profits of the solvent plant for calculating the deduction under section 80HH. The Appellate Tribunal held that the deduction should be based on the net income of the solvent plant before setting off losses from the hydrogenation plant.The judgment cited precedents to support the interpretation of sections 80J and 80HH. It emphasized that profits and gains for deductions should be directly derived from the industrial unit in question. Losses from one unit cannot be offset against profits of another unit for claiming deductions. The decision highlighted the importance of the term 'derived from' in determining eligible income for deductions under the relevant sections.In conclusion, the first two questions were answered in favor of the Revenue, while the third question was decided in favor of the assessee. The judgment provided clarity on the application of sections 80J and 80HH, emphasizing that deductions should be based on profits directly derived from the industrial undertaking without offsetting losses from other units.