Genuine industrial activity sustains Section 80 deductions, while settlement payments securing enduring commercial rights are capital in nature.

Deduction under Sections 80-IA and 80-IB was supported where the Silvassa unit was shown to be a genuine software development unit, with industrial registration, verified sales-tax exemption and business turnover records; short duration of operations and high profit margins alone were insufficient to negate the claim. The same reasoning applied to the assessment year covered by Section 80-IB, and the Revenue's allegation of profit diversion was not accepted. A settlement payment made to secure commercial rights, including intellectual property and customer restraints, was treated as capital expenditure because it conferred an enduring commercial advantage, so deduction was disallowed.

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Issues: (i) Whether the assessee was entitled to deduction under Section 80-IA and Section 80-IB of the Income-tax Act, 1961 for the Silvassa unit, including for the assessment years in question; (ii) Whether the sum of Rs.19,00,000 paid under the settlement was revenue expenditure deductible in computing business income.

Issue (i): Whether the assessee was entitled to deduction under Section 80-IA and Section 80-IB of the Income-tax Act, 1961 for the Silvassa unit, including for the assessment years in question.

Analysis: The unit at Silvassa was found to be a genuine software development unit set up in March 1999. The record showed registration with the industrial authorities, conditional sales tax exemption after verification of accounts, and business activity reflected in the turnover for the relevant years. The short period of operation and high profit margin by themselves were held insufficient to dislodge the claim, and the Revenue's allegation of diversion of profits was not accepted. The same reasoning applied to the claim under Section 80-IB for the assessment year 2000-2001 as well.

Conclusion: The claim for deduction under Section 80-IA and Section 80-IB was upheld, and the Revenue failed on this issue.

Issue (ii): Whether the sum of Rs.19,00,000 paid under the settlement was revenue expenditure deductible in computing business income.

Analysis: The settlement under Section 73 of the Arbitration and Conciliation Act, 1996 transferred valuable commercial rights, including intellectual property, trade mark, copyright and brand-related interests, and also restrained the rival group from doing business with the assessee's customers. The payment was therefore treated as made to acquire an enduring commercial advantage and not merely to meet an operational business expense.

Conclusion: The payment was held to be capital expenditure and the deduction was disallowed in favour of the Revenue.

Final Conclusion: The appeals succeeded only to the limited extent of reversing the allowance of the Rs.19,00,000 payment, while the deductions claimed for the Silvassa unit were sustained.

Ratio Decidendi: For deduction under Sections 80-IA and 80-IB, the genuineness of the industrial activity and business records may outweigh suspicion based on short duration or high profit margins; a settlement payment that secures enduring commercial rights and restrains competition is capital in nature.

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