2013 (10) TMI 1036 - HC - Income Tax

Income Tax Act: Limits on Deductions for Service Charges & Equipment Hire

The court upheld that service charges, equipment hire charges, and interest on loans to employees do not qualify for special deduction under Section 80-I ... Deduction u/s 80-I - Service charges received – Whether service charges received from the Heavy Water Board of Department of Atomic Energy could not be considered as profit derived from the industrial undertaking to qualify for deduction under Section 80-I of the Act – Held that:- Reliance has been placed upon the judgment in the case of Krishak Bharti Cooperative Limited versus Deputy Commissioner of Income Tax and Another [2013 (7) TMI 632 - DELHI HIGH COURT], wherein it has been held that after examining the nature and character of the service charges, the agreement between the appellant and Heavy Water Board, Department of Atomic Energy, Government of India, a Division Bench has opined that the appellant-assessee would be entitled to benefit under Section 80-I in respect of service charges received and the same were profits and gains derived from an industrial undertaking – Decided in favor of Assessee. Whether equipment hire charges; crane hire charges; Ammonia Tanker hire charges are eligible for deduction u/s 80-I of the Income Tax Act – Held that:- To examine whether the income was derived from an industrial undertaking, it is imperative to trace the source of profit or income to manufacture/production. Transportation, is post-manufacture and takes place after the goods or articles have been manufactured in the industrial undertaking. They relate to activity of transportation of the said articles or goods from the factory to the place of the consumer/customer. It is a service and does not partake character and is not a part of manufacture – Decided against the Assessee. Issues:1. Interpretation of Section 80-I of the Income Tax Act regarding deduction eligibility.2. Eligibility of various income items for deduction under Section 80-I.Issue 1: Interpretation of Section 80-I of the Income Tax Act regarding deduction eligibility:The judgment pertains to an appeal by the assessee concerning the Assessment Year 1995-96. The primary question raised was whether service charges received from the Heavy Water Board of the Department of Atomic Energy could be considered as profit derived from the industrial undertaking to qualify for deduction under Section 80-I of the Income Tax Act. The court referred to a previous decision in the case of the appellant where it was held that service charges, equipment hire charges, and interest on loans to employees would not qualify for special deduction under Section 80-I. The court upheld this decision, emphasizing that profits and gains must directly relate to the income of an industrial undertaking engaged in manufacturing or production. The court rejected the appellant's claim regarding equipment hire charges, interest on loans to employees, and crane hire charges based on the previous decision's findings.Issue 2: Eligibility of various income items for deduction under Section 80-I:Regarding the eligibility of income items for deduction under Section 80-I, the court examined specific items such as interest income from employees on advances, service charges from the Heavy Water Plan, equipment hire charges, crane hire charges, Ammonia Tanker hire charges, and interest income from banks and financial institutions. The court held that equipment hire charges, interest on loans to employees, and crane hire charges did not qualify for deduction under Section 80-I based on the previous decision's ruling. Additionally, the court addressed the issue of Ammonia tanker hire charges, stating that income earned from such charges did not fall under the category of 'profits and gains derived from an industrial undertaking.' The court emphasized that transportation charges, even if separately billed, were not considered part of the profit derived from manufacturing activities. However, in a separate judgment, the court ruled in favor of the appellant regarding service charges received from the Heavy Water Board, deeming them as profits and gains derived from an industrial undertaking eligible for deduction under Section 80-I.In conclusion, the judgment provides a detailed analysis of the interpretation of Section 80-I of the Income Tax Act and the eligibility of various income items for deduction under this section. It highlights the importance of income directly relating to industrial undertakings engaged in manufacturing or production and clarifies the criteria for determining whether specific income items qualify for deduction under Section 80-I.