Court rules on allocation of profits between mining and manufacturing activities, limits deductions under Section 80HH.

M/s. Deccan Cements Ltd. Versus The Commissioner of Income Tax

M/s. Deccan Cements Ltd. Versus The Commissioner of Income Tax - [2014] 360 ITR 444 Issues Involved:
1. Whether the Tribunal was correct in holding that the assessee runs two industrial undertakings: one for mining and one for manufacturing cement.
2. Whether the Tribunal was correct in holding that the assessee's profits could be allocated between mining and manufacturing cement.
3. Whether the Tribunal was correct in holding that the assessee is entitled to deduction under Section 80HH only for profits from manufacturing cement and not for profits from mining.

Detailed Analysis:

Issue 1: Two Industrial Undertakings
The Tribunal held that the assessee operates two distinct industrial undertakings: one for mining and one for manufacturing cement. The assessee contended that its primary business was cement manufacturing and that mining was merely an incidental activity to procure raw material. The Tribunal, referencing its earlier decisions for the assessment years 1984-85 and 1985-86, confirmed that the assessee was running two separate undertakings. The court agreed, noting that no appeal was filed against these findings, thus affirming the Tribunal's decision that the mining activity is distinct and independent from the cement manufacturing activity.

Issue 2: Allocation of Profits
The Tribunal determined that profits could be allocated between the two activities. The assessee argued that since the entire output of the mining operation was used as raw material for manufacturing cement, no separate profit could be derived from mining. The court, however, found that the cost of lime extracted from mining, when compared to its market value, would result in a profit. This profit, embedded in the final product, could be segregated. The court referenced the Supreme Court's decision in Tata Iron & Steel Co. Ltd, which supported the notion that profit from mining could be embedded in the profit from the final product, thus justifying the allocation of profits.

Issue 3: Deduction under Section 80HH
The Tribunal held that the assessee was entitled to deductions under Section 80HH only for profits from manufacturing cement, not from mining. The court examined the language of Section 80HH, which uses 'profit derived from' rather than 'attributable to,' indicating a narrower scope. The Supreme Court's decisions in Liberty India and Pandian Chemicals Ltd clarified that 'derived from' implies a direct nexus with the industrial undertaking. Since the legislature explicitly excluded mining activities from the benefits of Section 80HH, the court upheld that only profits from cement manufacturing were eligible for deduction. The court rejected the assessee's reliance on Textile Machinery Corporation Ltd, noting that the case did not apply as the Tribunal had already established the independent nature of the two activities.

Judgment:
The court answered all three questions in the affirmative, in favor of the Revenue and against the assessee, confirming that the assessee operates two distinct industrial undertakings, profits can be allocated between these activities, and deductions under Section 80HH apply only to profits from manufacturing cement.