Direct nexus for eligible unit expenses governs profit-linked deductions, and unrelated research costs cannot reduce deduction claims.

Research and development expenditure may be reduced from the profits of units claiming deduction under sections 80IB and 80IC only where it is incurred for and on behalf of those specific undertakings. The text explains that apportionment is not justified when the research division operates independently, develops unrelated products, and no direct nexus is shown between that expenditure and the eligible manufacturing units. Expenditure relating to other units or the head office cannot be charged against the profits of the eligible undertaking. On that basis, the disallowance founded on such apportionment was deleted, and the Revenue's challenge failed for lack of any substantial question of law.

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Issues: Whether research and development expenditure could be apportioned to the units eligible for deduction under sections 80IB and 80IC of the Income-tax Act, 1961, so as to reduce the deduction claimed by the assessee.

Analysis: The assessment record and the Tribunal's factual findings showed that the research and development activities were independent of the manufacturing units claiming deduction. The products under development in the research and development division were unrelated to the products manufactured by the eligible units, and no material established a direct nexus between the research expenditure and those units. The principle applied was that only expenditure incurred for and on behalf of the concerned undertaking can be attributed to it, and expenditure relating to other units or the head office cannot be deducted against the profits of the eligible undertaking. In these circumstances, the proposed question was found to be essentially factual and not to give rise to any substantial question of law.

Conclusion: The apportionment of research and development expenditure to the eligible units was not justified, and the disallowance made on that basis was deleted. The answer was in favour of the assessee on the substantive issue, and against the Revenue's challenge.

Final Conclusion: The appeal failed to raise any substantial question of law and was rejected.

Ratio Decidendi: For deductions linked to profits of a specified industrial undertaking, only expenditure having a direct nexus with that undertaking can be attributed to it; expenditure unrelated to the eligible unit cannot be apportioned against its profits.

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