1998 (4) TMI 67

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....the Income-tax Act, 1961 (Act No. 43 of 1961) (for short "the I. T. Act"), in respect of (i) profit on sale of scrap ; (ii) interest earned by the industrial undertaking ; and (iii) cash assistance received from the Government, on account of exports made by the assessee. The Income-tax Officer disallowed the relief in respect of those items under section 80HH of the Income-tax Act. On appeal, the Commissioner (Appeals) upheld the assessee's claim for deduction in regard to the profit on sale of scrap and interest earned by the industrial undertaking, but disallowed such relief, in respect of the third item, namely, cash assistance received from the Government on account of exports made by the assessee. On further appeal by the Reve....

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....scrap materials so sold were also reflected in the turnover of the industrial undertaking. The moot question that arises for consideration is as to whether the assessee is entitled to deduction of an amount equal to twenty per cent. on the profits earned out of the sale of scrap materials under section 80HH of the Income-tax Act. Sub-section (1) of section 80HH, relevant for the present purpose, reads as under : "Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction ....

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....rtaking or the business of hotel. Axiomatic a proposition of law it is that it is not sufficient, if a commercial connection is established between the profits earned and the industrial undertaking and the law requires that such profits must have been derived from the industrial undertaking. The industrial undertaking itself must be the source of that profit. The business of the industrial undertaking must strictly yield that profit. It must be the direct source of profit and not a means to earn any other profit. As already stated, in the industrial undertaking in the manufacture of V-belts, oil seals, O-rings and rubber moulded products, certain scrap materials resulted, which has a saleable value. To say that the scrap materials had no....