ORDER
U.B.S. Bedi, J.M.
1. This appeal of the Revenue is directed against the order passed by learned CIT(A)-2 Bilaspur, dt. 7th Feb., 1996 relevant to asst. yr. 1992-93 wherein following single effective ground has been raised–
On the facts and in the circumstances of the case, the learned CIT(A) erred in directing the AO to allow deduction under Section 80-I of the IT Act, 1961 including the income disclosed under Section 132 (4) of the IT Act, 1961.
2. This appeal was earlier decided by this Bench vide order dt. 22nd Sept., 2000 which came to be recalled by the order of this Bench on the application of the assessee vide order dt. 10th Oct., 2005.
3. The facts indicate that the assessee has claimed deduction under Section 80-I after including the amount of Rs. 4 lacs disclosed in the return. The AO rejected the claim of the assessee on the ground that the deduction was available in respect of profit and gain derived from the industrial undertaking and such profit and gain, as per P&L a/c, were only to the extent of Rs. 1,73,601 in the case of the assessee. So the AO restricted such deduction to 25 per cent of the amount of Rs. 1,73,601 against which assessee preferred appeal and it was submitted before the first appellate authority that the amount of Rs. 4 lacs disclosed as income was income from business of the assessee and it was disclosed on account of difference in stock. He further submitted that the assessee was entitled for deduction under Section 80-I in respect of income so disclosed and the AO was not correct in disallowing the claim of the assessee. The learned CIT(A) while considering and accepting the plea of the assessee has concluded to observe that the disclosure of Rs. 4 lacs was essentially on account of excess paper stock found in the premises of the assessee. As stock was related to the manufacturing activities of the assessee, the same has to be considered as income from industrial undertaking. The AO was, therefore, not correct in not considering the amount disclosed by the assessee in the return for the purpose of deduction under Section 80-I. The AO was, therefore, directed to allow the deduction under Section 80-I after including the income disclosed in the return.
4. Aggrieved by the order of the learned CIT(A), Department is in appeal and it was strongly pleaded that excess stock of paper found was to be its raw material for the products being manufactured by the assessee so with no reasoning the same could be taken as income derived from the industrial undertaking. As such the AO was justified in excluding such income of Rs. 4 lacs disclosed by the assessee on account of excess stock of paper found at the time of survey/search to work out the deduction under Section 80-I and learned CIT(A) was not correct in directing the AO to include such excess stock of paper found at the time of survey/search conducted. Therefore, it was pleaded that since the excess stock could not be said to be income derived from industrial undertaking, as such, assessee was not entitled to claim deduction under Section 80-I on such amount. Therefore, the order of the learned CIT(A) should be reversed and that of AO should be restored.
5. Learned Counsel for the assessee relied upon the order of the learned CIT(A) and further pleaded that since the stock of paper has been produced out of the income generated from manufacturing activities, the excess stock found also qualifies for deduction under Section 80-I which was rightly claimed by the assessee. Therefore, learned CIT(A) is justified in allowing the claim of the assessee. His order being legally correct should be upheld.
6. After hearing both sides and considering the materials on record, we find that it is an undisputed fact that the assessee disclosed Rs. 4 lacs on account of excess stock found at the time of survey/search and claimed deduction under Section 80-I on the returned income which includes income on account of excess stock of paper found and disclosed in the return of income. This claim of the assessee was, however, restricted to the business income excluding the amount of Rs. 4 lacs, on account of excess stock of paper found and disclosed on the ground that deduction was available in respect of profit and gains derived from industrial undertaking and such profit and gain, as per P&L a/c were only Rs. 1,73,601 in this case. But learned CIT(A), while specifically recording that disclosure of Rs. 4 lacs was essentially on account of excess paper stock found in the premises of the assessee has opined that the stock was related to the manufacturing activities of the assessee and the same has to be considered to be the income from industrial undertaking. Now the question before us is whether the deduction claimed under Section 80-I on this amount of Rs. 4 lacs being excess stock found in search/survey and disclosed in the return could be held to be income derived from industrial undertaking or not. To give background of the provision in this regard it would be relevant to point out that earlier Section 80-I was introduced by replacing Section 80E in which initial deduction was allowed out of profits and gains attributable to priority industry. This section was also deleted w.e.f. 1st April, 1973 and the present section was brought on the statute book by Finance No. (2) Act, 1980 w.e.f. 1st April, 1981. The distinguishing feature of the earlier Section 80-I and the existing one is that earlier the expression “profit attributable to priority industry” was on the statute book while in the existing provision legislature has used expression “any profits and gains derived from industrial undertaking or a ship or from hotel…” The controversy had since been going on before the Courts about the scope and actual meaning of the expression “attributable to” and “derived from” and Hon’ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT , for the first time, made distinction in the above referred two expressions and relevant observations are at pp. 93 and 94 which are reproduced as under:
As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor General relied, it will be pertinent to observe that the legislature has deliberately used the expression “attributable to”, and not the expression “derived from”. It cannot be disputed that the expression
“attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor General, it has used the expression “derived from”, as, for instance, in Section 80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity.
7. Similarly, Karnataka High Court in the case of Sterling Foods v. CIT has discussed the expression “derived from” and observed that expression “derived from” has a definite but narrow meaning and it cannot receive a flexible or wider concept.
8. To the same effect, Hon’ble Madras High Court in the case of CIT v. Jameel Leathers & Uppers has the view in favour of the Revenue.
9. In the case of Ashok Leyland Ltd. v. CIT . Hon’ble Supreme Court had again reiterated the same view as laid down in the case of Cambay Electric Supply Industrial Co. (supra).
10. While upholding the above view, Hon’ble Delhi High Court in the case of CIT v. Cement Distributors Ltd. has opined that commercial connection are irrelevant from the preposition of derived from and relevant observations are as under–
To be entitled to the relief under Section 80HH of the IT Act, 1961, the source of the particular income on which rebate under that section is sought for, must directly emerge from the running of the industrial undertaking, yielding profits and gains. Rebate is not allowable if the particular income is merely attributable or relatable to an industrial undertaking. Lease of immovable property (including plant and machinery embedded in the soil) is a transfer of a right to enjoy such property, in consideration of a price paid or promised or of money. Lease money for such transfer, having no direct nexus with the profits and gains from the property transferred for use, cannot, therefore, be said to be “profits and gains derived from the industrial undertaking” within the meaning of Section 80HH. It is entirely of a different character and species from profits, gains derived from the running of an industrial undertaking. Fixed lease money is not dependent on the running of the industrial undertaking. Once settled, lease money becomes payable irrespective of any profit or gain, or, for that matter, from the running of the industrial undertaking by the lessee. The lessee may or may not run the unit (industrial undertaking) or may or may not earn any profit or gain and in fact, may incur a loss in running it, but he will still be liable to pay the lease money. Thus income by way of lease money earned, though in a wider sense attributable to the undertaking (as it is to leasing out that unit), cannot be said to be profits and gains derived from the industrial undertaking so as to entitle the lessor assessee to a rebate under Section 80HH.
The words “derived” has to be assigned a restricted meaning as compared to the words “attributable to” or “referable to” and, therefore, to avail of a rebate under Section 80HH, an assessee must establish he has derived profits or gains from an industrial undertaking. In other words, the industrial undertaking must itself be the source of that profit and gain and it is not sufficient if a commercial connection is established between the profits and gains earned and the industrial undertaking.
The cardinal rule of interpretation is that the statute must be construed according to its plain language and neither should anything be added nor should something be subtracted therefrom unless there are adequate grounds to justify the inference that the legislature clearly so intended. It is also well settled that in a taxing statute one has to look merely at what is clearly stated. The meaning and extent of the statute must be collected from the plain and unambiguous expression used therein, rather than from any notions which may be entertained by the Court as to what is just or expedient.
On the same analogy no relief is available to the assessee under Section 80J in relation to the rent received by him from letting out the entire undertaking of the assessee.
11. In view of the criteria and parameters as laid down by their Lordships in various cases Hon’ble Madras High Court in the case of CIT v. Pandian Chemicals Ltd. when issue before it was relating to claim of the assessee for deduction under Section 80HH, where the expression used is similar, and their Lordships concluded that assessee who had deposited the amount with State Electricity Board and earned interest such interest income cannot be said to have derived from industrial undertaking as immediate source of interest in the deposit and not business. Their Lordships of the Hon’ble High Court have further opined that mere fact that interest amount was assessable as business income itself would not be sufficient unless the source of profit is the undertaking. Therefore, it was held that assessee is not eligible to claim deduction and there were no compelling reason to give wide meaning to the expression “derived from” under Section 80HH to cover every aspect. It will be pertinent to mention that SLP filed by the assessee has since been rejected as reported in (2001) 248 ITR (St) 243 and it reads as under–
Industrial undertaking–Interest on deposit whether income ‘derived from’ industrial undertaking:
12th Jan., 2001: Their Lordships S.P. Bharucha and Y.K. Sabharwal JJ. dismissed a SLP filed by the assessee against the order dt. 29th April, 1997 of the Madras High Court in Tax Case No. 1353 of 1985 reported as CIT v. Pandian Chemicals Ltd.
whereby the High Court answered in favour of the Revenue the question whether interest on deposit with the Tamil Nadu Electricity Board should be treated as income derived from an industrial undertaking for the purpose of relief under Section 80HH for the asst. yr. 1979-80, holding that mere connection between an income and the industrial undertaking would not be sufficient and there were no compelling reasons to give a wider meaning to the expression ‘derived from’ in Section 80HH of the Act, as the intention of the legislature was that industrial undertaking must be the source of the profits or gains: Pandian Chemicals Ltd. v. CIT–SLP (Civil) No. 8014 of 2000.
12. To the same effect, in order to arrive at the conclusion, Hon’ble Madras High Court has followed the ratio of the above judgment of Pandian Chemicals Ltd. (supra) in the case of Fenner (India) Ltd. v. CIT (2000) 160 CTR (Mad) 141.
13. Further, Hon’ble Supreme Court in the case of CIT v. Sterling Foods were again seized with the same expression “derived from” used in Section 80HH. Their Lordships while considering the decision of the same Court in the case of Cambay Electric Supply Industrial Co. (supra) decided the controversy in respect of claim of the assessee under Section 80HH on the profit earned from sale of import entitlements against the assessee after observing at p. 584 as under–
We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements become available. There must be, for the application of the words “derived from”, a direct nexus between the profits and gains and the industrial undertaking. In the instant case, the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee’s industrial undertaking.
14. While deciding the appeal of the assessee against the Madras High Court decision, the Hon’ble Supreme Court, in the case of Pandian Chemicals Ltd. v. CIT , with regard to meaning of words and phrases “derived from” has opined as under–
Words and phrases–“Derived from”, meaning of The words “derived from” in Section 80HH of the IT Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee’s industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking.
Held accordingly, that interest derived by the industrial undertaking of the assessee on deposits made with the electricity board for the supply of electricity for running the industrial undertaking could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by the undertaking for the purpose of the special deduction under Section 80HH.
15. After taking into consideration the ratio of the judgments as above and the discussion held, in our considered view, the conclusion drawn by learned CIT(A) is not correct. Since the stock found in excess and disclosed in the . income to the extent of Rs. 4 lacs was not on account of income derived from the industrial undertaking, the action of the learned CIT(A) in directing the AO to allow the relief under Section 80-I on the amount of Rs. 4 lacs is neither correct nor justified because the excess stock of paper, which is a raw material for the manufacturing of the products of the assessee has rightly been held by the AO to be not income derived from industrial undertaking. The words “derived from” under Section 80-I of the Act, to our mind, cannot have a wide import so as to include any income which can in some manner be attributed to the business. The derivation of the income must be directly connected with the business in the sense that the income is generated by the business from the industrial undertaking. It would not be sufficient if it is generated by the exploitation of a business asset. So the amount of Rs. 4 lacs derived on account of excess stock of paper found during the survey/search cannot be held to he derived from business activities of the industrial undertaking. Hence, the assessee was not entitled to get relief under Section 80-I of the IT Act with respect to such income. As such, while accepting the plea of the Revenue we reverse the order of the learned CIT(A) and restore that of AO.
16. As a result, appeal gets accepted.
