ITR No. 1 of 2010 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITR No. 1 of 2010 Date of Decision: 18.8.2010 M/s Liberty Group Marketing Division ....Petitioner. Versus Commissioner of Income Tax (Central), Ludhiana ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. S.K. Mukhi, Advocate with Ms. Jyoti, Advocate for the petitioner. Mr. Rajesh Katoch, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. In pursuance to a direction issued by this Court under Section 256 (2) of the Income Tax Act, 1961 (in short “the Act”), following question of law has been referred to this Court for its opinion by the Income Tax Appellate Tribunal, Delhi Bench “C”, New Delhi (hereinafter referred to as “the Tribunal”):- “Whether in the facts and circumstances of the assessee's case, the Tribunal has erred in law while not accepting claim under Section 80-I although assessee fulfilled all requisite conditions of being an industrial undertaking?” 2. The facts, in brief, are that the assessee is deriving income ITR No. 1 of 2010 -2- from commission and also trading in footwear and filed return on 30.7.1986 declaring an income of Rs.7,27,330/- for the assessment year 1986-87. The assessee claimed deduction under Section 80-I of the Act of Rs.1,40,920/- in the assessment year 1986-87 and Rs.97,494/- in the assessment year 1987-88. On enquiry, the Assessing Officer found that the entire stock was got manufactured from the sister concern for which production charges were paid at Rs.12,60,474/-. The assessee firm purchased raw material and supplied the same to the sister concern for manufacturing process. The Assessing Officer disallowed the deduction claimed under Section 80-I of the Act for both the above said assessment years holding that the assessee firm was not an industrial undertaking. On appeal, the Commissioner of Income Tax [in short “the CIT (A)”] upheld the view of the Assessing Officer and held that the assessee was getting the shoes made from cobblers on job work basis. On further appeal to the Tribunal, the view of the Assessing Officer as upheld by the CIT (A) was affirmed. 3. We have heard learned counsel for the parties and perused the record. 4. The issue that arises for consideration in this reference is whether the assessee who was getting the shoes made by engaging the cobblers etc. or from sister concern would be said to be deriving income from an industrial undertaking within the meaning of Section 80- I of the Act and entitled to deduction thereunder. 5. Learned counsel for the assessee submitted that the assessee was entitled to deduction under Section 80-I of the Act in view ITR No. 1 of 2010 -3- of the judgments in Aspinwall and Co. Ltd. v. Commissioner of Income Tax, [2001] 251 ITR 323 (SC); Commissioner of Income Tax v. UP State Agro Industrial Corporation, [1991] 188 ITR 370 (ALL); Commissioner of Income Tax v. Penwalt India Ltd., [1992] 196 ITR 813 (Bom); Commissioner of Income Tax v. Talwar Khuller (P) Ltd. [1999] 235 ITR 70 (ALL); Commissioner of Income Tax v. Prithviraj Bhoorchand, [2007] 280 ITR 92 (GUJ); Commissioner of Income Tax Vs. Prabhudas Kishordas Tobacco Products P. Ltd. [2006] 282 ITR 568 (GUJ); Commissioner of Income Tax v. Taj Fire Works Industries, [2007] 288 ITR 92 (MAD) and Commissioner of Income- tax v. Liberty Group Marketing Division, [2009] 315 ITR 125 (P&H). 6. Learned counsel for the revenue supported the order passed by the Tribunal and submitted that similar issue arose before this Court in Liberty Shoes Ltd. v. Commissioner of Income Tax, [2007] 293 ITR 478 (P&H) wherein this Court held that the assessee was not entitled to deduction under Section 80-IA in respect of profits and gains from the business of sale of PVC, Liberty shoes got manufactured according to its own specifications, designs etc. from outside agencies. Learned counsel further submitted that this Court relying upon the judgment of the Apex Court in CIT v. Sterling Foods [1999] 237 ITR 579 (SC) had decided the issue against the assessee and in favour of the revenue. According to the learned counsel none of the judgments relied upon by the assessee discusses the scope of the expression “derived from” which occurs in Section 80-I of the Act and has been explained in Sterling Foods Ltd. by the Apex Court. 7. We have given our thoughtful consideration to the rival ITR No. 1 of 2010 -4- submissions of learned counsel for the parties. 8. Under Section 80-I of the Act, a deduction of twenty five percent in the case of corporate tax assessees and twenty percent in other cases is allowed out of the profits and gains derived from a new Industrial Undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft included in the gross total income. 9. The Hon'ble Supreme Court in Sterling Foods' case (supra) was seized of the matter relating to deduction under Section 80HH of the Act. The assessee had earned income by sale of the import entitlements. It was held that it would not constitute profit and gains derived from its Industrial Undertaking of processing sea food and, the assessee was not entitled to benefit of Section 80HH of the Act. The Division Bench of this Court in Nahar Exports Ltd. v. Commissioner of Income Tax, [2007] 288 ITR 494 following the aforesaid judgment of the apex court while dealing with the expression “derived from” had recorded as under:- “The word “derive” is usually followed by the word “from” and it means: “get, to trace from a source; arise from, originate in, show the origin or formation of”. The source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government whereunder the export entitlements became available. There must be, for ITR No. 1 of 2010 -5- 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 was not direct but only incidental. The industrial undertaking exported processed sea foods. By reason of such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under s. 80HH of the IT Act, 1961.” 10. The words “profits and gains derived from Industrial Undertaking” occurring in Section 80-IA of the Act were under consideration of this Court in Liberty Shoes Ltd's case (supra). The assessee who was earning profit from business of trading activity or products of other concerns was held not to derive income from such Industrial Undertaking. Following the dictum laid down in Sterling Foods case it was held that the assessee was not entitled to any benefit under the said provision. 11. The issue raised herein, thus, authoritatively stands resolved against the assessee. 12. Suffice it to notice that the judgments cited by learned ITR No. 1 of 2010 -6- counsel for the assessee were either prior in point of time to the judgment delivered by the Apex Court in Sterling Foods case wherein scope of expression “derived from” was elaborated and discussed or the Apex Court judgment in Sterling Foods case was not under consideration in those judgments. Therefore, the assessee cannot derive any advantage from those pronouncements. 13. Accordingly, the question of law, referred to above, is answered in favour of the revenue and against the assessee. 14. The reference stands disposed of accordingly. (AJAY KUMAR MITTAL) JUDGE August 18, 2010 (ADARSH KUMAR GOEL) gbs JUDGE