ITA No.183 of 2002 -: 1 :- IN THE HIGH COURT FOR THE STATES OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision: November 25, 2011. 1. ITA No.183 of 2002 Nahar Spinning Mills Limited ... Appellant v. The Commissioner of Income Tax (Central), Ludhiana ... Respondent(s) 2. ITA No.132 of 2004 Nahar Spinning Mills Limited ... Appellant v. The Commissioner of Income Tax (Central), Ludhiana ... Respondent(s) CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MR. JUSTICE G.S. SANDHAWALIA Present: Shri Sanjay Bansal, Senior Advocate with Shri Robin Jarial, Advocate for the appellant. Shri Rajesh Katoch, Advocate for the respondent. Hemant Gupta , J. (Oral): This order shall dispose of ITA No.183 of 2002 and ITA No.132 of 2004 arising out of the assessment years 1990-91 and 1991-92 from the separate orders of the Income Tax Appellate Tribunal dated 31.5.2002 and 18.12.2003. Since the issue raised are common, the same are being taken up for hearing together. ITA No.183 of 2002 -: 2 :- Learned counsel for the assessee fairly pointed out that most of the questions of law, such as in respect of cash compensatory allowance, trading profits, interest incomes, rental incomes and property income stand decided against the assessee in ITA No.46/Chandi/2002 therefore, the assessee has sought the decision of this Court only on the following question of law:- “Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in holding that the assessee was not entitled to deduction under Sections 80-I and 80-HHC of the Income Tax Act, 1961 in respect of income from dry cleaning charges?” The brief facts out of which the said question of law is stated to have arisen is that the assessee is an industrial undertaking engaged in manufacturing and sale of cotton hosiery goods. The assessee has also made export sales. The Assessing Officer disallowed the following deductions as not falling under Section 80-1 of the Act:- i. Trading profits Rs.58,78,207/- ii. Property income Rs. 72,000/- iii. Interest income Rs.33,71,360/- iv. Dry-cleaning receipts profits Rs. 36,740/- v. CCA & Income from sale of import licences Rs.4,61,68,922/- Total Rs.5,55,27,229/- The Assessing Officer also deducted Rs.34,43,360 from the total income consisting of:- (i) interest income on advances to various firms and companies while dealing with deduction under Section 80-1 to the tune ITA No.183 of 2002 -: 3 :- of Rs.33,71,360/-; and (ii) rental income to the tune of Rs.72,000/-. The Commissioner of Income Tax set aside part of the order passed by the Assessing Officer whereas the finding recorded by the Commissioner of Income Tax are upheld by the Tribunal. The only issue raised by learned counsel for the assessee in the present appeals is that process of dry cleaning is a part of the manufacturing process and thus, the income derived from dry cleaning, job work of the third parties, is also income derived from industrial undertaking having direct and proximate nexus with its manufacturing activities and, therefore, the assessee is entitled to deductions under Section 80-I of the Act. Since the said activity is in the process of export activity as well, therefore, the assessee is entitled to deduction under Section 80-HCC as well. Though the learned Tribunal has referred to the decision of the Tribunal in the assessee's own case for the year 1988-89 and 1989-90 but it is asserted by learned counsel for the assessee that the question of dry cleaning charges, as an income derived from industrial undertaking, was not the issue raised and decided. Similarly, in four other cases, i.e., in ITA No.2251/Chandi/92, assessment year 1991-92, Greatways, No.599/Chandi/94, assessment year 1991-92, Eastman and No.1601/Chandi/93, assessment year 1990-91, Nav Bharat Knitwears and (2007)288 ITR 494, Nahar Exports & Chemicals v. CIT, the orders of the Income Tax Appellate Tribunal also do not deal with dry cleaning process as income derived from industrial undertaking. We have proceeded to examine the issue in the said background. Relevant provisions of Section 80-HCC and Section 80-I read as under:- “80HCC (1) Where an assessee, being an Indian company or a ITA No.183 of 2002 -: 4 :- person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise 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 to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods or merchandise: 80-I (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with an subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof:” Firstly, we will examine the claim of the assessee for deduction under section 80-HCC. Learned counsel for the assessee has vehemently argued that by clause (baa) to the explanation to Section 80-HCC “profits of business” has been introduced by the Finance Act No.2 of 1991, its income received from dry cleaning process is also an income in the export business of the assessee, therefore, liable to be taken into consideration for the grant of the benefit under Section 80-HCC. But we do not find any merit in the said argument. The effect of clause (baa) to the explanation to Section 80-HCC was considered by a Division Bench of this Court in ITA No.180 of 2002, decided on 3.2.2011, ITA No.183 of 2002 -: 5 :- Commissioner of Income Tax v. Hansa Agencies Pvt. Ltd., ITA No.180 of 2002. It was held that the interest income earned from surplus finance which was for earning interest falling under the head 'income from other sources' would not be calculated for determining business of profits under Section 80-HCC. The assessee has also not claimed the receipt from dry cleaning process as a part of the total turn over for the purpose of calculation of deductions under Section 80-HCC. Such claim is not discernible from any of the order of the authorities. Therefore, the argument raised by learned counsel for the assessee that the receipt from dry cleaning process is also eligible for computation of deduction under Section 80-HCC is not acceptable. Learned counsel for the assessee has vehemently argued that dry cleaning process is a part of the manufacturing activity and, thus, is income derived by an industrial undertaking. It is contended that it is not necessary that the assessee should earn such income in respect of the raw material of the assessee alone but even if the assessee has undertaken such job of a third party, it is still part of the manufacturing process, therefore, it is an income derived from industrial undertaking and, thus entitled to deduction under Section 80-I of the Act. Reliance is placed upon an order passed by this Court in CIT v. Impel Forge and Allied Industries Ltd. (2009) 183 Taxman 38 and also judgments of the Delhi High Court reported as NU-Look (P) Ltd. v. CIT (1957)157 ITR 25 and CIT V. Northern Aromatics Ltd. (2005)196 CTR 479. Reliance was also placed upon the Full Bench judgment of this Court reported as CIT v. Sovrin Knit Works, (1993)199 ITR 679 wherein the question which arose was whether the process of dyeing, furnishing, singeing would fall within the ambit of manufacturing or ITA No.183 of 2002 -: 6 :- production of textiles as envisaged by Entry 23 of Schedule I of the Industries (Development and Regulations) Act, 1951. It was found that bleaching, dyeing and printing of grey cloth amounts to manufacture or production of an article or thing within the meaning of Section 32 of the said Act. Learned counsel for the assessee also placed reliance upon a recent judgment of the Hon'ble Supreme Court in (2010)320 ITR 665 (SC), Commissioner of Income Tax, Mumbai v. Emptee Poly-Yarn (P) Ltd., wherein it was held that twisting and texturising of partially oriented yarn (POY) constitutes manufacturing in the context of POY into a textile yarn. Thus, it is argued that even though a new product has not come into existence with the process of dry cleaning but the process of dry cleaning is necessary process before using the yarn for weaving, therefore, dry cleaning is a part of the manufacturing process and, thus, is income derived from industrial undertaking. On the other hand, learned counsel for the revenue relies upon the Supreme Court judgment reported as (2001)251 ITR 323, Aspinwal & Co. Ltd. v. CIT, wherein it has been held that expression 'manufacturing' is to be given meaning as understood in common parlance, which means the production of articles for use from raw or prepared material by giving such material new forms, qualities or combinations whether by hand, labour or machine. It is, thus, contended by the learned counsel for the revenue that the process of dry cleaning does not give rise to any new article or qualities in the product, therefore, dry cleaning cannot be treated to be a part of manufacturing process. Reference is also made to (2009)317 ITR 218 (SC), Liberty India v. CIT, wherein it has been held that Sections 80-IA and 80-IB have a common scheme. The words “derived from” are narrower in ITA No.183 of 2002 -: 7 :- connotation as compared to the words “attributable to”. By using the expression “derived from”, the Parliament intended to cover sources not beyond the first degree. That was a case where benefit/entitlement pass scheme was declined as an income derived from an industrial undertaking. It is, thus, argued that process of dry cleaning is not a process falling in the first degree which may be considered for claiming deduction under Section 80-I of the Act. Keeping in view the aforesaid pronouncements in the present appeals, the assessee claimed dry cleaning receipt of Rs.36,074/- as income derived from business income. While discussing the said claim, the Tribunal stated to the following effect:- “16.2 ... We are unable to accept the submission of the learned counsel for the assessee that profits and gains from the industrial undertaking would also cover and include the trading profits, interest income, property income, rental income and income by way of dry cleaning charges as these activities are only incidental and do not have direct nexus with the industrial undertaking. Even if it is held that such income is liable to tax under the head 'profits from business' but the same are not profits derived from an industrial undertaking...” 16.5 ... We hold that the CIT(A) was justified in not allowing deduction u/s 80I in respect of trading profits, rental income which also does not have a direct nexus with the industrial undertaking, dry cleaning charges and interest income. We confirm her order and dismiss the ground of the cross objection filed by the assessee.” ITA No.183 of 2002 -: 8 :- We have heard learned counsel for the parties at length. We find that the income derived from a job work or from a process by an industrial undertaking, would be eligible for deduction under Section 80-I of the Act is a question of fact keeping in view the nature of the process. The two Division Benches of the Delhi High Court in Northern Aromatics, NU Look (P) Ltd. and Impel Forge and Allied Industries Ltd., have found so in view of the facts of the case. But we find that the facts on record do not suggest a finding that the process of dry cleaning undertaken by the assessee is such which relates to a step in the manufacturing process. Though, in the case of Emptee Poly-Yarn (P) Ltd. it has been held that texturising and twisting of yarn constitute manufacturing, i.e., even without giving such materials a new formation, qualities or combinations as observed in the case of Aspinwal & Co. Ltd., but the fact remains that there are details available as to what was being dry cleaned and whether the process of dry cleaning is a part of the manufacturing process. Therefore, in the facts of the case, we are unable to hold that the income of Rs.36,074/- received by the assessee is an income derived from the industrial undertaking from the manufacturing process. Thus, we find that the assessee is not entitled to deduction under Section 80-I as well. Consequently, the substantial question of law is answered against the assessee and in favour of the revenue and the appeals are dismissed. [ Hemant Gupta ] Judge [ G.S. Sandhawalia ] November 25, 2011. Judge kadyan