The assessee entitled to claim deduction u/s 80HH with respect for profits derived from processing of cashew in the factories owned by outsiders – High Court
ABCAUS Case Law Citation:
ABCAUS 2234 (2018) (03) HC
The respondent assessee had been carrying on processing of cashew nuts in owned factory and also in the factories of sister concerns, which were in backward areas. The processing was also done by the assessee in factories which were not in the backward areas.
The assessee had claimed deductions as under:
(a) under section 80-I relating to profits and gains derived from industrial undertakings
(b) under section 80HH related to profits and gains derived from newly established industrial undertaking in backward areas.
The Assessing Officer (AO) found that the the assessee was eligible for deduction only in respect of profits and gains derived from the assessee’s own industrial undertaking.
The view taken by the AO was affirmed by the CIT(A) who, with respect to the claim for factories in places which were not categorised as backward area, remanded the matter to verify whether those factories were new industrial undertakings as contemplated in the provision.
Two factories of the assessee were found to be not new industrial undertakings. Hence, the assessee’s claim with respect to the profits and gains derived from the sister concerns was declined under Section 80I.
The Tribunal considered the issue under Section 80I along with Section 80HH, insofar as the processing of cashew being carried on in other concerns. It held that section 80I would not be applicable in the case of processing done in other factories not belonging to the assessee and the deduction granted by the Assessing Officer was only with respect to the assessee’s own factories
The Hon’ble High Court observed that the interference made by the first appellate authority was only to verify whether the assessee’s own factories, with respect to which the deduction was disallowed are new industrial undertakings. The claim of the assessee for deduction, with respect to profits and gains derived from the industrial undertakings of its sister concerns, under Section 80I was declined by the Assessing Officer and affirmed by the first appellate authority. There was no appeal to the Tribunal by the assessee.
Therefore, the Hon’ble High Court opined that no question of law arose under Section 80I.
Regarding claim u/s 80H, the Hon’ble High Court observed that there was no dispute that the claim was made only with respect to the industrial undertakings within the backward areas as is mandatory under Section 80HH.
The Revenue had relied on the decision of the Honourable Supreme Court. Whereas, the assessee relied on decision of the Division Bench of the Hon’ble High Court. The Hon’ble High Court was to see whether the judgment of the Honourable Supreme Court had nullified the decision of the Division Bench.
In the case relied by the Revenue, the claim raised by the assessee was under Section 80HH with respect to the interest derived from the deposit made for supply of electricity. In that case, the manufacturing process in the industrial undertaking could be carried out only with electricity. The deposit was made with the licensee for supply of electricity and the income by way of interest was said to be an income derived from the processing.
The Hon’ble Supreme Court elaborating the term “derived from” held that interest/profits earned on the deposit made with the Electricity Board could not be said to flow directly from the industrial undertaking itself.
The Hon’ble High Court found that the law given by the Apex Court is that the words “derived from” should be understood as something which has direct or immediate nexus with the industrial undertaking. However, the situation in the instant case was quite distinct and different. Here, the assessee was engaged in the processing of cashew nuts and such processing was done in its own factories and also in the factories of other assessees, who were sister concerns. The derivation of income of the assessee was from such processing and it cannot be said to be income which is derived other than from the activity of processing.
The Hon’ble High Court held that it would not result in the dis-allowance. On the contrary, the benefit being conferred on the industrial undertakings within backward areas; the assessee who entrusts the processing to third parties would be entitled to claim the deduction for the profits and gains arising from the processing, if the factory is in a backward area. The emphasis is on “the profits and gains derived from an industrial undertaking in backward areas” whether it be the assessee’s own industrial undertaking or of another.
The Hon’ble High Court opined that though an assessee carrying on processing of another will not be able to claim such benefit, an assessee who carries on processing in an industrial undertaking belonging to another, but situated in a backward area would be entitled to claim the benefit under Section 80HH.
The Hon’ble High Court opined that the decision of the Hon’ble Supreme Court had not nullified the decision of the Division Bench.
The question of law was decided in favour of the assessee and against the Revenue.
