M/S Liberty Group Marketing Division v. Commissioner Of Income Tax (Central), Ludhiana

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 underSection 256 (2) of the Income Tax Act, 1961 (in short “the Act”),following question of law has been referred to this Court for its opinionby the Income Tax Appellate Tribunal, Delhi Bench “C”, New Delhi(hereinafter referred to as “the Tribunal”):- “Whether in the facts and circumstances of theassessee's case, the Tribunal has erred in law whilenot accepting claim under Section 80-I althoughassessee fulfilled all requisite conditions of being anindustrial undertaking?” 2. The facts, in brief, are that the assessee is deriving income ITR No. 1 of 2010 from commission and also trading in footwear and filed return on30.7.1986 declaring an income of Rs.7,27,330/- for the assessmentyear 1986-87. The assessee claimed deduction under Section 80-I ofthe Act of Rs.1,40,920/- in the assessment year 1986-87 andRs.97,494/- in the assessment year 1987-88. On enquiry, theAssessing Officer found that the entire stock was got manufacturedfrom the sister concern for which production charges were paid atRs.12,60,474/-. The assessee firm purchased raw material andsupplied the same to the sister concern for manufacturing process. TheAssessing Officer disallowed the deduction claimed under Section 80-Iof the Act for both the above said assessment years holding that theassessee firm was not an industrial undertaking. On appeal, theCommissioner of Income Tax [in short “the CIT (A)”] upheld the view ofthe Assessing Officer and held that the assessee was getting the shoesmade from cobblers on job work basis. On further appeal to theTribunal, the view of the Assessing Officer as upheld by the CIT (A) wasaffirmed. 3.We have heard learned counsel for the parties and perusedthe record. 4.The issue that arises for consideration in this reference iswhether the assessee who was getting the shoes made by engagingthe cobblers etc. or from sister concern would be said to be derivingincome 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 theassessee 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 ofIncome Tax, [2001] 251 ITR 323 (SC); Commissioner of Income Taxv. UP State Agro Industrial Corporation, [1991] 188 ITR 370 (ALL);Commissioner of Income Tax v. Penwalt India Ltd., [1992] 196 ITR813 (Bom); Commissioner of Income Tax v. Talwar Khuller (P) Ltd.[1999] 235 ITR 70 (ALL); Commissioner of Income Tax v. PrithvirajBhoorchand, [2007] 280 ITR 92 (GUJ); Commissioner of IncomeTax Vs. Prabhudas Kishordas Tobacco Products P. Ltd. [2006] 282ITR 568 (GUJ); Commissioner of Income Tax v. Taj Fire WorksIndustries, [2007] 288 ITR 92 (MAD) and Commissioner of Income-tax v. Liberty Group Marketing Division, [2009] 315 ITR 125 (P&H). ITR No. 1 of 2010-3- of the judgments in Aspinwall and Co. Ltd. v. Commissioner ofIncome Tax, [2001] 251 ITR 323 (SC); Commissioner of Income Taxv. UP State Agro Industrial Corporation, [1991] 188 ITR 370 (ALL);Commissioner of Income Tax v. Penwalt India Ltd., [1992] 196 ITR813 (Bom); Commissioner of Income Tax v. Talwar Khuller (P) Ltd.[1999] 235 ITR 70 (ALL); Commissioner of Income Tax v. PrithvirajBhoorchand, [2007] 280 ITR 92 (GUJ); Commissioner of IncomeTax Vs. Prabhudas Kishordas Tobacco Products P. Ltd. [2006] 282ITR 568 (GUJ); Commissioner of Income Tax v. Taj Fire WorksIndustries, [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 orderpassed by the Tribunal and submitted that similar issue arose beforethis Court in Liberty Shoes Ltd. v. Commissioner of Income Tax,[2007] 293 ITR 478 (P&H) wherein this Court held that the assesseewas not entitled to deduction under Section 80-IA in respect of profitsand gains from the business of sale of PVC, Liberty shoes gotmanufactured according to its own specifications, designs etc. fromoutside agencies. Learned counsel further submitted that this Courtrelying upon the judgment of the Apex Court in CIT v. Sterling Foods[1999] 237 ITR 579 (SC) had decided the issue against the assesseeand in favour of the revenue. According to the learned counsel none ofthe judgments relied upon by the assessee discusses the scope of theexpression “derived from” which occurs in Section 80-I of the Act andhas been explained in Sterling Foods Ltd. by the Apex Court. 7.We have given our thoughtful consideration to the rival submissions of learned counsel for the parties. 8.Under Section 80-I of the Act, a deduction of twenty fivepercent in the case of corporate tax assessees and twenty percent inother cases is allowed out of the profits and gains derived from a newIndustrial Undertaking or a ship or the business of a hotel or thebusiness of repairs to ocean-going vessels or other powered craftincluded 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 Section80HH of the Act. The assessee had earned income by sale of theimport entitlements. It was held that it would not constitute profit andgains derived from its Industrial Undertaking of processing sea foodand, the assessee was not entitled to benefit of Section 80HH of theAct. The Division Bench of this Court in Nahar Exports Ltd. v.Commissioner of Income Tax, [2007] 288 ITR 494 following theaforesaid 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 formationof”. The source of import entitlements could not besaid to be the industrial undertaking of the assessee.The source of the import entitlements could only besaid to be the Export Promotion Scheme of theCentral Government whereunder the exportentitlements became available. There must be, for the application of the words “derived from”, a directnexus between the profits and gains and theindustrial undertaking. In the instant case, the nexuswas not direct but only incidental. The industrialundertaking exported processed sea foods. Byreason of such export, the Export Promotion Schemeapplied. Thereunder, the assessee was entitled toimport entitlements, which it could sell. The saleconsideration therefrom could not be held toconstitute a profit and gain derived from theassessee's industrial undertaking. The receipts fromthe sale of import entitlements could not be includedin the income of the assessee for the purpose ofcomputing the relief under s. 80HH of the IT Act,1961.” the application of the words “derived from”, a directnexus between the profits and gains and theindustrial undertaking. In the instant case, the nexuswas not direct but only incidental. The industrialundertaking exported processed sea foods. Byreason of such export, the Export Promotion Schemeapplied. Thereunder, the assessee was entitled toimport entitlements, which it could sell. The saleconsideration therefrom could not be held toconstitute a profit and gain derived from theassessee's industrial undertaking. The receipts fromthe sale of import entitlements could not be includedin the income of the assessee for the purpose ofcomputing the relief under s. 80HH of the IT Act,1961.” 10.The words “profits and gains derived from IndustrialUndertaking” occurring in Section 80-IA of the Act were underconsideration of this Court in Liberty Shoes Ltd's case (supra). Theassessee who was earning profit from business of trading activity orproducts of other concerns was held not to derive income from suchIndustrial Undertaking. Following the dictum laid down in SterlingFoods case it was held that the assessee was not entitled to anybenefit under the said provision. 11.The issue raised herein, thus, authoritatively standsresolved against the assessee. 12.Suffice it to notice that the judgments cited by learned 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 thejudgment delivered by the Apex Court in Sterling Foods case whereinscope of expression “derived from” was elaborated and discussed orthe Apex Court judgment in Sterling Foods case was not underconsideration in those judgments. Therefore, the assessee cannotderive any advantage from those pronouncements. 13.Accordingly, the question of law, referred to above, isanswered in favour of the revenue and against the assessee.14.The reference stands disposed of accordingly. (AJAY KUMAR MITTAL) JUDGE August 18, 2010gbs (ADARSH KUMAR GOEL)JUDGE