2025 (7) TMI 811 - AT - Income Tax

Deduction u/s. 80IC - lease income earned - receipts falling within the meaning of profits derived from the eligible undertaking - direct nexus between the income derived and the business of the industrial undertaking Whether or not the lease rental income and income from the other streams of income disclosed by the assessee company under the head Other income in its books of account and reported as such in its audited financials are eligible for claim of deduction u/s 80IC of the Act? HELD THAT - Lessee had made payment to the assessee company on account of lease rental charges and not towards any manufacturing activity or job work charges. Further the service tax was also charged in all the invoices raised by the assessee company for providing of equipment on lease and not for any job work. Also the AS 26 statement of the assessee company revealed beyond doubt that the amounts so received were towards lease rental income on which the lessee had deducted tax at source (TDS) by treating the same as lease rental income. It is also a fact that the lease rental had been shown by the assessee company under the head Other income in its profit and loss account for the year under consideration and had not formed part of its sales. We are of the firm conviction that as there is no direct nexus between the manufacturing activity of the assessee company carried out at its eligible unit i.e. at the Baddi-2 and the lease income so earned by it therefore the revenue recognized from the said stream of income could not have been brought within the meaning of profits and gains derived by the assessee company from its eligible business of manufacturing and sale of specified products i.e. blow molded products for claiming deduction u/s 80IC of the Act. Our aforesaid view that there has to be a direct nexus between the income derived and the business of the industrial undertaking can safely be gathered from the judgment of Cambay Electrical Supply Industrial Co. Ltd. 1978 (4) TMI 1 - SUPREME COURT wherein deliberating upon the pari materia provisions of section 80IA of the Act had observed that though the expression attributable to has a much wider import and takes within its meaning receipts which are incidental to the actual conduct of the business of the industrial undertaking yet the same may not fall within the meaning derived from so as to be eligible for the benefit envisaged U/s. 80IA of the Act. Also we find in case of Sterling Foods 1999 (4) TMI 1 - SUPREME COURT had held that where the nexus between the income and the industrial undertaking was not direct but was only incidental it would not fall within the expression profits derived from industrial undertaking . Hon ble Apex Court in the case of Liberty India Ltd 2009 (8) TMI 63 - SUPREME COURT had brought out a fine distinction between the expressions first degree source derived from as against attributable to . Referring to section 80IB of the Act it was observed that the same provided for allowing of deduction of the profits and gains derived from the eligible business. It was observed that the words derived from are narrower in connotation as compared to the words attributable to . It was observed that by using the expression derived from the parliament had intended to cover sources not beyond the first degree. We thus in terms of our aforesaid deliberations are of the firm conviction that as the lease rental income received by the assessee company from supplying of equipment or machinery on lease to its client viz. viz. M/s. Reckitt Benckiser (India) Private Ltd could not have been brought within the meaning of profits and gains derived by the assessee company from its eligible business of manufacturing blow molded products therefore the authorities below had rightly concluded that the amount so received was not eligible for claim of deduction under Section 80IC of the Act. Alternatively we also concur with the DRP that as the assessee company was entitled to claim deduction under Section 80IC of the Act for carrying out manufacturing activity at its eligible unit viz. Baddi-2 unit (out of 5 different units) therefore it could not have claimed deduction for the manufacturing activity that was carried out at any other premises other than that of the eligible unit. Accordingly for the said reason also the assessee company had rightly been held to be ineligible for claiming of deduction on the subject income under Section 80IC of the Act. Remaining receipts/income that were disclosed in Note-19 under the head Other incomes of its Profit and loss account for the subject year viz. (i) interest on others Product Development Income (Net) liabilities written back capital subsidy amortization and Miscellaneous income included as a part of the eligible profits for computing deduction u/s 80IC - Interest income received by the assessee company can be held to be attributable to its business but cannot be construed as having been derived by from its business therefore the same in our view would not be entitled for deduction u/s 80IC of the Act. Our aforesaid view is fortified by the judgment of Pandian Chemicals Ltd. 2003 (4) TMI 3 - SUPREME COURT Project Development Income - If the subject amount was received on account of technical data supplied along with the manufactured product then the same will form part of the sales and thus be a part of the profit derived by the assessee company from its eligible business. At the same time we find that though it is the claim of the assessee company that the subject amount forms part of its sales but if that would have been so then why it has separately been accounted for in its financial statement under the head Other income . We herein set-aside the issue to the file of the AO for fresh adjudication. If the claim of the assessee company that the subject amount was received on account of technical data supplied to the customer alongwith the manufactured product is found to be in order then the A.O shall allow the assessee s claim. Liabilities written back by the assessee during the subject year viz. (i). that the same pertains to the eligible business of the assessee company; and (ii). that the same having been debited to the profit loss account of the assessee company for the preceding years (eligible years) had gone to reduce its income eligible for deduction u/s 80IC of the Act; are not discernible from the record therefore the matter is set-aside to the file of the A.O who is directed to carry out necessary verification and re-adjudicate in terms of our aforesaid deliberations the entitlement of the assessee company for deduction u/s 80IC on the subject amount credited in its books of account. Capital subsidy amortization though the revenue subsidies are included in the profits eligible for deduction under Section 80IC of the Act due to their direct nexus with business operations but the capital subsidies impact profits through the reduced depreciation allowable on the subsidized cost of the asset and thus the inclusion by the assessee company of the amount of capital subsidy amortization in the eligible profits for deduction under Section 80IC based on our aforesaid deliberations will not qualify for deduction under Section 80IC Miscellaneous income - In the absence of any material/evidence regarding the nature of the aforesaid income/receipt we are unable to conclude that the same was derived by the assessee company from its eligible business.

Summary

The core legal questions considered by the Tribunal in this appeal revolve around the eligibility of various streams of income for deduction under Section 80IC of the Income-tax Act, 1961. Specifically, the issues are:

1. Whether the "lease rental income" received by the assessee company from leasing equipment and supplying manpower to its client qualifies as "profits and gains derived" from the eligible business of manufacturing blow moulded plastic products, and thus is eligible for deduction under Section 80IC.

2. Whether other incomes disclosed under "Other Income" in the assessee's accounts-including interest income, product development income, liabilities written back, capital subsidy amortization, and miscellaneous income-can be considered as profits derived from the eligible undertaking and thus qualify for deduction under Section 80IC.

3. Whether the assessee can claim deduction under Section 80IC for manufacturing activities carried out at premises other than the specifically eligible unit (Baddi-2 unit).

Issue-wise Detailed Analysis

1. Eligibility of Lease Rental Income for Deduction under Section 80IC

Relevant Legal Framework and Precedents: Section 80IC(1) permits deduction on profits and gains derived by an undertaking from specified eligible businesses, particularly manufacturing of articles or things not listed in the Thirteenth Schedule. The expression "derived from" has been judicially interpreted to require a direct or immediate nexus between the income and the eligible business activity (Pandian Chemicals Ltd. v. CIT, 2003; Cambay Electrical Supply Industrial Co. Ltd. v. CIT, 1978; Sterling Foods v. CIT, 1999; Liberty India Ltd. v. CIT, 2009). The Supreme Court and various Tribunals have emphasized that incidental or remote income without direct nexus does not qualify for deduction under Section 80IC or similar provisions (e.g., interest income on security deposits or fixed deposits). The principle is that the profits must flow directly from the eligible industrial undertaking.

Court's Interpretation and Reasoning: The Tribunal analyzed the nature of the lease rental income by examining the agreements executed between the assessee and its client. The "Agreement for Equipment Lease" and the "Manpower Supply and Maintenance Agreement" explicitly indicated that the assessee supplied machinery and manpower to the client's premises and was responsible for maintenance. The agreements were titled and structured as lease and service contracts, not as contracts for manufacturing or job work. The invoices raised by the assessee described the charges as "rental charges on account of lease of equipment" and included service tax, further confirming the nature of the income as lease rental rather than manufacturing proceeds.

The Tribunal noted that the lease rental income was disclosed separately under "Other Income" in the audited financial statements and not included in sales revenue. Additionally, tax was deducted at source by the lessee treating the payments as lease rental income. These facts collectively established that the income was distinct from the manufacturing business carried out at the eligible unit.

The Tribunal held that such lease rental income lacks the direct nexus with the manufacturing activity required under Section 80IC. It is not income "derived from" manufacture or production of articles or things by the eligible undertaking. The income from leasing equipment and supplying manpower is a separate business stream and cannot be considered as job work or manufacturing income eligible for deduction.

Key Evidence and Findings: Agreements between parties, invoices with rental charges and service tax, separate accounting treatment in books, and TDS records treating the income as lease rental.

Application of Law to Facts: Applying the principle that only profits directly derived from manufacturing qualify, the Tribunal concluded that lease rental income is not eligible for deduction under Section 80IC.

Treatment of Competing Arguments: The assessee argued the lease rental income was misclassified and should be treated as job work charges, which would be eligible. The Tribunal rejected this, finding no documentary or contractual basis for such a claim and emphasizing the clear nature of the lease agreements and invoicing.

Conclusion: The lease rental income is not eligible for deduction under Section 80IC as it is not profits derived from the manufacturing business of the eligible unit.

2. Eligibility of Other Income Streams for Deduction under Section 80IC

a) Interest on Others (Rs. 1,63,125): The interest income arose from deposits made for electricity and sales tax purposes. The Tribunal held that while such interest may be "attributable to" the business, it is not "derived from" the business and thus not eligible for deduction under Section 80IC. This view is supported by Supreme Court precedent (Pandian Chemicals Ltd.) and subsequent judicial decisions emphasizing the need for direct nexus.

b) Product Development Income (Net) (Rs. 54,76,624): The assessee claimed this income was received for supplying technical data along with its products and thus formed part of the sales price. The Tribunal recognized that if this income indeed forms part of the sales proceeds, it would be eligible for deduction. However, as it was separately accounted under "Other Income," the Tribunal set aside this issue to the Assessing Officer for fresh adjudication to verify the nature of this income and allow deduction if substantiated.

c) Liabilities Written Back (Rs. 16,65,013): The amount related to excess provisions made in earlier years that had reduced eligible income previously. The Tribunal accepted that such write-backs can be considered profits derived from business activities and thus eligible for deduction under Section 80IC. However, due to insufficient record to confirm the linkage with the eligible business and prior years, the matter was remanded to the Assessing Officer for verification and re-adjudication.

d) Capital Subsidy Amortization (Rs. 30,00,000): The assessee claimed deduction on amortization of capital subsidy received from the government. The Tribunal distinguished capital subsidies from revenue subsidies, noting that capital subsidies reduce the actual cost of assets and thus depreciation, indirectly affecting profits. The amortization itself is not a deductible expense under Section 80IC. The Tribunal relied on the CBDT Circular and Supreme Court precedent (CIT v. Meghalaya Steel Ltd.) to hold that capital subsidy amortization is not eligible for deduction under Section 80IC.

e) Miscellaneous Income (Rs. 16,118): Due to lack of evidence regarding the nature of this income, the Tribunal was unable to conclude it was derived from the eligible business and thus did not allow deduction.

3. Claim of Deduction for Manufacturing Activities at Non-Eligible Premises

The assessee claimed deduction under Section 80IC for manufacturing activities carried out at multiple units but particularly for the Baddi-2 unit. The Tribunal upheld the view that deduction under Section 80IC is available only for profits derived from the eligible undertaking or unit. Manufacturing activities carried out at premises other than the eligible unit cannot be included for deduction. Since the lease rental income related to equipment supplied at the client's site (not the eligible unit), the deduction claim on that income was disallowed.

Significant Holdings

"The revenue from lease equipment or machinery neither would amount to manufacturing of articles by the eligible unit nor job working so as to claim deduction u/s 80IC of the Act. Such lease rental income cannot be considered as integral to manufacturing and sale of products and hence the same cannot be included in the revenue for the purpose of deduction u/s 80IC."

"It is now a settled principle that in order to claim deduction u/s 80IA or 80IC or 80HHC, there should be direct nexus between the income earned and the main activity the profits of which are eligible for deduction."

"Though interest income can be held to be 'attributable to' business, it cannot be construed as having been 'derived by' from business, therefore, not entitled to deduction under Section 80IC."

"Amortization of a capital subsidy in itself is not allowable as a direct deduction under Section 80IC, but the impact of the capital subsidy is reflected in the reduced cost of the asset for depreciation purposes."

"The assessee cannot claim deduction for manufacturing activity conducted at any other premises other than the eligible unit."

Final determinations:

- Lease rental income received for supply of equipment and manpower to client premises is not eligible for deduction under Section 80IC.

- Interest income on deposits related to business prerequisites is not eligible for deduction under Section 80IC.

- Product development income and liabilities written back are remanded for fresh verification to determine eligibility.

- Capital subsidy amortization is not eligible for deduction under Section 80IC.

- Miscellaneous income was not established as eligible for deduction.

- Deduction under Section 80IC is restricted to profits derived from the eligible unit only.