The central legal point established in the judgment is the narrow interpretation of 'derived from' in the context of industrial undertakings for claiming deductions under sections 80J and 80HH.

K. Shivashankar Bhat, J.—In respect of the assessment year 1983-84, the following questions are referred under section 256(1) of the Income Tax Act, 1961 (for short "the Act"), for our consideration :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction under section 80J in respect of hydrogenation plant from which there was a loss although the total income was a positive figure ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for computing the relief under section 80HH, income from lorry hire, weighment charge, miscellaneous receipts, income from fixed deposits, etc., should not be included as they were not income of the industrial undertaking ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that deduction under section 80HH should be allowed in respect of the solvent plant on its income without setting off the loss incurred in respect of hydrogenation plant ?"

2. The assessee is engaged in the business of extraction of oil, having two plants. The hydrogenation plant suffered loss during the relevant previous year; but the solvent plant earned profit.

3. In respect of the hydrogenation plant, the assessee sought benefit under section 80J of the Act. This was denied, in view of the loss suffered by the unit in question.

4. The assessee had also claimed the benefit of section 80HH in respect of its solvent plant. While computing the income from this plant, income received by the assessee from lorry hire, weighment charges and other miscellaneous activities were sought to be added by the assessee, which, again was refused by the Revenue. It was held by the Appellate Tribunal that the assessee could claim the benefit of section 80HH in respect of the exclusive income yielded by the solvent plant.

5. However, the Income Tax Officer had set off the loss from the hydrogenation plant against the profits of the solvent plant in computing the benefit under section 80HH in respect of the solvent plant. The Appellate Tribunal upheld the assessee's claim in this regard and held that the solvent plant should be treated separately for purposes of section 80HH.

6. In these circumstances, the above question were referred, the first two at the instance of the assessee and the third, at the instance of the Revenue.

7. The first question is concluded by our decision in Commissioner of Income Tax Vs. H.M.T. Ltd., (1993) 199 ITR 235 KAR dated July 21, 1992), while the second question is concluded by the decision in Sterling Foods Vs. Commissioner of Income Tax, Karnataka, (1984) 150 ITR 292 KAR . In Sterling Foods Vs. Commissioner of Income Tax, Karnataka, (1984) 150 ITR 292 KAR it was held that, under section 80HH, the relevant profits should be 'derived' from the unit in question directly; therefore, the income earned by the sale of import entitlement is outside the purview of section 80HH, even though the assessee earned the import entitlement by virtue of exporting the products of an industrial undertaking. The ratio of the said decision would equally govern the present case also.

8. Re : Third question. - The Income Tax Officer set off the loss of the hydrogenation plant against the income from the solvent plant for the purpose of calculating the deduction under section 80HH. This view as affirmed by the Commissioner (Appeals) was reversed by the Appellate Tribunal which held that the assessee was entitled to the relief under section 80HH in respect of the solvent plant as the net income earned by the said plant, before setting off the loss of the hydrogenation plant. Mr. Ramabhadran contended that 20 percent. of the profits and gains derived from an industrial undertaking (a unit) is allowed as a deduction, while computing the gross total income of an assessee; this is a beneficial provision enacted to encourage setting up of industria