JUDGMENT

M.L. Mehta, J.

1. Both these appeals arise out of the orders of the Income Tax Appellate Tribunal (hereinafter referred to as the "Tribunal") dated 30th April, 2010 pertaining to the assessment year 2004-2005.

2. During the relevant assessment year, the assessee has shown gross-receipts, which apart from goods sales of Rs.1,55,26,740/- also included scrap sales of Rs.79,45,411/-, labour charges of Rs.20,82,637/- and job work charges of Rs.11,86,895/- and claimed to be a part of the profit for the purposes of deduction under Section 80 IB of the Income Tax Act, 1961 (for short "the Act"). The Assessing Officer held that as per the provisions of Section 80IB, which emphasize "profit and gains derived from such industrial undertaking", the assessee's industrial undertaking set up for the purpose of manufacture of steel, forging, transmission gears and parts and accessories of motor vehicles, cannot be permitted deduction on sale of scrap, job work and labour charges as the same are attributable to the business carried on by the assessee, but not derived from the profits of industrial undertaking. He held that the aforesaid receipts may form a part of the profits and gains of the business, and can be said to be derived from other activities, but the immediate source of these cannot be an industrial undertaking. In other words, the AO held that the scrap sale charges and job work/labour charges are to be excluded for the purpose of giving effect to deduction under Section 80 IB of the Act.

3. Aggrieved by this, the assessee preferred appeal before the CIT(A) on various grounds including deductions relating to sale of scrap, job work and labour charges. With regard to the claim of deduction on sale of scrap, the CIT(A) held that the scrap generation at various stages of manufacturing process was part of the manufacturing activity of an industrial unit and thus represented profits and gains derived on this account were from the industrial undertaking. Consequently, it recorded a finding in this regard in favour of the assessee and allowed its appeal. The Revenue carried the matter in appeal before the Tribunal, which came to be dismissed vide the impugned order, holding that scrap was generated through the process of manufacturing and thus was a part and parcel of manufacturing process of industrial undertaking, and thus profits on sale of scrap represented profits and gains derived from industrial undertaking. This was based on the premise that there was an immediate and proximate connection with the manufacturing process of industrial undertaking. The Revenue is in appeal against this part of the impugned order in ITA No.351/2011.

4. With regard to the claim of deduction on job work and labour charges, CIT(A) disallowed the appeal of the assessee and held that the job charges not derived from the exports are to be categorized as independent income and has to be deducted from gross profits to calculate profits derived from the exports. He, however, held that the assessee was eligible for deduction under Section 37 on Rs.6,53,906/- which would work out to Rs.1,96,172/- on account of expenses relating to earning of these job work, labour charges. He accordingly directed the AO to reduce the claim of the deduction under Section 80IB of the Act to an amount of Rs.1,96,172/-. The assessee preferred appeal against the order of the CIT(A), which came to be allowed by the impugned order by the Tribunal, who held that job works/labour charges income received by the assessee, by utilizing its plant and machinery installed in the undertaking, gave rise to income which had a direct nexus with the assessee's industrial undertaking, and thus entitled to claim of deduction under Section 80IB of the Act. The Revenue is in appeal against this part of the impugned order in ITA No.167/2011.

5. ITA 167/2011 was admitted on the following substantial questions of law:

(i) Whether income received from job work/labour charged on work don