The main legal point established in the judgment is that income must be directly derived from the industrial undertaking to be eligible for deduction under Section 80IB of the Income-tax Act, 1961.

(Prayer: Tax Case Appeal preferred under Section 260A of the Income-tax Act, as against the order dated 31.10.2006 passed by the Income-tax Appellate Tribunal, Bench A, Chennai in ITA.No.193/Mds/2005.)

ELIPE DHARMA RAO, J.

1. The scope of application of Section 80IB of the Income-tax Act, 1961 (hereinafter referred to as the Act) is the subject matter in this appeal.

2. The appellant/assessee is a joint venture company of Chevron Multinational Corporation and Chennai Petroleum Products and they are involved in manufacture of additives and selling of additives on commission basis. The assessee company has filed its return of income on 29.11.2000, declaring a total income of Rs.6,10,33,466/=. During the course of scrutiny, it was found that the assessee claimed Rs.2,61,57,200/= towards deduction under Section 80-IB of the Act under the head deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.

3. The assessee has claimed the benefit of Section 80IB under the following heads:

1. Service Income : Rs.10,79,000-00

2. Interest on Deposits with Banks and Finance Institutions : Rs.14,19,000-00

3.Interest received from loans given to employees : Rs.25,51,000-00

4.Cash discount arising from prepayment of dues : Rs.19,84,000-00

5.Commission received : Rs. 3,02,000-00

6.Compensation received from sundry debtors for delayed payments : Rs.15,35,000-00

7.Imported materials : Rs.59,50,000-00

Rs.97,71,000-00

4. The Assessing Officer did not agree with the contentions of the assessee that these incomes are directly derived from the activity of industrial undertaking. With regard to the claim of the assessee under heads (1) to (6) above, the Assessing Officer, on verification of the records and the receipts produced by the assessee, has observed that the receives have not been derived from the direct activity of the Industrial Undertaking and there is no direct nexus between the Industrial Undertaking and the service income received. It is clear that training activities are carried out by the assessee at its Headquarters and has no direct nexus with the industrial undertaking as such.

5. With regard to the claim of the assessee under head No.(7) above, viz. imported materials, the Assessing Officer has observed that the income derived is not directly from Industrial Undertaking. There is no nexus between the income earned from selling of imported materials and industrial undertaking. It is only a trading activity. Testing and labelling alone cannot constitute manufacturing or producing of any article or thing. Nor there is any value addition to the item through processing. Hence profit earned on trading of import materials are totally outside the scope of income derived from industrial undertaking. On such grounds, the Assessing Officer has disallowed the claim of the assessee on these counts.

6. Aggrieved, the assessee has preferred an appeal before the Commissioner of Income-tax (Appeals) (CIT(A) in short), who, by his order dated 23.11.2004, has concurred with the findings of the Assessing Officer, and has held that the appellant (assessee) is not eligible for benefit under Section 80IB on the surplus money kept in fixed deposits for the purpose of bank guarantee or letters of credit, on service income received for training, on interest received on loans given to the employees, on commission receipts, and on interest collected from sundry debtors for delay in payments and other receipts.

7. But, however, the CIT(A) has observed that only with regard to cash discounts that are received on purchases, the plea of the appellant that it goes to reduce the purchases is to be considered. These are directly relatable to the purchases and hence, they go to reduce the purchases. Due to the accounting procedure it is disclosed as a separate receipt. However, it is to be noticed since value of purchases is reduced, the quantum of profit from the industrial un