THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 24.07.2013
+ ITA No. 1248/2010
KRISHAK BHARTI COOPERATIVE LIMITED ... Appellant
versus
DEPUTY COMMISSIONER OF INCOME TAX ... Respondent
Advocates who appeared in this case:
For the Appellant : Mr S. Ganesh, Sr Advocate with Ms Surekha Raman,
Mr Varun Singh and Mr Purushottam Kumar Jha
For the Respondent : Mr Rohit Madan Kumar, Ms Pushpa Sharma
WITH
+ ITA No. 614/2011
KRISHAK BHARTI COOPERATIVE LIMITED ... Appellant
versus
ADDITIONAL COMMISSIONER OF INCOME TAX ... Respondent
Advocates who appeared in this case:
For the Appellant : Mr S. Ganesh, Sr Advocate with Ms Surekha Raman,
Mr Varun Singh and Mr Purushottam Kumar Jha
For the Respondent : Mr Rohit Madan Kumar, Ms Pushpa Sharma
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED, ACTING
CHIEF JUSTICE
HON'BLE MR JUSTICE R.V. EASWAR
ITA No.1248/10 & 614/11 Page 1 of 15
JUDGMENT
BADAR DURREZ AHMED, ACJ
1. These appeals pertain to the assessment years 1993-94 and 1994-95.
ITA No.1248/2010, which relates to the assessment year 1993-94, has been
taken to be the lead matter and the facts of that case would be considered.
The other appeal, ITA No.614/2011 is on virtually identical lines.
2. By virtue of an order dated 06.09.2011, a Division Bench of this
court, while admitting the said appeals, framed the following substantial
question of law:-
"Whether in the facts and circumstances of the case, the Tribunal
was justified in holding that service charges received from the
Heavy Water Board of Department of Atomic Energy could not be
considered as profit derived from the industrial undertaking to
qualify for deduction under Section 80-I of the Act ?"
3. The service charges, which have been received by the appellant (Kribhco)
was in respect of Kribhco operating and maintaining the heavy water plant, also
known as the Hazira Ammonia Extension Plant (HAEP), owned by the Heavy
Water Board, Department of Atomic Energy, Government of India. The issue is
whether these service charges can be regarded as profits and gains of Kribhco
`derived from an industrial undertaking' and, consequently, whether Kribhco
would be entitled to any deduction under Section 80-I of the Income-tax Act,
1961.
4. In respect of the assessment year 1993-94, the extent of the above service
charges was Rs 6,36,45,631/-. Initially, the appellant (Kribhco) claimed
deduction under Section 80-I of the said Act in respect of the said service
ITA No.1248/10 & 614/11 Page 2 of 15
charges. Subsequently, during the assessment proceedings, the assessee revised
the claim by excluding these charges for the purposes of deduction under Section
80-I and treated them as its income from other sources. The Assessing Officer,
while computing the profits eligible for deduction under Section 80-I of the said
Act, reduced the profits of industrial undertaking by an amount of Rs
6,36,45,631/- on account of the fact that these service charges were treated as
income from other sources. However, before the Commissioner of Income-tax
(Appeals), the appellant by way of an additional ground, reiterated its initial
claim that the receipt of Rs 6,36,45,631 on account of service charges constituted
part of its profits and gains from an industrial undertaking and was eligible for
deduction under Section 80-I of the said Act. This claim of the appellant was
rejected by the Commissioner of Income-tax (Appeals), who held that the said
service charges were not profits and gains derived by the assessee from its
industrial manufacturing activities. It was held that the said service charges
received from the Heavy Water Board were not dependent upon the appellants
manufacturing activities and, consequently, it was held that the service charges
were not derived from the industrial undertaking of the appellant / assessee.
5. Being aggrieved, the appellant filed an appeal before the Income-tax
Appellate Tribunal (hereinafter referred to as `the Tribunal') which, by an order
dated 27.01.2006 upheld the view taken by the Commissioner of Income-tax
(Appeals). Thereafter, the appellant preferred appeals before this court under
Section 260-A of the said Act in respect of three years, including the assessment
year 1993-94 and 1994-95. Those appeals were numbered as ITA Nos 1252-
1254/2006. By an order dated 15.11.2006, a Division Bench of this court
dismissed those appeals holding that no substantial question of law arose for the
consideration of this court.
ITA No.1248/10 & 614/11 Page 3 of 15
6. Being aggrieved by the order dated 15.11.2006 passed by a Division
Bench of this court, the appellant filed a Special Leave Petition [SLP (C) No.
3802/2007] which got converted into a Civil Appeal (Civil Appeal
No.6244/2008). That appeal was disposed of by an order dated 21.10.2008. The
Supreme Court took the view that the Tribunal and the High Court had not
examined all the relevant contracts between the appellant and the Heavy Water
Board because the appellant, in the first instance, had only produced the
agreement dated 18.09.1994, but had failed to produce the contracts dated
05.08.1986 and 11.07.1990. The Supreme Court felt that the said contracts
needed to be examined in depth in order to determine the basic issue as to
whether the receipt of service charges was or was not directly linked with the
manufacturing activities carried out and the industrial undertaking of the
appellant. For this reason, while keeping all contentions from both sides
expressly open, the Supreme Court set aside the impugned judgment of the Delhi
High Court and remanded the matter to the Tribunal for reconsideration of the
matter in accordance with law.
7. It is, thereafter, that the matter was reconsidered by the Tribunal which
disposed of the appeal in respect of the assessment years 1993-94 being ITA
No.6130/Del/1997 by an order dated 26.02.2010. It is that order which is
impugned before us insofar as the assessment year 1993-94 is concerned. A
similar order was passed in respect of the assessment year 1994-95 in ITA
No.3902/Del/2010 dated 20.10.2010.
8. The appellant has an Ammonia / Urea Plant at Hazira. Just next to it and
within its premises, the Hazira Ammonia Extension Plan, which manufactures
heavy water, has been set up and established by the Heavy Water Board, which is
part of the Department of Atomic Energy, Government of India under the said
ITA No.1248/10 & 614/11 Page 4 of 15
agreements dated 05.08.1986, 11.07.1990 and 14.09.1994. After examining the
agreements between the appellant and the Heavy Water Board, the Tribunal,
which is the final fact finding authority in income-tax matters, has come to, inter
alia, the following conclusions:-
"1. The ownership of the industrial undertaking for manufacture of
heavy water vests with the Government of India, Department of
Atomic Energy since inception and not with the appellant /
assessee;
2. The Heavy Water Plant belonging to the Heavy Water Board
and the Ammonia / Urea Plant of the assessee are both
integrated with each other;
3. The process of manufacture of heavy water plant is dependent
on the supply of synthesis gas which is enriched with deuterium
which is a by-product of Kribhco's Ammonia / Urea plant.
There are 10 pipe lines connecting Kribhco's Ammonia / Urea
Plant with the Heavy Water Plant. The Schematic Diagram
showing 10 pipe lines is as under:-
KRIBHCO-HEAVY WATER PLANT (HAEP)
INTERCONNECTION LINE
Heavy Water (HAEP) PLANT
1 2 3 4 5 6 7 8 9 10
AMMONIA PLANT - KRIBHCO
ITA No.1248/10 & 614/11 Page 5 of 15
1. Syn Gas from AMMONIA PLANT to HAEP PLANT
2. Dry Syn Gas from AMMONIA TO HAEP (Startup Line)
3. High pressure Steam from AMMONIA PLANT / POWER
PLANT to HAEP
4. DM Water from AMMONIA PLANT / DM PLANT to
HAEP
5. Gaseous Nitrogent from OFFSITES PLANT (KRIBHCO)
to HAEP
6. Cooling Water makeup line from KRIBHCO to HAEP
7. Syn Gas return from HAEP to AMMONIA PLANT.
8. AMMONIA return from HAEP to AMMONIA PLANT.
9. FLASH Gas return from HAEP to AMMONIA PLANT.
10. Fire Water Line interconnection.
It will be apparent from the above diagram that six pipe lines carry
feed-stock from the Ammonia Plant of Kribhco to the Heavy Water
Plant, which, inter alia, includes synthesis gas. Three pipe lines,
namely, pipe lines shown at serial numbers 7, 8 and 9 show the return
of, inter alia, synthesis gas, after deuterium has been extracted
therefrom by the Heavy Water Plant. One pipe line, which has been
shown at S.No.10, is an interconnection of the Fire Water Line.
Essentially, the manufacturing process is that synthesis gas enriched
with deuterium, which is a by-product of the Ammonia / Urea Plant
belonging to the appellant is utilized by the Heavy Water Plant for
the purposes of extracting deuterium. The deuterium so extracted is
used in the manufacture of Heavy Water at the Heavy Water Plant.
The heavy water so produced is the property of the Heavy Water
Board. Insofar as the synthesis gas is concerned, after deuterium is
extracted from it, the same is returned to Kribhco's Ammonia / Urea
Plant;
ITA No.1248/10 & 614/11 Page 6 of 15
4. The Heavy Water Plant cannot exist without the Ammonia / Urea
Plant as the technology used for manufacture of heavy water is based
on Ammonia Hydrogen Exchange Mono-thermal process and the
deuterium required for manufacture of heavy water is supplied by the
ammonia / urea plant and is a by-product in manufacture of ammonia
/ urea;
5. However, the Ammonia / Urea Plant is not dependent on the Heavy
Water Plant as the Heavy Water Plant does not produce any by-
product, which is necessary for manufacture of Ammonia / Urea. In
other words, the manufacture of Ammonia / Urea is not dependent on
the Heavy Water Plant;
6. The appellant had employed its staff for carrying out the operation
and management of the Heavy Water Plant for which the appellant
was compensated by way of the said service charges;
7. From the terms of the agreement entered into between the Heavy
Water Board and the appellant for the operation and maintenance of
the Heavy Water Plant, it is clear that Kribhco was not concerned
with the profit or loss which was to be incurred by the Heavy Water
Board insofar as the Heavy Water Plant was concerned. The profit or
loss arising from the operation of Heavy Water Plant was attributable
to the Heavy Water Board and not to Kribhco;
8. Kribhco was concerned only with the service charges for operating
and managing the Heavy Water Plant and those service charges were
entirely dependent on the out-put of heavy water. In fact, the service
charges were directly proportional to the quantum of heavy water
produced at the Heavy Water Plant;
9. Finally, the Tribunal concluded that the industrial undertaking
manufacturing heavy water was not a part of the Ammonia / Urea
Plant of Kribhco, though it had been constructed in conjunction with
the Ammonia / Urea Plant of Kribhco.
ITA No.1248/10 & 614/11 Page 7 of 15
These are the findings of fact returned by the Income-tax Appellate Tribunal after
examining the contracts between the Kribhco and the Heavy Water Board. Based
upon this, the question arose as to whether the service charges received for
operation and maintenance of the Heavy Water Plant could be said to be in the
nature of profit and gains derived by Kribhco from an industrial undertaking so
as to make it eligible for a deduction under Section 80-I of the said Act. The
Tribunal, however, held that the service charges received by Kribhco from the
Heavy Water Board could not be treated as having been derived from an
industrial undertaking of the assessee. The primary reason for rejecting the claim
put forth by Kribhco was that the Tribunal felt that as Kribhco had no ownership
with regard to the plant and machinery, building, etc. of the Heavy Water Plant,
the service charges could not be treated as profit and gains derived from an
industrial undertaking "owned" by Kribhco. In fact, the Tribunal held that the
said service charges were nothing but expenditure in the hands of the Heavy
Water Board for manufacture of Heavy Water and, consequently, the said service
charges received by Kribhco for the operation and management of the Heavy
Water Plant was a step removed from the business of the industrial undertaking
of the assessee, namely, the Ammonia / Urea Plant of Kribhco. The Tribunal
held that the said service charges for operation and maintenance could not be said
to be covered under the first degree of operations.
9. Mr Ganesh, senior advocate, appearing on behalf of the appellant
submitted that the Tribunal had misconstrued the provisions of Section 80-I by
bringing in the question of ownership of an industrial undertaking. He submitted
that Section 80-I(1) referred to the profits and gains derived from an industrial
undertaking. Section 80-I(2) stipulated that the industrial undertaking should
fulfill the conditions set out in that sub-section. It is nobody's case that those
conditions have not been satisfied. According to Mr Ganesh, neither Section 80-
ITA No.1248/10 & 614/11 Page 8 of 15
I(1) nor Section 80-I(2) of the said Act stipulates or requires that the industrial
undertaking in question must be owned by the assessee. He sought to contrast
the provisions of Section 80-I(2) with those Section 80-I(3) which talks of the
ownership of the ship. Similarly, Section 80-I(4) also refers to the ownership of
the hotel. However, there is no such requirement of ownership insofar as an
industrial undertaking is concerned.
10. It was also contended by Mr Ganesh that there could be no quarrel with
the proposition that the industrial undertaking must be the proximate and
effective source of the profits and gains. In this context, he submitted that in the
present case, Kribhco had, in reality entered into a revenue sharing agreement or
arrangement with the Heavy Water Board for sharing the revenues of the Heavy
Water Plant. Furthermore, every single input required by the Heavy Water Plant
was supplied by Kribhco's Ammonia / Urea Plant. Importantly, the service
charges received by Kribhco for operating the Heavy Water Plant were entirely
dependent on the actual quantum of heavy water produced by Kribhco in the
Heavy Water Plant. It was, therefore, contended by Mr Ganesh that the real and
effective source of the service charge received by Kribhco was the Heavy Water
Plant, which, undoubtedly was an industrial undertaking. Consequently, he
submitted, all the requirements of Section 80-I were fulfilled. He submitted that
the question of ownership of the industrial undertaking was not a relevant factor
and that Kribhco did not own the Heavy Water Plant.
11. Mr Ganesh advanced an alternative submission that the Heavy Water Plant
was nothing, but an extension of Kribhco's Ammonia / Urea Plant. As such, the
service charges received by Kribhco could be considered as the profit or gain
derived from Kribhco's Hazira / Urea Plant which was, in any event, eligible for
deduction under Section 80-I of the said Act. In effect, what Mr Ganesh
ITA No.1248/10 & 614/11 Page 9 of 15
submitted was that, in the alternative, the Heavy Water Plant be regarded as a
part of the appellant's Ammonia / Urea Plant and, therefore, the service charges
received by the appellant would have to be regarded as profit or gains derived
from the said Ammonia / Urea Plant, which would include the Heavy Water
Plant.
12. Mr Rohit Madan (Senior Standing Counsel), appearing on behalf of the
revenue, submitted that there was no error in the Tribunal's order and that the
question of law framed in these appeals ought to be decided in favour of the
revenue and the appeals be dismissed. The learned counsel referred to the
agreement dated 14.09.1994 entered into between Kribhco and the Heavy Water
Board. He drew our attention, in particular to clauses 11 and 16 thereof. Clause
11 of the said Agreement deals with the remuneration and it provides that in
consideration of Kribhco operating and maintaining the Heavy Water Plant, the
Heavy Water Board, would pay to Kribhco, remuneration set out in Item-I,
Schedule-I thereto. It also stipulates that the remuneration would be payable only
as long as Kribhco continued to operate and maintain the Heavy Water Plant.
We have already indicated that there is no dispute on this aspect of the matter that
Kribhco was receiving service charges from the Heavy Water Board for
operating and maintaining the Heavy Water Plant. We have also indicated that
these service charges were directly proportional to the quantum of Heavy Water
produced in the Heavy Water Plant.
13. Our attention was drawn, as pointed out above, also to clause 16, which
specifically provided that the Heavy Water Board shall be the owner of the
Heavy Water Plant. There is also no dispute with this inasmuch as the Tribunal
has returned a finding of fact that the Heavy Water Plant belongs to the Heavy
Water Board and not to Kribhco. The latter was only operating and maintaining
ITA No.1248/10 & 614/11 Page 10 of 15
the Heavy Water Plant on behalf of the Heavy Water Board for which it was
receiving service charges. The question is whether these service charges could
be treated as the profits and gains of Kribhco derived from an industrial
undertaking and whether the same would be eligible for deduction under Section
80-I of the said Act.
14. The learned counsel referred to the Supreme Court decision in the case of
Pandian Chemicals Limited v. Commissioner of Income-tax: 262 ITR 278 (SC)
278 to explain as to what is meant by the expression "derived from", as appearing
in Section 80-I of the said Act. In Pandian Chemicals (supra), it has been held
that the words "derived from" in Section 80HH of the said Act must be
understood as "something which has a direct or immediate nexus with the
assessee's industrial undertaking". In that case, the assessee therein was required
to make certain deposits with the Electricity Board for supply of electricity for
running its industrial undertaking. Interest was earned on those deposits. The
court held that the interest so earned by the assessee on the said deposits could
not be said to flow directly from the industrial undertaking itself and could not be
regarded as profits and gains derived from an industrial undertaking for the
purposes of deduction under Section 80-HH of the said Act. The learned counsel
for the revenue sought to draw an analogy, insofar as the present case was
concerned. He submitted that the service charges received by Kribhco cannot be
said to be having a direct or immediate nexus with the industrial undertaking, that
is, the Heavy Water Plant.
15. The learned counsel for the revenue then referred to a decision of this
court in Commissioner of Income-tax v. Sona Koyo Steering Systems Limited:
(2010) 321 ITR 463 (Delhi) in support of his contention that each industrial
undertaking has to be taken independently for the purposes of computing
ITA No.1248/10 & 614/11 Page 11 of 15
deductions under Section 80-I of the said Act. He also placed reliance on another
decision of this court in Honda Siel Power Products Limited v. Commissioner of
Income-tax: (2009) 318 ITR 309 (Delhi), to submit that the expression `derived
from' was different and distinct from the expression "attributable to" and that the
former expression was narrower in scope than the latter expression. It was
contended that there must be an immediate and direct nexus to the essential
activity of the industrial undertaking for any profit or gains therefrom to qualify
for deduction under Section 80-I of the said Act. The learned counsel for the
revenue also referred to the decision of the Supreme Court in Liberty India v.
Commissioner of Income-tax: (2009) 317 ITR 218 (SC). In that decision, the
Supreme Court, in the context of Section 80-IB, which, for our purposes, is
similar to Section 80-I, observed as under:-
"14. ... It is evident that section 80-IB provides for allowing of
deduction in respect of profits and gains derived from the
eligible business. The words "derived from" are narrower in
connotation as compared to the words "attributable to". In
other words, by using the expression "derived from",
Parliament intended to cover sources not beyond the first
degree. ..."
In this backdrop, it was contended that the "service charges were not within the
first degree" and, therefore, could not be said to be derived from the industrial
undertaking.
16. Consequently, the learned counsel for the revenue submitted that the
question be answered in favour of the revenue and the appeals be dismissed.
17. Having considered the arguments advanced by the counsel for the parties,
we feel that the key issue is whether the ownership of an industrial undertaking is
a relevant factor for the purposes of construing the provisions of Section 80-I of
ITA No.1248/10 & 614/11 Page 12 of 15
the said Act. We find ourselves to be in agreement with the submission made by
Mr Ganesh that Section 80-I does not speak of the ownership of an industrial
undertaking. On a plain reading of Section 80-I(1) of the said Act, it is apparent
that the first question is what is the gross total income of an assessee ? The
next question is: does it include any profits or gains derived from an industrial
undertaking ? Neither Section 80-I(1) nor Section 80-I(2) requires the fulfillment
of the condition that the industrial undertaking from which any profits or gains
are derived are to be owned by the assessee. No such condition of ownership can
even be inferred from the above provisions. In coming to this conclusion, we are,
of course, not considering the provisions of Section 80-I(3) or 80-I(4), which
speak of ownership of a ship and ownership of a hotel. We are not considering
those provisions for the simple reason that even in those provisions, it does not
stipulate that the ship or hotel should be owned by the assessee. It only stipulates
that it should be owned by an Indian company or a company registered in India.
Therefore, that distinction which Mr Ganesh had sought to make would not be of
much use. However, de hors the said alleged distinction, a plain reading of
Section 80-I(1) and 80-I(2) would indicate that the ownership by the assessee of
an industrial undertaking from which the assessee derives profits and gains is not
a stipulated condition. The only thing that has to be seen is whether the source of
the profit or gains is an industrial undertaking. In the present case, there is no
doubt and the revenue also does not contest it, that the Heavy Water Plant is an
industrial undertaking. Therefore, once the issue of ownership is out of the way,
the only question that requires to be considered is whether the service charges
received by the appellant / Kribhco had a direct nexus with the industrial
undertaking (that is, the Heavy Water Plant). If that were to be so, the source of
the profit or gain would be in the first degree referred to in Liberty India (supra)
and would fall within the expression "derived from". We find that the service
charges are directly relatable to the operation and management of the Heavy
ITA No.1248/10 & 614/11 Page 13 of 15
Water Plant, which is an industrial undertaking. The service charges are directly
linked to the quantum of heavy water produced by Kribhco by operating and
maintaining the Heavy Water Plant. Therefore, in our view, there is a direct
nexus between the service charges and the industrial undertaking. As such, we
are of the view that the service charges are nothing but profits and gains derived
by Kribhco from the industrial undertaking (that is, the Heavy Water Plant) and,
the ownership of the Heavy Water Plant is of no relevance.
18. We must also note that the object behind Section 80-I of the said Act is to
encourage establishment of industrial undertakings. That object is clearly
satisfied in the present case. Section 80-I grants an incentive for promoting
industrialization and, as observed by the Supreme Court in Bajaj Tempo Limited,
Bombay v. the Commissioner of Income-tax, Bombay City-III, Bombay: 1992
(3) SCC 78, "a provision in a taxing statute granting incentives for promoting
growth and development should be construed liberally". It is upon a
consideration of this aspect also that we have arrived at the conclusion that the
service charges received by Kribhco were profits and gains derived from an
industrial undertaking and were eligible for a deduction under Section 80-I of the
said Act.
19. Insofar as the decisions cited by the learned counsel for the revenue are
concerned, the said decisions do not, in any way, detract from the position
indicated by us.
20. Therefore, we feel that as the issue of ownership is irrelevant, the service
charges received by Kribhco from the Heavy Water Board, would have to be
regarded as profits or gains derived from an industrial undertaking so as to
qualify for deduction under Section 80-I of the said Act. Because of the view we
ITA No.1248/10 & 614/11 Page 14 of 15
have taken, it is not necessary for us to examine the alternative plea advanced by
Mr Ganesh.
21. The question formulated is answered in the negative, in favour of the
assessee and against the revenue. The impugned order is set aside. The appeals
are allowed.
BADAR DURREZ AHMED, ACJ
R.V. EASWAR, J
July 24, 2013
dutt
ITA No.1248/10 & 614/11 Page 15 of 15
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