New industrial undertaking in backward areas — Deduction u/s.80HH — In the absence of particulars of outsourcing activity deduction cannot be allowed.

[CIT v. R. Pratap, (2009) 310 ITR 405 (SC)]

The Supreme Court was concerned with the case of an
assessee who claimed to be a processor of cashew kernels. The Supreme Court
noted that the said processing consisted of various stages like drying
followed by heating followed by decorticating which resulted in emergence of
the kernel covered by the skin which was ultimately sold. The Supreme Court
observed that if an assessee claims that he is the processor who has
outsourced some of its activities to its sister concern then the nature of the
activity undertaken by the industrial undertaking has got to be demonstrated
by the assessee who claims deduction u/s.80HH(1). The Supreme Court further
observed that the object underlying the enactment of S. 80HH(1) is to
encourage setting up of new industrial undertakings in backward areas. The
Supreme Court noted that in the present case, the assessee who had claimed
deduction had not given any particulars regarding the activity undertaken by
it, the activity outsourced by it to its sister concern, whether those sister
concerns were located in or outside the backward areas, etc. There was no
claim made by the assessee that its sister concerns were its job workers. No
details had been given as to whether after the process stands undertaken by
its sister concerns, whether or not, the material came back to the assessee
for further activities before export. There was no averment that the assessee
was the principal manufacturer. In the circumstances, the Supreme Court held
that the assessee was not entitled to claim the benefit of S. 80HH in the
assessment year in question. The Supreme Court however clarified that the
Department had given the benefit of 20% of the profits vis-à-vis the
number of bags processed in the assessee’s own factory situated/located in the
backward area and to that extent the findings given by the Assessing Officer
as well as by the Commissioner of Income-tax (Appeals) remained undisturbed.