Industrial undertaking – Deduction u/s 80-IB of ITA, 1961 – Condition precedent – Profit must be derived from industrial undertaking – Assessee manufacturing pig iron – Profit from sale of slag, a by-product in manufacture of pig iron – Profit entitled to deduction u/s 80-IB

Industrial undertaking – Deduction u/s
80-IB of ITA, 1961 – Condition precedent – Profit must be derived from
industrial undertaking – Assessee manufacturing pig iron – Profit from sale of
slag, a by-product in manufacture of pig iron – Profit entitled to deduction
u/s 80-IB

For the A.Y.
2004-05, the assessee claimed deduction u/s 80-IB of the Income-tax Act, 1961
for one of its industrial undertakings which was engaged in the manufacture of
pig iron. The AO computed the deduction u/s 80-IB only on the profits arising
from the sale of pig iron, without considering the profits arising on sale of
‘slag’ which, according to the assessee, was a by-product in the manufacture of
pig iron.

The Commissioner
(Appeals) allowed the assessee’s claim. The Tribunal held that the Commissioner
(Appeals) had taken the correct view holding that profits from sale of slag
generated out of the manufacturing process were a part of the profits derived
from the industrial undertaking engaged in the manufacturing of pig iron, but
allowed the appeal of the Revenue.

The Bombay High
Court allowed the appeal filed by the assessee and held as under:

‘(i)   The conclusion drawn by the Tribunal was
contrary to the finding rendered by it and perverse. The slag generated during
the process of manufacturing activity of pig iron was part of the manufacturing
process and was a by-product of pig iron and an integral part of the
manufacturing activity conducted by the assessee and thus the profits earned
from the sale of such by-product would have to be considered as part of the
profits derived from the business of the industrial undertaking.

(ii)   The slag generated during the manufacturing activity
satisfied the test of first degree source and, thus, the assessee was eligible
to seek deduction u/s 80-IB for the profits earned out of the sale of slag, in
addition to the deduction already availed of by the assessee on the profits
earned on sale of pig iron.’