1 to 6. [These paras are not reproduced here as they involve minor issues.) 7. The next point in this appeal relates to deduction allowable under Section 80HH of the Income-tax Act, 1961 ('the Act'), in respect of profits attributable to sale proceeds of scrap and drums. The learned departmental representative submitted that the Commissioner (Appeals) erred in holding that the assessee is entitled to deduction under Section 80HH in respect of profits attributable to sale proceeds of scrap and drums and value of stock at close of the accounting year.
8. The assessee is a domestic company in which the public are not substantially interested. Its main activity was manufacture and sale of super-enamelled aluminium, copper wire and DPC wires. The assessee claimed a deduction of Rs. 46,393 under Section 80HH, being 20 per cent of Rs. 2,31,963 in the revised return filed. This deduction was claimed as allowable on the profits and gains derived from the industrial undertaking. According to the ITO, it was seen from the profit and loss account that the profits and gains include a sum of Rs. 93,948 (Rs. 92,367--sale of scrap and drums, and Rs. 1,581--value of scrap at close), which, according to the ITO, cannot be said to have been derived from the industrial undertaking. The ITO, in arriving at this conclusion, drew support from the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84 and the decision in the case of CIT v. Cochin Refineries Ltd.  135 ITR 278 (Ker.). Accordingly, he came to the conclusion that the sum of Rs. 28,410 alone is allowable as deduction on the profits and gains of Rs. 1,47,051 being 20 per cent thereof.
9. On appeal, the Commissioner (Appeals), considering the nature of the business carried on by the assessee, came to the conclusion that the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) and that of the Kerala High Court in the case of Cochin Refineries Ltd. (supra), will not stand in the way in arriving at the conclusion that the scrap metal is a direct offshoot of the manufacturing activity of the assessee and, eventually, it cannot be put into a different category other than the one from which the main product is derived. Accordingly, he held as under: I am, therefore, of the considered opinion that in the appellant's case, the realisations from the waste material like scrap metal and empty drums, etc., will have to be construed as income derived from the industrial undertaking and the Income-tax Officer is, accordingly, directed to take that also into account for the purpose of allowing relief under Section 80HH. In passing, however, I may mention that in any event, the Income-tax Officer is certainly not right in excluding the entire sale proceeds from the purview of relief under Section 80HH as if it represented net profits. If at all the receipts under this category are to be held as not eligible for the said relief, then the Income-tax Officer should ascertain the net profit relatable to these receipts and not the gross receipts to deny the claim.
Aggrieved, the department is in appeal before us challenging the order passed by the Commissioner (Appeals).
10. The fact remains that the ITO, while admitting that the assessee is entitled to allowance under Section 80HH, has excluded a sum of Rs. 93,948, being the sale proceeds of scrap metal and some empty drums credited to the profit and loss account on the ground that this cannot be said to be income derived from the industrial undertaking. The contention of the learned Counsel appearing for the assessee was that profit from the sale of scrap metal and empty drums also was derived from the activity carried on by the assessee-company and formed part of the overall profit, and, therefore, it should also be considered as eligible for relief under Section 80HH.11. The point for consideration in this appeal is whether the assessee is entitled to relief under Section 80HH on profits attributable to sale value of scrap and drums. According to Section 80HH, where the gross total income of an assessee includes any profits or gains 'derived from' an industrial undertaking, or the business of a hotel, to which the section applies, there shall, in accordance with and subject to the provisions of the section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 20 per cent thereof. The assessee-company was manufacturing super-enamelled aluminium, copper wires and DPC wires in respect of which the turnover of Rs. 56.68 lakhs was accounted and under miscellaneous receipts was registered sale of scrap of Rs. 75,665 and drums of Rs. 16,702, aggregating to Rs. 92,367. The value of stock of scrap was Rs. 1,581. According to the learned counsel appearing for the assessee, the main activity of the assessee being manufacture and sale of different varieties of metallic wires, it is in the course -of the manufacturing activity that scrap metal was obtained. The scrap metal, he stated, is the direct outcome from the materials used in the manufacture of different varieties of metallic wires. Therefore, this amounts, if nothing else, to a by-product of the main product manufactured. Therefore, the scrap metals being directly derived from the industrial undertaking which was earned on by the assessee, profit derived from the sale therefrom would qualify for relief under Section 80HH. Adverting to the drums, it was stated they were purchased for storing water and were sold when they became useless.
12. There is the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra). In the said judgment, there was an observation to the effect that the expression 'attributable to' occurring in Section 80E of the Act is certainly wider in import than the expression 'derived from'. It was also pointed out therein that had the expression 'derived from' been used, it could have, with some force, been contended that a balancing charge arising from the sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. Taking a clue from the abovesaid observation, the learned departmental representative pointed out that inasmuch as the words 'derived from' are used in Section 80HH, it will mean only direct receipts from a business of specified nature but does not include receipts which have no direct link with the business. Accordingly, the expression 'derived from', as occurring in Section 80HH, will have a restricted meaning, whereby profit from the sale proceeds of the scrap metal obtained by the assessee in manufacturing various metallic wires cannot be considered as 'derived from' the manufacturing activity of the assessee.
13. The learned departmental representative also drew support from the decision of the Kerala High Court in Cochin Refineries Ltd.'s case (supra), wherein the Kerala High Court followed the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case (supra). In Cochin Refineries Ltd.'s case (supra), the Kerala High Court held as under: ...the words 'derived from' in Section 80J of the Act cannot have a wide import so as to include any income which can in some manner be attributed to the business. The derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of a business asset....
According to the facts occurring in Cochin Refineries Ltd.'s case (supra), the assessee-company had borrowed for the purpose of purchase of machinery and erection of refinery plant, heavy funds from USA. In the course of the refinery business, the company generated sufficient profits to leave some surplus cash with the company from time to time.
Such surplus cash was not to be utilised forthwith in repaying the loans since such loans had not fallen due. They would be due only on the dates specified in the agreements. Therefore, the company deposited these amounts for various terms in banks. In that process, the company earned interest income. It is on this account, the assessee claimed deduction under Section 80J of the Act. The Kerala High Court held the words 'derived from' in Section 80J cannot have a wider import so as to include any income which could, in some manner, be attributed to the business. As we have seen, the facts in the above case are entirely different from the facts here. In that case, there is also no direct relationship or nexus between the industrial activity and the interest earned on surplus amount, which had been invested in short-term deposit. Therefore, the ratio of the decision of the Kerala High Court in Cochin Refineries Ltd.'s case (supra) will not come to the aid of the department.
14. Insofar as the decision rendered by the Supreme Court in Cambay Electric Supply Industrial & Co. Ltd.'s case (supra) is concerned, that decision was rendered in relation to provisions of Section 80E and the question arose therein was whether the balancing charge under Section 41(2) of the Act, arising as a result of sale of old machinery and building, could be treated as profit attributable to the business of generation and distribution of electricity.
15. The learned departmental representative contended that Sections 41(1) and 41(2) are applicable "to the facts of this case in respect of sale proceeds of scrap and drums because original purchase price of metal was allowed as deduction. Sub-section (1) of Section 41 consists of two parts. The first part of Sub-section (1) contemplates recoupment of loss, expenditure or trading liability in some year for which allowance or deduction had been made in a bygone assessment year. The second part of sub-section contemplates deriving a benefit in respect of such trading liability by way of remission or cessation thereof in some subsequent year. Thus, Section 41(1) brings to tax certain amounts by a fiction of law. Therefore, the operation of such fiction should be limited to the language of the section. Where the assessee has incurred a loss or expenditure or trading liability and this trading liability has been allowed deduction in an earlier year and something has later on been recovered in respect of such liability or such liability has either been remitted or has ceased to exist, Section 41(1) comes into operation. But, according to the facts in the present case, nothing happens as contemplated by Section 41(1). Sale proceeds derived are for the sale of the particular product and not recoupment of earlier purchase. Accordingly, Section 41(1) has no application to the facts of this case.
16. Coming to Section 41(2), the provision relates to depreciable assets. If in respect of any building, machinery, plant or furniture any depreciation has been allowed and, subsequently, such building, etc., is sold, discarded, demolished or destroyed, the assessee may get some value either as a result of the sale or from insurance or from salvage or compensation thereabout. But, according to the facts of this case, the particular receipt under consideration, insofar as scrap was concerned, was realisation from the sale of waste material from manufacturing activity of the assessee-company and it was not a receipt from the sale of some of its old machinery, plant or building resulting in balancing charge as contemplated under Section 41(2). Therefore, Section 41(2) has no application to the facts of this case as far as scrap is concerned. The section may be attracted insofar as the sale price of drums is concerned.
17. Another decision brought to our notice by the revenue was that reported in the case of New India Fisheries Ltd. v. P.M. Mehra, ITO [1971) 82 ITR 765 (Bom.). In that case, the Bombay High Court, while dealing with deduction under Section 80J(1), held that profits and gains from a business activity like catching fish in deep sea with the aid of ships (trawlers) and selling the same cannot be regarded as profits and gains derived from ships to which the deduction allowed in Sub-section (1) of Section 80J will be applicable. In that case, the profits and gains were derived by the assessee from its business activity of catching fish and selling the same and the trawlers in question were simply instrument for earning such income and that is the reason why the Bombay High Court refused to accept the assessee's contention for relief under Section 80J. The ratio of this case also does not help the revenue.
18. The assessee was engaged in the manufacture and sale of different varieties of metallic wires and it is in the course of the manufacturing activity that waste material, viz., scrap metal was obtained. We hold that the assessee is entitled to deduction in respect of profits and gains from newly established industrial undertaking, as contemplated under Section 80HH in relation to profits from sale of scrap since this scrap, being a waste product which had a commercial value, was directly derived from the industrial undertaking which the assessee was carrying on and was sold in the normal course of running the industrial undertaking. The value of the scrap was shown at Rs. 75,665 and the value of the closing stock of scrap was shown as Rs. 1,581. In all, the value of the scrap comes to Rs. 77,246 and on the basis of working of the assessee, relief under Section 80HH would have to be given at the prescribed percentage including this amount.
The balance of Rs. 16,702 was shown as sale proceeds of drums.
According to the learned Counsel appearing for the assessee, Section 80HH applies even to sale proceeds of the drums. The sale proceeds of the drums used for storing water and which had become useless, cannot be said to be directly derived from the industrial undertaking considering the manfacturing activity in which the assessee was involved. The surplus is also of the nature falling under Section 41(2). Therefore, the assessee is not entitled to relief in respect of profits attributable to Rs. 16,702 under Section 80HH.