2011 (8) TMI 460 - AT - Income Tax

Deduction - whether the assessee is entitled to the benefit of deduction under section 10B of the Income-tax Act 1961 in regard to its business of manufacturing of gherkin pickles - As section 10B before its substitution w.e.f. 1.4.2001 defined manufacture to include process - Therefore the assessee is entitled to the deduction under section 10B of the Act as the assessee is manufacturing gherkin pickles from gherkin for the purpose of deduction u/s 10B - Appeals of the assessee are allowed. Addition - Recoverable advances from farmers - There is no dispute that assessee had given the money for supply of Gherkins to the agriculturists and farmers. There is also no dispute that the concerned farmers or agriculturists failed to supply Gherkins for which advances were given. Gherkins was an essential raw material of the assessee for producing Gherkins pickles.s held by Hon ble Apex Court in the case of CIT v. Woodward Governor India P. Ltd. 2009 -TMI - 32906 - SUPREME COURT the expression any expenditure used in section 37 of the Act cover both expenses incurred as well as loss even if the loss amount had not gone out of the pocket of the assessee - Hon ble Apex Court also observed that business losses are deductible under section 37(1) of the Act on the basis of ordinary principles of commercial accounting - Decided in favour of assessee.

Issues Involved:
1. Entitlement to deduction under section 10B of the Income-tax Act, 1961.
2. Disallowance of advance write-off made by the assessee.

Detailed Analysis:

Issue 1: Entitlement to Deduction under Section 10B

The primary issue in the assessee's appeals was whether the assessee is entitled to the benefit of deduction under section 10B of the Income-tax Act, 1961, for its business of manufacturing gherkin pickles. The assessee argued that the process involved in converting raw gherkins into gherkin pickles constitutes "manufacture" as per the provisions of section 10B.

The assessee detailed the extensive process involved in manufacturing gherkin pickles, which includes multiple stages such as pre-culling, dry grading, manual culling, washing, fine grading, fermentation, and packaging. The assessee contended that these processes transform raw gherkins into a distinct product known as gherkin pickles, which should be considered "manufacture" under section 10B.

The assessee cited several judicial precedents to support its claim, including the Hon'ble Supreme Court's decisions in the cases of Indian Hotels Co. Ltd., Arihant Tiles & Marbles (P) Ltd., and Edward Keventer Pvt. Ltd., as well as the Hon'ble Kerala High Court's decision in Tata Tea Ltd. and the Hon'ble jurisdictional High Court's decision in CIT v. Jamal Photo Industries (I) (P.) Ltd. These cases emphasized that processes resulting in a distinct end product should be considered "manufacture."

The Revenue, on the other hand, argued that the process of converting gherkins into gherkin pickles does not result in a new product, as the main ingredient (gherkin) retains its individuality. The Revenue relied on the definition of "manufacture" in section 2(29BA) of the Act, which requires a transformation into a new and distinct object. The Revenue also cited the Hon'ble Supreme Court's decision in Pio Food Packers, which held that converting pineapple into pineapple slices, jam, squash, and juice was not "manufacture."

The Tribunal, after considering the rival submissions, held that the provisions of section 10B before its substitution w.e.f. 1.4.2001, which defined "manufacture" to include "process," were applicable in the assessee's case. The Tribunal noted that the extensive processes undertaken by the assessee to convert raw gherkins into gherkin pickles constituted "manufacture" under section 10B. The Tribunal also observed that the definition of "manufacture" in section 2(29BA) supported the assessee's claim, as the transformation resulted in a product with a different name, character, and use.

The Tribunal concluded that the assessee was entitled to the deduction under section 10B, as the processes involved in converting gherkins into gherkin pickles constituted "manufacture." Consequently, the appeals of the assessee were allowed.

Issue 2: Disallowance of Advance Write-off

The Revenue's appeals concerned the disallowance of advance write-off made by the assessee. The assessee had debited amounts under the head "irrecoverable advances from farmers" in its Profit and Loss account for the assessment years in question. These advances were given to farmers for the supply of raw materials (gherkins), but the farmers failed to supply the gherkins, resulting in the write-off.

The Assessing Officer (A.O.) disallowed the write-off, arguing that it was claimed under the head "selling and distribution expenses," but should have been claimed under "procurement of agricultural produce/raw materials." The A.O. contended that the write-off could not be allowed as the irrecoverability of the advances could not be established within a short period.

The assessee argued that the advances were given to ensure a regular supply of raw materials, and the failure of the farmers to supply the gherkins resulted in a revenue loss. The assessee relied on the Hon'ble Supreme Court's decision in Mysore Sugar Co. Ltd., which allowed the write-off of advances given for procurement of raw materials.

The Tribunal, after considering the rival contentions, held that the advances given to farmers were a measure to ensure a continuous supply of raw materials essential for the assessee's business. The Tribunal noted that the failure of the farmers to supply the gherkins resulted in a revenue loss, which was deductible under section 37(1) of the Act, as per the Hon'ble Supreme Court's decision in Woodward Governor India P. Ltd.

The Tribunal concluded that the write-off of advances was justified and deleted the disallowances made by the A.O. Consequently, the appeals filed by the Revenue were dismissed.

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