2010 (12) TMI 958 - HC - Income Tax

Investment allowance - denial of claim on the ground that the aerated waters manufactured by it contained blended flavouring concentrates - Held that - Synthetic essences are clearly blended flavouring concentrates - amendment that was effected in the year 1988 for the purpose of introducing an explanation under Entry No.5 with the proposed amendment seeks to provide that the blended flavouring concentrate appearing in item 5 would include synthetic essence in any form - amendment was made effective from 1st April, 1 988, therefore, does not in any way have the effect of denuding the original entry of a part of it s content. The synthetic essence being but one form of a blended flavouring concentrate was a blended flavouring concentrate before the amendment as also after the amendment. The order of the Tribunal holding that the assessee, despite being engaged in the manufacture of a product which is covered by Entry 5 of the eleventh schedule, is entitled to investment allowance, therefore, cannot be sustained. In favour of revenue.

Summary

Issues:
1. Denial of investment allowance to the assessee for the assessment year 1983-84 due to the use of blended flavouring concentrates in manufacturing aerated waters.
2. Interpretation of whether synthetic essences used by the assessee constitute blended flavouring concentrates.
3. Impact of the explanation added under the eleventh schedule of the Income-tax Act in 1988 regarding the inclusion of synthetic essences in blended flavouring concentrates.
4. Consideration of the retrospective effect of the explanation added in 1988 on the original entry regarding investment allowance eligibility.

Analysis:
1. The judgment addresses the denial of investment allowance to the assessee for using blended flavouring concentrates in manufacturing aerated waters. The Commissioner accepted the assessee's explanation that synthetic essences used were not originally included in the term 'blended flavouring concentrates.' However, the High Court emphasized that synthetic essences are indeed blended flavouring concentrates due to their nature and composition, leading to the denial of the investment allowance.

2. The issue of whether synthetic essences qualify as blended flavouring concentrates was raised based on a previous judgment involving the same assessee. The Court distinguished the previous case, highlighting that it did not address the specific question of whether synthetic essence falls under the category of blended flavouring concentrates. The Court clarified that synthetic essences are inherently blended and used for flavoring, thus falling within the definition of blended flavouring concentrates.

3. The judgment delves into the impact of the explanation added in 1988 under the eleventh schedule of the Income-tax Act. The explanation explicitly stated that synthetic essences should be deemed as included in blended flavouring concentrates. The Court emphasized that the amendment aimed to prevent tax avoidance and clarified that synthetic essences were always considered part of blended flavouring concentrates, even before the amendment.

4. Regarding the retrospective effect of the 1988 explanation, the Court clarified that the clarification did not restrict the original entry's meaning. The amendment was deemed clarificatory, affirming that synthetic essence was a blended flavouring concentrate both before and after the explanation. Consequently, the Tribunal's decision to grant investment allowance to the assessee was overturned, emphasizing that the assessee's product fell within the scope of the eleventh schedule, thus disqualifying them from the investment allowance.

This comprehensive analysis of the judgment highlights the key issues, interpretations, and legal considerations surrounding the denial of investment allowance to the assessee in question.