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2012 (4) TMI 398 - HC - Income TaxDeduction u/s 80IB - Date of commencement of manufacturing activity - factory license was issued by the Chief Inspector of Factory only on 3.5.2005 - assessee had in fact began such manufacturing prior to 31.3.2004. - AO disallowed deduction - held that -Primarily we are of the opinion that while holding that assessees are not entitled to deduction under section 80IB(4) of the Act, we are not reading into it any other requirements contained in any other Act but are reading the requirements contained in the proviso to Sub-section(4)of Section 80IB of the Act so as to require that commencement of the industrial activity must be lawful and any manufacturing activity which is fundamentally unlawful or prohibited by law and against public policy, would not be covered by said provision. in cases where the application for license was already made before 31.3.2004, but obtained shortly thereafter, we are of the opinion that such lapse must be viewed as one which is purely technical even without accepting the contention of the counsel for the assessee that grant of license subsequently would relate back to the original date of application. - Decided in favor of the assessee
Issues Involved:
1. Claim of deduction under Section 80IB of the Income Tax Act. 2. Requirement of obtaining a factory license before commencing manufacturing activity. 3. Legal implications of starting manufacturing without a factory license. Issue-wise Detailed Analysis: 1. Claim of Deduction under Section 80IB of the Income Tax Act: The primary issue pertains to the claim of deduction under Section 80IB for the assessment year 2005-2006. The assessee declared nil income and claimed a deduction of Rs. 20.13 lakhs under Section 80IB. The Assessing Officer disallowed the claim on the grounds that the factory license was issued on 3.5.2005, indicating that production started only from that date. The CIT(Appeals) upheld this decision, concluding that either production had not started before 31.3.2004, or it was in violation of the Factory Act, thus disqualifying the deduction. The Tribunal reversed these decisions, stating that only conditions specified in Section 80IB need to be fulfilled, not additional requirements like holding a factory license at the commencement of production. 2. Requirement of Obtaining a Factory License Before Commencing Manufacturing Activity: The Tribunal held that there is no condition precedent to obtain the factory license before starting the industrial undertaking. The Tribunal relied on a similar case where the application for the factory license was made before the commencement of production but was granted later. The Tribunal emphasized that for claiming deduction under Section 80IB, only the conditions laid down under the said Section are required to be fulfilled. 3. Legal Implications of Starting Manufacturing Without a Factory License: The High Court examined whether the commencement of manufacturing activity can be considered valid without fulfilling the legal requirement of obtaining a factory license. The Factories Act mandates obtaining a license before using premises as a factory, and running a factory without such a license is a penal offense. The Court concluded that the commencement of manufacturing activity must be lawful, and any activity fundamentally unlawful or prohibited by law would not qualify for the deduction under Section 80IB. Judgment Analysis: For Cases Where No Application for License Was Made Before 31.3.2004: The Court held that the necessary conditions under Section 80IB(4) were not fulfilled if the assessee had not even applied for the factory license before 31.3.2004. The Court emphasized that setting up a factory without a license is prohibited and a penal offense, thus disqualifying the assessee from claiming the deduction. For Cases Where Application for License Was Made Before 31.3.2004 but Granted Later: The Court took a lenient view, considering the lapse as purely technical. The Court upheld the Tribunal's view that if the application for the license was made before the cut-off date but granted shortly thereafter, the deduction under Section 80IB should not be disallowed. Specific Case Outcomes: - Tax Appeals No. 1105/2010 and 1106/2010: The assessees had never applied for the factory license before 31.3.2004. These appeals were allowed, and the Tribunal's judgment was reversed. - Tax Appeals No. 1387/2010, 1388/2010, 1116/2010, 1125/2010, and 1117/2010: The assessees had applied for the license before 31.3.2004, and the licenses were granted shortly thereafter. These appeals were dismissed. - Tax Appeal No. 2016/2010: The date of application for the factory license was not clear. The proceedings were remanded to the Assessing Officer for verification. Conclusion: The High Court concluded that while the commencement of manufacturing activity must be lawful, a purely technical lapse in obtaining the factory license should not disqualify the deduction under Section 80IB if the application was made before the cut-off date. The appeals were disposed of accordingly, with specific directions for different cases based on their unique facts. The request for a certificate of fitness to appeal to the Supreme Court was denied.
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