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2012 (10) TMI 621 - HC - Income TaxZarda Yukta Pan Masala - dis allowance of deductions u/s 32AB and 80I - whether a tobacco preparation under Item 2 of Schedule XI of the I.T. Act - Held that - The percentage of tobacco in the mixture, is not material, in as much as once tobacco is mixed, even in a small quantity, the Pan Masala becomes a tobacco preparation, which is a separate and distinct commercial commodity and clearly identifiable to the consumers, who are addicted to tobacco.In Item No.1 of the list of articles or thing in Schedule XI, the items include beer, wine and other alcoholic spirits.The percentage of alcohol in the spirits is not given. With the same object the percentage of tobacco is also not given in tobacco preparation and in Item No.2 the words such as are indicative and inclusive and do not complete the list of tobacco preparations. The deduction under Section 80I is provided on the income from the manufacture of the articles other than articles or thing in the Schedule XI and which includes in Entry-2, tobacco and tobacco preparations, such as cigars and cheroots, cigarettes, biries, smoking mixtures or pipes and cigarettes, chewing tobacco and snuff . Pan Masala is not a mixture of tobacco but when it is mixed with tobacco, it becomes a tobacco preparation. The deduction under Section 80I is provided on the income from the manufacture of the articles other than articles or thing in the Schedule XI and which includes in Entry-2, tobacco and tobacco preparations, such as cigars and cheroots, cigarettes, biries, smoking mixtures or pipes and cigarettes, chewing tobacco and snuff . Pan Masala is not a mixture of tobacco but when it is mixed with tobacco, it becomes a tobacco preparation - Zarda Yukta Pan Masala is not a tobacco preparation under Item 2 of Schedule XI - deductions under Section 32AB and 80I disallowed - in favour of the revenue
Issues Involved:
1. Whether Zarda Yukta Pan Masala is a tobacco preparation under Item 2 of Schedule XI of the Income Tax Act. Detailed Analysis: Issue 1: Whether Zarda Yukta Pan Masala is a tobacco preparation under Item 2 of Schedule XI of the Income Tax Act. Background: The assessee, engaged in manufacturing Pan Masala including Zarda Yukta Pan Masala, claimed deductions under Section 80I of the Income Tax Act. The Income Tax Department contested this, asserting that Zarda Yukta Pan Masala is a tobacco preparation, which is listed under Item 2 of Schedule XI of the Act, thereby disqualifying it from such deductions. Assessment and Appeals: - The Assessing Officer (A.O.) disallowed the deduction, categorizing Zarda Yukta Pan Masala as a tobacco preparation. - The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT (A)], who allowed the deduction. - The department's subsequent appeal to the Income Tax Appellate Tribunal (ITAT) was dismissed, with the ITAT relying on its previous order in the case of M/s Kothari Products Ltd., which held that Zarda Yukta Pan Masala is not a tobacco preparation. High Court Proceedings: The High Court initially dismissed the department's reference application, stating no question of law arose from the ITAT's order. The Supreme Court also dismissed the Special Leave Petition (SLP) against this High Court order. Arguments by Revenue: - The revenue argued that the dismissal of the SLP by the Supreme Court does not equate to affirmation of the decision. - They cited precedents like Navab Sir Meer Osmal Ali Khan v. Commissioner of Wealth Tax, Hyderabad, which clarified that dismissal of an SLP does not constitute a decision on merits. - The revenue emphasized that each assessment year is separate, and thus, the question could be reconsidered. Arguments by Assessee: - The assessee contended that once a question is decided by the High Court and not interfered with by the Supreme Court, it should be binding. - They relied on State of Orissa v. Radheyshyam Gudakhu Factory, where the Supreme Court held that 'gudakhu', despite containing molasses and other constituents, is essentially a tobacco product. Court's Analysis: - The court noted that the previous orders did not address the merits of whether Zarda Yukta Pan Masala is a tobacco preparation. - The court emphasized that even a small percentage of tobacco in a product makes it a tobacco preparation. - It referenced the Supreme Court's decision in State of Orissa v. Radheyshyam Gudakhu Factory, which supported the view that products with tobacco, despite other ingredients, are considered tobacco preparations. - The court clarified that the absence of specific percentages of tobacco in the statute indicates that any amount of tobacco qualifies the product as a tobacco preparation. Conclusion: - The court concluded that Zarda Yukta Pan Masala is indeed a tobacco preparation under Item 2 of Schedule XI. - As a result, the assessee is not entitled to deductions under Section 80I of the Income Tax Act for the income derived from Zarda Yukta Pan Masala. - The income tax appeals and references were decided in favor of the revenue, directing the department to proceed accordingly. Summary: The High Court ruled that Zarda Yukta Pan Masala, containing tobacco, qualifies as a tobacco preparation under Item 2 of Schedule XI of the Income Tax Act. Consequently, the assessee is not entitled to deductions under Section 80I for this product. The court's decision was based on the interpretation that any product containing tobacco, regardless of the percentage, falls under the category of tobacco preparations, aligning with the Supreme Court's precedent in similar cases.
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