2005 (5) TMI 233 - AT - Income Tax

Deduction u/s 80-I - Profit And Gains From Industrial Undertakings - whether the industrial activity involved in the 'production' of demineralised water by the assessee-company amounts to manufacture within the meaning of the term as contemplated u/s 80-I of the Act - Disallowance of advertisement expenditure - Unaccounted purchase of bottles. HELD THAT - We are in full agreement with the Assessing Officer as well as the first Appellate authority in this matter. In fact, the argument of the assessee, if given effect to, by, as prayed, construing the word 'manufacture' so as to include within its purview activity which would not otherwise qualify for the same, would be to negate the entire case law on the subject and the meaning of the term manufacture' as judicially interpreted and elucidated by the Courts. In fact, the learned D.R. has cited not less than five cases, wherein the Hon'ble Supreme Court has held, in the facts of those cases, the industrial process as undertaken as not amounting to manufacture, and all in the context of some beneficial provision, and all of which would be of no avail, if the contention of the appellant company were to be accepted. The Hon'ble Supreme Court in a recent and popular case of IPCA Laboratory Ltd. v. Dy. CIT 2004 (3) TMI 9 - SUPREME COURT expressed its unequivocal view in the matter The water being produced by the assessee-company, though popularly referred to as 'mineral water', is in fact, 'demineralized water', in that the excess minerals are removed from the raw tap water. It may be that further purification/treatment may lead to 'specialized water', as the 'Therapeutic Water' (not presently available in India) as referred to by the food technologist in his report, for specific application(s), as for selective patients who are forbidden intake of certain salts and which may be considered, on factual considerations, to be resulting from 'manufacture'. It would also be pertinent to state that the assessee's claim of having 'manufactured' its end product is being not accepted only on the basis of tests as laid down by the Courts in the interpretation of the word 'manufacture', and not, for its producing demineralised water, as against mineral water, which distinction is of significance for excise purposes. As also stated, the focus of the Excise Law is decidedly different, and the excisability of the water as discussed at para 5 of this order was only to meet the arguments of the assessee in respect of one of its franchisees. We are, thus, of the opinion, under the given facts and circumstances and the law in the matter, that the transformation wrought on the normal drinking water, definitely with the purpose to make it purer, yet, does not satisfy the test of sufficient difference in name, character and use so as to qualify the antecedent processes as amounting to manufacture; the sophisticated machinery, labour, or other skills and knowledge that may have been deployed for the purpose, notwithstanding, as value addition, for which there could be several other contributing factors also, by itself, is not conclusive of the matter. Disallowance of advertisement expenditure - the said expenditure was incurred with the primary intent and the dominant purpose of enhancing or promoting the brand image/position in the market, and thus its value, with an eye on realizing a better price therefor, negotiations for which, or the planning for which, were already under way. That the expenditure was also able to pay short term dividends by affecting the reversal in the declining sales of its subsidiary and its bottlers, or rather, even effect an increase therein, is of no significance; the benefit arising to a third party not diluting or taking away the character or purpose of an expenditure. Rather, in the facts of the case, this benefit is not incidental, but only a natural corollary, as it is only with the increase in sales, or at best an arrest in its decline, that the brand value could be maintained or enhanced. We, therefore, are of the opinion that this expenditure by way of a special advertisement campaign of the 'MAAZA' line of product(s) by the assessee-company is not a business expenditure in its hands being not incurred in its capacity as a businessman in the course of carrying on or to facilitate its business, there being no direct relationship, apart from that of a shareholder, with the 'MAAZA' business segment. We find the ratio of the Supreme Court decision in CIT v. Chandulal Keshavlal Co. 1960 (2) TMI 1 - SUPREME COURT , wherein the Apex Court has held that the expenditure incurred for fostering the business of another or by way of distribution of profits, or gratuitously, or for some improper or oblique purpose outside the course of business is not deductible, as also of Associated Mining Industries Ltd.'s case, to be fully applicable to the facts of the case, i.e., the finding as to its dominant purpose of promoting its brand position/value and which it successfully attained. Its contention of being a revenue expenditure is, therefore, dismissed on the ground of absence of commercial expediency and the action of the lower authorities in disallowing its claim as such, upheld. In the result, we find no basis or interfering with the orders of the authorities below, which are upheld, dismissing the assessee's appeals. Unaccounted purchase of bottles - CIT(A) has not done so as gathered from his findings as listed in his order. Even more so, as the alleged lapse, i.e., the error in construing a credit for quantity discount as being against damaged/defective stock, by the Assessing Officer is not one that one would expect in the normal course, being entirely different in nature, as also the fact that the Assessing Officer does not make a casual reference to this credit/receipt, as stated by the assessee, and accepted by the CIT(A), but, rather is the finding on which the Assessing Officer bases his case. Also, we do not agree with his observation that the addition, if upheld, would stand to be set off by the additional deduction on account of purchase. As such, the matter being entirely factual, would need to be verified in material respects, i.e., the mode and manner in which the breakages are dealt with by the assessee-company in the normal course, which would also obtain in respect of 1,05,079 bottles under reference, as also the nature of credit. Accordingly, this matter is restored to the file of the Assessing Officer for necessary verification for the purpose of which the assessee may be offered proper opportunity of being heard. This ground of appeal is, therefore, decided accordingly. In the result, the assessee's appeals are dismissed, and that of Revenue allowed for statistical purposes.

Summary

Issues Involved:
1. Denial of deduction under section 80-I of the Income-tax Act, 1961.
2. Disallowance of advertisement expenditure.
3. Deletion of addition on account of alleged unaccounted purchase of bottles.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 80-I:
The principal issue relates to whether the industrial activity involved in the production of demineralised water by the assessee-company amounts to "manufacture" within the meaning of section 80-I of the Income-tax Act, 1961. The assessee claimed that the process of purifying and demineralising water, followed by packaging it, should qualify as "manufacture." The Assessing Officer and the CIT(A) rejected this claim, arguing that the activity was merely purification, not manufacture. The Tribunal examined the process described by the assessee and concluded that the end product, packaged drinking water, did not meet the criteria for "manufacture" as it did not result in a new and commercially distinct article. The Tribunal cited various case laws, including the Supreme Court's decision in Aspinwall & Co. Ltd. v. CIT, which defined "manufacture" as a process that produces a new article with a distinct name, character, and use. The Tribunal found that the packaged drinking water remained essentially the same as the raw water, only purified, and thus did not qualify as a manufactured product under section 80-I.

2. Disallowance of Advertisement Expenditure:
The second issue involved the disallowance of Rs. 22,31,700 spent on advertising the product "MAAZA," which was neither manufactured nor marketed by the assessee during the relevant year. The assessee contended that the expenditure was incurred to maintain the brand value and counter competition, which was commercially expedient. However, the Assessing Officer and CIT(A) disallowed the expenditure, arguing that it was not incurred for the assessee's business purposes but to support its subsidiary, which actually manufactured and marketed "MAAZA." The Tribunal upheld this disallowance, agreeing that the expenditure was not for the assessee's business but aimed at enhancing the brand value for a better sale price. The Tribunal referred to the Supreme Court's decision in CIT v. Chandulal Keshavlal & Co., which held that expenditure incurred for fostering another's business is not deductible.

3. Deletion of Addition on Account of Alleged Unaccounted Purchase of Bottles:
The third issue pertained to the deletion of an addition of Rs. 2,94,813 for unaccounted purchase of bottles. The Assessing Officer noted an excess consumption of bottles and attributed it to unaccounted purchases. The assessee explained that the excess was due to free replacements for broken bottles, supported by confirmations from the supplier. The CIT(A) accepted this explanation but did not remit the matter back to the Assessing Officer for verification. The Tribunal found that the matter required factual verification regarding the handling of breakages and the nature of a credit note for Rs. 1,37,240, which the Assessing Officer had construed as a deduction for damaged bottles. The Tribunal restored the matter to the Assessing Officer for necessary verification.

Conclusion:
The Tribunal dismissed the assessee's appeals on the first two issues, upholding the denial of deduction under section 80-I and the disallowance of advertisement expenditure. The Revenue's appeal on the third issue was allowed for statistical purposes, with the matter remitted back to the Assessing Officer for verification.