2007 (1) TMI 234 - AT - Income Tax

Disallowance of deduction u/s 80-IB - manufacturing/production activities - Capsulation of mushroom powder - taxability of interest income - Payment towards excise duty liabilities u/s 43 - assessment completed u/s 143(3) - notice issued - HELD THAT - In our opinion, all these activities do not bring in any new article or product into existence. The mushroom powder even after capsulation remains the same. There is no transformation of mushroom powder into new article. Before the capsulation, it was mushroom powder and even after the capsulation, it remains to be mushroom powder only. Once the capsule is removed, only mushroom powder emerges out of it. By filling this mushroom powder into gelatin capsules no new and distinct or separate product comes into existence. There is no change in the basic identity of the product and taste of the product. It is a matter of fact that mushroom powder can be consumed in bulk form nakedly without being put into any enclosure or it can be consumed by putting into the gelatin capsule. Putting of the mushroom powder into the gelatin capsule is for the purpose of smoothening its marketability which is nothing but a processing which does not amount to manufacture or production of a thing or article so as to fulfil the conditions stipulated for availing the benefit u/s 80-IB of the Act. For this purpose, we feel it pertinent to place reliance on the judgment of the Hon'ble Supreme Court in the case of Nilgiri Tea Co. 1959 (7) TMI 40 - BOMBAY HIGH COURT , it was held that when different brands of tea are mixed by the assessee for the purpose of producing of tea mixture of a different kind and quality, according to the formula evolved by them, there was plainly indubitably processing of different brands of tea because these brands of tea experienced as a result of mixing, qualitative change in that the tea mixture which came into existence was of different quality and flavour than the different brands of tea which went into the mixture. But the question whether the processing brings into existence any article or thing which may be said to be distinct from the article on which the process has been applied had been answered in negative. It was held that it was processing only. Thus, we have no hesitation in coming to the conclusion that the expression 'manufacture' or 'producing' any thing or article u/s 80-IB(2)(iii) has been used in a generic sense and within its ambit it does not include any processing of goods, which does not bring out a new or commercially distinct commodity. Accordingly, putting the mushroom powder into the gelatin capsule does not amount to manufacture or production of any commercially distinct commodity. Therefore, we hold that the assessee is not entitled for deduction u/s 80-IB. This ground of the assessee is rejected. Payment towards excise duty liabilities u/s 43 - This expenditure was never claimed as expenditure in the books of account and this was shown as advance in the books of account. The assessee made this claim before the Assessing Officer by way of a letter. Before us, the learned counsel for the assessee has not furnished any iota of evidence in support of the claim of the assessee. Admittedly this amount was shown as current assets being loans and advances. The assessee is not in a position to spell out the nature of liability. The assessee was making only verbal argument without stating the nature of expenditure, for which assessment year it relates and whether it was wholly and exclusively spent for business purpose and whether it was advance payment or payment towards liability for the current year. The assessee has not produced any order of the excise duty through which this liability is stated to have emerged. No judgment from any Court of law was also produced for compliance. In our opinion, to avail of the deduction, the payments are required to be actually paid within the time stipulated in the proviso to section 43B of the Act. If the payments have not been made within the stipulated time, the deduction cannot be claimed at any time thereafter. Thus, we decline to interfere with the order of the lower authorities and the order of the CIT(A) on this issue is confirmed. In the result, the appeals filed by the assessee are dismissed.

Issues Involved:

1. Violation of principles of equity and natural justice.
2. Disallowance of deduction under section 80-IB.
3. Disallowance of payment of differential duty of tax demanded by the Excise Department.
4. Taxability of interest income.
5. Levy of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Violation of Principles of Equity and Natural Justice:

The assessee argued that the Assessing Officer (AO) violated the principles of equity and natural justice by not providing the opportunity to examine the witness whose statements were used against the assessee in completing the assessment. The Tribunal found that the AO had given adequate opportunities of hearing on various dates, and there was no record showing that the assessee requested a copy of the statement or an opportunity to cross-examine the production in charge. The Tribunal concluded that no prejudice was caused to the assessee and dismissed this ground, emphasizing that the principles of natural justice aim to promote justice, not to thwart it.

2. Disallowance of Deduction under Section 80-IB:

The assessee claimed deductions under section 80-IB, asserting engagement in manufacturing activities. However, the AO and the Commissioner of Income-tax (Appeals) (CIT(A)) denied these deductions, stating that the assessee was merely filling imported mushroom powder into capsules, which did not constitute manufacturing. The Tribunal examined the detailed processes involved in capsulation and concluded that these activities did not bring a new article into existence. The mushroom powder remained the same before and after capsulation, and thus, no manufacturing or production of a new product occurred. Consequently, the assessee was not entitled to the deduction under section 80-IB.

3. Disallowance of Payment of Differential Duty of Tax Demanded by the Excise Department:

The assessee contended that the CIT(A) erred in confirming the disallowance of the payment of differential duty of tax demanded by the Excise Department. Alternatively, the assessee argued that the CIT(A) should have directed the AO to consider this claim as a petition for rectification under section 154 of the Income-tax Act. The Tribunal did not provide a detailed analysis on this issue in the provided text, and thus, the outcome of this ground remains unclear.

4. Taxability of Interest Income:

The assessee argued that the CIT(A) failed to decide on the merits of the taxability of interest income for the assessment years 2003-04 and 2004-05, which the AO treated as income from other sources. The Tribunal did not provide a detailed analysis on this issue in the provided text, and thus, the outcome of this ground remains unclear.

5. Levy of Interest under Sections 234B and 234C:

The assessee contended that the CIT(A) erred in confirming the levy of interest under sections 234B and 234C of the Income-tax Act. The Tribunal did not provide a detailed analysis on this issue in the provided text, and thus, the outcome of this ground remains unclear.

Conclusion:

The Tribunal dismissed the grounds related to the violation of principles of equity and natural justice and the disallowance of deduction under section 80-IB. The Tribunal concluded that the activities performed by the assessee did not constitute manufacturing or production of a new product, and thus, the assessee was not entitled to the deduction under section 80-IB. The outcomes of the other grounds related to the disallowance of payment of differential duty, taxability of interest income, and levy of interest under sections 234B and 234C were not detailed in the provided text.

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