2007 (2) TMI 267 - AT - Income Tax

Deduction u/s 80-IB - Profit And Gains From Industrial Undertakings - CIT held that the raw material used by the assessee for the manufacture as well as the finished product was alcohol and hence there is no manufacturing activity involved - HELD THAT - We find that the revenue is basically relying upon the decision of the Special Bench of this Tribunal in Shaw Scott Distilleries (P.) Ltd. s 2000 (9) TMI 209 - ITAT CALCUTTA when the Tribunal for the purposes of relief u/s 80HH was considering a related issue. In this regard it is the submission of the learned Counsel of the assessee that the Commissioner of Income-tax while taking the view that the assessee is not eligible for relief u/s 80-IB relied on the decision in Shaw Scott Distilleries (P) Ltd. s case without noticing that the facts in that case are totally different. We further observe in the case of CIT v. Rampur Distilleries Chemical Co. Ltd. 2004 (11) TMI 88 - ALLAHABAD HIGH COURT has held that since the term rectified spirit is not mentioned in the 1st item of Eleventh Schedule beer wine and other alcoholic spirits the same cannot be equated therewith and assessee engaged in production of rectified spirit is entitled for deduction of investment allowance for investment in plant and machinery. From the above it is apparent that in Hon ble High Court s view rectified spirit is quite different from Whisky Brandy Rum etc. being Indian made foreign liquor which are all potable. In the present case the assessee after obtaining rectified spirit which is not potable and other materials processed them to obtain IMFL. The raw material including rectified spirit are not fit for consumption by human beings but the end-product IMFL is potable and is so recognised in the trade. It is abundantly clear that the assessee is entitled to relief u/s 80-IB being a small scale industry engaged in production of IMFL from rectified spirit. The end-product IMFL is quite distinct and is a commercially different article than the major input rectified spirit which is not fit for human consumption. That the changes made in input results in a new arid different article is recognised in the trade as such. The same also has judicial recognition as seen from expositions of Hon ble Apex Court and Hon ble Allahabad High Court cited above. Section 80-IB itself envisages as such by way of reference to Eleventh Schedule in section 80-IB(iii). Hence in our considered opinion it has to be concluded that the assessee in this case satisfies the requirement that it manufactures or produces an article or thing for the purposes of section 80-IB of the Act. Thus we hold that the assessee is entitled to relief u/s 80-IB. As such we set aside the orders of lower authorities on this issue and decide the issue in favour of the assessee. In the result the assessee s appeal is allowed.

Summary

Issues Involved:
1. Denial of assessee's claim of relief under section 80-IB.
2. Disallowance of sales promotion expenses.

Detailed Analysis:

1. Denial of Assessee's Claim of Relief Under Section 80-IB:

Background:
The assessee, a firm registered as a small-scale industry, set up a second unit (Unit II) to manufacture and bottle Indian manufactured foreign liquor (IMFL) at Pondicherry. The assessee claimed relief under section 80-IB for the profits and gains derived from this new unit. This relief was initially allowed for the assessment years 2000-01 and 2001-02. However, the Commissioner of Income-tax (CIT) revised the assessment for the year 2001-02 under section 263, raising two objections: (i) that the undertaking was not new but an expansion of the existing unit, and (ii) that the activity did not constitute "manufacture."

Commissioner's Findings:
The Commissioner accepted that the undertaking was new but concluded that the activity did not constitute "manufacture" because the raw material (alcohol) and the finished product (IMFL) were essentially the same.

Assessee's Arguments:
The assessee contended that the process of blending alcohol involved significant qualitative changes, making the final product (IMFL) distinct from the raw material. They cited various legal precedents to support their claim that the activity constituted "manufacture."

Tribunal's Analysis:
- New Undertaking: The Tribunal noted that the Commissioner had accepted the unit as new, satisfying the parameters under section 80-IB. The new unit was located more than 10 km away from the old unit, had new plant and machinery, and operated under separate licenses.
- Manufacture: The Tribunal distinguished the present case from the Shaw Scott Distilleries case, noting that the input in the assessee's case was rectified spirit (non-potable), which underwent various processes to become IMFL (potable). The Tribunal cited several legal precedents, including the Supreme Court's decision in Bihar Distillery v. Union of India, which recognized the distinction between rectified spirit and IMFL. They concluded that the assessee's activity constituted "manufacture" because the final product was commercially different from the input.

Conclusion:
The Tribunal held that the assessee was entitled to relief under section 80-IB, setting aside the lower authorities' orders on this issue.

2. Disallowance of Sales Promotion Expenses:

Background:
In ITA No. 2020/Mad./06 for the assessment year 2004-05, the assessee raised an issue regarding the disallowance of sales promotion expenses, which the Commissioner of Income-tax (Appeals) had omitted to consider.

Tribunal's Decision:
The Tribunal found that the assessee had raised a valid ground regarding the disallowance of sales promotion expenses. They remitted this issue to the files of the Commissioner of Income-tax (Appeals) to provide a speaking order on the matter, ensuring the assessee was given an adequate opportunity to be heard.

Final Judgment:
- The assessee's appeal in ITA No. 2019/Mad./06 was allowed, granting relief under section 80-IB.
- The appeal in ITA No. 2020/Mad./06 was allowed for statistical purposes, with the issue of sales promotion expenses remitted to the Commissioner of Income-tax (Appeals) for further consideration.