2007 (8) TMI 410 - AT - Income Tax

Summary

Issues Involved:
1. Whether Gutkha manufactured by the assessee falls under the expression 'tobacco preparations' within the meaning of Item No. 2 of the Eleventh Schedule to the Income-tax Act.
2. Whether the assessee is entitled to deductions under sections 80-I and 80-IA of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Whether Gutkha manufactured by the assessee falls under the expression 'tobacco preparations' within the meaning of Item No. 2 of the Eleventh Schedule to the Income-tax Act:

The primary issue in all the appeals was whether Gutkha manufactured by the assessee is a 'tobacco preparation' within the meaning of Item No. 2 in the Eleventh Schedule to the Income-tax Act, and thus not entitled to deductions under sections 80-I and 80-IA. The Tribunal examined the legislative history and the relevant provisions, noting that the Eleventh Schedule lists articles or things, including 'Tobacco and tobacco preparations, such as, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff.'

The Tribunal observed that Gutkha, a mixture of betel nut and tobacco, is consumed for its tobacco content, which provides an intoxicating effect. Despite the small percentage of tobacco (6-7%) in Gutkha, the tobacco retains its pharmacological properties and effects. The Tribunal held that the dominant ingredient in a preparation is one that retains its basic characteristics without undergoing any metamorphosis. Since the properties of tobacco in Gutkha remain intact, Gutkha qualifies as a 'tobacco preparation.'

The Tribunal also considered the rule of ejusdem generis and concluded that the words 'such as' in Item No. 2 are illustrative, not exhaustive. Thus, Gutkha falls under 'tobacco preparations' and 'chewing tobacco.'

2. Whether the assessee is entitled to deductions under sections 80-I and 80-IA of the Income-tax Act:

Given that Gutkha is classified as a 'tobacco preparation,' the Tribunal examined whether the assessee is entitled to deductions under sections 80-I and 80-IA. The Tribunal noted that section 80-IA(2)(iii) specifies that the deduction is not available for industrial undertakings manufacturing or producing articles or things listed in the Eleventh Schedule.

The Tribunal reviewed the facts of the case, including the assessee's manufacturing activities and the deductions claimed. The Assessing Officer had denied the deductions, following the order of the Commissioner of Income-tax under section 263 for the assessment year 1993-94. The Tribunal upheld the Assessing Officer's decision, agreeing that Gutkha is a 'tobacco preparation' and thus not eligible for deductions under sections 80-I and 80-IA.

The Tribunal also addressed the assessee's argument that the words 'such as' in Item No. 2 are words of limitation. The Tribunal disagreed, stating that the words are illustrative, indicating various forms of tobacco use. The Tribunal concluded that Gutkha falls under 'tobacco preparations' and 'chewing tobacco,' making the assessee ineligible for deductions under sections 80-I and 80-IA.

Conclusion:

The Tribunal held that Gutkha manufactured by the assessee is a 'tobacco preparation' and 'chewing tobacco' within the meaning of Item No. 2 of the Eleventh Schedule. Consequently, the assessee is not entitled to deductions under sections 80-I and 80-IA of the Income-tax Act. The appeals filed by the Department were allowed, and those filed by the assessee were dismissed.