2024 (7) TMI 150 - HC - Income Tax

Deduction u/s 80-IC (2) (a) - Product of the appellant/assessee to be Pan Masala (Mouth Freshener) - process applied by the assessee is manufacture but the product of the assessee shall stand excluded for deduction in view of part B of the Thirteenth Schedule to the Act, 1961 - HELD THAT - Appellant/assessee has established its unit in an area notified by the Central Board of Direct Taxes by notification no. 41 dated 06.02.2004 u/s 80-IC (2) (a) of the Act, 1961. The product manufactured by the appellant/assessee is mouth freshener (Pan Masala) and its ingredients/raw materials do not include tobacco in any form. Thirteenth Schedule under Section 80-IC (2) of the Act, 1961 is in three parts namely Part A, Part B and Part C. Part A is for the State of Sikkim, Part B relates to the State of Himachal Pradesh and Uttaranchal and Part C relates to the Jammu and Kashmir. In the present case, we are concerned with Part A which is for the State of Sikkim. Clause (a) of sub-Section (2) of Section 80IC is applicable to any undertaking or enterprise established in an area notified by the Central Board of Direct Taxes to manufacture or produce any article or thing except those specified in the 13th Schedule. Part-A of the 13th Schedule is applicable for the State of Sikkim, whereby tobacco and tobacco products (including cigarettes, cigar, gutkha etc.), aerated branded beverages and pollution causing paper and paper products have been excluded. Except these items any undertaking or enterprise established in a notified area within specified dates to manufacture or produce any article or thing, is eligible for deduction under Section 80IC (3) of the Act, 1961. Entry-1 of Part-B of the 13th Schedule applicable to the State of Himachal Pradesh and State of Uttaranchal, provides the article or thing tobacco or tobacco products including cigarettes and pan masala . The word pan masala used in Entry 1 of Part B is not incorporated in Part-A of the 13th Schedule (for the state of Sikkim). Once the Legislature has not included pan masala in Part-A for the State of Sikkim, then it was not open for the ITAT to read the aforesaid entry-1 of Part-B in Entry-1 of Part-A. The finding recorded by the ITAT that the item manufactured by the appellant/assessee is included in tobacco products, is totally baseless and beyond the provisions of Section 80IC (2) read with the 13th Schedule to the Act, 1961. Both the substantial questions of law are answered in favour of the assessee and against the revenue. It is held that the appellant assessee is entitled for deduction under Section 80-IC (2) (a) (i) read with Section 80-IC (3) of the Act, 1961.

Summary

Issues:
1. Whether the subject pan masala is without any tobacco content.
2. Whether pan masala without any tobacco content falls within the purview of Entry 1 of Part A of the Thirteenth Schedule to the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the subject pan masala is without any tobacco content:

The court noted that the appellant/assessee established a unit for manufacturing mouth freshener (Pan Masala) without tobacco or catechu. This unit commenced production on 27.06.2006 and was situated in an industrial area notified by the Central Board of Direct Taxes. The raw materials used in the manufacturing process, as recorded in the assessment order, included ingredients like fennel, sugar-coated fennel, sugar crystal, scented betel nuts, dry dates, coriander seeds, menthol, flower of lime, jintan, saffron, and elachi powder, none of which contain tobacco. The Assessing Officer confirmed that the product was Pan Masala (Mouth Freshener) and did not contain tobacco in any form.

2. Whether pan masala without any tobacco content falls within the purview of Entry 1 of Part A of the Thirteenth Schedule to the Income Tax Act, 1961:

The appellant claimed a deduction under Section 80-IC (2) (a) of the Income Tax Act, 1961, which was initially rejected by the Assessing Officer on the grounds that the process did not amount to manufacturing and the product did not fall under Schedule 14. The Commissioner of Income Tax (Appeals) allowed the appeals, but the Income Tax Appellate Tribunal (ITAT) reversed this decision, excluding the product from deduction under Part B of the Thirteenth Schedule.

The ITAT's decision was based on the interpretation that "pan masala" falls within the negative list of the Thirteenth Schedule, Part A, which includes "tobacco products (including cigarettes, cigars, and gutka, etc.)." The ITAT referred to the Supreme Court's decision in Commissioner of Customs vs. Dilip Kumar Roy, emphasizing strict interpretation of taxing statutes and exemption provisions.

The court found that the appellant's unit was established in an area notified under Section 80-IC (2) (a) of the Act, 1961, and that Part A of the Thirteenth Schedule, applicable to Sikkim, did not include "pan masala" in its list of excluded items. The court highlighted that the ITAT erroneously read Part B, relevant to Himachal Pradesh and Uttaranchal, into Part A, which was impermissible. The court concluded that the product manufactured by the appellant/assessee did not fall under the negative list for Sikkim and was thus eligible for deduction under Section 80-IC (2) (a) (i) read with Section 80-IC (3) of the Act, 1961.

Conclusion:

The court set aside the impugned orders of the ITAT, holding that the appellant/assessee is entitled to the deduction under Section 80-IC (2) (a) (i) read with Section 80-IC (3) of the Income Tax Act, 1961. Both substantial questions of law were answered in favor of the assessee and against the revenue. All the appeals were allowed to the extent indicated.