2019 (4) TMI 1367 - AT - Income Tax

Entitled for section 80IC deduction from pan masala manufacturing - Revenue has not filed its appeal after annexing form no. 35 and statement of facts. His further case is that section 80IC deduction issue does not emanate from the Revenue s grounds - HELD THAT - We find no merit in this technical objection as both form no. 35 as well as statement of facts form part of record before us in the instant case file. It further transpires that the above stated grounds sufficiently seek to revive the Assessing Officer s action disallowing assessee s section 80IC deduction claim relating to pan masala manufacturing. We therefore adopt judicial consistency to revive the impugned section 80IC disallowance under this said particular in tune with the learned co-ordinate bench s decision. The Revenue succeeds in its grievance to this extent. The assessee had also claimed u/s 80IC deduction from profits derived from sale of 7190 wrist watches. D/R fails to dispute during the course of hearing that the Revenue s statement of facts in the instant case file makes it clear that the said watches formed part of assessee s brought forward stock worth ₹ 3,55,72,579/-. It therefore emerges that the assessee had very well manufactured the said wrist watches in the eligible undertaking only in earlier assessment years and derived profits from sale in the impugned assessment year. Revenue s grievance regarding the assessee s deduction claim relating to this latter issue of wrist watches. Direct the Assessing Officer to finalise consequential computation of assessee s claim u/s 80IC deduction disallowance only to the tune of the amount relating to the former issue of pan masala manufacturing as per law.

Summary

Issues Involved:
1. Eligibility of the assessee for deduction under section 80IC of the Income Tax Act, 1961 for the manufacture of pan masala.
2. Evidence of manufacturing activities and the adequacy of the plant and machinery.
3. Labour capacity and technical expertise required for manufacturing.
4. Inclusion of pan masala in the negative list of Thirteenth Schedule and its exclusion from the positive list of Fourteenth Schedule.

Detailed Analysis:

1. Eligibility for Deduction under Section 80IC:
The primary issue was whether the assessee’s activities qualified as "manufacturing" under section 80IC of the Income Tax Act, 1961. The Revenue contended that the assessee was merely engaged in the purchase and sale of readymade mouth fresheners and wristwatches without any qualifying manufacturing process. The Tribunal referred to its co-ordinate bench’s decision for earlier assessment years, which held that the assessee was not entitled to section 80IC deduction for pan masala manufacturing. The Tribunal reiterated that the assessee's activity did not amount to manufacture or production of any article or thing under section 80IC(2), thus disallowing the deduction claim.

2. Evidence of Manufacturing Activities:
The Revenue argued that the assessee failed to produce evidence of manufacturing activities and a list of plant and machinery with installed manufacturing capacity. The Tribunal noted that the assessee had valid registrations with the Central Excise Department, Sales Tax and VAT Department of Sikkim, and the Industries Department, which indicated engagement in manufacturing activities. However, the Tribunal found that the assessee’s manufacturing unit only had basic equipment and did not meet the stringent requirements for manufacturing under section 80IC.

3. Labour Capacity and Technical Expertise:
The Revenue questioned the feasibility of manufacturing 159,259 Kgs of mouth fresheners and 7,910 wristwatches with only four laborers, arguing that the required technical expertise for quality control and assurance was lacking. The Tribunal observed that the assessee’s claim was not supported by adequate evidence of technical expertise and labor capacity, reinforcing the disallowance of the deduction.

4. Inclusion in Negative List and Exclusion from Positive List:
The Tribunal examined whether pan masala was included in the negative list of the Thirteenth Schedule and excluded from the positive list of the Fourteenth Schedule. The Tribunal referred to the legislative intent and the specific inclusion of "pan masala" in the negative list of Thirteenth Schedule, which includes tobacco products. The Tribunal concluded that "pan masala" is explicitly excluded from the benefits of section 80IC, thus disallowing the deduction claim.

Conclusion:
The Tribunal upheld the Revenue’s appeal, disallowing the assessee's section 80IC deduction claim for pan masala manufacturing due to its inclusion in the negative list and failure to meet the manufacturing criteria. However, the Tribunal allowed the deduction claim for wristwatches, as they were part of the assessee’s brought forward stock from earlier assessment years. The Revenue’s appeal was partly allowed, reinstating the disallowance of the section 80IC deduction for pan masala manufacturing.