Manufacturing deduction through outsourced production and block assessment require search-based incriminating material, not mere retracted admission.

Deduction under section 80-IA was held allowable where the assessee retained control over manufacture, supplied technical inputs, supervised production, and marketed the products under its own brand, even though the work was carried out through loan licensee manufacturers who were not separately eligible. The incentive applied to the assessee's manufacturing activity as a whole, so disallowance on that ground was rejected. In the block assessment context, an amount could not be treated as undisclosed income under Chapter XIV-B merely on the basis of a retracted admission when search operations yielded no incriminating material. Without search-based evidence of concealment, the regular book entry could not be converted into block-assessment income.

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Issues: (i) Whether deduction under section 80-IA of the Income-tax Act, 1961 was allowable to the assessee in respect of profits arising from manufacture carried out through loan licensee manufacturers who were not themselves eligible for the deduction. (ii) Whether the amount brought to tax in the block assessment could be treated as undisclosed income under Chapter XIV-B of the Income-tax Act, 1961 in the absence of incriminating material found in search.

Issue (i): Whether deduction under section 80-IA of the Income-tax Act, 1961 was allowable to the assessee in respect of profits arising from manufacture carried out through loan licensee manufacturers who were not themselves eligible for the deduction.

Analysis: The deduction was claimed in respect of a manufacturing arrangement where the assessee retained overall control, supplied the formula and technical inputs, supervised production, and marketed the products under its own brand. The relevant enquiry was whether the assessee was engaged in manufacture for the purposes of the incentive provision, not whether every contracted manufacturer also independently satisfied the eligibility conditions. The earlier decisions on industrial concessions recognised that manufacture or processing may be carried on through others acting under the assessee's supervision and that the assessee does not lose eligibility merely because part of the manufacturing work is outsourced.

Conclusion: The deduction under section 80-IA was allowable to the assessee on the entire profit attributable to the manufacturing activity, and the disallowance made on the ground that the loan licensee manufacturers were not separately eligible was not justified.

Issue (ii): Whether the amount brought to tax in the block assessment could be treated as undisclosed income under Chapter XIV-B of the Income-tax Act, 1961 in the absence of incriminating material found in search.

Analysis: The addition was founded essentially on an admission later retracted, while the search itself did not yield incriminating documents or material showing concealment or falsity in the assessee's claim. A mere admission on a point of law, especially when retracted before completion of assessment, cannot by itself establish undisclosed income. In the absence of search-based material demonstrating undisclosed income, the claim already reflected in the regular books and returns could not be converted into block-assessment income.

Conclusion: The amount assessed in the block assessment did not constitute undisclosed income within the meaning of Chapter XIV-B.

Final Conclusion: The assessee succeeded on the substantive issues, the revenue's appeals failed, and the cross-objection was allowed.

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