Assessee denied deduction under Section 32AB for manufacturing prohibited items, appeal partially allowed

The Tribunal held that the assessee was ineligible for deduction under section 32AB as it was considered a manufacturer of prohibited items listed in the Eleventh Schedule. The issue of allocating operating and other expenses for deductions under sections 80HH and 80-I was remanded back to the CIT(A) for further consideration. The appeal was partly allowed.

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Issues Involved:
1. Disallowance of deduction under section 32AB of the Income-tax Act, 1961.
2. Allocation of operating and other expenses for the purposes of computation of deduction under sections 80HH and 80-I of the Income-tax Act in respect of profits of the Medak unit.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 32AB:

The assessee claimed a deduction under section 32AB for profits from the business of oil of olay and crest tartar control toothpaste. The Assessing Officer (AO) observed that the assessee did not reduce profits from eligible business and non-business receipts. The AO noted that the assessee got these products manufactured on a job work basis and was involved in the manufacture of cosmetics and toiletry preparations listed in the Eleventh Schedule, which are prohibited items for deduction under section 32AB.

The assessee argued that it did not manufacture the products but got them manufactured by small scale industrial undertakings, which should make the profits eligible for deduction under section 32AB. The Commissioner of Income-tax (Appeals) [CIT(A)] directed the AO to verify if the products were manufactured or only traded by the assessee and decide accordingly. The CIT(A) confirmed the AO's decision to exclude 50% of interest from IDBI and other sources, and dividend income.

The CIT(A) held that the assessee was a manufacturer as it controlled the manufacturing process, despite not owning the plant and machinery. The CIT(A) concluded that the assessee was not eligible for deduction under section 32AB as it was not a small scale unit, and the SSI status of the job workers was irrelevant.

The Tribunal reviewed the agreements between the assessee and the small scale industries, noting that the assessee provided raw materials, packaging, and quality control, thus exercising significant control over the manufacturing process. The Tribunal concluded that the assessee was indeed a manufacturer under the provisions of section 32AB and ineligible for the deduction since the items were listed in the Eleventh Schedule.

2. Allocation of Operating and Other Expenses:

The assessee contended that the CIT(A) did not adjudicate ground No. 2(d) regarding the allocation of operating and other expenses for computing deductions under sections 80HH and 80-I for the Medak unit. The AO had allocated all operating expenses to the Medak unit based on sales, contrary to the directions in the CIT(A)'s earlier order, which specified that only "common operating expenses" should be allocated based on sales.

The Tribunal found the assessee's contention valid and remanded the issue back to the CIT(A) to adjudicate on the merits with a speaking order.

Conclusion:

The Tribunal concluded that the assessee was a manufacturer of the items listed in the Eleventh Schedule and thus ineligible for deduction under section 32AB. The issue regarding the allocation of operating and other expenses was remanded to the CIT(A) for adjudication. The appeal was partly allowed.

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