Tribunal: Detergent Not Prohibited, Assessee Eligible for Deduction

The Tribunal allowed the appeal of the assessee, holding that detergent is not classified as a prohibited article under the Eleventh Schedule. It was determined that detergent and soap are distinct products with different manufacturing processes and compositions. As detergent was not specifically mentioned in the prohibited list, the assessee was entitled to claim the deduction under section 80IB of the Act.

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Issues Involved:
1. Disallowance of deduction u/s 80IB.
2. Classification of detergent as a prohibited article under the Eleventh Schedule.

Issue 1: Disallowance of Deduction u/s 80IB

The assessee is aggrieved by the impugned order dated 9th December, 2011 on the ground that the learned CIT(A) erred in maintaining the disallowance of Rs. 6,63,956/- made u/s 80IB of the Act by holding that the assessee is manufacturing prohibited articles as per Eleventh Schedule.

The crux of arguments on behalf of the assessee is that detergent and soap are two different commodities, their physical and chemical properties are different and the method of use is also different. The learned counsel further invited our attention to the relevant provisions of the Act and there is no mention of the detergent in the negative list. A plea was also raised that from the date of its inception, the assessee is a small scale industrial undertaking for which our attention was invited to various pages of the paper book. On the other hand, the learned Senior DR strongly defended the impugned order by submitting that the composition of soap and detergent is the same and the same has been mentioned in the negative list.

The assessee declared total income of Rs. 15,49,230/-, after claiming deduction of Rs. 6,63,956/- u/s 80IB of the Act in its return filed on 25.2.2004. The return was selected for scrutiny, therefore, pursuant to notice u/s 147 vide order dated 27.2.2010 the income was determined at Rs. 2,91,61,870/- (including disallowance of deduction of Rs. 6,63,956/-). However, u/s 154 of the Act, necessary correction was made by the AO himself by restricting the disallowance to Rs. 6,63,956/- as claimed by the assessee. On appeal, the learned CIT(A) affirmed the disallowance which is under challenge before the Tribunal.

Issue 2: Classification of Detergent as a Prohibited Article under the Eleventh Schedule

The Tribunal analyzed the relevant portion from the impugned order which stated: "The chemical process for making soap has not gone through any metamorphic change. The soaps earlier were made by mixing chemicals like fatty acid, caustic soda, sodium silicate. The modern day detergent soaps are also made by mixing chemicals like LAB, sodium silicate and caustic soda. The only new material used in the detergent soap is LAB in place of fatty acid. This fact clearly show that the detergent soaps are one kind of soap."

The Tribunal considered the list of prohibited articles in the Eleventh Schedule, which includes "Toothpaste, dental cream, tooth-powder and soap" but not detergent. The Tribunal noted that "Nothing prevented the legislature to specifically use the word 'detergent powder' if it wanted to do so."

The Tribunal also detailed the manufacturing processes of soap and detergent, highlighting their differences. It was concluded that "Soap is the product of reaction between a fat and sodium hydroxide (Fat + 3NaOH - glycerine + 3 soap). The whole process of both the items is indicative of factor that both the products are altogether different and commercially also known differently."

For claiming deduction u/s 80IB of the Act, the article manufactured should not be in the list of the Eleventh Schedule, and the product should be from a small scale industrial undertaking. The Tribunal found that the assessee was registered as a small scale industry from its inception and continued as such. The dictionary meanings of soaps and detergent were also found to be different, supporting the view that they are distinct items.

The Tribunal concluded that "detergent is not included in Schedule 11, consequently, deduction should not have been denied to the assessee." The appeal of the assessee was allowed.

This order was pronounced in the open Court on 11.5.2012.

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