Lawful commencement of manufacture governs section 80IB deduction; untimely licensing defeats relief, but delayed grant after application may not.

Deduction under section 80IB(4) depends on lawful commencement of manufacture within the stipulated period. Where an industrial undertaking began production before the cut-off date but had not obtained the mandatory factory licence, the claim failed because manufacture carried on in breach of a prohibitory licensing regime did not satisfy the statutory condition. Where the assessee applied for the licence before the cut-off date and the licence was granted shortly thereafter, the delay was treated as technical and the deduction was allowed. The position therefore turned on the factual matrix: absence of a timely licence application defeated the claim, while a timely application followed by delayed grant did not.

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Issues: (i) Whether deduction under section 80IB could be denied where the industrial undertaking had commenced manufacture before the cut-off date but had not obtained a factory licence under the Factories law before that date; (ii) whether deduction could be allowed where the application for factory licence had been made before the cut-off date but the licence was granted thereafter.

Issue (i): Whether deduction under section 80IB could be denied where the industrial undertaking had commenced manufacture before the cut-off date but had not obtained a factory licence under the Factories law before that date.

Analysis: The deduction under section 80IB(4) was available only if the industrial undertaking began to manufacture or produce articles within the stipulated period. The statutory scheme of the Factories Act and the relevant Rules required prior licensing for use of premises as a factory, and running a factory without such licence was prohibited and penal in nature. The Court held that the commencement of manufacture contemplated by section 80IB could not be divorced from this basic legal requirement. Mere actual production, when carried on in breach of a mandatory and prohibitory licensing regime, was not sufficient to satisfy the statutory condition for the deduction.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether deduction could be allowed where the application for factory licence had been made before the cut-off date but the licence was granted thereafter.

Analysis: Where the assessees had applied for the factory licence before the cut-off date and the licence was granted shortly thereafter, the default was treated as technical. The Court accepted that the manufacturing activity had in fact commenced within time and held that the subsequent grant of licence did not disqualify the claim in those cases.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The legal position was split according to the factual matrix: absence of any timely application for factory licence defeated the deduction, whereas prior application followed by delayed grant did not. Accordingly, some appeals succeeded for the Revenue, some failed, and one matter was restored for factual verification.

Ratio Decidendi: For claiming deduction under section 80IB(4), the commencement of manufacture must be lawful; actual production undertaken in violation of a mandatory and prohibitory factory-licensing regime does not satisfy the statutory condition, but a mere delayed grant of licence after timely application amounts only to a technical defect.

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