Lawful commencement of manufacture governs Section 80IB(4) deduction: no pre-cutoff licence application defeats the claim, but technical delay may not.

Deduction under Section 80IB(4) depends on lawful commencement of manufacture, not merely on the fact of production within time. Where no factory licence application was made before the cutoff date, the defect was treated as substantive non-compliance because running a factory without the required licence was legally prohibited, and the deduction was not available. By contrast, where the assessee had applied for the licence before the cutoff date and the licence was issued shortly thereafter, the delay was regarded as technical and could not by itself justify denial of the deduction. The governing distinction was between complete failure to seek the licence and delayed grant after timely application.

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Issues: (i) Whether deduction under Section 80IB(4) of the Income-tax Act, 1961 could be denied merely because the factory licence was obtained after the cutoff date, and whether the requirement of lawful commencement of manufacture was relevant; (ii) Whether an assessee who had applied for a factory licence before the cutoff date but received it shortly thereafter could be denied the deduction on that ground.

Issue (i): Whether deduction under Section 80IB(4) of the Income-tax Act, 1961 could be denied merely because the factory licence was obtained after the cutoff date, and whether the requirement of lawful commencement of manufacture was relevant.

Analysis: The deduction under Section 80IB(4) was linked to commencement of manufacturing within the prescribed time, but the commencement had to be lawful and not in breach of basic statutory requirements governing setting up and running of a factory. Where no application for a factory licence had even been made before the cutoff date, the omission was not a mere formality, because running a factory without the requisite licence was treated as legally prohibited.

Conclusion: The requirement was answered against the assessee where no licence application had been made before the cutoff date, and such cases were not entitled to the deduction.

Issue (ii): Whether an assessee who had applied for a factory licence before the cutoff date but received it shortly thereafter could be denied the deduction on that ground.

Analysis: Where the application for licence had already been submitted before the cutoff date and the licence was granted shortly thereafter, the lapse was treated as technical. The Court distinguished such cases from those involving complete absence of an application, and held that the deduction could not be withheld solely on this ground.

Conclusion: The requirement was answered in favour of the assessee in cases where the application had been made before the cutoff date and the licence followed shortly thereafter.

Final Conclusion: The governing distinction was between total non-compliance with the licensing requirement and a merely technical delay in grant of the licence after timely application; on the present record, the matter was not finally decided on merits and was sent back for factual verification and fresh consideration.

Ratio Decidendi: For deduction under Section 80IB(4), commencement of manufacturing must be lawful; complete failure to seek the mandatory factory licence before the cutoff date defeats the claim, while a timely application followed by belated grant amounts only to a technical lapse.

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