Manufacturing of IMFL qualifies for Section 80IB deduction but not sales tax incentives

The Asst. Commissioner of Income Tax Versus M/s. Shaiv Distilleries (P) Ltd.

The Asst. Commissioner of Income Tax Versus M/s. Shaiv Distilleries (P) Ltd. - TMI Issues Involved:
1. Whether blending and bottling of IMFL amounts to manufacture under Section 80IB(2)(iii).
2. Whether sales tax incentive qualifies for deduction under Section 80IB.

Issue-wise Detailed Analysis:

1. Blending and Bottling as Manufacture:

The department challenged the CIT(A)'s decision that blending and bottling of IMFL (Indian Made Foreign Liquor) qualifies as manufacturing under Section 80IB(2)(iii). The assessee company engaged in blending and bottling of whisky and brandy claimed a deduction under Section 80IB. The AO denied this claim, arguing that blending different types of alcohol does not constitute manufacturing, as it does not involve processes like malting, fermentation, heating, vaporizing, or distillation. The AO's stance was based on previous court rulings, including the Apex Court, which classified blending as a processing activity, not manufacturing.

The CIT(A) allowed the claim, noting that similar disallowances in earlier years had been overturned by the ITAT and the Madras High Court, which recognized blending and bottling as manufacturing. The ITAT upheld the CIT(A)'s decision, citing past judgments in the assessee's favor, including a 2006-07 ruling where the Tribunal allowed the deduction under Section 80IB. The Tribunal reaffirmed that the activity qualifies as manufacturing, thus dismissing the revenue's appeal on this ground.

2. Sales Tax Incentive and Section 80IB Deduction:

The assessee claimed a deduction under Section 80IB for sales tax incentives received from the Government of Goa, treating them as income derived from industrial undertaking. The AO disallowed this claim, referencing the Supreme Court's decision in Liberty India Vs. CIT, which held that incentive profits, such as duty drawbacks, are not derived from eligible business under Section 80IB.

The CIT(A) ruled in favor of the assessee, stating that the sales tax collected is part of the sales turnover and thus income derived from the industrial undertaking. The CIT(A) rejected the AO's request for enhancement, except for a minor correction of Rs. 3,558/-.

The Tribunal, however, sided with the AO, referencing the Supreme Court's Liberty India decision, which emphasized that the immediate source of income must be the industrial undertaking itself, not government policy. The Tribunal ruled that sales tax incentives are government benefits and not directly derived from the industrial undertaking, thus not eligible for Section 80IB deduction. The Tribunal followed its precedent in ACIT vs. M/s. Sri Mahalasa Power Rentals, which similarly denied Section 80IB benefits for sales tax incentives, and allowed the department's appeal on this ground.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the CIT(A)'s decision on the issue of blending and bottling as manufacturing but reversed the CIT(A)'s ruling on sales tax incentives, denying the Section 80IB deduction for such incentives. The final order was pronounced in the open court on 14.8.2014.