2018 (8) TMI 1797 - AT - Income Tax

Tribunal denies tax deduction for 'pan masala' manufacturing under Section 80IC due to product categorization.

The tribunal upheld the Assessing Officer's decision to disallow the Section 80IC deduction claim for manufacturing 'pan masala' due to its inclusion in ... Disallowance u/s 80IC - proof of manufacture - “pan masala” product manufactured in Sikkim unit - assessee had manufactured or produced it “pan masala” within the scheme of the Act - as contended that this “pan masala” is an article or thing specifically included in the Thirteen Schedule and the instant taxpayer has failed to satisfy its case to be covered under item 7 part-B of the Fourteenth Schedule for Sikkim state - HELD THAT:- We decline Revenue’s first and foremost plea qua “manufacturing” aspect to conclude that the assessee can be safely held to have manufactured / produced its “pan masala” in the specified unit site in Sikkim. Revenue’s latter arguments based on inter-play of impugned section 80IC deduction provision vis-à-vis operation of the restrictive covenant enshrined in Thirteen Schedule’s negative list read with positive list of the Fourteenth Schedule (supra) relevant to the specified list of article(s) or thing(s) in issue. As in Commissioner of Customs vs. Dilip Kumar Roy [2018 (7) TMI 1826 - SUPREME COURT OF INDIA] has gone into a very elucidate discussion on the issue of basic tenets of literal or strict interpretation to be adopted with regard to a taxing statute, their interplay, purposive construction as well as application of equitable principles to inter alia conclude that there is no room for intendment in such a fiscal statute and regard must be had to clear meaning of the words and the matter should be governed wholly by the language incorporated therein. Their lordships’ make it clear that one has to strictly look to the language used without any scope for searching intendment or for drawing any presumption Exemption provision in a taxing statute is to be interpreted strictly. Assessee’s burden to how that his case comes within the specified parameters envisaged in the exemption clause or notification and any ambiguity in such a provision has to be interpreted in Revenue’s favour. Also earlier decision in Raghunath Rai Bareza vs. PNB [2006 (12) TMI 479 - SUPREME COURT OF INDIA] holds that it is a cardinal principle of interpretation of a statute that the words used therein by the legislative are to be understood in their natural, ordinary or popular sense and construed as per their grammatical meaning unless such a construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. Their lordships further invoked “Golden Rule” of interpretation that the words of a statute must prima facie to be given their ordinary meaning. We find it very much relevant at this stage that their lordships yet another judgment in Smt. Tarulata Shyam vs. CIT [1977 (4) TMI 3 - SUPREME COURT] also made it clear that it is the fundamental rule of taxation that where there is no scope for importing into the statute words which are not there, such an important word would be not to construe but to amend the statute. And also that even if there is any casus omisus, the defect can be remedied by the legislation alone and not by judicial interpretation. All these settled legal principles to avert to the taxpayer’s impugned section 80IC deduction claim. There is hardly any dispute by now that it has manufactured “pan masala” in its specified unit situated in Sikkim state. Its claim throughout was that “pan masala” is covered in 7th item Part-B in the Fourteenth Schedule (applicable for the state of Sikkim) to be “Food processing including agro-based industries, processing, preservation & food packaging of fruits and vegetables (excluding conventional grinding / extraction units) The above item in the positive list is meant to promote food processing including of agrobased industries, processing, preservation & food packaging of fruits and vegetables only. We go by ordinary grammatical meaning of food processing to be “ the process by which food is processed for consumption by humans or animals” as per Collins English dictionary therefore. We repeat that the Assessing Officer threw sufficient light as per suitable references; sector-wise, that “pan masala” does not find place in National Food Processing policy as well. The assessee’s section 80IC deduction claim therefore fails to satisfy the requisite test of its inclusion in positive list of specified articles or things prescribed in Item No.7, Part-B, Fourteenth Schedule to section 80IC(2) of the Act. It therefore fails to discharge its burden to be covered under the impugned deduction provision as per hon'ble apex court’s constitutional bench’s ratio hereinabove. The assessee’s manufactured item “pan masala” forms part of Thirteenth Schedule Part-A (for the state of Sikkim) comprising of a negative list at serial No.1 reading “tobacco products (including cigarettes, sigma and gutka etc.) rather. The question as to whether “pan masala” is included in tobacco products or not stands answered by the legislature itself in part-B in the same schedule very much containing the crucial expression “tobacco and tobacco products including cigarettes and pan masala. Legislature’s clinching expression “etc” used in former part-A is inclusive in nature which is sufficiently answered in part-B of the very schedule wherein the tobacco products category includes “pan masala” since “etc” has been omitted to be used. The legislative intention is explicitly clear that it had sought to exclude tobacco products as segment including cigarettes and pan masala from the ambit of section 80IC of the Act. We apply necessary implication principle in these facts and circumstances to hold that “pan masala” definition used in para-B of the Thirteenth Schedule is included in tobacco products would also cover part- A thereto describing very categories of tobacco products to be not eligible for section 80IC deduction. We conclude in these peculiar facts and circumstances that the assessee’s impugned claim fails to clear the rigor of the above negative list in Thirteenth Schedule Part-1 Item No. 1 applicable for Sikkim. We further are of the view that an item covered in the negative list cannot be held to have been simultaneously included in the positive list as such an interpretation would lead to absurdity in interpretation of the two limbs of section 80IC deduction provision. We accordingly restore Assessing Officer’s action making assessee’s deduction claim in lead assessment year 2007-08. Issues Involved:1. Validity of reopening the assessment under Section 148.2. Eligibility of Section 80IC deduction for the manufacturing of 'pan masala'.3. Whether the activity of the assessee constitutes 'manufacture' under Section 80IC.4. Applicability of the Thirteenth and Fourteenth Schedules of the Income Tax Act concerning the negative and positive lists of articles or things.Issue-wise Detailed Analysis:1. Validity of Reopening the Assessment under Section 148:The Assessing Officer issued a notice under Section 148 on 03.03.2014, believing that the taxpayer's business activity did not amount to manufacture or production under Section 80IC(2), leading to the escapement of taxable income. The assessee's objections to the reopening were declined, as the Assessing Officer found sufficient grounds, including failure to file returns within the stipulated time, issuance of Section 142(1) notice, and inconsistencies in raw material consumption and sales.2. Eligibility of Section 80IC Deduction for the Manufacturing of 'Pan Masala':The Revenue's primary grievance was the CIT(A)'s reversal of the assessment findings, which disallowed the assessee's Section 80IC deduction claims. The CIT(A) concluded that since the appellant started manufacturing 'pan masala' from 2006, it was eligible for the exemption before 'pan masala' was shifted to the negative list effective 01.04.2007. The CIT(A) found the appellant's registrations with various departments and affidavits from Gazetted Officers confirming its manufacturing activities as valid evidence.3. Whether the Activity of the Assessee Constitutes 'Manufacture' under Section 80IC:The CIT(A) and the tribunal relied on the Supreme Court's decision in Arihant Tiles & Marbles Pvt. Ltd., which held that activities recognized by various government authorities as manufacturing should be considered as such under Section 80IA. The tribunal noted that the assessee was registered under central excise, VAT, and other relevant departments, and had been recognized as a manufacturer by the Ministry of Finance. The tribunal also referred to the case of DCIT vs. M/s Khushbu Industries, where similar activities were deemed manufacturing.4. Applicability of the Thirteenth and Fourteenth Schedules of the Income Tax Act:The tribunal examined whether 'pan masala' fell under the positive list of the Fourteenth Schedule or the negative list of the Thirteenth Schedule. The Assessing Officer argued that 'pan masala' was excluded from the positive list and included in the negative list of tobacco products. The tribunal agreed, noting that 'pan masala' was explicitly listed under tobacco products in Part-B of the Thirteenth Schedule and thus was not eligible for Section 80IC deduction. The tribunal emphasized the principle of strict interpretation of exemption provisions, as upheld by the Supreme Court in Commissioner of Customs vs. Dilip Kumar Roy.Conclusion:The tribunal restored the Assessing Officer's action, disallowing the Section 80IC deduction claim of Rs. 436,98,608/- for the lead assessment year 2007-08, and similarly for the subsequent years. The Revenue's appeals were allowed, concluding that 'pan masala' is included in the negative list of the Thirteenth Schedule and not eligible for the deduction under Section 80IC.