Manufacture and excise duty deductions upheld where capsule filling created a distinct product and liability had crystallized.

Filling mushroom powder into gelatine capsules was treated as manufacture or production because the process created a commercially distinct product through controlled filling, quality checks, polishing, sorting, bottling and packing, supporting deduction under section 80IB. Excise duty payment was also held allowable under section 43B since the liability had crystallized, payment was admitted, and the claim could not be denied merely because of its accounting presentation. By contrast, the allegation of denial of cross-examination failed because no concrete prejudice was shown, so no actionable breach of natural justice was established.

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Issues: (i) Whether the assessee's activity of filling mushroom powder into gelatine capsules amounted to manufacture or production so as to qualify for deduction under section 80IB of the Income-tax Act, 1961; (ii) Whether the assessee was entitled to deduction under section 43B of the Income-tax Act, 1961 in respect of excise duty paid; (iii) Whether the alleged denial of cross-examination of the former employee caused prejudice and amounted to violation of natural justice.

Issue (i): Whether the assessee's activity of filling mushroom powder into gelatine capsules amounted to manufacture or production so as to qualify for deduction under section 80IB of the Income-tax Act, 1961.

Analysis: The expression "manufacture" was not defined in the Act for the relevant assessment years, and it had to be understood in its common commercial sense. The activity was not a mere marketability process on the facts found by the Court. The assessee held multiple licences and approvals describing it as a manufacturing unit, the product composition was regulated, and the process involved controlled filling, quality checks, polishing, sorting, bottling and packing. The finding that the capsule merely retained the original character of the powder was unsupported by material. The process resulted in a commercially distinct product and could not be treated as a mere trade activity.

Conclusion: The assessee's activity amounted to manufacture or production and the claim under section 80IB was rightly allowable. This issue is answered in favour of the assessee.

Issue (ii): Whether the assessee was entitled to deduction under section 43B of the Income-tax Act, 1961 in respect of excise duty paid.

Analysis: The admitted factual matrix showed payment of excise duty and availment of CENVAT credit, and the same claim had been accepted in the subsequent assessment year. The existence of the payment was not in dispute, and the assessee's liability had crystallized. The earlier reasoning that the claim could not be accepted merely because of the manner of presentation in the books was not sufficient to deny the statutory deduction.

Conclusion: The deduction under section 43B was allowable. This issue is answered in favour of the assessee.

Issue (iii): Whether the alleged denial of cross-examination of the former employee caused prejudice and amounted to violation of natural justice.

Analysis: A mere denial of opportunity does not by itself establish breach of natural justice unless prejudice is shown. The assessee had itself placed materials and explanations before the authorities, and no concrete prejudice from the absence of cross-examination was demonstrated. The statement of the employee was not treated as conclusively binding, and the assessee failed to establish that the outcome turned on the alleged denial of opportunity.

Conclusion: No actionable prejudice or fatal violation of natural justice was established. This issue is answered against the assessee.

Final Conclusion: The appeals succeeded on the substantive tax issues relating to manufacture under section 80IB and deduction under section 43B, but failed on the natural justice challenge. The judgment thus granted relief only to the extent of the first two issues.

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