2018 (7) TMI 1733 - HC - Income Tax

Capsulation of mushroom powder qualifies as manufacture; assessee entitled to deduction under s.80IB and on 43B

M/s. DXN Herbal Manufacturing (India) Pvt. Ltd. Versus The Income Tax Officer, Ward-I (1), Pondicherry

M/s. DXN Herbal Manufacturing (India) Pvt. Ltd. Versus The Income Tax Officer, Ward-I (1), Pondicherry - [2019] 411 ITR 646 (Mad), [2018] 96 taxmann.com ... Issues Involved:1. Entitlement to deduction under Section 80IB of the Income Tax Act.2. Entitlement to deduction under Section 43B of the Income Tax Act.3. Violation of principles of natural justice.Issue-wise Detailed Analysis:1. Entitlement to Deduction under Section 80IB:The primary issue was whether the assessee was entitled to claim deduction under Section 80IB. The Tribunal held that the activities of the assessee did not amount to manufacturing as there was no new article produced; the mushroom powder remained unchanged even after being encapsulated. The Tribunal referred to the dictionary meaning of 'manufacture' and 'production' as these terms were not defined under the Income Tax Act at that time. The Tribunal concluded that filling mushroom powder into gelatin capsules was merely a process for marketability and did not constitute manufacturing or production.The assessee argued that the process involved in encapsulating mushroom powder amounted to manufacturing, citing licenses obtained from various statutory authorities, which authorized them to manufacture Ayurvedic drugs. The assessee also pointed out that the process involved multiple steps and quality control measures, indicating a manufacturing activity.The court noted that the Tribunal's finding was based on personal opinion without material evidence. The court referenced the Supreme Court's decision in Aspinwall & Co. Ltd. vs. Commissioner of Income-tax, which defined 'manufacture' as a process that results in a new and different article. The court found that the assessee's activities met this definition and thus qualified as manufacturing.2. Entitlement to Deduction under Section 43B:The second issue was whether the assessee was entitled to a deduction under Section 43B for the payment of Central Excise Duty. The Assessing Officer and CIT(A) denied the deduction on the grounds that the payment was not claimed in the books of accounts but shown as an advance in the balance sheet. The Tribunal upheld this view, stating that the assessee had not provided sufficient evidence of the liability.The court referred to a previous decision in TCA No. 730 of 2015, where it was held that actual payment of excise duty, even if under protest, satisfied the conditions of Section 43B. The court found that the assessee had indeed paid the excise duty and was entitled to the deduction. The court also noted that for subsequent years, the assessee's claim had been accepted, reinforcing their entitlement for the relevant assessment years.3. Violation of Principles of Natural Justice:The third issue was whether the Tribunal was correct in holding that the violation of principles of natural justice did not result in injury to the assessee. The assessee contended that the statement of an employee, which was used against them, was taken without cross-examination, thus violating natural justice principles.The court held that not every lack of opportunity constitutes a violation of natural justice unless it results in prejudice. The court found that the assessee had substantiated their case with sufficient evidence, and the statement of the employee was not conclusive. The court concluded that the Tribunal's decision did not cause prejudice to the assessee.Conclusion:The court allowed the appeals in part. It held in favor of the assessee on the issues of entitlement to deductions under Sections 80IB and 43B, but against the assessee on the issue of violation of natural justice principles. The court emphasized that the assessee's activities constituted manufacturing and that they were entitled to the claimed deductions.