2019 (4) TMI 1367 - AT - Income Tax

Tribunal disallows claim for pan masala manufacturing but allows for wristwatches under section 80IC.

The Tribunal upheld the Revenue's appeal, disallowing the assessee's section 80IC deduction claim for pan masala manufacturing due to its inclusion in the ... Manufacture or production - Processing versus manufacture - Interpretation of exemption/negative list under section 80IC - Burden of proof on assessee for exemption - Effect of statutory schedules (positive/negative lists) on eligibility for deduction - Application of authoritative precedent in tax exemption casesManufacture or production - Processing versus manufacture - Interpretation of exemption/negative list under section 80IC - Assessee's claim of deduction under section 80IC in respect of pan masala manufactured in the specified Sikkim unit - HELD THAT: - The Tribunal examined whether the assessee's activity amounted to manufacture/production and whether the manufactured pan masala was eligible for deduction under section 80IC. On facts the Tribunal accepted that the assessee carried out manufacturing/production (registrations with excise, VAT and industry authorities, sworn affidavits, demonstration of manufacturing process and reliance on precedents establishing that blending/processing which produces a distinct article qualifies as manufacture). However, the Tribunal applied principles of statutory interpretation applicable to tax exemptions and the specific schedules to section 80IC. It held that Item No.7 Part-B of the Fourteenth Schedule (food processing) does not encompass pan masala and, more importantly, that pan masala is treated within the Thirteenth Schedule's tobacco products negative list (Part-A/Part-B cross-reading shows legislature intended to exclude tobacco products including pan masala). Applying the rule that exemption provisions are to be strictly construed and that the assessee bears the burden of showing inclusion within the exemption parameters, the Tribunal concluded that even though manufacturing took place, pan masala was excluded from section 80IC relief by the negative list and therefore the Assessing Officer's disallowance must be restored (adopting co-ordinate bench reasoning and applying authoritative principles on strict construction of fiscal exemptions).Assessee's section 80IC deduction claim in respect of pan masala is rejected; Assessing Officer's disallowance is restored.Manufacture or production - Burden of proof on assessee for exemption - Assessee's claim of deduction under section 80IC in respect of sale of wrist watches - HELD THAT: - The Tribunal noted that the watches sold in the assessment year formed part of the assessee's brought forward stock which had been manufactured in the eligible undertaking in earlier assessment years; Revenue did not dispute the statement of facts regarding the origin of the stock. On this basis the Tribunal found no merit in rejecting the deduction claimed for profits derived from sale of those watches and directed the Assessing Officer to give consequential effect in computation.Assessee's section 80IC deduction in respect of wrist watches is allowed; Assessing Officer to complete consequential computation.Final Conclusion: Partly allowed: deduction under section 80IC disallowed insofar as it relates to pan masala manufactured in the Sikkim unit (Assessing Officer's disallowance restored); deduction allowed in respect of profits on sale of wrist watches (consequential computation directed). Issues Involved:1. Eligibility of the assessee for deduction under section 80IC of the Income Tax Act, 1961 for the manufacture of pan masala.2. Evidence of manufacturing activities and the adequacy of the plant and machinery.3. Labour capacity and technical expertise required for manufacturing.4. Inclusion of pan masala in the negative list of Thirteenth Schedule and its exclusion from the positive list of Fourteenth Schedule.Detailed Analysis:1. Eligibility for Deduction under Section 80IC:The primary issue was whether the assessee’s activities qualified as 'manufacturing' under section 80IC of the Income Tax Act, 1961. The Revenue contended that the assessee was merely engaged in the purchase and sale of readymade mouth fresheners and wristwatches without any qualifying manufacturing process. The Tribunal referred to its co-ordinate bench’s decision for earlier assessment years, which held that the assessee was not entitled to section 80IC deduction for pan masala manufacturing. The Tribunal reiterated that the assessee's activity did not amount to manufacture or production of any article or thing under section 80IC(2), thus disallowing the deduction claim.2. Evidence of Manufacturing Activities:The Revenue argued that the assessee failed to produce evidence of manufacturing activities and a list of plant and machinery with installed manufacturing capacity. The Tribunal noted that the assessee had valid registrations with the Central Excise Department, Sales Tax and VAT Department of Sikkim, and the Industries Department, which indicated engagement in manufacturing activities. However, the Tribunal found that the assessee’s manufacturing unit only had basic equipment and did not meet the stringent requirements for manufacturing under section 80IC.3. Labour Capacity and Technical Expertise:The Revenue questioned the feasibility of manufacturing 159,259 Kgs of mouth fresheners and 7,910 wristwatches with only four laborers, arguing that the required technical expertise for quality control and assurance was lacking. The Tribunal observed that the assessee’s claim was not supported by adequate evidence of technical expertise and labor capacity, reinforcing the disallowance of the deduction.4. Inclusion in Negative List and Exclusion from Positive List:The Tribunal examined whether pan masala was included in the negative list of the Thirteenth Schedule and excluded from the positive list of the Fourteenth Schedule. The Tribunal referred to the legislative intent and the specific inclusion of 'pan masala' in the negative list of Thirteenth Schedule, which includes tobacco products. The Tribunal concluded that 'pan masala' is explicitly excluded from the benefits of section 80IC, thus disallowing the deduction claim.Conclusion:The Tribunal upheld the Revenue’s appeal, disallowing the assessee's section 80IC deduction claim for pan masala manufacturing due to its inclusion in the negative list and failure to meet the manufacturing criteria. However, the Tribunal allowed the deduction claim for wristwatches, as they were part of the assessee’s brought forward stock from earlier assessment years. The Revenue’s appeal was partly allowed, reinstating the disallowance of the section 80IC deduction for pan masala manufacturing.