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 negative list and failure to meet the manufacturing criteria. However, the Tribunal allowed the deduction claim for wristwatches as part of the assessee's brought forward stock. The Revenue's appeal was partly allowed, reinstating the disallowance of the section 80IC deduction for pan masala manufacturing.

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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.

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