2022 (5) TMI 1683 - AT - Income Tax

Assessee allowed deductions under Sections 80IB and 80IC; Section 14A disallowance rejected and revenue appeals dismissed

ITAT, Mumbai allowed the assessee's deductions under sections 80IB and 80IC, finding the profits were derived from undertakings located in the specified ... Claim of deduction u/s 80IC & 80IB - profits derived from its undertaking established in the specified area of Wayanad Himachal Pradesh and Uttaranchal, respectively - HELD THAT:- Since the issue on hand being squarely covered following the principle of consistency, we find merit in submission of the assessee and allow the claim of deduction u/s 80IB & 80IC of the Act. Disallowance u/s 14A - Since the assessee has not earned any exempt income during the year under consideration, therefore, we don’t find any infirmity in the decision of ld. CIT(A) in allowing the claim of the assessee following the decision of M/s Chem Invest Ltd. [2009 (8) TMI 126 - ITAT DELHI-B] Therefore, both these ground of appeal of the revenue stand dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a deduction under section 80IC/80IB can be denied in a subsequent assessment year where the deduction was allowed in the initial assessment year and has not been withdrawn for that initial year. 2. Whether the process of preparing a product by diluting an existing dye (Acid Violet 49 paste diluted with water) constitutes 'manufacture or production' such that the undertaking qualifies for deduction under section 80IC(2) and section 80IB(4)/(5)(i). 3. Whether disallowance under section 14A is exigible where no exempt income has been earned during the year, and whether invocation of Rule 8D requires application of its formula irrespective of whether exempt income arose. ISSUE-WISE DETAILED ANALYSIS Issue 1: Continuity of deduction under sections 80IC/80IB where initially allowed Legal framework: Sections 80IC and 80IB provide specified deductions for profit and gains of undertakings for a consecutive period (ten years) starting from the initial assessment year when the undertaking commences manufacture or production; the statutory scheme contemplates continuity of relief for the specified period subject to conditions and subject to withdrawal of relief for the initial year. Precedent treatment: The Tribunal relied on authoritative High Court reasoning establishing that once a deduction is granted in the initial assessment year, the deduction ordinarily continues for the statutory period unless the relief for the initial year is also withdrawn; initiation of reopened proceedings alone does not amount to ipso facto withdrawal of the initial-year relief. Interpretation and reasoning: The Tribunal examined the factual matrix-dates of commencement, acceptance of the deduction in the initial assessment years, and continuation of allowance up to the immediately preceding year-and found no material to show that facts relevant to the initial grant had changed for the subsequent year. The Tribunal rejected the argument that issuance of notice under section 148 to reopen the initial-year assessment equated to withdrawal of the initial-year relief at the time the subsequent-year assessment was passed. The Tribunal treated the principle as a bar to denying the deduction in the later year unless the initial-year relief had been formally withdrawn by a concluded action prior to withholding the relief in the subsequent year. Ratio vs. Obiter: Ratio - where deduction under sections 80IC/80IB was allowed in the initial assessment year and was not withdrawn at the time of passing the subsequent assessment order, the Assessing Officer cannot deny the deduction for that subsequent year; initiation of reopening proceedings without formal withdrawal of the initial-year allowance does not permit denial. Obiter - ancillary remarks on potential relevance of changes in manufacturing process or factual matrix if properly established by Revenue. Conclusions: The Tribunal upheld the appellate authority's allowance of deductions under sections 80IC and 80IB for the assessment year in question on the ground of continuity and absence of withdrawal of initial-year relief; Revenue's grounds challenging the allowance were dismissed. Issue 2: Whether dilution of an acid dye constitutes 'manufacture or production' for sections 80IC/80IB Legal framework: Qualification for sections 80IC and 80IB requires that an undertaking be engaged in manufacture or production of any article or thing; statutory definitions and tax jurisprudence distinguish mere processing/packaging from manufacture based on change in chemical composition, integral structure or creation of a new article. Precedent treatment: The Tribunal noted that the same factual issue had been examined in an earlier coordinate-bench decision involving the same assessee and similar facts, and that the earlier decision had been relied on to support allowance of the relief. The Tribunal accepted the earlier Tribunal analysis without re-opening the technical question on merits in the present appeal because facts were materially identical and no contrary material was placed before it. Interpretation and reasoning: Although the Assessing Officer regarded dilution of Acid Violet 49 paste with water as not amounting to manufacture, the Tribunal declined to traverse the merits anew where an earlier coordinate-bench ITAT order had accepted the claim and the initial-year allowances remained unwithdrawn. The Tribunal applied the principle of consistency and followed the coordinate-bench conclusion in favour of the assessee rather than addressing chemical/technical criteria afresh. Ratio vs. Obiter: Ratio - on the facts of this record and in presence of earlier coordinate-bench acceptance and unwithdrawn initial-year allowance, the denial of deduction on the ground that dilution did not constitute manufacture could not be sustained in the subsequent year. Obiter - no definitive technical holding was laid down regarding whether dilution per se changes chemical composition or integral structure; the Tribunal did not finally resolve the pure scientific/manufacturing question in this order. Conclusions: The Tribunal allowed the deductions under sections 80IC and 80IB with reference to the prior coordinate-bench ruling and the continuity principle, and dismissed Revenue's challenge on this ground. Issue 3: Applicability of section 14A disallowance and Rule 8D where no exempt income arose Legal framework: Section 14A addresses expenditure incurred in relation to exempt income; Rule 8D prescribes a statutory formula for computing disallowance in certain circumstances. Jurisprudence has considered whether disallowance under section 14A is exigible where no exempt income has actually been earned and whether Rule 8D must be mechanically applied where invoked. Precedent treatment: The Tribunal considered and followed an authoritative decision of a Higher Tribunal (Special Bench) holding that section 14A provisions are not inapplicable merely because no exempt income has been earned in the year; however, the Tribunal also noted controlling authority relied upon by the assessee and the appellate authority's reasoning in the case under appeal. Interpretation and reasoning: On the facts, the Tribunal observed that the assessee had not earned any exempt income during the year under consideration. The appellate authority had deleted the disallowance under section 14A following an earlier decision; the Tribunal found no infirmity in that deletion in the circumstances and accepted the approach that where no exempt income has arisen, the deletion was sustainable. Concerning Rule 8D, the Tribunal did not adopt Revenue's contention that invocation of Rule 8D required mechanical computation of disallowance by formula regardless of absence of exempt income; instead it endorsed the appellate authority's deletion of the disallowance on the facts of the year. Ratio vs. Obiter: Ratio - on the facts where no exempt income was earned during the year, deletion of section 14A disallowance by the appellate authority was upheld; Revenue's submission that Rule 8D must be mechanically applied even in such a scenario was rejected in the present factual context. Obiter - broader proposition about Rule 8D's mandatory application irrespective of exempt income was not treated as a binding pronouncement and was not accepted as a ground to sustain the disallowance here. Conclusions: The Tribunal dismissed Revenue's grounds challenging deletion of section 14A disallowance and upheld the appellate authority's view that, given absence of exempt income in the year, no disallowance under section 14A needed to be sustained; consequential cross-objection by the assessee became infructuous and was dismissed.