2022 (12) TMI 1578 - AT - Income Tax

Fabric whitener made by diluting Acid Violet-49 held manufacturing under s.2(29BA); s.80IC(2) relief allowed, s.14A deleted and Chapter VI-A deductions

M/s Jyothy Laboratories Limited, Versus DCIT-10 (2) (1), Mumbai

M/s Jyothy Laboratories Limited, Versus DCIT-10 (2) (1), Mumbai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the activity of producing the product described as 'Ujala Supreme' by diluting Acid Violet-49 paste with water and undertaking associated operations qualifies as 'manufacture' or 'production of any article or thing' within the meaning of the statutory definition of manufacturer (section 2(29BA)) for purposes of claiming deduction under section 80IC(2)(a). 2. Whether an undertaking that was allowed deduction under sections 80IB/80IC in initial assessment years can be denied the same deduction in a subsequent assessment year when the initial-year allowance has not been withdrawn (principle of continuity/consistency of tax holiday claims). 3. Whether expenditure disallowable under section 14A is to be disallowed where the assessee has not earned any exempt income in the year; and whether a circular of the revenue authority indicating applicability of section 14A in absence of exempt income requires a different result. 4. Whether an amount disallowed under section 14A (if any) must be added to the book profit for computation of tax under the alternate minimum/ MAT provision (Explanation 1(f) to section 115JB). 5. Whether deduction(s) under sections 80IB/80IC are to be applied only against business income or may be set off against gross total income (i.e., whether the statutory scheme permits the deduction to be applied against non-business income such as interest from investments). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Qualification for deduction under section 80IC(2)(a): whether production of Ujala Supreme is 'manufacture/production' under section 2(29BA), and whether the product falls within the negative list (Thirteenth Schedule). Legal framework: The statutory test requires that an undertaking must be engaged in manufacturing or production of any article or thing as defined in the Act to qualify for deduction under section 80IC(2)(a). The Thirteenth Schedule contains items ineligible (negative list) and classification/nomenclature under other fiscal statutes (e.g., central excise, VAT, NIC) is relevant for determining whether a product is excluded, but such classifications are not mechanically imported into the Income-tax code. Precedent treatment: Earlier judicial authorities provide two contrasting lines - authorities holding dilution/blending that produces an article with a distinct name, character and use can amount to manufacture; other authorities have held that mere blending/mixture where original characteristics remain and process is reversible does not amount to manufacture. A High Court principle establishes that an allowance of tax holiday in the initial assessment year continues for the prescribed consecutive years unless the initial-year relief is withdrawn; that precedent was applied to the facts here. Interpretation and reasoning: The Tribunal examined the factual matrix and manufacturing processes: captive blow-moulding and injection moulding of containers, labelling, controlled blending of Acid Violet-49 paste with water (specified proportion), electrically-operated stirring, filtration, pumping to filling stations, filling and capping, quality assurance, secondary packaging and dispatch. These integrated operations employ plant and machinery, manpower and create a packaged commodity for consumer use (fabric whitener) with distinct name, character and use from the raw acid paste. The report relied on by revenue (analytical laboratory) was found not to address the full legal issue and carried limiting caveats regarding its use; classifications under excise/VAT were held not determinative for income-tax purposes. The Tribunal followed the earlier coordinate bench findings in favour of the taxpayer on identical facts and applied the principle of consistency; there was no material to show any change in facts or withdrawal of the initial-year allowance. The combined factual and legal analysis led to conclusion that a new commodity emerges and the activity qualifies as manufacture/production within section 2(29BA) for section 80IC purposes. Precedent treatment (specific): The Tribunal followed earlier coordinate bench orders favorable to the assessee on identical facts (initial years) and applied the High Court principle of continuity of deduction where initial-year allowance has not been withdrawn. Several adverse decisions (on blending/no manufacture) were considered and distinguished on factual and legal grounds; favorable authorities on dilution-plus-processing being manufacture were followed. Ratio vs. Obiter: The holding that the composite captive operations and dilution-plus-packaging process amount to manufacture producing an article of different name, character and use is ratio and determinative for the deduction claim under section 80IC(2)(a) on the facts before the Tribunal. The application of the consistency principle to bar denial in a later year where initial-year allowance stood unwithdrawn is also ratio. Conclusion: The claim of deduction under section 80IC(2)(a) in respect of the undertaking producing Ujala Supreme is allowable. Revenue's appeal on this ground is dismissed. Issue 2 - Applicability of section 14A where no exempt income is earned in the year; relevance of departmental circular. Legal framework: Section 14A disallows expenditure incurred in relation to income which does not form part of the total income (exempt income). The statutory text and judicial pronouncements have addressed whether the section operates where no exempt income is earned in the year. Precedent treatment: The Tribunal followed earlier decisions on identical facts in which it had been held that where no exempt income is earned in the relevant year, the disallowance under section 14A is not tenable. A departmental circular that purports to clarify applicability of section 14A does not displace the statutory requirement as interpreted by controlling judicial decisions. Interpretation and reasoning: On the facts, the assessee did not earn exempt income during the year under consideration; therefore, there was no proximate exempt income to which the alleged expenditure related. The Tribunal therefore upheld deletion of the section 14A disallowance by the appellate authority. The circular relied upon by revenue was not treated as overriding the statutory scheme or judicial interpretation in the circumstances. Ratio vs. Obiter: The finding that section 14A disallowance is not warranted where no exempt income arises in the year - and consequent deletion of the disallowance - is ratio to the resolution of the appeal. Conclusion: Deletion of the section 14A disallowance is upheld; revenue's grounds on this point are dismissed. Issue 3 - Addition of a section 14A disallowance to book profit under Explanation 1(f) to section 115JB. Legal framework: The computation of book profit for alternate minimum taxation includes prescribed adjustments. Whether a disallowance under section 14A must be added to book profit depends on whether the disallowance survives scrutiny. Interpretation and reasoning: Since the section 14A disallowance was deleted on the merits (no exempt income), there was no surviving ground to require an add-back under Explanation 1(f). Absent a subsisting disallowance, the addition to book profit does not arise. Ratio vs. Obiter: The conclusion that no add-back is required because the underlying disallowance was deleted is ratio to the decision on the book-profit contention. Conclusion: Revenue's plea to add back the impugned disallowance to book profit is dismissed. Issue 4 - Scope of set-off of deductions under sections 80IB/80IC: whether these deductions are limited to business income or can be applied against gross total income. Legal framework: Section 80A requires that deductions under specified sections (80C-80U) be allowed from gross total income; a related provision directs computation rules for deductions whose language refers to income of a particular nature. Earlier authoritative judicial pronouncement holds that chapter-wise rules must be read together and that deductions under the relevant parts of Chapter VI-A are to be applied having regard to statutory scheme, with an overall ceiling that aggregate Chapter VI-A deductions cannot exceed gross total income. Precedent treatment: The Tribunal applied a recent authoritative apex court ruling holding that the scheme of Chapter VI-A and the provision determining computation (section 80AB or its equivalent) do not curtail the scope of the entitlement under the substantive deduction section to be applied only to business income; rather, deductions are to be allowed against gross total income subject to the statutory ceiling. The revenue's reliance on an absence of an explicit proviso in the section invoked by the assessee was rejected. Interpretation and reasoning: On a plain reading of the relevant sections, deductions under the enumerated sections of Chapter VI-A are to be allowed in computing total income from the gross total income, and the aggregate of such deductions cannot exceed gross total income. The statutory mechanics and the apex court interpretation indicate that the deduction admitted under sections 80IB/80IC may be set off against gross total income and need not be confined strictly to income characterized as 'business income' for the purpose of set-off, subject to the overall statutory limits. Ratio vs. Obiter: The conclusion permitting set-off of the allowed deductions against gross total income (and not limiting them to business income) follows the cited apex court principle and is ratio for the cross-objection issue. Conclusion: The assessing officer is directed to allow the claim of deduction out of the gross total income; the cross-objection is partly allowed on this point. OVERALL CONCLUSIONS The Tribunal upheld the allowance of deduction under section 80IC(2)(a) on the facts that the composite operations produced a distinct marketable article and that earlier favourable allowances in initial years were not withdrawn; it deleted the section 14A disallowance because no exempt income arose in the year and consequently refused any book-profit add-back; and it directed that eligible deductions under sections 80IB/80IC be allowed against gross total income in accordance with the statutory scheme and controlling higher-court authority. Revenue appeals were dismissed and the assessee's cross-objections were partly allowed consistent with these holdings.