Pan masala manufacturer without tobacco in Sikkim gets Section 80-IC deduction despite ITAT denial

Calcutta HC held that assessee manufacturing pan masala (mouth freshener) without tobacco in Sikkim was entitled to deduction under Section 80-IC(2)(a). The court distinguished between Part A (Sikkim) and Part B (Himachal Pradesh/Uttaranchal) of the Thirteenth Schedule, noting that while Part B specifically excludes pan masala, Part A only excludes tobacco products, aerated beverages, and pollution-causing paper products. Since pan masala was not explicitly listed in Part A's exclusions for Sikkim, and the product contained no tobacco, the ITAT's denial of deduction was overturned. The substantial questions of law were decided in favor of assessee.

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Issues:
1. Whether the subject pan masala is without any tobacco content.
2. Whether pan masala without any tobacco content falls within the purview of Entry 1 of Part A of the Thirteenth Schedule to the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the subject pan masala is without any tobacco content:

The court noted that the appellant/assessee established a unit for manufacturing mouth freshener (Pan Masala) without tobacco or catechu. This unit commenced production on 27.06.2006 and was situated in an industrial area notified by the Central Board of Direct Taxes. The raw materials used in the manufacturing process, as recorded in the assessment order, included ingredients like fennel, sugar-coated fennel, sugar crystal, scented betel nuts, dry dates, coriander seeds, menthol, flower of lime, jintan, saffron, and elachi powder, none of which contain tobacco. The Assessing Officer confirmed that the product was Pan Masala (Mouth Freshener) and did not contain tobacco in any form.

2. Whether pan masala without any tobacco content falls within the purview of Entry 1 of Part A of the Thirteenth Schedule to the Income Tax Act, 1961:

The appellant claimed a deduction under Section 80-IC (2) (a) of the Income Tax Act, 1961, which was initially rejected by the Assessing Officer on the grounds that the process did not amount to manufacturing and the product did not fall under Schedule 14. The Commissioner of Income Tax (Appeals) allowed the appeals, but the Income Tax Appellate Tribunal (ITAT) reversed this decision, excluding the product from deduction under Part B of the Thirteenth Schedule.

The ITAT's decision was based on the interpretation that "pan masala" falls within the negative list of the Thirteenth Schedule, Part A, which includes "tobacco products (including cigarettes, cigars, and gutka, etc.)." The ITAT referred to the Supreme Court's decision in Commissioner of Customs vs. Dilip Kumar Roy, emphasizing strict interpretation of taxing statutes and exemption provisions.

The court found that the appellant's unit was established in an area notified under Section 80-IC (2) (a) of the Act, 1961, and that Part A of the Thirteenth Schedule, applicable to Sikkim, did not include "pan masala" in its list of excluded items. The court highlighted that the ITAT erroneously read Part B, relevant to Himachal Pradesh and Uttaranchal, into Part A, which was impermissible. The court concluded that the product manufactured by the appellant/assessee did not fall under the negative list for Sikkim and was thus eligible for deduction under Section 80-IC (2) (a) (i) read with Section 80-IC (3) of the Act, 1961.

Conclusion:

The court set aside the impugned orders of the ITAT, holding that the appellant/assessee is entitled to the deduction under Section 80-IC (2) (a) (i) read with Section 80-IC (3) of the Income Tax Act, 1961. Both substantial questions of law were answered in favor of the assessee and against the revenue. All the appeals were allowed to the extent indicated.

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