2009 (12) TMI 215 - HC - Income Tax

Court grants Section 80IA/80IB benefits from 1999-2000, upholds commercial production start on single unit sale.

The court ruled in favor of the assessee in the first set of appeals, allowing the benefit under Section 80IA/80IB to commence from the assessment year ... New Industrial Undertaking- . The assessee is in the business of manufacturing of pharmaceuticals formulations in bulk drugs and supplying the drugs to the Government hospitals, institutions besides selling the product in domestic and foreign markets. It is claiming depreciation on plant and machinery for benefit under Section 80IA/80IB of the Income Tax Act. The assessee had carried out trial production from 20th March, 1998. On that basis the Assessing Officer treated assessment year 1998-99 as the initial year for benefit under the aforesaid provision. Since this benefit is allowable for five years, according to the Assessing Officer, this benefit as admissible from assessment years 1998-99 to assessment year 2002-03. The assessee on the other hand was claiming benefit from assessment year 1999-2000 to assessment year 2003-04. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the order of the Assessing Officer but the ITAT has reversed that order holding that since Section 80IA/80IB of the Act being beneficial legislation, the benefit should be extended to the assessee. Held that- the order of the Tribunal allowing the benefit is correct. Issues Involved:1. Determination of the 'initial assessment year' for claiming benefits under Section 80IA/80IB of the Income Tax Act.2. Distinction between trial production and commercial production for the purpose of tax benefits.3. Validity of commercial sales as a criterion for establishing the commencement of production.Issue-wise Detailed Analysis:1. Determination of the 'initial assessment year' for claiming benefits under Section 80IA/80IB of the Income Tax Act:The primary issue was whether the initial assessment year for claiming benefits under Section 80IA/80IB should be the year in which trial production commenced or the year in which commercial production began. The assessee claimed the benefit starting from the assessment year 1999-2000, arguing that commercial production began in that year. The Assessing Officer, however, considered the initial assessment year to be 1998-99, the year in which trial production started, thus limiting the benefit period to 2002-03.The Tribunal ruled in favor of the assessee, stating that Section 80IA/80IB, being beneficial legislation, should be interpreted to extend the benefit to the assessee. It held that trial production is different from commercial production, and the benefit should commence from the year of commercial production, i.e., 1999-2000.2. Distinction between trial production and commercial production for the purpose of tax benefits:The court examined whether trial production could be considered as the commencement of manufacturing for the purpose of claiming tax benefits. The assessee argued that trial production did not amount to manufacturing and that commercial production, which began in the assessment year 1999-2000, should be considered for the benefit.The court noted that the first sale from the Goa unit was made on 23rd April 1998, relevant to the assessment year 1999-2000. The court agreed with the Tribunal's view that merely showing closing stock as on 31st March 1998 did not establish commercial production. The court cited judgments from the Bombay High Court and Allahabad High Court, which distinguished between trial and commercial production, supporting the view that commercial production marks the commencement of manufacturing for tax purposes.3. Validity of commercial sales as a criterion for establishing the commencement of production:In a separate set of appeals (ITA No. 160/2008, ITA No. 161/2008 & ITA No. 793/2009), the Tribunal ruled against the assessee, noting that the sale of one water cooler and one air-conditioner in the assessment year 1998-99 indicated the commencement of commercial production. The assessee's explanation that these sales were for obtaining registration under the Excise Act and Sales Tax Act was not accepted.The court upheld the Tribunal's decision, emphasizing that the sale of marketable products, regardless of quantity, indicated the commencement of commercial production. The court concluded that the provisions of the Income Tax Act use the term 'manufacture,' and trial production is not regarded as the beginning of manufacturing for marketing purposes. The court noted that the sale of even a single unit could establish marketable quality, thus marking the start of commercial production.Conclusion:The court ruled in favor of the assessee in the first set of appeals (ITA No. 1154/2009 and ITA No. 1204/2009), allowing the benefit under Section 80IA/80IB to commence from the assessment year 1999-2000. In the second set of appeals (ITA No. 160/2008, ITA No. 161/2008 & ITA No. 793/2009), the court upheld the Tribunal's decision that the sale of even a single unit marked the commencement of commercial production, thus ruling against the assessee.