2025 (10) TMI 287 - AT - Income Tax

Authority upholds classification of distilled organic inedible fatty acid under Excise Chapter 38, allowing deduction under Section 80IC

ITAT KOLKATA upheld CIT(A)'s finding that the assessee's product, described as distilled organic inedible fatty acid, falls within Excise Chapter 38 ... Deduction claimed u/s. 80IC - excise classification of product manufactured - product manufactured by the assessee namely, 'organic inedible fatty acid' would fall within the excluded/negative items as listed in XIII Schedule of the Act or not? - CIT(A) held that the product manufactured by the assessee did not fall in the negative list of the XIII schedule, instead, the product manufactured by the assessee falls under Chapter 38 of the Excise Classification which includes Industrial Monocarboxylic Fatty Acid, which is defined to include long chain fatty acid and the product manufactured by the assessee i.e. 'distilled fatty acid' would fall in the said category HELD THAT:- CIT(A) duly considered all details and has categorically held that the product manufactured by the assessee would fall under the category as mentioned in Chapter 38 of the Excise Act, which is having a different code, and hence, did not fall under the negative list as detailed in Chapter XIII, therefore, the assessee is entitled to the deduction u/s. 80IC of the Act. DR, on the other hand, could not rebut the aforesaid factual aspects. Therefore, we do not find any infirmity in the order of the Ld. CIT(A). There is no merit in the appeals of the revenue and the same are accordingly dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the product manufactured - 'organic inedible fatty acid' (distilled fatty acid) - falls within the excluded/negative items in the Thirteenth Schedule such that deduction under section 80IC(2)(a) is inadmissible? 2. Whether the Assessing Officer's reliance on excise classification Chapter 29 (organic chemicals) is legally sustainable where records and excise returns classify the product under Chapter 38 (industrial monocarboxylic fatty acids)? 3. Whether the reopening of assessments under section 147/148, prompted by an auditor's erroneous entry in Form 10CCB, is justifiable when contemporaneous records and prior returns consistently support the claimed deduction? 4. Condonation of delay in filing revenue appeals. 5. Maintainability of certain appeals under section 268A where the tax effect is below prescribed monetary limits. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Eligibility for deduction under section 80IC(2)(a) vis-à-vis Thirteenth Schedule negative list Legal framework: Section 80IC(2)(a) grants deduction to industrial undertakings located in notified backward areas provided the item/product manufactured is not covered by the negative list set out in the Thirteenth Schedule for the State. The Thirteenth Schedule specifies excluded activities/articles by reference to excise classification (chapters and tariff items). Precedent treatment: No precedents were cited or applied by the Tribunal; determination rests on statutory text and classification materials on record. Interpretation and reasoning: The critical legal question is one of product classification - whether the manufactured product falls within Chapter 29 entries (organic chemicals) included in the negative list. The Assessing Officer asserted classification under Chapter 29 but failed to identify the specific line item. The appellate discussion examined the six sections and line items of Chapter 29 and found no item covering the product in question. Conversely, documentary material (excise classification extracts and Form ER-1 excise returns) consistently placed the product under Chapter 38 (industrial monocarboxylic fatty acids, e.g., stearic acid / industrial fatty acids). The appellate authority analysed the manufacturing process (use of crude fatty acids, vacuum distillation to produce distilled fatty acids) and end uses (soap noodles, surfactants) and concluded alignment with Chapter 38 entries. The excise department had accepted the Chapter 38 classification on excise returns without dispute, strengthening the factual basis for that classification. Ratio vs. Obiter: Ratio - eligibility for section 80IC(2)(a) depends on correct classification of the product against the Thirteenth Schedule; where classification on record places the product outside the Thirteenth Schedule negative list (Chapter 38), the deduction is allowable. Obiter - observations regarding manufacturing process and end uses serve as factual support but are not separate legal propositions. Conclusions: The product does not fall within the Thirteenth Schedule negative list (Chapter 29). Conditions of section 80IC(2)(a) are satisfied and the deduction claimed under section 80IC is justified; the Assessing Officer's disallowance is to be deleted. Issue 2 - Validity of Assessing Officer's classification reliance and probative value of excise records Legal framework: Statutory schedules reference excise/tariff classifications to determine inclusion in negative lists; tax assessment depends on correct identification of tariff headings and supporting documentary evidence. Precedent treatment: None invoked; tribunal treated classification and administrative acceptance as decisive factual material. Interpretation and reasoning: The AO's reliance on an assertion that the product fell under Chapter 29 was undermined by the AO's failure to specify the exact line item. The assessee produced contemporaneous excise classification extracts and excise returns (Form ER-1) declaring the product under Chapter 38, accepted by the excise authorities. The appellate authority accepted the excise returns and classification as significant, probative evidence. The tribunal found no rebuttal from Revenue and no infirmity in accepting the CIT(A)'s factual conclusion that Chapter 38 applied. Ratio vs. Obiter: Ratio - administrative classification and consistent excise filings accepted by the excise department constitute persuasive evidence of the correct tariff classification for the purpose of determining eligibility under section 80IC. Obiter - remarks about the AO's omission to specify a line item emphasize evidentiary weakness but do not form a separate legal rule. Conclusions: The AO's classification is not sustainable on the record; the excise classification under Chapter 38, supported by accepted excise returns, governs the determination and favors allowance of the deduction. Issue 3 - Reopening assessments under section 147/148 based on auditor's erroneous Form 10CCB entry Legal framework: Reopening under section 147/148 requires recorded reasons showing income has escaped assessment; the sufficiency and reliability of reasons are judged against the record and surrounding facts. Precedent treatment: The tribunal did not undertake a full legal adjudication of the reopening; the point was rendered academic by the substantive allowance of the deduction on merits. Interpretation and reasoning: The reopening was triggered by an auditor's inadvertent tick in Form 10CCB suggesting coverage by the Fourteenth Schedule. The assessee produced contemporaneous documents (initial year audit report with correct entry, an errata/revised report from the auditor) explaining the mistake. The CIT(A) found that the auditor's error caused suspicion but did not alter the documentary classification and excise returns showing Chapter 38. Given deletion of the disallowance, the tribunal treated the reopening challenge as academic and did not further adjudicate §147 legitimacy. Ratio vs. Obiter: Obiter - while the reopening was premised on an auditor's mistake, the tribunal's dismissal of the reopening point was procedural/academic because the substantive tax issue was decided in favour of the assessee; no binding pronouncement on the general law of reopening was made. Conclusions: The reopening issue was rendered academic by the substantive outcome; no adjudication on the legal sufficiency of the reasons recorded under section 147 was undertaken, leaving the assessee free to raise the point in other proceedings if needed. Issue 4 - Condonation of delay in filing revenue appeals Legal framework: Tribunal may condone delay where sufficient cause is shown; assessment of sufficiency is discretionary. Interpretation and reasoning: Separate delay-condonation applications were filed for appeals 66 days beyond the limitation. The Tribunal, on the averments made, exercised discretion to condone the delay. Ratio vs. Obiter: Ratio - the Tribunal exercised its discretion to condone the delay on the facts; this is a case-specific exercise of discretion, not a precedent on condonation standards. Conclusions: Delay in filing the revenue appeals was condoned. Issue 5 - Maintainability under section 268A for appeals with low tax effect Legal framework: Section 268A limits departmental appeals where tax effect is below thresholds prescribed by CBDT. Interpretation and reasoning: For two assessment years the tax effect fell below prescribed monetary limits; Tribunal held those appeals not maintainable under section 268A and dismissed them on that ground. Ratio vs. Obiter: Ratio - appeals with tax effect below the prescribed CBDT limits are not maintainable under section 268A; applied on the facts. Conclusions: Appeals for the specified assessment years were dismissed as not maintainable under section 268A.