Incentive deduction continuity protects unchanged dairy operations, while belated audit reporting requires substantive eligibility review.
Deduction under section 80IB cannot be denied in later years where it was allowed initially after examination, the dairy unit's operations remain unchanged, milk processing renders products marketable, and small-scale industrial status has not been withdrawn. Additional depreciation should not be rejected solely because the prescribed audit report was filed after the return; the procedural omission requires examination of substantive eligibility. Set-off of losses of amalgamated companies is unavailable where the amalgamating entities do not qualify as industrial undertakings by carrying on manufacturing or processing activity. The assessee receives relief on the deduction and depreciation issues but not on loss set-off.
Issues: (i) Whether deduction under section 80IB could be denied in later years on the ground that pasteurisation and processing of milk did not amount to manufacture or production and that the unit was not a small scale industrial undertaking; (ii) Whether additional depreciation could be denied merely because the audit report in the prescribed form was not filed along with the return and was filed later; (iii) Whether set off of losses of amalgamated companies was allowable under section 72A.
Issue (i): Whether deduction under section 80IB could be denied in later years on the ground that pasteurisation and processing of milk did not amount to manufacture or production and that the unit was not a small scale industrial undertaking;
Analysis: The deduction had been allowed in the initial years after examination of the unit's activities, and the same business operations continued in the relevant years. The processing of milk involved pasteurisation, standardisation, boiling, cooling, packing and production of allied dairy products, which rendered the product marketable and supported the character of manufacture or production. The unit was also recognised as a small scale industrial undertaking, and the revenue had not shown withdrawal of that status. In these circumstances, the later denial of deduction on the same facts was not justified.
Conclusion: The denial of deduction under section 80IB was unsustainable and the claim was to be allowed in favour of the assessee.
Issue (ii): Whether additional depreciation could be denied merely because the audit report in the prescribed form was not filed along with the return and was filed later;
Analysis: The report was admittedly not enclosed with the return, but it was furnished subsequently. The requirement was treated as procedural in the context of the claim, and the mere initial omission could not by itself defeat the substantive entitlement to be examined in accordance with law.
Conclusion: The disallowance of additional depreciation was set aside and the matter was to be re-examined in favour of the assessee.
Issue (iii): Whether set off of losses of amalgamated companies was allowable under section 72A.
Analysis: The amalgamating entities were found not to be carrying on manufacturing or processing activity so as to qualify as industrial undertakings for the purposes of the statutory requirement. On the material placed, no basis was shown to disturb that finding.
Conclusion: The disallowance of set off of amalgamated companies' losses was upheld against the assessee.
Final Conclusion: The appeals succeeded on the core deduction and depreciation issues, while the claim relating to set off of losses from amalgamated companies failed, resulting in a partial relief to the assessee.
Ratio Decidendi: Where an incentive deduction has been accepted in the initial assessment year after examination of the statutory conditions, the revenue cannot deny it in subsequent years on the same facts without a legally sustainable basis; a belated audit report may not defeat substantive entitlement if the default is merely procedural.
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