TaxTMI 
TaxTMI 
2012 (4) TMI 398
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....the Assessing Officer. He raised several queries with respect to different claims and in particular, deduction under Section 80IB of the Income Tax Act. The Assessing Officer called upon the assessee to satisfy why such claim should not be disallowed on the ground that though the auditor in his report had certified that manufacturing activity had commenced on 21.3.2004, factory license was issued by the Chief Inspector of Factory only on 3.5.2005. In respect to such a query, the assessee contended that assessee had complied with all conditions of Section 80IB of the Act. The unit was set up before 31.3.2004 and had also commenced manufacturing activity before the said date. It was conveyed that assessee is engaged in the business of manufacturing of poly rolls, plastic bags and pouches, etc.. Such manufacturing was being carried out at the factory of the assessee at Daman which premises were obtained by the assessee on rental basis. Necessary machinery was purchased on 16.3.2004. Assessee produced evidence of purchase of raw material and production as also consumption of electricity for manufacturing activity. Assessee also contended that Excise registration was granted on 1.3.2004....
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....inion that such grant of license on 3.5.2005 would show that production started only from that date. He noted that without such license, the assessee could not have commenced the manufacturing activity. He therefore, concluded that assessee failed to prove that manufacturing process had stated before 31.3.2004. On these grounds, deduction claimed by the assessee was disallowed. 5. Assessee carried the matter in appeal. CIT(Appeals) dismissed the assessee's appeal. He took note of Rule 4 of Goa, Daman & Diu Factories Rules, 1985, which prohibits use of premises as factory without valid license and concluded thus : "2.3.4 One thing is very clear and that is either the production/manufacturing had not started before 31.03.2004 and therefore no deduction u/s.80IB can be allowed or the appellant has violated the provisions of the Factory Act and had stated the production/manufacturing in violation of the Factory Act. In this second situation also deduction u/s.80IB cannot be allowed in view of the decision of the Hon'ble Supreme Court. Bombay High Court and Madras High Court discussed below :- ......" 6. Assessee carried the matter in further appeal before the Tribunal. Tribunal by i....
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....question of law: "(B) Whether the Tribunal was right in law as well as in facts in upholding the assessee's claim of deduction under Section 80IB of the Act when application for license to run the factory was made to the Factory Inspector prior to 31.3.2004 but the actual license was granted only after the said date?" 9. Learned senior counsel Shri Manish Bhatt for the Revenue vehemently contended that Section 80IB of the Act provides for deduction in respect of profit and gains in respect of certain industrial undertaking. Sub-section(4) thereof envisages deduction in case of industrial undertakings located in the backward area subject to fulfillment of the condition that it begins to manufacture or produce articles or things during the period beginning on 1st April 1993 and ending on 31st March 2004. He submitted that in all cases, license from the Factory Inspector under the Factories Act was not obtained before 31.3.2004. Assessees therefore, cannot be stated to have fulfilled this vital condition on commencement of manufacturing activity before 31.3.2004. He drew our attention to various provisions contained in the Factories Act and Goa, Daman & Diu Factories Rules, 1985,("t....
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.... Assessing Officer was obliged to inquire into genuineness of firm and its constitution as specified in the instrument of the partnership and if on inquiry he was satisfied that if a genuine firm with the constitution so specified was in existence, he was obliged to grant registration. (c) In case of CIT v. Grand Enterprises [1999] 235 ITR 594/[2000] 110 Taxman 33 (Ker.), wherein the Division Bench of Kerala High Court also examined the question of registration of partnership firm. The facts involved in the case were that the license for running a Bar was granted to one of the partners of the partnership firm whereas license was utilised by the firm for running the said Bar. When the Assessing Officer on such facts refused to continue registration of the firm, assessee objected to the same. Ultimately, issue reached High Court. Kerala High Court observed that the conducting of liquor trade and the transfer of the license were opposed to public policy and would defeat the object of the Act. Court therefore, would not come to the rescue of an assessee to sustain a contract which was opposed to public policy. (d) In case of CIT v. Swarna Bar Restaurant [2011] 334 ITR 387....
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....t, also be an agreement opposed to public policy and, hence, unlawful and void. 16. On a conjoint reading of section 15 of the A.P. Act, and rule 39 of the IMFL Rules, it is clear that no license can, except with the prior permission of the Commissioner of Prohibition and Excise (Licensing Authority), include any other person as his partner to carry on business in the sale and purchase of intoxicating liquor. It is the law laid down in Bihari Lal Jaiswal (1996) 217 ITR 746(SC) which would apply to the facts of the present case, and not the judgment in Grand Enterprises." (e) In case of Maddi Venkataraman & Co.(P. ) Ltd. v. CIT [1998] 229 ITR 534/96 Taxman 643 (SC), wherein certain expenditures made by the assessee were claimed as business expenditure or loss. The Court finding that assessee had indulged in transaction in violation of the provisions of Foreign Exchange(Regulation) Act held that the assessee's contention that it would have incurred loss, cannot be a justification for contravention of law. It was observed that it would be against the public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of provisions of ano....
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....oss. High Court had reversed such order on the ground that possession of heroin was an offence and that it would be disgraceful for a doctor to indulge in activities against humanity. Apex Court reversed the decision of High Court making following observations : 15. In our opinion, the High Court has adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by courts on legal principles and not on one's own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out." 10.3 Counsel relied on decision in case of Vijay Ship Breaking Corpn. v. CIT [2009] 314 ITR 309/[2008] 175 Taxman 77 (SC), wherein the Apex Court considered ship breaking activity as a manufacturing activity. This judgement was cited in support of the contention that since activity carried on by the assessee was that of manufacturing activity, deduction under sub-section(4) of Section 80IB would have to be granted. 10.4 Reliance was also placed on decision of this Court in case of CIT v. Radhe De....
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....assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking : Provided that the total period of deduction does not exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2000 : Provided further that in the case of such industries in the North- Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years." 13. From the above provisions, it can be seen that to qualify for deduction under sub-section(4) of Section 80IB of the Act, one of the essential requirements was that industrial undertaking concerned should have begun to manufacture or produce articles or things on or ....
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.... to several subjects mentioned therein. Clause (aa) refers to requiring previous permission in writing of the State Government or the Chief Inspector to be obtained for the site on which the factory is situated and for the construction or extension of any factory or class or description of factories. * Sub-section (2) of Section 6 provides that if on an application for permission referred to in clause (aa) of sub-section(1) is made accompanied by the plans and specifications and sent to the State Government or Chief Inspector and no order is communicated to the applicant within three months from the date on which it is so sent, permissions shall be deemed to have been granted. * Sub-section (3) of Section 6 provides for an appeal in case Tribunal or Chief Inspector refused to grant such permission. Section 6 of the Factories Act reads as under : 6. Approval, licensing and registration of factories -(1) The State Government may make rules - (a) requiring, for the purposes of this Act, the submission of plans of any class or description of factories to the Chief Inspector or the State Government; (aa) requiring, the previous permission in wr....
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.... makes provisions with respect to cleanliness, disposal of wastes and effluents, latrines and urinals, etc. * Chapter IV pertains to safety of workers engaged in such factories. * Chapter IV-A of the Factories Act makes provisions relating to hazardous processes. * Chapter V of the Factories Act pertains to welfare of the workers and of the families engaged in such factories. * Chapter VI prescribes certain maximum working hours and other provisions relating to weekly holidays and compensatory holidays. . * Chapter VII makes provisions prohibiting employment of young children in factories. * Chapter X pertains to penalties and procedure for such penalties. * Section 92 contained in Chapter X of the Factories Act pertains to General penalty for offences and reads as under : "92. General Penalty for offences - Save as is otherwise expressly provided in this Act and subject to the provisions of section 93, if in, or in respect of, any factory there is any contravention of any of the provisions of this Act or of any rules made thereunder or of any order in writing given thereunder, the oc....
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....prohibits use of any premises as a factory without a valid license and reads as under : "4. Prohibition of use of a premises as a factory without a valid licence. No occupier of a factory shall use any premises as a factory or carry on any manufacturing process in a factory except under a licence obtained or renewed in respect of such premises in accordance with the provisions of these rules. " * Rule 5 pertains to certificate of stability and provides that no manufacturing process shall be carried on in any building of a factory constructed, reconstructed or extended, or in any building which has been taken into use as a factory or part of factory until a certificate of stability has been sent by the occupier or manager of the factory to the Chief Inspector and accepted by him. * Rule 6 pertains to application for registration and grant of license and reads as under : "6. Application for registration and grant of license. (1) The occupier or manager of every factory coming within the scope of this Act after its commencement shall submit to the chief inspector an application in triplicate in Form 2 for the registration of the factory accompanied....
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....cified in the schedules to rule 131 in relation to the factory concerns have not been complied with; or iii. that there imminent danger to life in a factory due to explosive or inflammable dust, gas or fumes, and effective measures in his opinion have not been taken to remove the danger. (2) Subject to the provisions hereinafter contained with respect to suspension and unless earlier renewed under rule 9, every such licence shall remain in force until the 31st day of December of the year for which the licence is granted, or renewed under rule 9." * Rule 9 pertains to renewal of license. In particular clause(b) of sub-rule(2) of of Rule 9 provides that the Chief Inspector may also refuse the renewal of the license on the ground that the applicant has been guilty of repeated contraventions of the provisions of the Act or Rules or both, or the applicant has obtained the licence by fraud or by misrepresentation. 20. From the above statutory provisions, it can be seen that before setting up of a factory, intending manufacturer has to obtain license as envisaged under Section 6 of the Act and Rules made thereunder. The Act itself contains large number of welf....
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....ted in case of Maddi Venkataraman & Co.(P. ) Ltd .(supra) and one arising in case of Dr. T.A. Quereshi (supra). In one set of cases deduction claimed pertains to penalty on illegal expenditure while carrying on legal activities whereas in other set of cases, deduction claimed was with respect to activities which itself was per se illegal. 26. In the present group of cases, however, we need not dwell on this issue at any length. Primarily we are of the opinion that while holding that assessees are not entitled to deduction under section 80IB(4) of the Act, we are not reading into it any other requirements contained in any other Act but are reading the requirements contained in the proviso to Sub-section(4)of Section 80IB of the Act so as to require that commencement of the industrial activity must be lawful and any manufacturing activity which is fundamentally unlawful or prohibited by law and against public policy, would not be covered by said provision. 27. However, in cases where the application for license was already made before 31.3.2004, but obtained shortly thereafter, we are of the opinion that such lapse must be viewed as one which is purely technical even without accept....