Karnataka H.C : The assessee’s claim for deduction under Section 80IB of the Act is not hit by the exception provider a in Section 80IB(2)(iii) read with Schedule 11th (Item 25) to the Income-Tax Act, as polyutherim foam used by the assessee in the manufacture of automobile seat results in commercially different product then that mentioned in the 11th Schedule

High Court Of Karnataka

CIT vs. Polyfex (India) (P.) Ltd.

Assessment Year : 2003-04

Section : 80-IB

Dilip B. Bhosale And B. Manohar, JJ.

IT Appeal No. 623 Of 2007

February  25, 2014

JUDGMENT

Dilip B. Bhosale, J. – This income tax appeal is directed against the order dated 16th March 2007 rendered by Income Tax Appellate Tribunal, (for short ‘the Tribunal’) in ITA No.994/Bang/2006 pertaining to the assessment year 2003-04, whereby the Tribunal allowed the appeal filed by the assessee. The appeal before the Tribunal was directed against the order passed by the Commissioner of Income Tax (Appeals)-VI (for short the CIT(A) dated 08-11-2006. By this order, the CIT (A) confirmed the assessment order dated 14-03-2006 passed by the Assessing Authority.

2. The substantial questions of law raised by the Revenue in this appeal read thus:

“1.   Whether the Tribunal was correct in holding that the assessee’s claim for deduction under Section 80IB of the Act is not hit by the exception provider a in Section 80IB(2)(iii) read with Schedule 11th (Item 25) to the Income-Tax Act, as polyutherim foam used by the assessee in the manufacture of automobile seat results in commercially different product then that mentioned in the 11th Schedule?

2.   Whether the assessee is entitled to claim deduction under Section 80IB of the Act in respect of a product manufactured by it which is listed in the 11th Schedule of the Income-tax Act?”

3. The very same question, though was not framed in so many words, was considered by the Tribunal, along with other questions. The Tribunal, answered the first question in favour of the assessee and against the Revenue holding that it cannot be stated that the assessee is engaged in the manufacture or production of ‘polyurethane foam’ (for short the PT foam”). The Tribunal also held that one has to see the end product for holding whether the industrial undertaking is entitled to deduction under Section 80-IB(2)(iii) of the Income Tax Act, 1961 (for short the Act). Then the Tribunal observed that the end product, in the present case, is commercially different from the item mentioned in the Eleventh Schedule and so observing granted deduction under Section 80-IB of the Act. Further, the Tribunal on the question whether the assessee is a Small scale Industrial Undertaking remanded the matter to the Assessing Officer. This part of the order is not challenged by the Revenue. Learned counsel appearing for the Revenue fairly submitted that they have no objection for the order of remand passed by the Tribunal to decide the issue of Small Scale Industry and whether the assessee is entitled to the benefit of deduction under Section. 80-IB of the Act claiming to be a Small Scale Industrial Undertaking.

4. The respondent-assessee filed its return of income on 29-10-2003 declaring the total income of Rs.2,73,90,293/-. The same was processed and taken up for scrutiny by issuing notice under Section 143(2) of the Act. In the course of assessment, it was noticed that the assessee had claimed deduction under Section 80-IB to the extent of Rs.28,98,051/- i.e., 30% benefit available on Pune Unit as it was granted in the earlier year. In the course of assessment, the Managing Director of the assessee was examined and on the basis of the materials placed by the assessee on record, the Assessing Officer held that during the relevant, assessment year the assessee manufactured the PT foam. In other words, the Assessing Officer held that the claim of the assessee that they do not manufacture the PT foam was just to claim benefit under Section 80-IB of the Act. The order of the Assessing Officer was confirmed by the CIT(A) and in the second appeal by the assessee, the Tribunal reversed, the same. The relevant observations made by the Tribunal find place in paragraph 12 of the order, which read thus:

“12. As per section 80IB(2)(iii), deduction u/s.80IB is not allowable if the industrial undertaking manufactures or produces an cuticle or thing specified in the 11th schedule.” In the instant case, the assessee company is manufacturing automobile seats, in which polyurethane foam along with other chemicals is also being used. It cannot be said that industrial undertaking is engaged in the manufacture or production of polyurethane foam. The assessee company received orders for the supply of automobile seats. Under the sales-tax, the assessee is putting sales-tax on the products styled as automobile seats for two and four wheelers. One has to see the end product for holding that the industrials undertaking is entitled to deduction or not. In the instant case and end product is commercially different from the item mentioned in the 11th Schedule. Therefore, the deduction u/s.80IB cannot be denied on the ground that the assessee is manufacturing an item listed in the 11th schedule.”

5. Section 80-IB(2)(iii) is relevant for our purpose. This Section applies to any industrial undertaking which fulfils, insofar as the present appeal is concerned, the condition that it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, in any part of India: Provided that the condition in this clause, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words “not being any article or thing specified in the list in the Eleventh Schedule” had been omitted. The remaining part of this provision is not relevant for our purpose. In the-Eleventh Schedule, we are concerned with Entry 25 which reads as follows: “Latex Foam, Sponge and Polyurethane foam”.

6. From bear perusal of clause (iii) of sub-Section (2) of Section 80-IB read with Entry 25 in Eleventh Schedule, it is clear that if any industrial undertaking manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, is liable to be taxed. In other words, deduction as provided for under Section 80-IB is not allowable if the manufacturer or producer of any article or thing, manufactures or produces the articles mentioned in Entry 25 in the Eleventh Schedule. It is in this backdrop, learned counsel appearing for the Revenue submitted that what the assessee manufactures is the PT foam which is covered by Entry 25 in the Eleventh Schedule and are, therefore, not entitled for deduction. He submitted that the Tribunal misdirected itself and held that the assessee is not engaged in manufacture or production of the PT foam. In other words, he submitted that the Tribunal wrongly held that the end product i.e. automobile seats, is the production of the assessee, and therefore, it is not covered by Entry 25. He submitted that the Tribunal lost sight of the fact that the assessee produces the PT foam or PT foam in the shape of seats for different vehicles such as cars, two wheelers, auto rickshaws etc.

7. On the other hand, Mr. Kulkarni, learned counsel appearing for the respondent-assessee submitted that what is important for allowing the deduction under Section 80-IB is the end product and not raw materials. He submitted that the PT foam is used by the assessee as a raw material for manufacturing seats, and therefore, it cannot be stated that it is covered by Entry 25 in the Eleventh Schedule. In support of his contention he placed reliance upon the following judgments: (i) CIT v. Vinbros & Co. [2012] 349 ITR 697/210 Taxman 252/25 taxmann.com 367 (SC); (ii) CIT v. Malborough Polychem (P.) Ltd. [2009] 309 ITR 43/177 Taxman 44 (Raj); (iii) CIT v. Prabhudas Kishordas Tobacco Products (P.) Ltd. [2006] 282 ITR 568/154 Taxman 404 (Guj).

8. In the present case, it is not in dispute that the assessee manufactures the PT foam in different shapes of automobile seats. Over and above, manufacturing/producing the PT foam in different shapes of seats they do not carry on any further process in respect thereof. In other words the assessee manufactures/produces the PT form, in different shapes of seats and do not make or undertake any further process to change its original character as PT foam. It remains as PT foam. It is not the case of assessee that after producing PT foam they carryout any further process, to change its original character as PT foam. The Managing Director of the assessee in his evidence confirmed that with the use of other components/ingredients, what they manufacture is PT foam, in the shapes as per their requirement. One of the questions that was put to the Managing Director and his reply to the same is relevant, which reads thus:

“Q.2: Please state if the item produced constitutes polyurethane foam which is further added by other components to make a seat then why the item produced should; not be stated to be covered in Eleventh Schedule of Income-tax Act, 1961?

Ans: I am not conversant with Income-tax Act, 1961 so I cannot comment the legality of it. I will consult the auditor and other experts and furnish you the reply.”

9. Though it was possible for the witness to state that they either add any other component or chemical to make a seat from the PT foam, he simply answered the question that he is not conversant with the Act and therefore cannot comment on the question. It is not demonstrated before us or pointed out to us that apart from manufacturing the PT foam in different shapes of automobile seats, they carry on any further process so as to change its original character as “polyurethane foam”. What is required for seeking deduction under Section 80-IB is that one should not manufacture or produce any article or thing, not being any article or thing specified in the list in the Eleventh Schedule. Having regard to the admitted position that the assessee manufactures the PT foam, it cannot be stated that it is not a part of the Eleventh Schedule. The Tribunal for no valid reason has recorded a finding that the assessee is not engaged in the manufacture or production of the PT foam. We fail to understand as to why, in the present case, the end product could be called commercially different from the PT foam as mentioned in the Eleventh Schedule. The assessee is not involved in any further process including stitching of seat covers. It simply produces the PT foam seats which are used for making end product to be fixed in different vehicles. Admittedly the assessee do not manufacture the end product, namely seats to be fixed in vehicles.

10. The Hon’ble Supreme Court in Vinbros & Co. (supra) while considering the question whether on the facts and in the circumstances of the case, the Tribunal was right in holding that blending and bottling of IMFL would amount to manufacture” for the purpose of claiming deduction under Section 80-IB?. While considering the question, the Hon’ble Supreme Court agreed with the decision of the Tribunal which observed that the end product is totally different and is commercially different commodity than the major input rectified spirit which is not fit for human consumption. Hence, the changes made to the original product results in a new different commercial commodity which is recognized as to in the trade. In our case, what the assessee manufactures is the foam in the shape of seats and therefore it cannot be stated that new product with the help of the PT foam comes into existence by any process. Similar is the view taken by Gujarath High Court in Prabhudas Kishordas Tobacco Products (P.) Ltd. (supra).

11. Mr. Kulkarni, learned counsel appearing for the assessee also placed reliance upon the judgment of Rajasthan High Court in Malborough Polychem (P.) Ltd. (supra) in support of his contention that on two earlier occasions, i.e. for the assessment years 1999-2000 and 2001-2002, the benefit under Section 80-IB was given to the assessee and therefore the principle of consistency ought to be followed for the subsequent assessment years. With respect, we do not agree with this view. In our opinion, if the Assessing Authority has committed any error of law in allowing the deduction on two earlier occasions, it is not necessary that they should extend similar benefit in the subsequent years and allow the illegality to perpetuate. In our view, these judgments are of no avail to the respondent-assessee.

12. In the circumstances, we answer the first question in favour of the Revenue and against the assessee. The second question as rightly submitted by Mr. K.V. Aravind, need not be answered since it over lapse with the first. In the result, the appeal is allowed with no order as to costs.

[Citation : 363 ITR 224]