SIDWAL REFRIGERATION IND. LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-8(1)

Whether reporters of local papers may be allowed to see the judgment?

To be referred to the Reporter or not?

Whether the judgment should be reported in the Digest?

There is no quarrel that the assessee qualifies as the industrial undertaking as specified in the said Section for the purpose of deriving benefit of the said provision. This provision allows deduction from profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years commencing at the time during the periods as specified in Sub-section (2) and the dispute is as to which are the first five assessment years. These five years are to commence at any time during the periods as specified in Sub-section (2). Sub-section (2) mentions “beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility……..” The provision which existed at that time included Sub- section 12 and clause (c) thereof defined “initial assessment year” in the following manner: “(12)……… (c)“initial assessment year” – (1) in the case of an industrial undertaking or cold storage plant or ship or hotel, means that assessment year relevant to the previous year in which the industrial undertaking begins to manufacture of produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning;”

The initial assessment year, for the purpose of Section 80IA, is the assessment year relevant to previous year in which the “industrial undertaking begins to manufacture or produce articles or things”. In 2009:DHC:5666

There is no dispute that first sale from Goa unit was made on 23rd April, 1998 which would be the period relevant to assessment year 1999-2000. The assessee had also produced evidence in the form of no objection certificate from local authority for manufacture operation in Goa unit as well as approval for release of HT power obtained by the assessee, which were granted only in the month of April, 1998. The assessee did not even have the requisite minimum number of employees employed in the previous year relevant to assessment year 1998-99. As against this, the plea of the Revenue is 2009:DHC:5666

We are of the opinion that merely because some closing stock was shown as on 31st March, 1998, would not lead to the conclusion that there was commercial production as well. Naturally, even for the purpose of trial production material would be needed and there would be production which will result in stock of finished goods. Otherwise, there is overwhelming evidence produced by the assessee, and accepted by the Tribunal as well, from which it is clear that there was only a trial production in the assessment year 1998-99 and commercial and full-fledged production commenced only in the year 1999-2000. Therefore, we proceed further with the discussion on this basis.

The controversy, thus, boils down to the limited sphere namely whether, even with the start of trial production, with no commercial production in a particular year, it will be treated as “initial year” for the purpose of Section 80IA/80IB. The CIT(A) held so and this opinion of the CIT(A) did not found favour with the ITAT. The ITAT discussed the matter in the following manner: “The expression “initial assessment year” used in this context is defined in clause (c) of sub-section (12) of section 80-IA, according to which, “initial assessment year” in the case of an industrial undertaking means the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. In the present case, the industrial undertaking of the assessee company at Goa had commenced the production on 20.3.1998 and although the same was a trial production, the stand of the Revenue is that there was still commencement of production in the previous year relevant to AY1998-99 2009:DHC:5666

preferred and the question of law which arises is as under: “Whether the Ld. ITAT erred in allowing benefit of deduction u/s 801A/802B of the Act from the AY 98- 99 (by treating the same as initial year of production) to AY 2003-04.”

After hearing the counsel for the parties, we are of the opinion that the interpretation given by the Tribunal to Section 80IA/80IB is industrial undertakings who “has begun or begins to manufacture or produce articles……. .” The court was of the opinion that the provision must be interpreted having regard to the object for which the section was enacted namely to encourage the establishment of new industrial 2009:DHC:5666

This judgment was followed by Bombay High Court in Metropolitan Springs Pvt. Ltd.(Supra), in the following manner: “In view of this decision, Mr. Mehta is right when he contends that the view of the Tribunal that once the materials are fed into the machine, whether for trial production or commercial production, it would amount to a manufacture for the purpose of the said sub-section, is incorrect, as being inconsistent with the view expressed by this court in the aforesaid decision. In the present case, however, we find that no material whatsoever has been produced by the assessee before any of the income- tax authorities, including the Tribunal, to show that the production made by the assessee in the calendar year 1951 was merely a trial production and that the goods produced were not for commercial sale but were merely for testing or sampling purposes, as in the case before the Division Bench of this court referred to above. As the Tribunal has pointed out, it was admitted by the assessee that it had commenced production in 1951, the contention of the assessee merely being that the said production was a trial production. As no material has been produced by the assessee at any stage to justify that contention, it must be taken as established that the assessee did not prove that the said production in 1951 was merely a trial production. The assessee must, therefore, be held to have commenced production in 1951 and was not entitled to the benefit of the exemption under s. 15C of the said Act in respect of newly established industrial undertakings, beyond the assessment year 1956-57.”

The Allahabad High Court took the same view in Himalyan Magnesite Ltd.(Supra) accepting the ratio in Hindustan Antibiotics Ltd.(Supra). That case concerns with Section 80J of the Income Tax Act, 1961 and is in pari materia with Section 80IA/80IB. The only difference is that under Section 80J similar benefit is available to newly established industrial undertakings, ships or hotel business in certain circumstances. 2009:DHC:5666

The Madras High Court in the case of Additional Commissioner of Income Tax, Madras-II clear from the following: “As regards the year of manufacture, on the question whether there can be an experimental period, a reference was made to the case of CIT v. Hindustan Antibiotics Limited, 93 ITR 548 and Madras Machine Tools Manufacturers Ltd. v. CIT, 98 ITR 119 in both of which it was held that manufacturing for the purpose of section 15C of the 1922 Act and section 84 of the 1961 Act was the date of "commercial" manufacture and the period during which experimental work, particularly manufacture, was effected had to be disregarded. It, therefore, appears that there is an authoritative view that section 84 commences to operate not from the date when an undertaking physically starts to manufacture but operates from the date on which commercial manufacture is to start. This observation was made in the light of section 84(7) which states that the provisions of the section in relation to an industrial undertaking is to apply is from the assessment year relevant to the previous year in which the undertaking begins to manufacturer produce articles. It so happened that on experimental basis, the assessee, in the present case, started manufacture in December, 1963, but on commercial basis, this started only in January, 1964, which would be in the assessment year 1965-66. The controversy that seems to have arisen was whether the experimental portion of manufacture was to be considered as a period during which "manufacture" had taken place for the purpose of applying section 84(7).”

ITA No. 160/2008, ITA No. 161/2008 & ITA No. 793/2009

Question involved in all these three appeals is same which we have discussed earlier. It also arises under Section 80IA of the Act. The Tribunal has even taken note of judgment of Bombay High Court, Allahabad High Court as well as Madras High Court, holding that there should be regular production and not the trial production. However, on facts the Tribunal decided the case against the assessee. What weighed with the Tribunal was that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and air-conditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee that this was done to file the registration under the Excise Act as well as the Sales Tax Act. This did not find favour with 2009:DHC:5666

Thus, the distinguishing feature is that after the production, commercial sale also took place as well before on 31st March, 1998. In this factual scenario following question of law was framed in these appeals: 2009:DHC:5666

When we carefully examine the ratio laid down in various judgments noted above while dealing with ITA No. 1154/2009, we arrive at irresistible conclusion that the decision rendered by the Tribunal is without blemish and does not call for any interference. The provisions of Income Tax Act use the word “manufacture”. Trial production is not regarded as beginning to manufacture or to produce articles because of the reason that the assessee has to produce trial production to verify whether it can be used ultimately in the manufacture of the final article. These are, therefore, “trial runs”. The article is tested to find out as to whether it can be launched as a final product in the market or not. Therefore, with mere trial production, the manufacture for the purpose of marketing the goods has not started which starts only with commercial production namely when final product to the satisfaction of the manufacturer has been brought into existence and is now fit for marketing.

In Hindustan Antibiotics Ltd.(Supra), the court found that sterile penicillin which was a final product, saleable in the market, can never be produced until first crude penicillin is produced or manufactured and if that be so, mere production or manufacture of crude penicillin will not be regarded as beginning of manufacture or production of articles. The court opined that until the assessee- company reaches a stage where it is in a position to decide that a final product, which could ultimately be sold in the market, could be 2009:DHC:5666

In the present case, the assessee had sold one water cooler and one air-conditioner before April, 1998. Thus, the stage of trial production had been crossed over and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when assessee failed to show that the dealer returned those goods on the ground that there was any defect in the water cooler or air-conditioner produced and sold by the assessee to the dealer. Things would have been different if that had happened. The Tribunal, in the circumstances, is right that the two types of conditions stipulated in Section 80IA were fulfilled with the commercial sale of the two items in that assessment year. Whether the purpose of that sale was to obtain registration of excise or sales tax would be immaterial.

We thus answer the question as framed against the assessee and in favour of the Revenue and dismiss these appeals.