TMI Blog2012 (4) TMI 398X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsequently would relate back to the original date of application. - Decided in favor of the assessee - Tax Appeal Nos. 1105, 1106, 1116, 1117, 1125, 2016, 1387 & 1388 of 2010 - - - Dated:- 17-1-2012 - Akil Kureshi and Sonia Gokani, JJ. Manish Bhatt and Mrs. Mauna M. Bhatt for the Appellant. J.P. Shah and Tushar Hemani for the Respondent. JUDGMENT Akil Kureshi, J. Issues are identical in all the appeals. Facts may be noted from Tax Appeal No.1387/2010. 2. This appeal is filed by the Revenue calling in question the judgement of the Tribunal dated 23.12.2009. By the said judgement, the Tribunal allowed the respondent assessee's appeal and reversed the order passed by the Assessing Officer as confirmed by the CIT(Appeals). 3. Issue pertains to the claim of deduction under Section 80IB of the Act raised by the assessee. We are concerned with the assessment year 2005-2006. For the said year, the assessee had filed return of income declaring nil income. In such return, the assessee had claimed deduction of Rs.20.13 lakhs(rounded off) under Section 80IB of the Act. Case of the assessee was taken under scrutiny by the Assessing Officer. He raised several qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 15C (akin to present section 80IA/80IB). The Supreme Court observed at page 202 as under : "Sub-section(2) of section 15C has a negative as well as a positive aspect. Negative, the new industrial undertaking of the assessee should not be formed : i by the splitting up of the business already in existence. ii by the reconstruction of the business already in existence, or iii by the transfer to a new business of building, machinery or plant used in a business which was being carried on before April 1, 1948 We agree that it is not possible to exclude any new industrial undertaking other than the three categories mentioned above." "Thus, according to the Supreme Court, an A.O. cannot add any new condition to the list of disabling condition. On Principles, it would not be correct for the A.O. to add a condition that the deduction will be denied if assessee was not holding factory license when production commenced in March 2004 though, the assessee might have obtained factory license belatedly in subsequent year." 4. Assessing Officer however, disallowed the claim. He was of the opinion that such grant of license on 3.5.2005 would show that produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory from the Factory Inspector as per Rule 4 of Factory Rules red with Section 6 of the Factory Act?" 8. In Tax Appeals No.1105/2010 and 1106/2010, however, factual situation is slightly different. In these Tax Appeals also Assessing Officer had disallowed deduction under Section 80IB of the Act on the ground that factory license was not granted before 31.3.2004 which was last date of commencement of manufacturing. CIT(Appeals) dismissed the assessee's appeal. Tribunal however, reversed the decision of the Revenue Authorities. The vital difference on facts is that the assessee in these cases had applied for necessary license under the Factories Act and the Rules made thereunder before 31.3.2004 but were granted such license subsequent to the said date. In Tax Appeals No. 1387/2010, 1388/2010, 1116/2010, 1125/2010 and 1117/2010 also, it emerges from the record that assessees had applied for license before 31.3.2004 but were granted such license after that date. In Tax Appeal No.2016/2010, date of application of license is not available from the record. For the purpose of these appeals, therefore, we formulate following substantial question of law: "(B) Whether the Tribunal wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnificant in value and quantity. Hence it could not be said that the company has started production and manufacture of the articles before May 31, 1958." ( b ) In case of Bihari Lal Jaiswal v. CIT [1996] 217 ITR 746/84 Taxman 236 (SC), wherein the assessee was a firm and sought registration under the Income Tax Act. One of the partners of the firm had obtained license for retail sale of country spirit. One of the conditions of the license was that the holder shall not enter into a partnership for the working of privilege under the license despite which, the holder of the license entered into such partnership. In this background, it was observed that registration confers a substantial benefit upon the partnership firm. There is no reason why such a benefit should be extended to persons who have entered into a partnership agreement prohibited by law. One arm of law cannot be utilised to defeat the other arm of law. We may however, notice that such decision was rendered under Sections 185 or 186 of the Income Tax Act. Said sections as they stood at the relevant time envisaged that on an application being made for registration of the firm, the Assessing Officer was obliged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir favour, no one can carry on business in trading in liquor in the Stte ofg Anmdhra Pradesh. In addition, a person who has been granted a licence has to ensure compliance with the terms and conditions prescribed therein. As the business of trading in intoxicating liquor is res extra commercium, a high degree of control is exercised by law to ensure that the business of trading in liquor is carried on strictly in accordance with the provisions of the A.P. Excise Act, the rules, made thereunder, and the terms and conditions of the licence granted in favour of the licensee. Violation of any of the conditions would entail suspension/cancellation of licence under section 31 of the A.P. Act. In cases where a licence is granted in favour of an individual it is only he, and no other, who is entitled to carry on business of trading in intoxicating liquor. By his act of entering into a partnership, a licence would have permitted the other partners also to carry on business of trading in intoxicating liquor. Such a partnership agreement would not only fall foul of, and defeat, the provisions of the A.P. Excise but would under section 23 of the Indian Contract Act, also be an agreement oppos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of section 15C is to encourage setting up of new industrial undertakings by offering tax incentive within a period of 13 years from April 1, 1948. Section 15C provides for a fractional. exemption from tax of profits of a newly established undertaking for five assessment years as specified therein. This section was inserted in the Act in 1949 by section 13 of the Taxation Laws (Extensions to Merged States and Amendment) Act, 1949 (Act 67 of 1949) extending the benefit to the actual manufacture or production of articles commencing from a prior date, namely, April 1, 1948. After the country had gained independence in 1947 it was most essential to give fillip to trade and industry from all quarters. That seems to be the background for insertion of section 15C. " 10.2 Counsel relied on decision of the Apex Court in case of Dr. T.A. Quereshi v. CIT [2006] 287 ITR 547/157 Taxman 514 (SC), wherein the assessee, a medical practitioner had claimed deduction on the value of heroin seized from his gross income. Tribunal held that heroin was a part of his stock-in- trade and had allowed deduction of the estimated value of the heroin seized from the gross income as a business loss. Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dishonest or acted in conscious disregard of its obligation. 12. Having thus heard learned counsel for the parties, we may recall that Section 80IB of the Act pertains to deduction in respect of profits and gains from certain industrial undertakings. Sub-section(1) thereof reads as under : "(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub- sections (3) to (11) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section." Sub-section(4) of Section 80IB provides for deduction in case of industrial undertaking in certain cases and reads as under : "(4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Factory Inspector as required under the Factories Act and the Rules. In a group of cases mentioned above, assessees had not even applied for such license prior to 31.3.2004. Such application was made only after the said cut off date. Naturally the license was granted sometime thereafter. In another set of cases, however, assessees had applied for such license prior to 31.3.2004, but admittedly such license was granted shortly thereafter. 16. Insofar as set of cases where no application for license was made, we have to examine whether assessees can be stated to have fulfilled the necessary requirement for claiming deduction under Section 80IB(4) of the Act. It is true that proviso to sub-section(4) requires the assessee to begin to manufacture or produce articles or things on or before 31.3.2004. However, can such commencement of manufacturing activity be de-hors the legal requirements is the question. 17. At this stage it would be useful to take note of some of the provisions contained in the Factories Act and the Rules. Section 6 of the Factories Act pertains to approval, licensing and registration of factories. Sub-section(1) of Section 6 empowers the State to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to have been granted. (3) Where a State Government or a Chief Inspector refuses to grant permission to the site, construction or extension of a factory or to the registration and licensing of a factory, the applicant may within thirty days of the date of such refusal appeal to the Central Government if the decision appealed from was of the State Government and to the State Government in any other case. Explanation : A factory shall not be deemed to be extended within the meaning of this section by reason only of the replacement of any plant or machinery, or within such limits as may be prescribed, of the addition of any plant or machinery if such replacement or addition does not reduce the minimum clear space required for safe working around the plant or machinery or adversely affect the environmental conditions from the evolution or emission of steam, heat or dust or fumes injurious to health." Section 7 of the Factories Act pertains to notice by occupier who intends to occupy any premises as factory and who is required to give such notice to Chief Inspector containing specific details. Chapter III of the Factories Act pertains to health and makes provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Government to make rules. 18. It can thus be seen that the Factories Act makes detailed provisions with respect to granting license for factories as also makes number of welfare measures pertaining to the welfare of the workers engaged in the factories including health, safety, working hours and protection of young children in employment in factories. 19. In exercise of powers under the Factories Act, Government of Goa, Diu and Daman has framed the Rules. Sub-rule(1) of Rule 3 provides for approval of plans and provides inter-alia that no site shall be used for the location of a factory or no building in a factory shall be constructed, re-constructed, extended or taken into use as a factory, unless previous permission in writing is obtained from the Chief Inspector of Factories. Sub-rule(2) of Rule 3 provides that if the Chief Inspector is satisfied that the plans are in consonance with the requirements, he shall subject to such conditions as he may specify, approve them by signing and returning to the applicant one copy of each plan. Rule 4 prohibits use of any premises as a factory without a valid license and reads as under : "4. Prohibitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of the rule and on being satisfied that there is no objection to the grant of the licence applied for, register the factory and grant licence in Form 4 to the applicant to use as factory such premises as are specified in the application and subject to compliance with such conditions as are specified in the licence: Provided that subject to the provisions of sub-section (3) of Section 6, the Chief Inspector may refuse to register the factory and grant a licence if he satisfied--- ( i ) that an application is not accompanied by plans- ( a ) of the site on which the factory is to be situated; and ( b ) for the construction or extension of the factory; ii. that the plans so submitted have not been approved by the Chief Inspector; ii. that the factory has not been constructed in accordance with the plans approved by the Chief Inspector or in compliance with the conditions subject to which the plans are approved; ii. that material requirements of the relevant provisions specified 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 80IB of the Act. In the present case, however, we are concerned with one of the basic requirements of setting up of a factory i.e. obtaining a license without which legally it would not be permissible to set up a factory and to commence manufacturing activity. In absence of such license, setting up of factory is prohibited. Setting up a factory without license is a penal offence. We have noticed that Factories Act makes large number of welfare measures. To implement such measures, it would be absolutely essential that licensing procedure is in place. While examining requirements of section 80IB(4) of the Act, we cannot be oblivion to such provision. 24. In those appeals where we find that assessee had not even applied for factory license before 31.3.2004, we cannot hold that necessary conditions under sub-section(4) of Section 80IB of the Act were fulfilled. 25. We are conscious of two different situations arising in the case of Srish Chandra Sen v. CIT [1961] 41 ITR 340 (SC) and reiterated 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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