S.80IB deduction not available in absence of Factory License

PrintPDF

CIT Vs. Jolly Polymer, Gujarat High Court

Assessee claimed deduction u/s Sec 80IB for AY 2005- 06. The AO noticed that though the auditor has certified that manufacturing activity had commenced in March 2004, Factory license was obtained only in May 2005. He contended that without such license, the assessee could not have commenced the manufacturing activity before April 1st 2004, which was the precondition to avail Sec 80IB benefit. He therefore, disallowed the deduction u/s 80IB claimed by the assessee.

On the other hand, the assessee con-tended that it had complied with all the conditions in Sec 80IB inasmuch as the unit was set up before April 1st 2004 and had also commenced manufacturing activity before this date. The assessee claimed that Sec 80IB nowhere provides that obtaining Factory License is a prerequisite to avail deduction, and to read such additional requirement into the section would not be permissible in law.

On appeal, ITAT accepting assessee’s contentions, held that only those conditions actually specified in Section 80IB of the Act were required to be fulfilled by the assessee while claiming such deductions. Accordingly, ITAT allowed the deduction as claimed by assessee.

A Division bench of Gujarat HC, re-versing the ITAT ruling, held that in the absence of Factory License, it could not be said that the assessee had com¬plied with all the preconditions for availing Sec 80IB benefit. Thus, HC disallowed the assessee’s claim for deduction. HC observed that though it was true that proviso to sub-section(4) requires the assessee to begin to manufacture or produce articles or things on or before April 1st 2004, such commencement of manufacturing activity could not be dehors the legal requirements.

HC, on perusal of Factories Act and Rules there under, observed that use of any premises as factory without a valid license was prohibited. Thus, running a factory without a valid license was not only prohibited but also a penal offence. HC observed that “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 pol-icy, would not be covered by said pro-vision.”

HC also observed that outside of the Income Tax Act, there may be large number of requirements for the factory owner to be fulfilled and mere breach of some technical provision or a requirement would not ipso facto disqualify an assessee from claiming deduction under Section 80IB of the Act. However, Factory License was the basic requirements of setting up of a factory without which legally it would not be permissible to set up a factory and to commence manufacturing activity.

Accordingly, HC held that the benefit of Sec 80IB was not available where the assessee had not applied for Factory License before April 1st 2004. How¬ever, HC also clarified that in other cases where the assessee had applied for Factory License before April 1st 2004 but was granted the same later, deduction shall be allowable and such cases shall be treated as mere technical default.