CIT vs. Vinbros And Co. [2012] 349 ITR 697 (SC)
The assessee, a small–scale industry recognised as such by the Director of Industries, Pondichery, set up a second unit to manufacture and bottle Indian manufactured foreign liquor (IMFL) at Pondichery. In its return for the assessment years 2003-04 and 2004-05, it claimed deduction u/s. 80-IB of the Act in respect of the profits and gains derived from the second unit. The Assessing Officer, however, rejected the plea on the issue that the process carried on by the assessee for its product, did not constitute ‘manufacture’ within the meaning of section 80-IB. He further held that setting up of the second unit was only an expansion or reconstruction of the existing unit. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).
In the proceedings before the Commissioner of Income Tax (Appeals), the assessee explained the process of blending as follows:
The assessee purchased rectified spirit or extra neutral alcohol (ENA) made of grain or grapes or malt to which it added demineralised water in required proportion to reduce the strength of the ENA to make various products like whiskey, brandy, rum, etc. Apart from that, other ingredients like caramel, sugar, etc., were also added as per the blending formulations. This blend was subject to filtration for required time, blend inspection and then bottling in empty bottles. The finished products were packed and sold.
The Commissioner of Income Tax (Appeals) considered the fact that the alcoholic strength of ENA which was around 95 % v/v was reduced to a maximum of 42.8 % v/v. Consequently, the Commis- sioner of Income Tax (Appeals) held that there was no manufacture or production of any new article or thing as the alcohol which was the input remained as alcohol. In the circumstances, he rejected plea for deduction u/s. 80-IB of the Act.
On further appeal before the Tribunal, the assessee reiterated the contentions as regards the process undertaken to result in a totally different marketable commodity. Considering the entirety of the issue and applying the decision of the Allahabad High Court in the case of CIT vs. Rampur Distilleries and Chemicals Co. Ltd., reported in [2005] 277 ITR 416 (All), the Tribunal held that the rectified spirit is not mentioned in the first item of the Eleventh Schedule ‘beer, wine and other alcoholic spirits’ and, consequently, the assessee as a small-scale industrial unit was entitled to deduction u/s. 80-IB of the Act.
On appeal by the Revenue before the High Court, it was held that a perusal of section 80-IB showed that a deduction under the said provision is available only where the assessee engages in the manufacture or production of an article or thing, not being an article or thing as specified in the list in the Eleventh Schedule or operates one or more cold storage plant or plants in any part of India. The proviso to sub-clause (iii) of s/s. (2) of section 80-IB of the Act showed that the condition with reference to the list in the Eleventh Schedule did not apply at all to the case of an industry being a small scale undertaking or an undertaking referred to in s/s. (4). The industry run by the assessee was admittedly a small-scale industry, reference to the Eleventh Schedule for the purpose of consideration of the claim u/s. 80-IB of the Act did not arise.
As regards the second issue as to whether the assessee had engaged itself in the manufacturing or producing of an article or thing by the act of blending, the High Court observed that (i) the assessee did not just add water and sell the final product, apart from water, the assessee had to add several items to make it fit for human consumption; (ii) the assessee was not a manufacturer of ENA which was the basic raw material required for making various IMFL products; (iii) it was mixing water and other ingredients with ENA formulations; (iv) the alcoholic strength of the ENA which was around 95 % v/v was reduced to a maximum of 42/8 % v/v in respect of the final marketable commodity, namely, whiskey, brandy, rum, vodka and gin; (v) the blending was subject to filtration for required time and thereafter only, the final product was sold. On the face of the facts stated above, the High Court opined that it was not possible for it to accept that the blending should not be treated as a manufacturing activity u/s. 80-IB of the Act.
The Supreme Court dismissed the civil appeal filed by the Revenue holding that there was no infirmity in the impugned judgment of the high Court.
