Facts of the Case

  1. The Revenue filed appeals pertaining to Assessment Years 2004-05 and 2006-07 challenging the grant of deduction under Section 80-IC of the Income Tax Act.
  2. The assessee was engaged in manufacturing air conditioners and other products by assembling and processing components procured from third-party suppliers.
  3. The Revenue disputed that such activity amounted to manufacturing or production.
  4. The Revenue further contended that the industrial units of the assessee were not situated in notified areas eligible for deduction under Section 80-IC.
  5. The assessee submitted various documents including notifications, revenue records, audit reports, and certificates establishing that the units were located within notified industrial areas.
  6. The Commissioner (Appeals) and the Income Tax Appellate Tribunal decided in favor of the assessee and granted deduction under Section 80-IC.

Issues Involved

  1. Whether assembly/manufacturing of air conditioners from procured parts constituted "manufacturing" or "production" under Section 80-IC of the Income Tax Act, 1961.
  2. Whether the assessee's industrial units situated at Khasra No. 262Mi fell within notified areas eligible for deduction under Section 80-IC.
  3. Whether Revenue could deny deduction merely on doubts without conducting proper verification and factual inquiry.

Petitioner’s (Revenue’s) Arguments

The Revenue contended:

  • The assessee merely assembled components procured from third parties and therefore was not engaged in manufacturing or production activities.
  • The units of the assessee were allegedly not situated within notified areas prescribed under the Government scheme for Uttarakhand.
  • Khasra No. 262Mi was not specifically mentioned in the relevant notifications.
  • Notification dated 28.06.2004 was applicable and the later notification dated 26.04.2006 should not govern the matter.
  • The Revenue argued that "262Mi" was a separate khasra and not covered under Khasra No.262.

Respondent’s (Assessee’s) Arguments

The assessee argued:

  • The final products manufactured, namely air conditioners, were commercially distinct products different from individual parts procured from third parties.
  • Manufacturing and production under Section 80-IC covered such activities.
  • The industrial units were situated in notified industrial areas.
  • Khasra No.262Mi formed part of Khasra No.262 and therefore fell within notified geographical limits.
  • Supporting documents including notifications, Patwari reports, revenue records, audit reports and previous assessment findings confirmed eligibility for deduction.
  • Deduction accepted during earlier years could not be denied subsequently without revising the original position.

Court Findings / Order

The Delhi High Court dismissed the Revenue's appeals and upheld the deduction under Section 80-IC in favor of the assessee.

The Court held:

Manufacturing Aspect

  • Air conditioners manufactured by the assessee were distinct commercial products separate from the parts procured from third parties.
  • Therefore, the activity clearly amounted to manufacturing/production under Section 80-IC.

Location Aspect

  • The Court observed that Khasra No.262Mi represented a part of Khasra No.262.
  • Since the entire Khasra No.262 was covered under the relevant notification, Khasra No.262Mi automatically fell within the notified area.
  • Revenue had failed to conduct proper verification and relied merely on suspicion and uncertainty.
  • No material was produced to establish that findings of lower authorities were perverse.

Accordingly, the Court held that the Revenue's contentions lacked merit and dismissed the appeals.

Important Clarification

The Court specifically clarified that:

  • "Min/Mi" means part of a khasra number and where the entire parent khasra number is notified, the corresponding part would also stand covered.
  • Relief cannot be denied merely on assumptions, uncertainty, or suspicion without factual verification.
  • Findings of fact recorded by appellate authorities cannot be interfered with unless perversity is established through supporting material.
  • The Court clarified that it had not examined the legal position prior to issuance of Notification dated 26.04.2006.

Sections Involved

  • Section 80-IC – Special provisions relating to certain undertakings in specified States
  • Section 80-IB – Deduction in respect of profits from industrial undertakings

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:7864-DB/SKN18122013ITA5452013_142923.pdf 

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