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.
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 1387 of 2010
Commissioner of Income Tax
M/s Jolly Polymers
TAX APPEAL No. 1388 of 2010
TAX APPEAL No. 2016 of 2010
TAX APPEAL No. 1105 of 2010
TAX APPEAL No. 1106 of 2010
TAX APPEAL No. 1116 of 2010
TAX APPEAL No. 1117 of 2010
TAX APPEAL No. 1125 of 2010
J U D G M E N T
(Per: Mr. Justice AKIL KURESHI)
1. 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 queries with respect to different claims and in particular, deduction under Section 80IB of the Income Tax Act. The Assessing Officer called upon the assessee to satisfy why such claim should not be disallowed on the ground that though the auditor in his report had certified that manufacturing activity had commenced on 21.3.2004, factory license was issued by the Chief Inspector of Factory only on 3.5.2005. In respect to such a query, the assessee contended that assessee had complied with all conditions of Section 80IB of the Act. The unit was set up before 31.3.2004 and had also commenced manufacturing activity before the said date. It was conveyed that assessee is engaged in the business of manufacturing of poly rolls, plastic bags and pouches, etc.. Such manufacturing was being carried out at the factory of the assessee at Daman which premises were obtained by the assessee on rental basis. Necessary machinery was purchased on 16.3.2004. Assessee produced evidence of purchase of raw material and production as also consumption of electricity for manufacturing activity. Assessee also contended that Excise registration was granted on 1.3.2004 and Sales Tax Registration was granted on 7.1.2004 and SSI registration was granted on 21.3.2004. No Objection Certificate from Pollution Control Board was also obtained on 7.1.2004. With respect to non availability of factory license, the assessee contended as under :
“It appears that by oversight factory license was left out to be applied on the date of commencement of production in March, 2004. The license was eventually applied in Jan 2005 and was issued by authority on 03.05.2005. However, circumstances of delayed obtaining of factory license has not bearing either on formation of unit which is validly formed in March 2004 or manufacturing work being commenced in factory from March 2004. Delayed registration, if at all, may have consequences under the Factories Act, but, it would be incorrect to suggest that it per se invalid the eligibility of unit which was formed validly in the year 31.3.04. Section 80IB nowhere provides for such requirement as pre- requisite. To read such additional requirement in the section, according to Supreme Court, is not permissible in law. Reference is invited to decision in the case of Textile Machinery Corporation Ltd. (107 ITR 195), wherein the Supreme Court analysised conditions of section 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 production started only from that date. He noted that without such license, the assessee could not have commenced the manufacturing activity. He therefore, concluded that assessee failed to prove that manufacturing process had stated before 31.3.2004. On these grounds, deduction claimed by the assessee was disallowed.
5. Assessee carried the matter in appeal. CIT(Appeals) dismissed the assessee’s appeal. He took note of Rule 4 of Goa, Daman & Diu Factories Rules, 1985, which prohibits use of premises as factory without valid license and concluded thus :
“2.3.4 One thing is very clear and that is either the production/manufacturing had not started before 31.03.2004 and therefore no deduction u/s.80IB can be allowed or the appellant has violated the provisions of the Factory Act and had stated the production/manufacturing in violation of the Factory Act. In this second situation also deduction u/s.80IB cannot be allowed in view of the decision of the Hon’ble Supreme Court. Bombay High Court and Madras High Court discussed below :-……”
6. Assessee carried the matter in further appeal before the Tribunal. Tribunal by impugned order reversed the orders passed by the Revenue Authorities. Tribunal was of the opinion that only those conditions specified in Section 80IB of the Act were required to be fulfilled by the assessee claiming such deductions and that therefore, in the present case deduction could not have been disallowed. We may record that the Tribunal principally relied and reproduced an order dated 5.6.2009 in case of ITO Vapi v. Samarth Health Care. It was a case wherein however, the assessee had applied for factory license prior to commencement of production but same was granted subsequently. It was in this background Tribunal in that case observed that for claiming deduction under Section 80IB of the Act only those conditions laid down under the said Section are required to be fulfilled and no more.
7. Facts are same in Tax Appeal No. 1388/2010. For the purpose of these appeals, we formulate following substantial question of law :
“(A) Whether the Appellate Tribunal is right in law and on facts in holding that there is no condition precedent to obtain the factory license before starting the industrial undertaking, without appreciating the fact that legally production cannot commence without obtaining the license to run the factory 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 was right in law as well as in facts in upholding the assessee’s claim of deduction under Section 80IB of the Act when application for license to run the factory was made to the Factory Inspector prior to 31.3.2004 but the actual license was granted only after the said date?”
9. Learned senior counsel Shri Manish Bhatt for the Revenue vehemently contended that Section 80IB of the Act provides for deduction in respect of profit and gains in respect of certain industrial undertaking. Sub-section(4) thereof envisages deduction in case of industrial undertakings located in the backward area subject to fulfillment of the condition that it begins to manufacture or produce articles or things during the period beginning on 1st April 1993 and ending on 31st March 2004. He submitted that in all cases, license from the Factory Inspector under the Factories Act was not obtained before 31.3.2004. Assessees therefore, cannot be stated to have fulfilled this vital condition on commencement of manufacturing activity before 31.3.2004. He drew our attention to various provisions contained in the Factories Act and Goa, Daman & Diu Factories Rules, 1985,(“the Rules” for short) to contend that manufacturing activity without such license is prohibited.
9.1 In support of his contentions, counsel relied on the following decisions :
a) In case of Madras Machine Tools Manufacturers Ltd. v. Commissioner of Income-tax, Madras reported in (1975) 98 ITR 119, wherein the Revenue’s contention that the assessee had commenced the manufacturing activity albeit without requisite license, was negatived observing that :
“We are also not inclined to accept the contention of the revenue that the articles produced or manufactured need not be the articles licensed under the Industries Development and Regulation Act, 1951, and that any article produced by the undertaking will entitle the company to claim the benefit of section 84 in the year of such production. Section 84(7) contemplates all articles by the undertaking and the word “undertaking” in the context can only mean a licensed undertaking. In the context the articles of the undertaking can only be those for which licence has been obtained by the undertaking under the said Act. In any event, we are of the view that there has not been any regular and substantial production or manufacture of articles by the company and that the few articles produced are quite insignificant 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 and others v. Commissioner of Income-tax and others reported in (1996) 217 ITR 746(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 utilized 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 inquire into genuineness of firm and its constitution as specified in the instrument of the partnership and if on inquiry he was satisfied that if a genuine firm with the constitution so specified was in existence, he was obliged to grant registration.
c) In case of Commissioner of Income-tax v. Grand Enterprises reported in (1999) 235 ITR 594, wherein the Division Bench of Kerala High Court also examined the question of registration of partnership firm. The facts involved in the case were that the license for running a Bar was granted to one of the partners of the partnership firm whereas license was utilised by the firm for running the said Bar. When the Assessing Officer on such facts refused to continue registration of the firm, assessee objected to the same. Ultimately, issue reached High Court. Kerala High Court observed that the conducting of liquor trade and the transfer of the license were opposed to public policy and would defeat the object of the Act. Court therefore, would not come to the rescue of an assessee to sustain a contract which was opposed to public policy.
d) In case of Commissioner of Income-tax v. Swarna Bar Restaurant reported in (2011) 334 ITR 387(AP), wherein Division Bench of Andhra Pradesh High Court considering the case where the assessee partnership firm was carrying the business in trading of Indian made foreign liquor. License for such purpose was obtained from Andhra Pradesh Excise Department in the name of one of the partners in his individual capacity. The Assessing Officer held that the assessee had not obtained permission from the Excise Department before entering into partnership. Such partnership was prohibited under the Andhra Pradesh Excise Act, 1968 and therefore, status of the assessee could not be treated as a firm. As a result he disallowed the remuneration paid to the partners and interest on capital borrowed. High Court noticing statutory amendments made in Sections 184 and 185 of the Act, observed that prior to amendment, Section 185 empowered the Assessing Officer to inquire into genuineness of the firm and its constitution. However, subsequent to amendment, distinction between registered firm and unregistered firm has been removed. High Court made following observations :
“9. It is evident from section 15 of the A.P. Act that except under the authority and in accordance with the terms and conditions, of a license granted in their favor, 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 license 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 there under, and the terms and conditions of the license granted in favour of the licensee. Violation of any of the conditions would entail suspension/ cancellation of license under section 31 of the A.P. Act. In cases where a license is granted in favor 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 license 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 opposed to public policy and, hence, unlawful and void.
16. On a conjoint reading of section 15 of the A.P. Act, and rule 39 of the IMFL Rules, it is clear that no license can, except with the prior permission of the Commissioner of Prohibition and Excise (Licensing Authority), include any other person as his partner to carry on business in the sale and purchase of intoxicating liquor. It is the law laid down in Bihari Lal Jaiswal (1996) 217 ITR 746(SC) which would apply to the facts of the present case, and not the judgment in Grand Enterprises.”
e) In case of Maddi Venkataraman and Co.(P. ) Ltd. v. Commissioner of Income-tax reported in (1998) 229 ITR 534, wherein certain expenditures made by the assessee were claimed as business expenditure or loss. The Court finding that assessee had indulged in transaction in violation of the provisions of Foreign Exchange(Regulation) Act held that the assessee’s contention that it would have incurred loss, cannot be a justification for contravention of law. It was observed that it would be against the public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of provisions of another statute or any penalty imposed under another statute.
On the other hand, learned counsel Shri Tushar Hemani vehemently contended that the assessee had fulfilled all the conditions under Section 80IB of the Act to claim such deduction. The manufacturing activity had actually commenced before 31.3.2004. Voluminous evidence was produced in this regard. Neither the Assessing Officer nor the CIT(Appeals) had come to the finding that in fact the manufacturing activity had not started. Assessee had obtained necessary registration from the Excise department. Assessee had registered itself as SSI, also obtained NOC from the Pollution Control Board. Only with respect to the factory’s license due to oversight/ ignorance, same was not obtained in time. Counsel submitted that in view of the fact that manufacturing activity had actually commenced, mere fact that the factory license was not obtained before 31.3.2004 would be of no consequence.
10.1 In support of his contention, counsel relied on decision in case of Textile Machinery Corporation Ltd.v. Commissioner of Income-tax, West Bengal reported in (1977) 107 ITR 195, wherein under similar provisions contained in the Income-tax Act, 1922, the Apex Court observed as under :
“The principal object 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. Commissioner of Income-tax reported in (2006) 287 ITR 547(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. High Court had reversed such order on the ground that possession of heroin was an offence and that it would be disgraceful for a doctor to indulge in activities against humanity. Apex Court reversed the decision of High Court making following observations :
15. In our opinion, the High Court has adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by courts on legal principles and not on one’s own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out.”
10.3 Counsel relied on decision in case of Vijay Ship Breaking Corporation and others v. Commissioner of Income-tax reported in (2009) 314 ITR 309(SC), wherein the Apex Court considered ship breaking activity as a manufacturing activity. This judgement was cited in support of the contention that since activity carried on by the assessee was that of manufacturing activity, deduction under sub-section(4) of Section 80IB would have to be granted.
10.4 Reliance was also placed on decision of this Court in case of Commissioner of Income-tax-I v. Radhe Developers in Tax Appeal No. 546/2008 dated 13.12.2011, wherein in context of deduction under Section 80IB(10) it was held that what is required of an assessee was to have developed the housing project. It was thereafter not further necessary that assessee must also be himself owner of the land on which such project was developed.
10. Learned counsel Shri J.P. Shah appearing for the assessee in Tax Appeals No.1105/2010 and 1106/2010 submitted that even if manufacturing activities carried on by the assessee are termed to be illegal, the moment Revenue proposed to tax income arising from such activity, all deductions under the Act must also be applied. Counsel relied on the decision of the Apex Court in case of Hindustan Steel Ltd. Vs. State of Orissa reported in (1972) 83 ITR 26 to contend that in any case, since the breach is a technical breach, deduction should not be disallowed.
11. We may notice however, that said decision pertains to imposition of penalty under Orissa Sales Tax Act. It was in this background that the Apex Court observed that the penalty will not ordinarily be imposed unless the party acted deliberately in defiance of law or was guilty of conduct contumacious or 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.”
13. 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 with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking :
Provided that the total period of deduction does not exceed ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co-operative society) subject to fulfillment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2000 :
Provided further that in the case of such industries in the North- Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years.”
14. From the above provisions, it can be seen that to qualify for deduction under sub-section(4) of Section 80IB of the Act, one of the essential requirements was that industrial undertaking concerned should have begun to manufacture or produce articles or things on or before 31.3.2004.
15. In the present cases, from the record, it emerges that assessee had in fact began such manufacturing prior to 31.3.2004. Assessees had produced necessary evidence in this regard of purchase of raw materials and sale of finished goods, of consumption of electricity and such other evidences. Though the Assessing Officer did record that the assessee could not have commenced manufacturing activity before 31.3.2004, it was on the basis that factory license was issued after such date. He did not dispute voluminous evidence produced by the assessee to show purchase of raw material, consumption of electricity, proof of sale of finished product etc. CIT(Appeals) rejected the assessee’s appeal but not on the ground that manufacturing activity had not in fact commenced before 31.3.2004. Even before us, Revenue did not raise any serious dispute that though without factory license, manufacturing activity had started. We therefore, proceed on this factually concluded issue namely that assessees had in fact begun to manufacture its articles or things before 31.3.2004.
16. Equally undisputed is the fact that assessees had not obtained license from 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.
17. 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.
18. At this stage it would be useful to take note of some of the provisions contained in the Factories Act and the Rules.
19. Section 6 of the Factories Act pertains to approval, licensing and registration of factories. Sub-section(1) of Section 6 empowers the State to make rules with respect to several subjects mentioned therein. Clause (aa) refers to requiring previous permission in writing of the State Government or the Chief Inspector to be obtained for the site on which the factory is situated and for the construction or extension of any factory or class or description of factories.
20. Sub-section(2) of Section 6 provides that if on an application for permission referred to in clause (aa) of sub-section(1) is made accompanied by the plans and specifications and sent to the State Government or Chief Inspector and no order is communicated to the applicant within three months from the date on which it is so sent, permissions shall be deemed to have been granted.
21. Sub-section(3) of Section 6 provides for an appeal in case Tribunal or Chief Inspector refused to grant such permission. Section 6 of the Factories Act reads as under :
6. Approval, licensing and registration of factories -(1) The State Government may make rules –
(a) requiring, for the purposes of this Act, the submission of plans of any class or description of factories to the Chief Inspector or the State Government;
(aa) requiring, the previous permission in writing of the State Government or the Chief Inspector to be obtained for the site on which the factory is to be situated and for the construction or extension of any factory or class or description of factories;
(b) requiring for the purpose of considering applications for such permission the submission of plans and specifications;
(c) prescribing the nature of such plans and specifications and by whom they shall be certified;
(d) requiring the registration and licensing of factories or any class or description of factories, and prescribing the fees payable for such registration and licensing and for the renewal of licenses;
(e) requiring that no license shall be granted or renewed unless the notice specified in section 7 has been given.
(2) If on an application for permission referred to in clause (aa) of sub-section (1) accompanied by the plans and specifications required by the rules made under clause (b) of that sub-section, sent to the State Government or Chief inspector by registered post, no order is communicated to the applicant within three months from the date on which it is so sent, the permission applied for in the said application shall be deemed 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.”
22. 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.
23. Chapter III of the Factories Act pertains to health and makes provisions with respect to cleanliness, disposal of wastes and effluents, latrines and urinals, etc.
24. Chapter IV pertains to safety of workers engaged in such factories.
25. Chapter IV-A of the Factories Act makes provisions relating to hazardous processes.
26. Chapter V of the Factories Act pertains to welfare of the workers and of the families engaged in such factories.
27. Chapter VI prescribes certain maximum working hours and other provisions relating to weekly holidays and compensatory holidays.
28. Chapter VII makes provisions prohibiting employment of young children in factories.
29. Chapter X pertains to penalties and procedure for such penalties.
30. Section 92 contained in Chapter X of the Factories Act pertains to General penalty for offences and reads as under:
“92. General Penalty for offences – Save as is otherwise expressly provided in this Act and subject to the provisions of section 93, if in, or in respect of, any factory there is any contravention of any of the provisions of this Act or of any rules made there under or of any order in writing given there under, the occupier and manager of the factory shall each be guilty of an offence and punishable with imprisonment for a term which may extend to
[two years] or with fine which may extend to [one lakh rupees] or with both, and if the contravention is continued after conviction, with a further fine which may extend to [one thousand rupees] for each day on which the contravention is so continued:
[Provided that where contravention of any of the provisions of Chapter IV or any rule made there under or under section 87 has resulted in an accident causing death or serious bodily injury, the fine shall not be less than [twenty-five thousand rupees] in the case of an accident causing death, and [five thousand rupees] in the case of an accident causing serious bodily injury.
Explanation : In this section and in section 94 “serious bodily injury” means an injury which involves, or in all probability will involve, the permanent loss of the use of, or permanent injury to, any limb or the permanent loss of, or injury to, sight or hearing, or the fracture of any bone, but shall not include, the fracture of bone or joint (not being fracture of more than one bone or joint) of any phalanges of the hand or foot.”
3`. Section 112 of the Factories Act pertains to general power of the State Government to make rules.
32. 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.
33. In exercise of powers under the Factories Act, Government of Goa, Diu and Daman has framed the Rules.
34. 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.
35. 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.
36. Rule 4 prohibits use of any premises as a factory without a valid license and reads as under :
“4. Prohibition of use of a premises as a factory without a valid license. No occupier of a factory shall use any premises as a factory or carry on any manufacturing process in a factory except under a license obtained or renewed in respect of such premises in accordance with the provisions of these rules. “
37. Rule 5 pertains to certificate of stability and provides that no manufacturing process shall be carried on in any building of a factory constructed, reconstructed or extended, or in any building which has been taken into use as a factory or part of factory until a certificate of stability has been sent by the occupier or manager of the factory to the Chief Inspector and accepted by him.
38. Rule 6 pertains to application for registration and grant of license and reads as under :
“6. Application for registration and grant of license.
(1) The occupier or manager of every factory coming within the scope of this Act after its commencement shall submit to the chief inspector an application in triplicate in Form 2 for the registration of the factory accompanied by an application Form 3 for the grant of license therefore :
Provided that the occupier or manager of a place to which the provisions of the Act are made applicable by a notification under section 85 of the Act shall submit an application within 30 days of the date of that notification.
(2) Every such application shall be accompanied by a treasury receipt or an invoice for book adjustment, as the case may be, for payment of the fees prescribed for the purpose specified in the schedule below :–…………
(i) fees to be charged for the following classes of factories shall, subject to a minimum of rupees five, be half of those specified above, if they do not work for more than 180 days in the aggregate in the calendar year :–
(a) Gur Factories
(b) Cashew nut Factories
(c) Rice Mills.
(ii)In the case of other factories working for a part of the year and commencing work on or after 1st day of July, the fees to be charged for the first time shall, subject to a minimum rupees five, be half of those specified in the schedule aforesaid.”
39. Rule 7 pertains to grant of license and reads as under :
“7. Grant of license.– The Chief Inspector may, on application being made to him under sud-rule (1) of rule 6 and on payment of the fees prescribed in sub-rule (2) of the rule and on being satisfied that there is no objection to the grant of the license applied for, register the factory and grant license 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 license:
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 license 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;
that the plans so submitted have not been approved by the Chief Inspector;
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;
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
that there imminent danger to life in a factory due to explosive or inflammable dust, gas or fumes, and effective measures in his opinion have not been taken to remove the danger.
(2) Subject to the provisions hereinafter contained with respect to suspension and unless earlier renewed under rule 9, every such license shall remain in force until the 31st day of December of the year for which the license is granted, or renewed under rule 9.”
40. Rule 9 pertains to renewal of license. In particular clause(b) of sub-rule(2) of of Rule 9 provides that the Chief Inspector may also refuse the renewal of the license on the ground that the applicant has been guilty of repeated contraventions of the provisions of the Act or Rules or both, or the applicant has obtained the license by fraud or by misrepresentation.
41. From the above statutory provisions, it can be seen that before setting up of a factory, intending manufacturer has to obtain license as envisaged under Section 6 of the Act and Rules made there under. The Act itself contains large number of welfare measures providing for health, safety, working hours etc. of the persons employed in the factory. It also prohibits employment of young children in factories. Such provisions can be implemented only if necessary licensing policy is framed and implemented. The license from the Factory Inspector in this respect assumes considerable significance without which it can be easily seen that it would not be possible to implement any of the welfare measures made in the Factories Act.
42. We have already noticed that the Rules prohibit use of any premises as factory without a valid license. Section 92 of the Act makes penal provisions for any breach of the provisions of the Act or Rules made there under. Thus running of a factory without a valid license is not only prohibited but is also a penal offence.
43. In that view of the matter, we are unable to hold that only requirement of sub-section(4) of Section 80IB is for assessee to commence manufacturing activity even if such manufacturing activity is prohibited by law.
44. We are conscious that that besides the Factories Act, outside of Income Tax Act, there may be large number of requirements for the factory owner to be fulfilled. All such requirements may not be fundamental or substantial. 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. 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.
45. 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.
46. We are conscious of two different situations arising in the case of Srish Chandra Sen(deceased) and others v. Commissioner of Income-tax, West Bengal reported in 41 ITR 340 and reiterated in case of Maddi Venkataraman and Co.(P. ) Ltd.(supra) and one arising in case of Dr. T.A. Quereshi(supra). In one set of cases deduction claimed pertains to penalty on illegal expenditure while carrying on legal activities whereas in other set of cases, deduction claimed was with respect to activities which itself was per se illegal.
47. In the present group of cases, however, we need not dwell on this issue at any length. Primarily we are of the opinion that while holding that assessees are not entitled to deduction under section 80IB(4) of the Act, we are not reading into it any other requirements contained in any other Act but are reading 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 policy, would not be covered by said provision.
48. However, in cases where the application for license was already made before 31.3.2004, but obtained shortly thereafter, we are of the opinion that such lapse must be viewed as one which is purely technical even without accepting the contention of the counsel for the assessee that grant of license subsequently would relate back to the original date of application. We are inclined to uphold the Tribunal’s view to this extent.
49. In the result, we answer question(A) in the negative i.e. in favor of Revenue and against the assessee. We answer question(B) in the affirmative i.e. in favor of the assessee and against the Revenue.
50. In Tax Appeal No. 1105/2010 and 1106/2010, the assessees had never applied for factory license before 31.3.2004. In view of our answer to above question(A), these Tax Appeals are allowed. Judgement of the Tribunal is reversed.
51. In Tax Appeals No.1387/2010, 1388/2010, 1116/2010, 1125/2010 and 1117/2010, assessee had already applied before 31.3.2004 and such licenses were granted shortly thereafter. In view of our answer to question(B), these Tax Appeals are dismissed.
52. In Tax Appeal No. 2016/2010 the date of application for factory license is not emerging from the record. Proceedings are therefore, placed before the Assessing Officer for verifying such fact and to decide the assessee’s case on the basis of findings given in this judgement. For the above purpose, the order of the Tribunal is set aside.
53. Tax Appeals are disposed of accordingly.
54. Shri Hemani for the assessees at this stage prayed that certificate of fitness to appeal to the Supreme Court in terms of Article 133(1) read with Article 134A be granted. Request is not accepted.