Case Law Details
Case Name : ACIT Vs. Nestor Pharmaceuticals Limited (Delhi High Court)
Appeal Number : ITA No. 2010-TIOL-124-HC-DEL-IT
Date of Judgement/Order :
Related Assessment Year :
Recently, the Delhi High Court in the case of ACIT Vs. Nestor Pharmaceuticals Limited [2010-TIOL-124-HC-DEL-IT] on the issue of whether the year in which trial production starts can be considered as initial Assessment Year (AY) for claiming benefit under section 80-IA of the Income Tax Act, 1961 (the Act) after relying on various judicial precedents held that the initial year is the year in which the commercial production starts and not trial production.
Facts and background of the case
- As per Section 80-IA of the Act, profits and gains derived by an eligible industrial undertaking will be entitled to a deduction, beginning from the year in which the undertaking begins manufacture of produce articles or things.
- The taxpayer, a company eligible to benefit under section 80-IA of the Act, was engaged in the business of manufacturing of pharmaceuticals formulations in bulk drugs. The taxpayer carried out trial production from 20 March 1998 (i.e. AY 1998-99), however, its commercial production starts from (AY 1999-00). Accordingly, the taxpayer after considering AY 1999-2000 as initial assessment year, claimed benefit from AY 1999-2000 to 2003- 04
- However, the Assessing Officer (AO) treated the year of trial production i.e. AY 1998-99 as initial assessment year and held that the taxpayer was eligible for the benefit from AY 1998- 99 to 2002- 03. Accordingly, the benefit was not allowed for the AY 2003- 04.
- The Commissioner of Income Tax (Appeals) [CIT (A)] confirmed the order of the AO. However, the Income Tax Appellate Tribunal (the Tribunal) held that since on 20 March 1998 only trial production started which is different from commercial production; the benefit should be allowed in the year in which commercial production started i.e. AY 1999- 2000.
- The taxpayer contended that the trial production did not amount to manufacture. It is only when commercial production commences the manufacturing begins. Accordingly, the benefit available under section 80-IA of the Act should be allowed from AY 1999- 2000.
- The taxpayer also produced evidence in the form of no objection certificate from local authority for manufacture operation in an eligible unit as well as approval for release of power obtained by the taxpayer, which were granted only in the month of April, 1998. Further, the taxpayer did not have the requisite minimum number of employees employed in the AY 1998- 99.
Tax department’s contentions
- The tax department contended that the trial production in an eligible unit amounted to manufacture of its products. Accordingly, the initial AY in which the taxpayer company was entitled to deduction under section 80-IA of the Act was AY 1998- 99.
- Further, the taxpayer had closing stock of finished goods of INR 149,405 in the eligible unit as on 31 March 1998. Therefore, without commercial production how the closing stock of finished goods can be valued.
Issue before High Court
- Whether the year in which trial production starts can be considered as initial AY for claiming benefit under section 80-IA of the Act?
High Court Rulings
- High Court observed that, merely because some closing stock was shown as on 31 March 1998, it would not lead to the conclusion that there was commercial production as well. Naturally, even for the purpose of trial production material would be needed and there would be production which will result in stock of finished goods.
- After considering the view taken by the various judicial precedents (CIT v. Hindustan Antibiotics Ltd.  93 ITR 548 (Bom) ACIT Vs. Southern Structurals Ltd.  110 ITR 164 (Mad) CIT Vs Food Specialities Ltd.  156 ITR 790 (Del) Madras Machine Tools Manufacturers Ltd. v. CIT  98 ITR 119 (Mad) ) the High Court held that the initial AY, for the purpose of section 80-IA of the Act, is the year in which the “industrial undertaking begins commercial production and not the trail production.
The Delhi High Court ruling is in line with several judicial precedents laid down by various courts in India. The Chandigarh Tribunal in the case of Himachal Fine Blank Ltd.3 had also laid down the same principle.