Whether when assessee specialises in transforming raw food materials into therapeutic food by adopting customised processes, it cannot be denied Sec 80IB benefits - YES: ITAT

THE issues before the Bench are - Whether when the assessee specialises in transforming raw food materials into therapeutic food by adopting customised processes, it cannot be denied Sec 80IB benefits and Whether the computation of deduction u/s 80IB as made by the assessee is erroneous when the assessee has removed the interest paid on partners capital which has resulted into enhancement of profit. And the verdict partly goes in favour of the assessee.

Facts of the case

The assessee is a partnership firm which is registered as a Small Scale Industry. The assessee was exclusive suppliers of food packets for the “mid day meal scheme” of the Government. For this purpose, it was converting raw food material into therapeutic food in packets. The assessee claimed deduction u/s 80IB. The AO disallowed the entire claim of deduction u/s 80IB after detailed discussion. The CIT(A) too rejected the assessee’s claim on the reasoning that the list of ingredients submitted by the appellant as raw materials & final product did not indicate that any new product had come into existence. Different food items (raw materials) had been merely ground & mixed together, the chemical composition had not changed intrinsically. The constituents of the final product were separate.

On appeal before the Tribunal the AR submitted that the assessee used various products of raw materials which were processed at different stages with lot of mixing and blending and then a separate and distinct product came into existence. All the stages of processing of raw materials required various kinds of machines and the knowledge of ingredients for mixing. The DR submitted that even though in the earlier years, assessee’s claim had been allowed, however, the same cannot be held to be res judicata in this year.

Having heard the parties, the Tribunal held that,

++ various raw materials are subject to various stages of processing like roasting, grinding, mixing, blending, etc through a skilled labours and machines in a proper proposition and ratio. The ultimate product which comes into existence is a therapeutic food, which is a new product, definitely separate and distinct from the raw materials. It has different characteristics altogether and commercially also it is no longer regarded as original commodity. This therapeutic food cannot be reversibly changed to original form once again;

++ even though principle of res judicata does not apply to the Income Tax proceedings, however, if the same facts are permeating in all the years which has been accepted by both the parties, the same cannot be disturbed or a contrary view can be taken without any change in the facts and circumstances or change in the law. The CIT(A) is not correct in holding that the assessee was not engaged in a manufacturing of therapeutic food;

++ on the issue of protective addition , the computation of deduction u/s 80IB as made by the assessee is wholly erroneous, the assessee has removed the interest paid on partners capital which has resulted into enhancement of profit. This working is wrong as the profit of the firm is always worked out after the interest and remuneration paid to the partner, which is an outgoing expense while computing the net profit of a partnership firm. The addition of Rs. 5,66,185/-, though made on protective basis by the AO stands confirmed. This addition would be on substantive basis;

++ on the issue of disallowance made u/s 40(a)(ia), the entire details for the payments made to the various truck drivers as claimed by the assessee has not been furnished. The onus is wholly upon the assessee. Accordingly, in the interest of justice we set aside this issue to the file of the AO to decide the issue afresh.