2012 Supreme(AP) 93

High Court of Andhra Pradesh
V.V.S. RAO & B.N. RAO NALLA
Commissioner of Income Tax, Vijayawada
Versus
M/s. O.R. Distilleries Ltd., Tirupathi
REFERRED CASE Nos.254 of 1996 and 77 of 1997
Decided On : 27-01-2012

Headnote:

Income Tax Act, 1961 - Section 256(1) , 32A, 32AB, 263, 143(3) - Andhra Pradesh Excise Act, 1968 - Section 2(29) - Andhra Pradesh Rectified Spirit Rules, 1971 – These two Referred Cases can be disposed of by a common order as they arise out of the assessment of income tax of the same assessee, namely Income Tax Appellate Tribunal (ITAT) referred the following questions under Section 256(1) of the Income Tax Act, 1961 for opinion of this Court. Whether on the facts and in the circumstances of the case, the ITAT is correct in holding that the article or thing, viz., alcohol including rectified spirit and denatured spirit manufactured by the assessee-company do not come under the ambit of Eleventh Schedule of the I.T. Act, 1961? Whether on the facts and in the circumstances of the case, the ITAT is correct in law in holding that the assessee company is entitled to investment allowance u/s.32A of the I.T .Act, 1961 for the asst? In R.C.No.77 of 1997 the ITAT referred the following two questions for the opinion of this Court. Whether on the facts and in the circumstances of the case, the ITAT is correct in holding that the article or thing, viz., alcohol including rectified spirit and de-natured spirit manufactured by the assessee-company do not come under the ambit of Eleventh Schedule of the I.T. Act? Whether on the facts and in the circumstances of the case, the ITAT is correct in law in holding that the assessee-company is entitled to investment allowance u/s.32A of the I.T. Act, 1961 for the assessment year and also deduction under Section 32AB for assessment? Background facts Assessee filed the return of income for claiming net loss of Rs.16,54,000/-. By a subsequent return the loss was revised downward to Rs.16,09,450/-. assessee claimed investment allowance which was allowed by the Income Tax Officer (ITO), Commissioner of Income Tax (CIT), on scrutiny found that investment allowance cannot be allowed as the petitioner manufactured rectified spirit and denatured spirit and also sold arrack after diluting the rectified spirit. Therefore, in exercise of powers under Section 263 of the Act, the CIT revised the order aggrieved by which, the assessee filed an appeal. ITAT allowed the appeal holding that item 1 of Eleventh Schedule disqualifies manufacture of only potable liquor from claiming investment allowance and that the rectified spirit and denatured spirit do not come within the purview of item 1. Aggrieved by the order of the ITAT the Revenue sought reference of the two questions mentioned above, which is registered as R.C.No.254 of 1996 before this Court –Held Industrial alcohol/rectified spirit is not potable. Rectified spirit is basic raw material for potable liquors. Investment allowance claimed by the assessee and allowed by the ITO was only on the machinery used for the manufacture of rectified spirit which is not potable liquor like wine or beer which could fall within the scope and ambit of other alcoholic spirits appearing in item 1 of Eleventh Schedule main activity of the assessee company is the manufacture of rectified spirit. However, sometimes it was forced by the Govt. to convert the end product viz., spirit into arrack by diluting it with water. Mainly and essentially the appellant was licensed to manufacture rectified spirit and denatured spirit which are not potable. They are called industrial spirits learned representative of the assessee brought to our notice clarification issued by the Central Board of Direct Taxes to the effect that industrial alcohol is not covered by item 1 of the Eleventh Schedule of the I.T. Act. said clarification was issued in Govt. of India, Dept. of Revenue Considering the terms of the licence issued to the assessee and the nature of the product manufactured by it and also taking into consideration the aforementioned clarification issued by the CBDT, Court are of the opinion that rectified spirit and denatured spirit which are not potable liquors and which are known as industrial spirits are not covered by item 1 of the Eleventh Schedule to the I.T. Act no denial that the assessee was given licence to manufacture rectified/denatured spirit. They had no licence to manufacture beer, wine or arrack or any other alcoholic beverage. At the relevant time due to compulsion from the Government, the assessee was required to manufacture arrack and supply to the Government assessee claimed investment allowance in respect of the machinery purchased for the manufacture of rectified spirit and not the arrack. Respectfully following the reasoning in Industries we hold that the assessee cannot be denied investment allowance – Referred Cases shall stand disposed of accordingly.