Gutkha Makers not entitled to Section 80I/80IA Deduction

AIT News Network

NEW DELHI. Special Bench of ITAT vide a significant ruling AIT-2008-113-ITAT has ruled that Gutkha and pan masala containing tobacco are "tobacco preparation" and "chewing tobacco" within the meaning of Item no. 2 of the Eleventh Schedule to the Income Tax Act. Since the assessee is manufacturing or producing Gutkha, which is one of the items covered by the Eleventh Schedule, the assessee is not entitled to claim deduction u/s. 80I/80IA.

                Special Bench was constituted to resolve the controversy in bunch of appeals as to whether Gutkha manufactured by the assessee falls under the expression "tobacco preparations" within the meaning of Item no. 2 of the Eleventh Schedule to the I-T Act so as to deprive the assessee of the special relief u/s. 80-I and 80-IA of the I-T Act. The assessee pointed out that a Division Bench of this Tribunal at Allahabad has taken the view in Kothari Products Ltd. v. ACIT, that "Zarda Yukta Pan Masala" (pan masala containing tobacco) is not a "tobacco preparation" under Item no. 2 of the Eleventh Schedule and that the deduction u/s. 32AB and 80-I of the I-T Act could not therefore be denied to the assessee on the ground that the said pan masala was a tobacco preparation within the meaning of Item No.2 in the Eleventh Schedule in the Income-tax Act. In its application seeking the constitution of a Special Bench, the assessee further pointed out that a Division Bench of this Tribunal at Pune has however taken a contrary view in the assessee's own case for the Assessment Years 1994-95 and 1995-96 and has held that Gutkha manufactured by the assessee is a tobacco preparation within the meaning of Item No.2 in the Eleventh Schedule and thus not eligible for deduction u/s. 80-I/80-IA.

Special Bench ruled as under:

• The expressions "tobacco" and "tobacco preparations" in Item No.2 of the Eleventh Schedule in the Income-tax Act do not mean one and the same thing. While the expression "tobacco" means processed narcotic leaves and hence "tobacco" would mean a product in which the said leaves arc substantially used in terms of quantity, value or base, the expression "tobacco preparations" means a preparation using tobacco if the pharmacology of nicotine and physiological and psychological effects of nicotine are dominant and the properties of nicotine, a substance derived from tobacco, do not undergo any metamorphosis as a result of addition of other ingredients in the preparation. Tested on this principle, "Gutkha" falls under the expression "tobacco preparations". We therefore hold accordingly.

• The test suggested by the learned senior counsel requiring that substantial quantity of "tobacco", either in terms of weight/quantity or value or base in the preparation, must be present m a product/preparation is relevant for judging whether a product falls under the expression "tobacco" or not. The test whether an ingredient is a dominant one in a preparation is relevant for judging whether a preparation fans under the expression "tobacco preparations" or not. The dominant nature of an ingredient in a preparation must be judged in the light of the fact whether the properties of t hat ingredient are retained and dominate the preparation without undergoing any metamorphosis as a result of the addition of other ingredients in the preparation. Tested on this principle also, Gutkha falls under the expression "tobacco preparations" for the reasons explained earlier in this Order.

• The words "such as" used in Item No.2 are merely illustrative and not exhaustive. They are indicative of what arc mentioned thereafter. In the contextual setting of Item No.2 of the Eleventh Schedule, the words "such as" are mere indication of various forms of tobacco use, namely, (i) smoking tobacco; and (ii) smokeless tobacco comprising of various forms of "chewing tobacco" and "snuff'. Without prejudice to the aforesaid, the words "chewing tobacco" in Item No.2 would also cover "Gutkha" within its sweep and ordinary meaning.

• The fact that Gutkha is not one of the items individually enumerated in Item No.2 of the Eleventh Schedule does not mean that it does not fall under the expressions "tobacco preparations" and "chewing tobacco" used therein. Courts have time and again declined to be bound by labels and have always tried to look through it and reach to the substance. In substance, Gutkha is well covered by the aforesaid expressions and hence absence of its individual denomination in Item No. of the Eleventh Schedule is not material. This is more so as Gutkha was not widely used at the time when the Eleventh Schedule was inserted in the I-T Act.

• In popular sense also, Gutkha is used for its tobacco content the taste of which is further enhanced by other ingredients present in Gutkha. Those who are not interested in tobacco would never use Gutkha for the reason that other variants of pan masala without tobacco are available in the market and therefore persons interested in using the other ingredients of Gutkha would use them for the sake of taste of other ingredients and not Gutkha. Besides, the name of the assessee, namely Dhariwal Tobacco Products Private Ltd., indicates that the assessee treats itself as a manufacturer of tobacco products and its Gutkha as a tobacco product. Subsequent alteration in the name would not dilute the nature of the products produced by the assessee. Thus, it is evident that all concerned understand Gutkha as falling under "tobacco preparations" as well as under "chewing tobacco" in Item No.2. In Royal Hatcheries Pvt. Ltd. v. State of AP (supra), the Hon'ble Supreme Court has held that the particular words used by the legislature in the denomination of articles are to be understood according to the common commercial understanding of the terms used. Tested on this principle also, "Gutkha" is perceived, according to the common commercial understanding, as "tobacco preparation" and "chewing tobacco".

• Classification of goods under legislations dealing with levy of taxes and duties on them is relevant only for the purpose of those legislations. They arc not relevant for the purpose of interpreting the expressions "tobacco", "tobacco preparations" and "chewing tobacco". The meaning of the aforesaid expressions used in I tem no. 2 has to be seen in their contextual setting in Item no. 2 of the Eleventh Schedule.

• The judgment of the Hon'ble Allahabad High Court declining to admit the Reference Application filed by the Department against the order of a Division Bench of this Tribunal at Allahabad in Kothari Products Ltd. and the Hon'ble Supreme Court declining to interfere with the aforesaid judgment of the High Court is an authority for the proposition that the issue whether Gutkha falls under the expression "tobacco preparations" within the meaning of Item No.2 of the Eleventh Schedule is a pure question of fact. Our finding on the facts is that Gutkha manufactured by the assessee falls under the expressions "tobacco preparations" as well as "chewing tobacco" within the meaning of Item No.2 of the Eleventh Schedule.

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