1996 (3) TMI 28 - HC - Income Tax

Initial Depreciation, Manufacture Or Production, New Industrial Undertaking, Set Off, Special Deduction, Unabsorbed Development Rebate

Issues Involved:
1. Whether the assessee was manufacturing textiles within the meaning of entry 32 of the Fifth Schedule and entry 21 of the Ninth Schedule, thereby entitling it to higher development rebate and initial depreciation.
2. Whether relief under section 80J should be allowed before the set off of unabsorbed development rebate.

Detailed Analysis:

Issue 1: Manufacturing Textiles and Eligibility for Higher Development Rebate and Initial Depreciation
The primary issue was whether the assessee, engaged in processing textiles, could be considered as manufacturing textiles within the meaning of entry 32 of the Fifth Schedule and entry 21 of the Ninth Schedule of the Income-tax Act, 1961, thereby qualifying for higher development rebate and initial depreciation.

The assessee claimed higher development rebate and initial depreciation, arguing that its activities of bleaching, dyeing, and tentering purchased cloth constituted manufacturing. The Income-tax Officer denied these claims, asserting that the processed items did not qualify as textiles under the specified entries.

The Tribunal upheld the assessee's claims, but the Department contended that the assessee was not engaged in manufacturing activities as defined in the relevant entries. The Department argued that the processes performed by the assessee did not result in a new product but merely enhanced the appearance of the cloth.

The court referred to previous cases involving the same assessee, such as CIT v. S. S. M. Finishing Centre [1985] 155 ITR 791 and CIT v. S. S. M. Finishing Centre [1990] 186 ITR 597, where it was held that the operations performed by the assessee did not amount to manufacturing or production of textiles. The court emphasized that the basic quality of the cloth remained unchanged after processing, thus disqualifying the assessee from claiming higher development rebate and initial depreciation.

The court also considered various other judgments, including Ujagar Prints v. Union of India [1989] 179 ITR 317, CIT v. Natraj Processing Industries [1993] 203 ITR 833, and CIT v. Sovrin Knit Works [1993] 199 ITR 679 [FB], but found them either distinguishable or not applicable to the present case.

Ultimately, the court concluded that the Tribunal was incorrect in holding that the assessee was manufacturing textiles within the meaning of the relevant entries. Therefore, the assessee was not entitled to higher development rebate and initial depreciation.

Issue 2: Priority of Relief under Section 80J
The second issue was whether relief under section 80J should be allowed before the set off of unabsorbed development rebate.

The Income-tax Officer held that relief under section 80J could not be given as there was no income after setting off the unabsorbed development rebate. The Appellate Assistant Commissioner and the Tribunal, however, held that relief under section 80J should be allowed before setting off the unabsorbed development rebate.

The Department argued that relief under section 80J should be given only after setting off the unabsorbed development rebate, citing the Supreme Court's decision in Cambay Electric Supply Industrial Co. v. CIT [1978] 113 ITR 84, which supported the priority of setting off unabsorbed development rebate before granting relief under section 80J.

The court also considered other relevant judgments, including CIT v. Rockweld Electrodes India Ltd. [1995] 215 ITR 358, Mettur Chemical and Industrial Corporation Ltd. v. CIT [1996] 217 ITR 768, and Scindia Steam Navigation Co. Ltd. v. CIT [1995] 211 ITR 747, which reinforced the precedence of setting off unabsorbed development rebate before granting relief under section 80J.

The court concluded that the Tribunal was incorrect in holding that relief under section 80J should be allowed before setting off the unabsorbed development rebate. Therefore, the court answered the second question in the negative and in favor of the Department.

Conclusion:
Both questions were answered in the negative and in favor of the Department. The court held that the assessee was not engaged in manufacturing textiles within the meaning of the relevant entries and was not entitled to higher development rebate and initial depreciation. Additionally, the court held that relief under section 80J should be allowed only after setting off the unabsorbed development rebate. Leave for appeal to the Supreme Court was granted.

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