2011 (7) TMI 1220 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for additional depreciation u/s 32(1)(iia) of the IT Act.
2. Definition and scope of "manufacture" and "production" under the IT Act.

Summary:

1. Eligibility for Additional Depreciation u/s 32(1)(iia):
The Revenue appealed against the order of the CIT(A)-II, Surat, which deleted the disallowance made by the AO of Rs. 47,82,881/- on account of additional depreciation for the assessment year 2006-07. The assessee, engaged in the business of export of art silk cloth and embroidery, claimed additional depreciation of 20% on new embroidery machines. The AO disallowed this claim, arguing that the embroidery process did not result in a distinct product and thus did not qualify as "manufacture" under section 32(1)(iia).

2. Definition and Scope of "Manufacture" and "Production":
The CIT(A) reversed the AO's decision, stating that the assessee's activities amounted to "manufacture" or "production" as per section 32(1)(iia). The CIT(A) emphasized that the term "production" is broader than "manufacture" and includes bringing into existence new goods by a process involving human skill and labor. The CIT(A) cited the Supreme Court's decision in S.S.M. Bros. (P) Ltd. & Ors. V/s CIT, which held that processing textiles, including embroidery, qualifies for development rebate. The CIT(A) concluded that the assessee's embroidery activities, which transformed plain cloth into a commercially distinct product, qualified for additional depreciation.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s order, agreeing that the assessee's embroidery process resulted in a new, commercially distinct product, thus qualifying as "manufacture" under section 32(1)(iia). The Tribunal also referenced the Karnataka High Court's decision in CIT-vs- Darshak Ltd., which held that converting plain glassware into decorative glassware constitutes "manufacture." Consequently, the Tribunal dismissed the Revenue's appeal and directed the AO to allow the additional depreciation of Rs. 27,33,075/-.

Conclusion:
The Tribunal affirmed the CIT(A)'s decision, recognizing the assessee's embroidery activities as "manufacture" eligible for additional depreciation u/s 32(1)(iia) of the IT Act. The Revenue's appeal was dismissed.