2016 (3) TMI 1076 - AT - Income Tax

Entitlement to depreciation - whether the production of readymix concrete amounts to manufacture and hence the assessee would be entitled for deprecation as claimed in respect of the machinery used? - Held that - It is common knowledge that an uneducated mason does the work of preparation of readymix concrete for construction of houses and it is never treated as manufacturing activity either in the common parlance or in the commercial parlance. The readymix concrete can be produced in huge volume with the help of machines with less manpower but merely because there is increase in volume, it cannot automatically be treated as manufacturing activity. At any rate, the end product is only an intermediate product which is used for construction of buildings, roads, dams etc. and when the end product is not considered as manufacturing activity, then it is difficult to hold that the intermediate product can be classified as manufacture or production of article or thing. Having regard to the ratio laid down by the Hon ble Apex Court in the case of N.C. Budharaja & Co 1993 (9) TMI 6 - SUPREME Court , bearing in mind the fact that the end product should amount to manufacture or production of an article or thing, the readymix concrete manufactured by the assessee, which is also engaged in the construction activity, cannot be said to be a manufacturing activity. Therefore, answer the question in the negative and in favour of the Revenue by holding that the assessee is not entitled for additional depreciation in respect of machinery used since production of readymix concrete would not amount to manufacture of article or thing. - Decided against assessee

Issues Involved:

1. Allowability of additional depreciation on machinery used by the assessee.
2. Determination of whether the production of readymix concrete amounts to manufacture.

Detailed Analysis:

1. Allowability of Additional Depreciation:

The primary issue revolves around whether the machinery used by the assessee for producing readymix concrete qualifies for additional depreciation under section 32 of the Income Tax Act. The assessee claimed additional depreciation on new plant and machinery, including Transit Mixer, Tata Trucks, and Ashok Leyland Trucks, asserting they were used for manufacturing readymix concrete. The Assessing Officer (AO) denied the claim, categorizing the machinery as road transport vehicles, not eligible for additional depreciation. The AO maintained that the vehicles' adaptation for specific use does not change their fundamental nature as road transport vehicles. The CIT(A) upheld the AO's decision, leading the assessee to appeal before the Tribunal.

2. Determination of Manufacturing Activity:

The core question was framed as whether the production of readymix concrete constitutes manufacturing, thereby entitling the assessee to additional depreciation. The Judicial Member referenced the ITAT Delhi Bench's decision in YFC Projects (P) Ltd. vs. Dy. CIT, which, citing the Supreme Court's ruling in N.C. Budharaja & Co., established that manufacturing involves creating a new, distinct product through a series of changes. The Judicial Member concluded that producing readymix concrete is a manufacturing activity, as it results in a distinct product that cannot revert to its original components.

Conversely, the Accountant Member argued that the assessee's activities do not qualify as manufacturing or production of an article or thing, referencing the Supreme Court's decision in N.C. Budharaja & Co., which associated "manufacture" and "produce" with movables, not construction activities. The Accountant Member cited several cases, including Bhagat Construction Co. (P) Ltd. and Minocha Brothers (P) Ltd., where construction-related activities were not deemed manufacturing.

Judgment Analysis:

Judicial Member's Perspective:

- The Judicial Member emphasized that the production of readymix concrete involves a scientific process and results in a new, distinct product.
- The machinery used for producing readymix concrete should be classified as "plant and machinery" under section 32, thus qualifying for additional depreciation.
- The Judicial Member relied on the ITAT Delhi Bench's findings in YFC Projects (P) Ltd., which recognized the production of readymix concrete as manufacturing.

Accountant Member's Perspective:

- The Accountant Member contended that the assessee's activities do not constitute manufacturing, as the end product (construction of buildings, roads, etc.) is not a movable article or thing.
- The production of readymix concrete, being an intermediate product used in construction, does not qualify as manufacturing.
- The Accountant Member referenced various judicial decisions, including those of the Delhi High Court and the Supreme Court, which supported the view that construction-related activities do not amount to manufacturing.

Third Member's Decision:

- The Third Member concluded that the production of readymix concrete does not amount to manufacturing or production of an article or thing.
- The Third Member noted that the end product (construction) is not considered manufacturing, and hence, the intermediate product (readymix concrete) cannot be classified as such.
- The Third Member emphasized that the common and commercial parlance test should be applied, and in this context, producing readymix concrete is not seen as manufacturing.

Final Conclusion:

The Tribunal, by majority view, decided that the assessee is not entitled to additional depreciation on the machinery used for producing readymix concrete, as the activity does not amount to manufacturing or production of an article or thing. The matter was directed to be placed before the Division Bench for final resolution based on the majority view.

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