2005 (3) TMI 787 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Denial of deduction under section 80-IA.
3. Eligibility for higher rate of depreciation on Electrically Heated Flameless Furnace.
4. Disallowance for personal utilization of telephone.
5. Disallowance of motor car expenses and depreciation.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The first ground in all three appeals pertains to the validity or otherwise of the reassessment proceedings. This issue was not pressed by the appellant and thus, was dismissed.

2. Denial of Deduction under Section 80-IA:
The core issue in all three appeals was the denial of deduction under section 80-IA. The assessee, engaged in the annealing and straightening of steel rods, claimed this process as a manufacturing activity eligible for deduction under section 80-IA. The Assessing Officer, after a spot verification survey, concluded that the process did not result in the production of a new article or thing, thus denying the deduction. This decision was upheld by the CIT(A), who compared the activity to retreading of tyres, concluding that no new distinct product was created.

The assessee argued that the annealing process involves significant structural changes, citing various legal precedents and literature to support their claim. The learned counsel referenced the Madras High Court's decision in CIT v. Tamil Nadu Heat Treatment & Fetting Services (P.) Ltd., which recognized heat treatment as a manufacturing activity. The counsel also cited other cases where similar processes were deemed manufacturing activities.

The DR contended that no new article or thing emerged from the annealing process, distinguishing it from the Tamil Nadu Heat Treatment case. However, the tribunal found the assessee's activity similar to the one recognized by the Madras High Court as manufacturing. Thus, the tribunal directed the Assessing Officer to allow the deduction under section 80-IA, recognizing the annealing process as a manufacturing activity.

3. Eligibility for Higher Rate of Depreciation on Electrically Heated Flameless Furnace:
The assessee claimed 100% depreciation on electrically heated flameless furnaces, asserting they were energy-saving devices under Appendix-I, Item No. (3)(iii), Item (b). The Assessing Officer and CIT(A) denied this claim, stating the assessee failed to prove the furnaces met the required criteria.

The assessee provided purchase bills and certificates from suppliers, claiming the furnaces were energy-saving devices. The tribunal noted that some certificates were not presented during the assessment. Consequently, the issue was remanded to the Assessing Officer to verify if the furnaces met the specified criteria and, if so, to allow the higher depreciation rate.

4. Disallowance for Personal Utilization of Telephone:
The respective disallowances for personal utilization of telephone were Rs. 5,000 for assessment years 1995-96 and 1996-97, and Rs. 6,000 for the assessment year 1997-98. These grounds were not pressed by the appellant and thus, were dismissed.

5. Disallowance of Motor Car Expenses and Depreciation:
The assessee contested the disallowance of 1/4th motor car expenses and depreciation for assessment years 1996-97 and 1997-98, arguing it was excessive. After hearing both parties, the tribunal directed the Assessing Officer to restrict the disallowance to 1/5th of the expenses and depreciation.

Conclusion:
In conclusion, the appeals were partly allowed. The tribunal recognized the annealing process as a manufacturing activity eligible for deduction under section 80-IA, remanded the issue of higher depreciation on furnaces for further verification, dismissed the unpressed grounds, and partially allowed the appeal regarding motor car expenses and depreciation.