2011 (12) TMI 282 - AT - Income Tax

Assessee manufacturing TV/AC - Depreciation claimed @40 on plastic moulds - CIT assessee not in business of of rubber & plastics thus depreciation to be claimed @25 percent and issued notice under 263 - Held That - Assessee manufactured plastic and rubber goods and were used in manufacture of TV/AC. In view of Malabar Industrial Co. Ltd. (2000 - TMI - 5786 - SUPREME Court), order set aside. Further when two views are possible and AO adopted one view for which the Commissioner does not agree, it cannot be treated as erroneous or prejudicial to the interests of the revenue.

Summary

Issues Involved:
1. Eligibility of Depreciation Rate on Moulds
2. Invocation of Section 263 by the CIT
3. Applicability of Judicial Precedents

Issue-wise Detailed Analysis:

1. Eligibility of Depreciation Rate on Moulds:
The primary issue revolves around whether the assessee is entitled to claim depreciation at 40% on moulds used for manufacturing plastic and rubber components, which are integral to the production of electronic goods like TVs, ACs, and washing machines. The CIT contended that the higher depreciation rate of 40% is applicable only to moulds used in rubber and plastic goods factories, as per the relevant entry in the depreciation schedule. The CIT argued that since the assessee is primarily in the business of manufacturing electronic goods, the appropriate depreciation rate should be 25%.

The assessee, however, argued that it manufactures plastic and rubber components in-house, which are essential for its electronic goods manufacturing process, thereby justifying the claim for higher depreciation. The assessee relied on the interpretation that the entry in the depreciation schedule does not restrict the higher rate solely to standalone plastic and rubber goods factories but includes any factory using such moulds for manufacturing plastic goods.

2. Invocation of Section 263 by the CIT:
The CIT invoked Section 263, asserting that the AO's order allowing 40% depreciation was erroneous and prejudicial to the interests of the revenue. Section 263 empowers the Commissioner to revise any order passed by the AO if it is deemed erroneous and prejudicial to the revenue. The CIT's decision was based on the interpretation that the assessee's business did not fall within the specific entry for higher depreciation rates.

The assessee countered this by arguing that the AO's decision was a possible and permissible view under the law. The assessee cited the Supreme Court ruling in Malabar Industrial Co. Ltd. v. CIT, which states that if the AO adopts one of the permissible views, it cannot be deemed erroneous merely because the CIT disagrees with it.

3. Applicability of Judicial Precedents:
The CIT relied on the Madras High Court decision in CIT v. Falcon Wires (P.) Ltd., which emphasized that industries not explicitly covered by specific entries in the depreciation schedule cannot claim benefits intended for those entries. Conversely, the assessee cited the Karnataka High Court ruling in CIT v. Amco Batteries Ltd., which allowed higher depreciation for moulds used in manufacturing plastic covers for batteries, even if the covers were not sold independently.

The Tribunal also considered the ITAT Bangalore Bench's decision in BPL Refrigeration Ltd. v. Asstt. CIT, which supported the assessee's claim for higher depreciation, stating that moulds used in manufacturing plastic parts for electronic goods should qualify for the higher rate, even if the parts are not sold separately.

Conclusion:
The Tribunal concluded that the AO's decision to allow 40% depreciation was a possible view, supported by judicial precedents. It held that the CIT's invocation of Section 263 was unwarranted, as the AO's order was neither erroneous nor prejudicial to the interests of the revenue. The Tribunal set aside the CIT's order and upheld the AO's decision, allowing the assessee's appeal.