2011 (11) TMI 502 - AT - Income Tax

Additional depreciation - disallowance as the machinery is not used for any manufacturing or production activity and no new product came into existence - assessee engaged in the business of exporting of safety razor blades and twin track shaving system - Held that - The process carried on raw grounded blades purchased from market to make them commercially viable certainly amounts to manufacture. The raw grounded blades could not be used for shaving thus cannot be commercially viable product, which is salable in the market. The final product manufactured by assessee is commercially new and different article having a distinctive name character and use. Thus, assessee is manufacturer and is entitled for additional depreciation u/s. 32(1)(iia) on additional machineries purchased and used for packaging - Decided in favour of assessee. Wastage in production process - Disallowance as there is no manufacturing activity - Held that - This amount has already been credited to P&L Account by the assessee in its final accounts and already offered this amount for taxation and same cannot be taxed again - considering the findings of CIT(A) upholding the activity of the assessee as manufacturing, hence on this count also the assessee succeeds - Decided in favor of assessee

Summary

Issues Involved:
1. Deletion of additional depreciation by CIT(A) on machinery claimed not used for manufacturing or production activity.
2. Deletion of addition on account of wastage in the production process.

Detailed Analysis:

1. Deletion of Additional Depreciation:

The first issue concerns the CIT(A)'s decision to delete the additional depreciation added by the Assessing Officer (AO). The AO contended that the machinery on which additional depreciation was claimed was not used for any manufacturing or production activity, and no new product came into existence. The assessee, engaged in exporting safety razor blades, filed a return for the Assessment Year 2006-07. During scrutiny, the AO noted the claim for additional depreciation under section 32(i)(iia) of the Income Tax Act, 1961, and rejected it based on several observations, including the machinery being used only for wrapping and packing, and no new commercial product coming into existence.

The CIT(A) allowed the claim of the assessee, noting that the semi-manufactured blades were transformed into usable blades through various processes, and even the packaging activity itself transformed the product into a different commercial product. The CIT(A) emphasized that the entire manufacturing process was integrated, and the additional machinery was part of this manufacturing process. The CIT(A)'s findings were supported by detailed descriptions of the manufacturing process, which involved grinding, coating, pre-heating, spraying, sintering, cooling, oiling, wrapping, and packaging.

The Tribunal upheld the CIT(A)'s order, agreeing that the assessee's processes constituted manufacturing, resulting in a new and distinct commercial product. The Tribunal referenced the definition of "manufacture" under section 2(29BA) of the Act and the Supreme Court's decision in Ujagar Prints v. Union of India, which defined manufacturing as a process resulting in a new and different article with a distinctive name, character, or use. The Tribunal concluded that the assessee was entitled to additional depreciation under section 32(1)(iia) of the Act.

2. Deletion of Addition on Account of Wastage:

The second issue pertains to the CIT(A)'s deletion of an addition of Rs. 28,27,662/- on account of wastage in the production process. The AO added this amount to the income of the assessee, arguing that there was no manufacturing activity, and hence, the claim of loss on account of production could not be allowed. The CIT(A) allowed the claim, noting that the assessee was indeed engaged in manufacturing activity and had accounted for the alleged wastage in the closing stock as raw material.

The Tribunal upheld the CIT(A)'s decision, stating that the amount represented the value of closing stock of raw material lying in stock, which had already been credited to the Profit & Loss Account and offered for taxation. The Tribunal reiterated that since the assessee's activity was manufacturing, the claim for wastage was valid.

Conclusion:

The Tribunal dismissed the revenue's appeal, confirming the CIT(A)'s orders on both issues. The assessee's processes were deemed to constitute manufacturing, entitling them to additional depreciation, and the addition on account of wastage was correctly deleted as it was already accounted for in the closing stock.