2015 (10) TMI 589 - AT - Income Tax

Conversion of jumbo rolls into small sizes - whether conversion amounts to manufacture or production, eligible for deduction under sec. 32AB or deduction under sections 80-HH and 80-I? - Held that - Hon ble Supreme Court in M/s India Cine Agencies & Computer graphics Ltd. Versus CIT 2008 (11) TMI 15 - SUPREME COURT held that this activity amounts to manufacture or production. Thus, we think it is not necessary to recapitulate and recite all the decision on the construction expression manufacture . But suffice to say that core of all the decisions of the Hon ble Supreme Court or Hon ble High Court is to the effect that broadly manufacture is a transformation of an article, which is commercially different from the one which is converted. It is a change of one object to another for the purpose of marketability. It brings something into existence, which is different from that, which originally existed. The new product is a different commodity physically as well as commercially. The Hon ble Court also explained broader test to determine whether manufacture is there or not, it is propounded that when a change or series of changes are brought out by application of processes which take the commodity to the point where, commercially, it cannot be regarded as the original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process. Thus, in our opinion, the moment the assessee has carried the embroidery work, the character of sari had changed. It does not remain the original grey synthetic cloth. It has its independent market and value in the market other than the grey synthetic cloth. Thus, the learned AO failed to appreciate this aspect. We further, find that the ld.First Appellate Authority has appreciated the controversy in right perspective as well as followed the order of the ITAT, wherein, it has been held that the embroidery work is an activity of manufacture. In view of the above discussion, we do not find any merit in the appeal of the Revenue. - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of additional depreciation claimed by the assessee.
2. Interpretation of the term "manufacture" in the context of embroidery work.
3. Applicability of Section 32(1)(iia) of the Income Tax Act.

Issue 1: Disallowance of Additional Depreciation
The case involved a dispute over the disallowance of additional depreciation claimed by the assessee. The Assessing Officer (AO) disallowed the claim of Rs. 32,89,944, stating that the embroidery work done by the assessee did not amount to manufacturing activity. The AO argued that the embroidery work on sarees did not change the basic features of the item and only added value. However, the Commissioner of Income Tax (Appeals) allowed the claim, citing previous decisions where embroidery work was considered a manufacturing activity. The ITAT upheld the CIT(A)'s decision, stating that the embroidery work changed the character of the fabric, making it a distinct product with its own market value. Therefore, the ITAT dismissed the Revenue's appeal and the assessee's cross-objection.

Issue 2: Interpretation of "Manufacture" in Embroidery Work
The key contention revolved around whether embroidery work constituted manufacturing activity. The ITAT referred to various legal precedents, including decisions of the Hon'ble Supreme Court and High Courts, to define "manufacture." The court highlighted that the transformation of an article into a new and distinct object with a different name, character, and use qualifies as manufacturing. In this case, the ITAT concluded that the embroidery work changed the sari into a distinct product with its own market value, meeting the criteria of manufacturing. The court emphasized that the core of manufacturing lies in the transformation of an article into a commercially different product, which was evident in the embroidery work undertaken by the assessee.

Issue 3: Applicability of Section 32(1)(iia) of the Income Tax Act
The ITAT analyzed the provisions of Section 32(1)(iia) of the Income Tax Act, which allows additional depreciation for new machinery or plant acquired after a specified date by businesses engaged in manufacturing or production. The dispute did not concern the applicability of this section but focused on whether the embroidery work qualified as manufacturing for claiming additional depreciation. The ITAT clarified that the eligibility for additional depreciation hinged on engaging in manufacturing or production activities, which the assessee's embroidery work was deemed to satisfy based on the interpretation of "manufacture" provided in legal precedents. Therefore, the ITAT directed the AO to allow the claim of additional depreciation, as the embroidery work was considered a manufacturing activity.

This comprehensive analysis of the judgment highlights the core issues, legal interpretations, and the final decision rendered by the ITAT in the case.