2015 (12) TMI 377 - AT - Income Tax

Rectification of mistake - CIT(A) quashed the order passed by the AO u/s 154 by holding that disallowance of depreciation in this case was not a prima facie mistake - Held that - CIT(A) quashing the rectification order passed by the AO, has placed reliance on M/s. Hari Fashion vs. ACIT 2011 (5) TMI 931 - ITAT AHMEDABAD wherein Tribunal observed that because of the above processes, which have to be carried out in a very careful manner, the embroidered fabric acquires entirely different looks and has different commercial value and that thus, because of the said operations, an entirely new commodity emerges. It was held that because of these operations, the look of the fabric changed substantially and the new article is commercially known differently from the original fabric; that even otherwise, the word produce has a wider connotation than the work manufacture ; that in S.S.M. Brothers (P) Ltd. and others vs. CIT (1999 (1) TMI 2 - SUPREME Court ), development rebate claimed u/s 33(1)(b)(B)(i) of the Act was allowed by holding that the plant and machinery were used in the production of processed textiles (embroidery) and, therefore, machinery was entitled to the development rebate claimed; that the decision in S.S.M Brothers (P) Ltd. & others (supra), was directly applicable to the facts of this case, because section 32(1)(iia), like section 33(1)(b)(B)(i), also provides for additional depreciation in respect of new machinery and plant purchased by an assessee engaged in the business of manufacture or production of article or thing; that since section 32(1)(iia) also uses the expression production of any article or thing , any product with embroidery work is an article or thing; that the provisions of section 31(1)(iia) are larger in scope than those of section 33(1)(B)(b)(i) in as much as section 32(1)(iia) provides for additional depreciation on plant and machinery, which is used in the production/manufacture of any article or thing, whereas section 33(1)(b)(B)(i) pertains to development rebate on plant and machinery which is used in the construction, manufacture or production of any article or thing, as listed in the Fifth Schedule; that even from the angle of Excise Duty under the Central Excise Act, embroidery is subject to levy of duty and is considered as manufacture under Tariff item 5810. CIT(A) was correct in quashing the rectification order passed by the Assessing Officer. - Decided against revenue.

Summary

Issues:
Department's appeal against quashing of order for disallowance of depreciation under section 154 of the Income Tax Act for assessment year 2007-08.

Analysis:
1. The Department filed an appeal against the order quashing the AO's decision to disallow depreciation claimed by the assessee under section 154 of the Income Tax Act for the assessment year 2007-08. The assessee, engaged in embroidery work, had claimed additional depreciation for new machinery purchased. The AO found the claim erroneous as the assessee was not involved in manufacturing or production of articles as required for depreciation under section 32(1)(iia) of the Act.

2. The AO rejected the assessee's explanation based on the definition of "manufacture" in section 2(29BA) and relevant case laws. The CIT(A) later overturned the AO's decision, leading to the Department's appeal. The Department argued that the machinery was used for embroidery work and not for manufacturing or production, thus not meeting the criteria for additional depreciation under section 32(1)(iia).

3. The CIT(A) relied on the Tribunal's decision in "M/s. Hari Fashion vs. ACIT" to support the assessee's claim. The Tribunal in that case considered embroidery work as production of a new article with commercial value, qualifying for depreciation benefits. Additionally, the CIT(A) referred to judgments by the Punjab & Haryana High Court and the Supreme Court endorsing a broad interpretation of "manufacture" under the Income Tax Act.

4. The CIT(A) highlighted that processes like embroidery on grey cloth were considered production and manufacture under relevant provisions of the Act. The Tribunal's decision in "S.S. Embroiders, Amritsar vs. Department of Income Tax" further supported the allowance of depreciation for machinery used in textile industry activities. No contradictory decisions were presented to challenge these interpretations.

5. Ultimately, the Tribunal dismissed the Department's appeal, affirming the CIT(A)'s decision to quash the AO's rectification order. The judgment emphasized the broader interpretation of "manufacture" and "production" under the Income Tax Act, supporting the assessee's claim for depreciation benefits in the case of embroidery work.