2021 (1) TMI 1103 - AT - Income Tax

Disallowance of the additional depreciation claimed by the Appellant Company u/s. 32(1)(iia) - Manufacture or production - AO has held that the process of delivery of CNG to automobiles at the CNG filling centres does not amount to manufacture or production or an article or thing which is mandatory requirement for claiming additional depredation u/s. 32 (1)(iia) - Whether the compressed natural gas produced by the appellant, having different name, character and use from natural gas can be said to be covered by the phrase manufacture or production? - HELD THAT - As decided in CENTRAL U.P. GAS LIMITED 2016 (12) TMI 814 - ALLAHABAD HIGH COURT compressed natural gas in its compressed form has a distinct identity and character and use. It is settled law of the Apex Court in the case of Income Tax Officer Vs.Arihant Tiles and Marbles P. LTD. reported in 2009 (12) TMI 1 - SUPREME COURT that when a commodity acquires a distinct name, use and commercial identity, it would acquire the trait of 'manufacture'. Question is answered in favour of the assessee.

Summary

Issues Involved:
1. Validity of the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Entitlement of the assessee to additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961.
3. Dropping of penalty proceedings initiated under Section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by the CIT(A):
The appellant challenged the order of the CIT(A)-35, New Delhi, dated 28.08.2017, arguing that it was "bad in law."

2. Entitlement to Additional Depreciation under Section 32(1)(iia):
The primary contention was whether the assessee’s activity of compressing natural gas into Compressed Natural Gas (CNG) qualifies as "manufacture" or "production" under Section 32(1)(iia) of the Income Tax Act, 1961.

- Assessee's Argument: The assessee argued that it was engaged in manufacturing activities as evidenced by a certificate from the Central Excise Department and the payment of Central Excise duty. The process involved complex machinery and multiple stages of compression, cooling, and filtration, transforming natural gas into CNG, which is distinct in name, character, and use from natural gas.

- Assessing Officer's (AO) and CIT(A)'s Stand: The AO and CIT(A) held that the compression of natural gas into CNG does not amount to "manufacture" or "production" of a new article or thing. Thus, the additional depreciation claim of ?8,23,15,761/- was disallowed.

- Legal Precedents and Definitions: The DR argued that the definitions of "manufacture" under the Central Excise Act and the Income Tax Act differ. The Income Tax Act defines "manufacture" as a process resulting in a new and distinct object with a different name, character, and use. Several case laws were cited to support the argument that not all processes qualify as manufacturing for Income Tax purposes.

- Tribunal's Analysis: The Tribunal considered the arguments and referred to the judgment of the Hon'ble High Court of Allahabad in the case of Central UP Gas Ltd. Vs DCIT, which held that the process of compressing natural gas into CNG constitutes "manufacture" as it results in a new product with a distinct identity, use, and commercial value. The Tribunal found that the assessee's process of converting natural gas into CNG meets the criteria of "manufacture" under the Income Tax Act.

3. Dropping of Penalty Proceedings under Section 271(1)(c):
The assessee also contested the penalty proceedings initiated under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars of income.

- Tribunal's Decision: Based on the decision to allow the additional depreciation claim, the Tribunal implicitly addressed the penalty proceedings, suggesting that the basis for the penalty no longer exists.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the process of compressing natural gas into CNG qualifies as "manufacture" under Section 32(1)(iia) of the Income Tax Act, 1961. Consequently, the additional depreciation claim was allowed, and the penalty proceedings under Section 271(1)(c) were rendered moot. The Tribunal's decision was guided by the precedent set by the Hon'ble High Court of Allahabad in the Central UP Gas Ltd. case, which recognized the transformation of natural gas into CNG as a manufacturing activity.