2011 (5) TMI 1137 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made on account of disallowance of additional depreciation claimed on embroidery machines.
2. Deletion of addition made on account of 20% disallowance out of conveyance, general, staff welfare, and telephone expenses.

Summary:

Issue 1: Disallowance of Additional Depreciation on Embroidery Machines

The Revenue challenged the deletion of an addition of Rs. 9,12,112/- made by the Assessing Officer (AO) on account of disallowance of additional depreciation claimed on embroidery machines. The AO had disallowed the additional depreciation on the grounds that the assessee's activity of embroidery did not constitute "manufacture" within the meaning of section 32(1)(iia) of the Income-tax Act, 1961. The AO argued that embroidery was merely a value addition and did not result in a commercially different product.

The CIT(A) allowed the claim for additional depreciation, stating that the embroidery process transformed the basic form of the fabric, making it a different product. The CIT(A) relied on various case laws, including the Supreme Court's decision in S.S.M. Bros. (P) Ltd. & Ors. V/s CIT, which held that processes like dyeing, printing, and embroidery constituted manufacturing. The CIT(A) concluded that the assessee was engaged in the business of manufacture or production and was thus eligible for additional depreciation u/s 32(1)(iia).

The Tribunal upheld the CIT(A)'s decision, noting that the embroidery process resulted in a product that was commercially different from the input fabric. The Tribunal emphasized that the term "production" has a broader connotation than "manufacture" and includes processes that bring new goods into existence. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

Issue 2: Disallowance of 20% Out of Conveyance, General, Staff Welfare, and Telephone Expenses

The Revenue also contested the deletion of an addition of Rs. 34,054/- made by the AO, which represented 20% of the total expenses on conveyance, general, staff welfare, and telephone expenses. The AO had disallowed this amount on the grounds that some expenses were personal or non-business in nature and lacked proper documentation.

The CIT(A) deleted the disallowance, reasoning that such expenses were petty and incurred in the routine course of business. The CIT(A) noted that the AO had not identified any specific non-genuine or non-business expenditure and that the expenses were necessary for the day-to-day running of the business.

The Tribunal agreed with the CIT(A), stating that the AO had not provided evidence of any specific personal or non-business expenditure. The Tribunal found no reason to interfere with the CIT(A)'s decision and dismissed the Revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The Tribunal found that the assessee was entitled to additional depreciation on embroidery machines and that the disallowance of 20% of certain expenses was unwarranted. The appeal was dismissed in its entirety.