2014 (1) TMI 1938 - HC - Income Tax

Additional depreciation - a new plant and machinery were installed at Mother Dairy - processing of Milk v/s not manufacturing of any item - treatment to the process of making skimmed milk powder from milk as manufacture or production - whether production of skimmed milk powder is nothing but milk without water content? - HELD THAT - The plant here is of making milk powder and process of producing the milk powder is complex and it is a completely different commercial commodity from the main ingredient milk. The decision of Aspinwall CO.Ltd 2001 (9) TMI 3 - SUPREME COURT requires reference wherein held the word manufacturing has not been defined in the Income-tax Act but in the absence definition of word manufacture has to be given a meaning as is understood in a common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article, then the same would amount to manufacturing activity. We can take note of the complex process explained by the assessee in making milk powder which is completely a different commodity. There is no way in which the final product could be restored to the original product. This process involves four different stages namely (I) Standardization (ii) Preheating( iii)Evaporation and (iv) Spray dying. A distinct commodity is thus arising from the entire complex process and it is a commercially distinct marketable commodity resulting from this process and such transformation is irreversible and thus, the plant and machinery installed by the assessee for the purpose of manufacturing the milk powder has been rightly given the benefit of additional depreciation by the authorities. Thus, the whole process of conversion of the raw material when leads to production of new article and when its character, use and nature also indicate complete transformation bringing into existence the new product altogether. The assessee has rightly been allowed the benefit of additional depreciation by both the revenue authorities.

Summary

Issues:
Challenge to additional depreciation on milk powder manufacturing plant under Income Tax Act.

Analysis:
The Revenue challenged the decision of the Income Tax Tribunal regarding the allowance of additional depreciation on the milk powder manufacturing plant. The Tribunal upheld the decision of the CIT(A) in favor of the assessee, allowing the additional depreciation. The assessee claimed the depreciation under section 32(1)(iia) of the Income Tax Act for installing new plant and machinery at Mother Dairy for producing milk powder.

The CIT(A) accepted the assessee's claim, stating that the manufacturing process of milk powder involved substantial value addition, making it a different product from milk. The Tribunal supported this decision, citing relevant case law and emphasizing that the additional depreciation is allowable for new machinery or plant acquired by an assessee engaged in manufacturing and production activities.

The High Court analyzed the provisions of section 32(1)(iia) of the Act, which allows depreciation for new machinery or plant acquired after a specified date by businesses engaged in manufacturing or production. The Court noted that the milk powder manufacturing process involved multiple stages like standardization, preheating, evaporation, and spray drying, resulting in a distinct and irreversible transformation of milk into a new commercial commodity.

Referring to legal precedents, the Court emphasized that for an activity to be considered manufacturing, the end product must be recognized as a new and distinct commodity in the market. The Court cited the Supreme Court's decision in a similar case, highlighting that the final product should no longer be identifiable with the original raw material after the manufacturing process.

Based on the detailed analysis of the manufacturing process and legal principles, the High Court concluded that the assessee was rightly allowed the additional depreciation on the milk powder manufacturing plant. The Court dismissed the Revenue's appeal, affirming the decisions of the lower authorities and holding that the substantial question of law raised by the Revenue had been adequately addressed and answered.