2010 (1) TMI 880 - AT - Income Tax

Whether production of ready mixed concrete (RMC) amounts to manufacture - Additional depreciation - assessee to claim additional depreciation under section 32(l)(iia) of the Act - mixing of four products in prescribed ratio would result a different identifiable product which cannot be reconverted to its original shape. Hon ble Supreme Court in the case of India Cine Agencies (2008 -TMI - 31532 - SUPREME COURT ) has considered cutting of a jumbo films rolls into small piece of films a manufacturing activity. - Held that - Revenue Authority have erred in holding that assessee is not carrying out any manufacturing activity. Assessing Officer directed to allow additional depreciation on machinery used for the production of ready mixed concrete. Disallowance of purchases - net profit in terms of percentage is almost double than the previous year - Assessing Officer was unable to point out a single defect in its books of account. Merely non-filing of confirmation from two suppliers, it cannot be held that assessee has not received the goods from these persons and the credit balance in the shape of sundry credit appearing in the books of account is unaccounted money of the assessee. The assessee has filed certificate from the bank indicating the facts that cheque issued by it were cleared - Held that - Assessing Officer is not justified in making the disallowance of purchases made by the assessee. appeal filed by the assessee is allowed.

Issues Involved:
1. Whether the production of ready mixed concrete (RMC) amounts to manufacture or production of goods or articles, thereby entitling the assessee to claim additional depreciation under section 32(1)(iia) of the Income Tax Act.
2. Disallowance of expenses incurred for the purchase of sand from specific suppliers.

Issue-wise Detailed Analysis:

1. Whether production of RMC amounts to manufacture or production of goods or articles:

The assessee filed a return of income declaring a total income of Rs. 29,28,760 and claimed additional depreciation under section 32(1)(iia) of the Act, asserting that it was engaged in the manufacturing of RMC. The Assessing Officer (AO) disagreed, referencing various judicial decisions, and held that the assessee was not manufacturing or producing any article, thus not qualifying as an industrial undertaking eligible for additional depreciation. The CIT (Appeals) upheld the AO's decision, emphasizing that there was no chemical change in the raw materials used to produce RMC.

The assessee appealed, arguing that the production of RMC involved a chemical reaction and resulted in a new product that could not be reverted to its original components. The assessee cited the Supreme Court's decision in the case of India Cine Agencies v. CIT, where the conversion of jumbo rolls into smaller films was considered a manufacturing activity. The assessee also highlighted the use of heavy machinery and computerization in the production process, asserting that the activity was complex and systematic.

The Tribunal, after considering various judicial precedents and the detailed process involved in producing RMC, concluded that the assessee's activity qualified as manufacturing. The Tribunal noted that the mixing of components in prescribed ratios resulted in a new, identifiable product that could not be reconverted to its original form. Thus, the Tribunal allowed the assessee's claim for additional depreciation.

2. Disallowance of expenses incurred for the purchase of sand:

The AO disallowed expenses amounting to Rs. 6,64,521 and Rs. 4,04,012 incurred for purchasing sand from Subhash Chand and Vishal Enterprises, respectively, due to the lack of confirmations from these suppliers. The AO's notices to Subhash Chand were returned with the remark "not known," and the assessee failed to provide confirmations.

The assessee contended that it had shown a net profit of Rs. 79.11 lakhs on a turnover of Rs. 884.81 lakhs, with a net profit percentage almost double that of the previous year. The assessee argued that the AO's notice did not include Subhash Chand's father's name, making it difficult to locate him in the village. The assessee also provided evidence of payments through cheques and suggested that the AO could have verified the suppliers via their telephone numbers.

The Tribunal found that the AO had not pointed out any defects in the assessee's books of account and had not taken further steps to verify the suppliers' existence. The Tribunal held that the mere non-filing of confirmations did not justify the disallowance, especially given the evidence of cheque payments and the absence of any defects in the books. Consequently, the Tribunal allowed the assessee's appeal and deleted the disallowance of the expenses.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal recognizing the production of RMC as a manufacturing activity eligible for additional depreciation and deleting the disallowance of expenses incurred for sand purchases.

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