2016 (4) TMI 40 - AT - Income Tax

Additional depreciation u/s 32(1)(iia) on plant and machinery - whether to claim additional depreciation, the assessee s main business must be manufacture or can be it an activity of the main business i.e. ancillary activity? - Held that - It is clear that the manufacturing activity of the assessee is a separate economical activity and incidental to the main business. Since, the assessee was already running a manufacturing activity independently and manufacturing pipes as it is observed in the above judgment, that one business can be advantageously combined with another business. Hence, in the present case, as per the provisions of section 32(11)(iia) and relying on the decision of Hon ble Madras High Court in the case of Hi Tech Arai Ltd. (2009 (9) TMI 60 - MADRAS HIGH COURT ), the assessee is already engaged in the business of manufacture even though it is an activity of the main business. In our considered view, the assessee is eligible to claim additional depreciation u/s 32(1)(iia) of the Act as an existing manufacturer. - Decided in favour of assessee.

Summary

Issues Involved:
1. Eligibility of the assessee to claim additional depreciation under section 32(1)(iia) of the Income Tax Act.
2. Determination of whether the assessee's business activities qualify as manufacturing or production.

Issue-wise Detailed Analysis:

1. Eligibility to Claim Additional Depreciation:
The central issue is whether the assessee, engaged primarily in infrastructure projects, qualifies for additional depreciation under section 32(1)(iia) of the Income Tax Act. The assessee claimed additional depreciation on plant and machinery amounting to ?32,25,776/-. The Assessing Officer (AO) disallowed the claim, arguing that the assessee's primary business of executing infrastructure projects does not constitute manufacturing or production. The AO relied on the Hon’ble Madras High Court’s decision in Hi Tech Arai Ltd., which stipulates that additional depreciation is allowable only if the taxpayer is engaged in the business of manufacturing or production of any article or thing.

2. Determination of Manufacturing or Production Activity:
The assessee argued that it has a separate unit for manufacturing pipes, which are used both for captive consumption in its contract business and sold to external parties. The CIT(A) upheld the AO's decision, stating that the primary business of the assessee is infrastructure projects, and the manufacturing of pipes is merely incidental and not an independent business. The CIT(A) emphasized that the manufacturing activity was not the end activity but a process within the larger business operation.

Appellant's Arguments:
The assessee contended that it meets the conditions for claiming additional depreciation, as it has invested in new plant and machinery and is engaged in manufacturing pipes. The assessee cited the case of Hi Tech Arai Ltd., arguing that the provision does not require the new machinery to be directly related to the primary business. Additionally, the assessee referenced the case of Lake Palace Hotels and Motels (P.) Ltd., where the court held that incidental business activities could qualify for benefits if they are part of the overall business operations.

Respondent's Arguments:
The Departmental Representative (DR) argued that the assessee's primary business is construction and infrastructure, which does not qualify as manufacturing or production. The DR maintained that the manufacturing of pipes is not a separate business activity but an ancillary process within the main business. The DR also noted that the assessee's case differs from Hi Tech Arai Ltd., where the new machinery was used for a distinct and separate production activity.

Tribunal's Findings:
The Tribunal analyzed the submissions and relevant case laws. It referred to the Madras High Court's decision in Hi Tech Arai Ltd., which clarified that the setting up of new machinery or plant does not need to have an operational connection to the primary business. The Tribunal also considered the Rajasthan High Court's decision in Lake Palace Hotels and Motels (P.) Ltd., which supported the view that incidental business activities could qualify for additional depreciation if they are part of the overall business operations.

The Tribunal concluded that the assessee's manufacturing activity of pipes, though ancillary to its main business, qualifies as a separate economic activity. The Tribunal held that the assessee is eligible for additional depreciation under section 32(1)(iia) as it is engaged in the business of manufacturing, even if it is an activity within the main business.

Conclusion:
The Tribunal allowed the appeals of the assessee for both assessment years, holding that the assessee is entitled to claim additional depreciation under section 32(1)(iia) of the Income Tax Act. The judgment emphasized that the manufacturing of pipes, even if part of the larger business operation, qualifies as a manufacturing activity eligible for additional depreciation.