2022 (12) TMI 279 - AT - Income Tax

Disallowance of additional depreciation u/s 32(1)(iia) - appellant has not fall within the purview of manufacturing in term of section 2(29BA) - Whatever process is applied by the assessee, the oil remains oil and the requirements of manufacture as defined in section 2(29BA) are not satisfied? - HELD THAT - We observe certain facts from the submission of assessee made before lower authorities and also argued before us, which stand uncontroverted by revenue. Firstly the assessee is doing two distinguishable types of activities, viz. (i) purchasing oil from local/overseas market and reselling as such, which is a trading activity and (ii) purchasing raw-oil, applying technical-processes, converting the same into finished-oil of high nutritional value of different qualities/brands, which is a manufacturing activity . The proportion of manufacturing activity in the year was 98.93%. Secondly, the flow-chart of manufacturing activity depicts various step-by-step activities from purchase of raw-oil - storage of oil analytical observation segregation of oil according to quality / nutritional value mixing for enhancing quality / nutritional value lastly packing in jars/bottles of different brand names and qualities. Thirdly, the whole process requires application of labour, machinery and analytical lab. Fourthly, the chemical composition is changed in such a way that nutritional-values are enhanced and the finished product becomes edible for a longer period. Therefore, the final product is a commercially, physically and chemically different. Fifthly, a very important factor that the assessee has been consistently regarded as manufacture by various Government Department and Agencies. The process undertaken by the assessee have been treated as manufacture under Excise Act and allied tax laws. These factors clearly indicate that the assessee s case falls within the scope of manufacture as defined in sub-clause (b) of section 2(29BA) i.e. bringing into existence of a new and distinct object or article or thing with a different chemical composition or alternatively it qualifies to be treated as production . Hence the assessee is eligible for additional depreciation. Vital fact, which is not disputed by revenue, that the assessee is purchasing plastic granule/raw material and manufacturing packing material therefrom such as jar/pouches/bottles make the assessee fully eligible for additional depreciation . It is very much clear that the assessee is eligible for additional depreciation . Therefore, we uphold the claim of additional depreciation as made by assessee and direct the Ld. AO to allow the same. Appeal of assessee is allowed.

Issues Involved:
1. Disallowance of additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961.
2. Determination of whether the assessee's activities qualify as "manufacturing" under Section 2(29BA) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Additional Depreciation:
The primary issue revolves around the disallowance of additional depreciation claimed by the assessee under Section 32(1)(iia) of the Income Tax Act, 1961. The assessee claimed additional depreciation of Rs. 20,25,596/- on plant and machinery, which was disallowed by the Assessing Officer (AO). The AO's contention was that the assessee's activities did not qualify as "manufacturing" and thus, the additional depreciation was not permissible. The AO observed that the assessee was engaged in the business of buying oil in bulk, repacking it in tins, jars, bottles, etc., and selling it, which did not amount to manufacturing. The AO further noted that the raw material (oil) and the final product (repacked oil) remained the same, both physically and chemically, and hence, no new product was produced.

2. Determination of Manufacturing Activities:
The second issue pertains to whether the assessee's activities qualify as "manufacturing" under Section 2(29BA) of the Income Tax Act, 1961. The assessee argued that their activities involved several stages such as storing, analytical observation, segregation, mixing, packing, and branding, which transformed the raw oil into a finished product with enhanced nutritional value. The assessee contended that these processes required the use of labor, machinery, power, packing material, and analytical labs, thus qualifying as manufacturing. The assessee also highlighted that the proportion of manufacturing activity constituted 98.93% of their total activities for the year under consideration. The assessee relied on various judicial precedents to support their claim that their activities amounted to manufacturing.

Tribunal's Findings:
The Tribunal examined the relevant provisions of the law, specifically Section 32(1)(iia) and Section 2(29BA) of the Income Tax Act, 1961. Section 32(1)(iia) allows additional depreciation for new machinery or plant acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing. Section 2(29BA) defines "manufacture" as a change in a non-living physical object resulting in transformation into a new and distinct object with a different name, character, and use, or bringing into existence a new and distinct object with a different chemical composition or integral structure.

The Tribunal noted that the assessee's activities involved purchasing raw oil, applying technical processes, and converting it into finished oil with high nutritional value and different qualities/brands. The Tribunal observed that the flow-chart provided by the assessee depicted various step-by-step activities from purchase of raw oil to the final packing in jars/bottles of different brand names and qualities. The Tribunal emphasized that the entire process required the application of labor, machinery, and analytical labs, resulting in a significant change in the chemical composition and nutritional value of the oil.

The Tribunal also considered the fact that the assessee was consistently regarded as a manufacturer by various government departments and agencies, and the process undertaken by the assessee was treated as manufacturing under the Excise Act and allied tax laws. These factors indicated that the assessee's activities fell within the scope of "manufacture" as defined in Section 2(29BA).

Moreover, the Tribunal acknowledged the assessee's submission that they also manufactured packing material such as jars, pouches, and bottles from plastic granules using machinery installed in their factory. This undisputed fact further supported the assessee's eligibility for additional depreciation.

Conclusion:
The Tribunal concluded that the assessee's activities qualified as "manufacturing" under Section 2(29BA) of the Income Tax Act, 1961, and thus, the assessee was eligible for additional depreciation under Section 32(1)(iia). The Tribunal directed the AO to allow the claim of additional depreciation as made by the assessee. Consequently, the appeal of the assessee was allowed.

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