Madhuri Refiners Private Ltd. Vs DCIT (ITAT Indore)
Conclusion: Additional depreciation on purchase of raw material and making packing material was manufacture as the final product was a commercially, physically and chemically different and a very important factor that the assessee had been consistently regarded as “manufacture” by various Government Department and Agencies.
Held: AO observed that assessee had claimed additional depreciation u/s 32(1)(iia) of Rs. 20,25,596 on plant and machinery. AO confronted the assessee on eligibility of claim. Assessee made a detailed submission on business activity, and tried to convince the AO that it was eligible for claim of additional depreciation. However, AO rejected the claim of assessee. CIT(A) also rejected the contention of the assessee and hence the present appeal. Assessee, submitted that had there been a “trading activity” only, why would have assessee installed the plant and machinery of such a high magnitude on which the “additional depreciation” itself was as high as Rs. 20,25,596 and also emphasised that it had been consistently regarded as “manufacture” by various Government Department and Agencies. It was held that the process undertaken by assessee had been treated as manufacture under Excise Act and allied tax laws, although the excise-duty was exempt on edible oil. The assessee’s case was reverted back. Firstly the assessee was doing two distinguishable types of activities, viz. (i) purchasing oil from local/overseas market and reselling as such, which was 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 was a “manufacturing activity”. The proportion of “manufacturing activity” in the year was 98.93%. Secondly, the flow-chart of “manufacturing activity” depicted 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 required application of labour, machinery and analytical lab. Fourthly, the chemical composition was changed in such a way that nutritional-values were enhanced and the finished product became edible for a longer period. Therefore, the final product was a commercially, physically and chemically different. Fifthly, a very important factor that the assessee had been consistently regarded as “manufacture” by various Government Department and Agencies. The process undertaken by the assessee had been treated as manufacture under Excise Act and allied tax laws. These factors clearly indicated 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 qualified to be treated as “production”. Hence assessee was eligible for additional depreciation.
FULL TEXT OF THE ORDER OF ITAT INDORE
Feeling aggrieved by appeal-order dated 05.06.2019 passed by Ld. Commissioner of Income-Tax (Appeals)-I, Indore [“Ld. CIT(A)”], which in turn arises out of assessment-order dated 29.12.2017 passed by learned ACIT-3(1), Indore [“Ld. AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment Year [“AY”] 2015-16, the assessee has filed this appeal on following grounds:
“1. That on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in confirming the action of Ld. Assessing Officer in upholding the disallowance of additional depreciation u/s 32(1)(iia) of the Income Tax Act, 1961 of Rs. 2025596/-. The action of Ld. CIT(A) is illegal, unjustified arbitrary and against the facts of the case.
2. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the order passed by ld. Assessing Officer. u/s 143(3), without appreciating assessee’s submission while adjudicating the appeal.
3. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the appellant has not fall within the purview of manufacturing in term of section 2(29BA) of the Income Tax Act, 1961.”
2. Brief facts are such that the assessee-company filed return of income on 30.09.2015 declaring a loss of Rs. 39,72,580/-. The case was selected for scrutiny and statutory notices u/s 143(2)/142(1) were issued, which were duly complied with. During assessment proceeding, Ld. AO observed that the assessee has claimed additional depreciation u/s 32(1)(iia) of Rs. 20,25,596/- on plant and machinery. Ld. AO confronted the assessee on eligibility of claim. The assessee made a detailed submission on business activity, which is reproduced in assessment-order at Page No. 4 to12, and tried to convince the Ld. AO that it is eligible for claim of additional depreciation. However, the Ld. AO being unsatisfied with the submission of assessee, rejected the claim of assessee by observing as under:
“5.3 The explanation, case laws and submissions given by the assessee is given due consideration and is found to be not acceptable for the following reasons:
1. The nature of business of the assessee is to buy oil in bulk in loose quantities from market and to pack it and sale in different type of packing i.e. in tins, jars, bottles etc.
2. As per definition of manufacture u/s 2(29)(BA), it is a change in the nonliving physical object resulting into transformation into a new and distinct object having a different name character and use and bringing into existence a thing with a different chemical composition. But in the case of the assessee, it is only purchasing of oil in bulk quantities and selling of oil which is sold in packaged container which amount to packing only but not manufacturer of oil.
3. In the case of the assessee, the assessee has not changed the raw material form which is used as input neither physically nor chemically nor resulted in the production of any new product. Both the input and output are same products and hence the activity of the assessee does involve in the production of any new product and hence does not amount to manufacture.
4. Since the assessee has not involved in any manufacture activity, is not eligible to claim additional depreciation on the plan and machinery and hence the additional depreciation claim of Rs.20,25,596/- is disallowed.”
3. Being aggrieved by action of Ld. AO, the assessee filed appeal to Ld. CIT(A). During appellate proceeding, the assessee again made an extensive submission on the facts as well as judicial precedents, which is reproduced below:
“It is submitted that the assessee has raised Four grounds of appeal and the main ground of appeal, which is 2 & 3rd one, and others are covered by the ground of appeal raised subsequently –
The second & Third Ground of appeal read as under –
