Additional depreciation was allowable on purchase of Raw Material and making packing material

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 & 3^rd one, and others are covered by the ground of appeal raised subsequently –

The second & Third Ground of appeal read as under –

• • erred in disallowing Rs. 2025596/- on account of additional depreciation without appreciating the facts
  • Not providing opportunity of being heard for disallowance made.

With Thy Honour’s permission, a submission is being made on above ground of appeals.

Before going into further arguments with regard to above grounds of appeal as raised by assesse, firstly we would like to draw your Honour’s attention towards the business of the company.

The company M/s Madhuri Refiners Private Limited is mainly engaged in the manufacturing activities i.e. repacking of edible Oil in which company used to buy oil in bulk and loose quantities from market and sale in Tin/Jar and bottles or other packing as required by the customers.

The Repacking process involved several stages such as Storing, Analytical observation, Segregation & Mixing of oil, packing, branding etc. and the said stages requires labour, machinery, power, packing material, analytical lab and job works.

In addition to the above company is also engaged in trading business of Oil i.e. loose oil purchased from Local as well as overseas market and sale directly to the parties in tankers or in loose quantities which constitute 1.07 % only of total sale and balance is from manufacturing activities i.e. 98.93 % as regard the year under consideration.

Now, we would like to draw your Honour’s attention toward the assessment order passed under section 143(3) of Income-tax Act for the year under consideration wherein Ld. AO has disallowed Rs. 2025596/- on account of additional depreciation as claimed by assessee under section 32(1)(iia) of the Income Tax Act by observing that – assessee has not involved in any manufacture activity.

At this point of time it is pertinent to mention here that while making addition on account of additional deprecation, Ld. AO. has not pay proper attention towards the assessee submission dt. 11.02.2017 & 26.12.2017.

More so, ignored the evidence and the judicial pronouncements of Hon’ble Supreme court as furnished by the assessee and also not provided opportunity of being heard.

Above all, the Ld. AO. has claimed in the assessment order Page no. 3 in which stated that – Assessee was asked to explain why the additional depreciation claimed on the plant and machinery of Rs. 20,25,596/- should not be disallowed since the assessee is not engaged in manufacturing business.

The claim of Ld. AO. is based on erroneous footing since Ld. AO. never raised specific quarry with regard to the disallowance of additional deprecation and neither issued any show cause notice in this regard .

However at this point of time, we are again retreated our claim that assesse company is engaged in manufacturing activities.

Now, It is worthwhile to examine the expression “manufacture” as defined in section 2(29BA) which read as under:

“manufacture”, with its grammatical variations, means a change in a non­living physical object or article or thing, resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or thing with a different composition or integral structure.

Form the above it is learned that ‘manufacture’ is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable.

The essential point thus is that, in manufacture something is brought into existence, which is different from that, which originally existed in the sense that the thing produced is by itself a commercially different commodity.

In this regard we are producing process flow chart for the purpose of explaining the entire manufacturing process in greater details , which is as under –

It is needless to mention here that the above process required Labour, Packing material, Loading, Unloading, Power, machinery and analytical Lab and same can be evident from attached Note No. 26 –“Factory expenses” of Profit & Loss Account of audited Balance-Sheet for the year under consideration. Kindly refer page no. 1

##. Here we would like to draw your honour attention towards the packing unit, wherein assesse company also manufactured the packing material such as jar/pouches/bottles form plastic granules by using machinery installed in factory. In this regard we are enclosing copies of purchase bills of plastic granule/raw material. Kindly refer page no. 2 to 3

We are also enclosing the schedule & Sub schedule of fixed assets from audited Balance–sheet for the year under consideration showing Plant & machineries related to manufacturing activates. Kindly refer page no. 4 to 7

In the above manufacturing process assessee-company not only repacked the edible oil but repacked the oil in manner that not loses its nutrition value and remain edible for longer period and most of the process is automated and performed by the machinery.

Above all it is a very complex process which can only be carried by experts since its related to the health & safety of the people and company has to follow the regulation of foods and safety department as prescribed.

The above flow chart exhibit that the raw material acquired by the assesse company has gone through various processes which resultant into commercially different commodity and become marketable or saleable.

Furthermore on the perusal of above flow chart your honour will appreciated the fact that inputs and output are different in all respect viz. technically & commercially and also known by different name.

In the instance case there is distinct change of one object to another for the purpose of making it marketable. A new product has been brought into existence which is distinctly different from the raw materials which are used and is a commercially different commodity.

Thus it is crystal clear that different commodity having a distinct name and character emerges from the raw material after undergoing various process in form of analytical test, Segregation, Mixing, filing, packing etc. The final product is entirely different commercially from the raw material.

In addition to the above activities, it is also be noted that assesse has been consistently regarded as manufacture by various Government Department and Agencies. The above processes undertaken by the assesse have been treated as manufacture under the Excise Act and allied tax laws.

Here we would like to draw your attention towards the definition of Manufacture given by various statuses –

As per Excise Act –

1. Any activity ancillary to manufacture or producing a product

2. Any activity mentioned in Schedule 1 which is considered as deemed to be manufacture

3. labeling or relabelling, Packing or Re-Packing, Declaration of Retail price or alteration of retail price in relation to the goods mentioned in schedule 3 shall be considered as deemed manufacture.

The Factories Act, 1948- section 2(k)

(k) “manufacturing process” means any process for—

(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing, or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal,

(ii) pumping oil, water, sewage or any other substance; or

(iii) generating, transforming or transmitting power; or

(iv) composing types for printing, printing by letter press, lithography, photogravure or other similar process or book binding; [or]

(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels; or

(vi) preserving or storing any article in cold storage;

It is pertinent to mentioned here that assesse company having license under the provision of Factories Act, 1948. Wherein stated that company engaged in manufacture process of Edible Oil & packing and Jar Packing.

Xerox copy of same is enclosed for your honour kind perusal. Kindly refer page no. 8

The above proposition has been also supported by various judicial pronouncements; In this regard assesse has place reliance on judgment of the Supreme court in the case of:

(i) M/s India Cine Agencies Vs. Commissioner of Income-tax madras (3649­3650 of 2003)

(ii) Arihant Tiles and marbles P.Ltd. (2010) 320 ITR 79 (SC)

(iii) CIT Vs. Hindustan Petroleum Corporation Ltd. (9296 of 2017) Xerox copies of above Judgments are annexed – kindly refer page no. 9 to 42

From the perusal of above judgment your honour will find that the legal position is well settled by the Supreme Court with regard the type’s activities fall under the ambit of manufacture.

Moreover rule laid down by the Hon’ble Supreme Court in the case of M/s India Cine Agencies vs. CIT Madras and Arihant Tiles has been reiterated in the case of CIT vs. Hindustan Petroleum Corporation.

In the above case Hon’ble Supreme Court had consider bottling of LPG as undertaken by the assesssee is a process which amount to manufacturing.

In the case of India Cine Agency, Hon’ble Supreme Court has considered the judgment rendered in the case of Sesa Goa (supra) and all other decisions on the point which contemplate the meaning of expression “manufacture” as well as “production”. The relevant discussion made by the Hon’ble Court reads as under:

“2. As noted above, the core issue is whether activity undertaken was manufacture or production.

3. In Black’s Law Dictionary (5th Edition), the word “manufacture’ has been defined as, “the process or operation of making goods or cipy material produced by hand, by machinery or by other agency; by the hand; by machinery; or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine “. Thus by process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. (See Dy. CST (Law), Board of Revenue (Faxes) Coco Fibres [1992J Supp. l SCC 290).

4. Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. it is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges.

Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. Collector of Central Excise v. Rajasthan State Chemical Works [1991) 4 SCC 473) = (2002-TIOL-66-SC-CX).

7. To put it differently, the test to determine whether a particular activity amounts to “manufacture’ or not is: Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its character, use and name, whether be it the result of one process or several processes-‘manufacture’ takes place and liability to duty is attracted.

Etymologically the word ‘manufacture’ properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union of India [J985) 33 SCC 314) = (2002-TIOL-27-SC-CX).”

In the instant case your honour will find that assesseee company fulfill requisite condition as stipulated by the Hon’ble supreme court in the above cases.

In above context, It is worthwhile to read the decision pronounced by ITAT Delhi bench in the case of DCIT Vs. Legancy Food Pvt. Ltd. Kindly refer page no. 43 to 57, wherein food supplement as supplied by the M/s Glaxo Smithkline Consumer Healthcare Ltd for packaging to contract manufacture i.e. Legancy food Pvt. Limited treated as process of manufacturing. Since the inputs and outputs are different in all respect technically & commercially and final product know as different name.

In the assessee case your honour will observed that above inputs as mentioned in flow chart are given, a new different product emerges from raw material and the entire process provided the commercial identity to goods & same has been become the marketable or saleable goods.

In view of the above, it is submitted that assesse engaged in business of manufacturing within the meaning of income tax Act and eligible to claim additional depreciation on the plant and machinery.”

4. However, Ld. CIT(A) rejected the submission of assessee and confirmed the disallowance by holding as under:

“3.1 During the course of appeal proceeding, the counsel of the appellant has filed detailed written submissions which are reproduced above. I have considered the reasons given by the Assessing Officer in the assessment order and also the written submission filed by the appellant. After taking into account the express provision of the Income Tax Act, 1961 dealing the additional depreciation and definition of plant and machinery and manufacturing, I am of the opinion that the activity of packaging of oil being done by the appellant does not fall within the purview of manufacturing. Therefore, I am in agreement with Assessing Officer that the additional depreciation is admissible only for manufacturing of the articles in terms of section 2(29BA) of the Income tax Act, 1961. I have also gone through the various case laws cited by the appellant in support of the ground of appeal which have not been found applicable on the facts of the present case. Therefore, I hereby endorse the finding of the Assessing Officer as listed at serial Nos.1 to 4 above. The addition made on this account is hereby confirmed. The grounds of appeal are dismissed.”

5. Aggrieved by order of Ld. CIT(A), the assessee has now come in appeal before us.

6. During hearing before us, Ld. AR reiterated the extensive submissions made by assessee to lower authorities, which have been reproduced in foregoing paragraph. Referring to the same, Ld. AR pointed out that it is true that the assessee is doing two 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 and thereafter selling the same, which is a “manufacturing activity”. Ld. AR submitted that the assessee is not claiming that it is exclusively doing “manufacturing activity” alone, the assessee is frankly admitting that it is doing both activities, but the “trading activity” constituted about 1.07% and “manufacturing activity” constituted about 98.93%. Since the assessee is engaged in “manufacturing activity”, it is eligible for “additional depreciation”. Going further, Ld. AR carried us to the flow-chart of “manufacturing activity”, which is noted in the order of Ld. CIT(A) as reproduced above, and explained each activity of flow-chart. Ld. AR submitted that flow-chart clearly demonstrates that the assessee purchases raw-oil and after application of the various steps such as storage of oil – analytical observation – segregation of oil according to quality / nutritional value – mixing for enhancing quality / nutritional value, etc. obtains finished oil of different qualities / nutritional value. Ld. AR submitted that the assessee applies labour, machinery, chemicals, laboratory, power, etc. in performing “manufacturing activity”. Ld. AR submitted that the Ld. AO has made incorrect observations that (i) the activity of assessee is only buying oil and re-packing in tins, jars, bottles; and (ii) both inputs and outputs are same, the assessee does not change the raw material physically or chemically. Ld. AR submitted that by virtue of the complex process carried out by us, the assessee obtains oil of different and high nutritional-value / quality than the raw-oil and, therefore, there is a significant change in properties, although the input and output both are called “oil”. Ld. AR 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 is as high as Rs. 20,25,596/-. Ld. AR also emphasised 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, although the excise-duty is exempt on edible oil. With these submissions, Ld. AR prayed to accept the assessee as eligible for additional depreciation.

7. DR strongly opposed the submissions of Ld. AR and placed a heavy reliance on the orders of lower authorities. Ld. AR argued that 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. Therefore, the assessee is not eligible to claim additional depreciation.

8. In order to resolve the controversy, let us first examine the relevant provision of law.

8.1 Section 32(1)(iia) of the act, which grants the benefit of additional depreciation, reads as under:

“32.(1) In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—

(i) XXX

(ii) XXX

(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation, transmission or distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):

[Emphasis supplied]

Thus, the claim of additional depreciation is allowed to an assessee engaged in the business of “manufacture or production of any article or thing”.

8.2 The term “manufacture” has been defined in section 2(29BA) as under:

“2(29BA). “manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing,—

(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or

(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;

8.3 The term “production” is not defined anywhere in Income-tax act. But, however, the Hon’ble Supreme Court has, in CIT Vs. N.C. Budharaja and Co., 1993 AIR 2529, while interpreting the words “manufacture” and “production” has made following observations:

“The word “production” has a wider connotation than the word “manufacture”. While every manufacture can be characterised as production, every production need not amount to manufacture.”

“The word “production” or “produce” when used in juxtaposition with the word “manufacture” takes in bringing into existence new goods by a process which may or may not amount to manufacture.”

9. In Deepak G. Kherajani, Surat Vs. Department of Income-tax, ITA No. 2113/Ahd/2010, dated 13.05.2011, the Hon’ble Ahmedabad Bench of ITAT had an occasion to deal with a case of “additional depreciation”, wherein it was observed and held thus:

“3. On appeal, the learned CIT(A) allowed the claim in the following terms:-

“5. In the written submission, the AR has submitted that even though a composite unit engaged in all the processes may be termed as being 3 ITA no.2113/Ahd/2010 engaged in manufacturing of textiles yet, an industry engaged in one or two activities or processes in the series, should also be considered as a manufacturer. It has been further submitted that the Assessee, in addition to job-work, is engaged in manufacturing and trading of embroidered dupattas, sarees and dress materials. The work done by embroidery machines changes the basic form of the fabric in the same manner as is in the case of dyeing and printing. The value of cloth is increased by way of embroidery. The input is cloth and the output is embroidered sarees, dupattas and dress materials: In support of his contentions, the AR has placed reliance on the various provisions of  section 32(1)(iia) of the IT Act and on the following case-laws, and has pleaded that the addition be deleted.

6. I have carefully considered both the positions. At the outset, it is necessary to refer to the provisions under which additional depreciation was claimed by the Assessee, which is section 32(1)(iia):

(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an Assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty percent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).

It is evident that some of the new machineries or plants on which additional depreciation was claimed by the Assessee were acquired after 30-09-2009 and used for less than 180 days u/s 32(1)(iia) of the Act., the Assessee should have been engaged in the business of manufacture or production of any article or thing. It is important to note the use of the word 4 ITA no.2113/Ahd/2010 ‘or’ between the words manufacture and production, which means that, for additional depreciation to be admissible, the assessee would have to be engaged in either manufacture ‘or’ production.

6.1 P. Ramanathan Aiyer’s, The Law Lexicon, which is edited by Hon’ble Justice Y.V.Chandrachud, former CJI, says: the word ‘production’ or ‘produce’ when used in juxta-position with the word “manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. (I.T. Commissioner, Orissa V/s M/s N.C.Budharaja & Co, AIR 1993 SC 2529, 2534) It also defines production in connection with the levy of the Excise duty as “some expenditure of human skill and labour in bringing the goods concerned into the condition which would attract the duty. They should be produced in the sense that some human activity should be spent on them and they should be subject to some processes in order that the they may be brought to the state in which they become fit for consumption” (Aluminum Corporation of India Ltd. V/s Coal Board, AIR 1959 Cal, 222,226)

6.2 Thus, the word “production’ does not necessarily have to be examined and analysed by the strict rigour of what otherwise constitutes manufacture. It is a more general term and involves the bringing into existence by the use of human skill and labour, and the application of some processes, a product which is fit for consumption. Under the Central Excise Act, the activity of embroidery of man-made fibres is liable to excise duty under Chapter 58, Heading No. 5810 and Sub-Heading No. 5810.92 of the First Schedule to the Central Excise Tariff Act, 1985 @ 8%. However, the Central Government vide Notification No. 30/2004-Central Excise dated 09-07-2004 has exempted all the excisable goods falling under Chapter 58 (except 5804.90, 5805.90, 58,07 and 5808.10) from the levy of Excise Duty, (see Annexure-2). Thus, even if the criteria of manufacturing is to be applied, then also the activity of embroidery would amount to manufacturing under the Central Excise Act, resulting in the embroidered product being liable to excise duty.

6.3 The AR has placed reliance on the decision of the Hon’ble Supreme in the case of S.S.M.Bros. (P) Ltd. & Ors. V/s CIT (2000) 243 ITR 418. In this case, the Hon’ble Supreme Court has dealt with the application of the provisions of  section 33(1)(b)(B)(i) and has held that, when read together with item 32 of Schedule-V, the machinery or plant installed for the production of textiles including those dyed, printed or otherwise processed, made wholly or mainly out of cotton, the Assessee is entitled to deduction on account of development rebate under the said section. The Court has further observed that, if the machinery or plant is required to be utilized in the production of such textiles at whatever stage, the Assessee is entitled to the benefit. In this case, the Assessee had been producing 5 ITA no.2113/Ahd/2010 embroidered cloth which started from scratch i.e., with cotton, The Court observed that it would make no difference if the Assessee bought the cloth and then processed it using the machinery for embroidering, and in some cases after dying. What was important was that, the Assessee utilized the machinery in the production of processed textiles. To my mind, the ratio of this case is squarely applicable to the facts of the assessee’s case, even though, the Hon’ble Supreme Court dealt with development rebate yet, sub-clause-(B) to section 33(1) allows for the grant of development rebate on new machinery or plant which is installed for the purpose of construction ‘or ‘ manufacture ‘or’ production of any one or more of the articles specified in the Fifth Schedule. As already discussed clause-(iia) to section 32(1) though not covering construction, is applicable where the new machinery or plant is utilized in the business of manufacture ‘or ‘ production. The Legislative intent behind both the sections was apparently the same, i.e. to encourage and promote the setting up of new businesses or the expansion of existing businesses. Which activities constitute manufacture or production, is listed out in the Fifth Schedule. Item-32 of the Fifth Schedule lists:

(32) Textiles (including those dyed, printed or otherwise processed) made wholly or mainly of cotton, including cotton yarn, hosiery and rope, The Hon’ble Supreme Court has held that the activity of manufacturing falls under the phrase otherwise processed’ and is therefore eligible for development rebate. If we draw a parallel and agree on the similarity and the Legislative intent then, for the purposes of additional depreciation u/s 32(1)(iia) the activity of embroidery would also be eligible for deduction.

6.4 In the case of  Oracle Software India Pvt. Ltd. vs. CIT reported in 2010 (1) Scale 425 the Hon’ble Supreme Court has held that” “the term “manufacture” implies a change, but, every change is not a manufacture, despite the fact that every change in an article is the result of treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation / process renders a commodity or article fit for use for which it is otherwise not fit, the operation / process fall within the meaning of the word “manufacture”.

6.5 It must be appreciated that the designs which are embroidered are specific to a product and the purpose for which the product is to be utilized. It is thus different from printing. While a design may be printed on bales of cloth, embroidery can only be done for a specific purpose and for a specific use. The embroidery for the top of a woman’s wear would be clearly different from that of the bottom, the embroidery on the kameez would have to be a specific design which is suitable and matches a kameez. The embroidery on the salwar or the bottom would be different. The Assessee cut the pieces, got them embroidered, packed them into 6 ITA no.2113/Ahd/2010 boxes and exported them. This meant that the end product was completely different from the bale of cloth or finished fabric prior to being embroidered. In other words, the market recognition of the embroidered finished product necessarily had to be different from the finished fabric prior to being embroidered. To this extent, such activity of embroidery could also be treated as manufacture.

6.6 In view of the discussion above, it is held that the Assessee was fully entitled to the additional depreciation of 10% (machineries used for less than 180 days) under the provisions of  section 32(1)(iia) of the IT Act. The AO is directed to allow the claim of additional depreciation i.e. the sum of Rs.9,12,112/- under the provisions of  section 32(1)(iia) of the IT Act.”

4. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The ld. DR while relying on the order of the AO contended that the Ld. CIT(A) has not appreciated that the basic input material is ‘finished fabrics’ and the final output is also ‘finished fabrics’ and thereby no separate or distinct product emerged out of the process of embroidery work carried out by the assessee .There is even no transformation of goods to the extent they are commercially known ‘differently’. There being ,no ‘manufacture ‘ within the meaning of section 32(1)(iia) for the purpose of allowance of ‘additional depreciation’, the assessee being engaged in the business of embroidery work on job work basis alone, the ld. CIT(A) was not justified in deleting the disallowance, the ld. DR added. The ld. AR on behalf of the assesseee ,on the other hand, supported the findings of the ld. CIT(A).

5. We have heard both the parties and gone through the facts of the case. As is apparent from the undisputed facts on record, the AO himself allowed the claim of depreciation but not the additional depreciation on the same machinery on the ground that embroidery work undertaken on job work basis by the assessee, did not amount to manufacture within the meaning of provisions of sec.32(1)(iia) of the Act. The ld. CIT(A), on the other hand, found that the designs which were embroidered were product specific and the end product was completely different from the bale of cloth or finished fabric prior to being embroidered. The market recognition of the embroidered finished product necessarily had to be different from the finished fabric prior to being embroidered and thus, the activity of embroidery could also be treated as manufacture. Since additional depreciation could be allowed only if the assessee was engaged in either manufacture ‘or’ production, relying on a number of decisions, the ld. CIT(A) allowed the claim of additional depreciation. Indisputably, the embroidery is one of the process in the manufacture of man-made fabrics. The words used in sec. 32(1)(iia) of the Act are ‘manufacture’ or ‘production’. ‘The word ‘production’ has a wider connotation than the word ‘manufacture’. While every manufacture can be characterised as production, every production need not amount to manufacture. The word ‘production’ or ‘produce ‘ when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products which emerge in the course of manufacture . Here we may refer to a decision of the Hon’ble Apex Court relied upon by the assessee before the ld. CIT(A) in the case of S.S.M.Bros. (P) Ltd. & Ors. V/s CIT (2000) 243 ITR 418. In this decision, the issue was as to whether the assessee purchasing cloth and doing embroidery work thereon with the aid of imported machines, would be entitled to development rebate at an enhanced rate under the provisions of section 33(1)(b)(B)(i) of the Act. Hon’ble Apex Court held that if the machinery or plant is required to be utilised in the production of such textiles, at whatever stage, the assessee is entitled to the benefit of this development rebate. It is not disputed, fairly, that if the assessee had been producing the embroidered cloth starting from scratch, that is, by starting with cotton, this machinery would have been entitled to be considered for the purposes of such development rebate. It did not make any difference that in the particular case, the assessee bought the cloth and then processed it, using the machinery, by embroidering it, Hon’ble Apex Court concluded. Accordingly, the claim of the assessee was allowed. If a process renders a commodity or article fit for use for which it is otherwise not , the process falls within the meaning of the word “manufacture, as concluded in Oracle Software India Pvt. Ltd. vs. CIT reported in 2010 (1) Scale 425. In the instant case, indisputably and as found by the ld. CIT(A) , the assessee cut the pieces, got them embroidered, packed them into boxes and exported them implying thereby that the end product was completely different from the bale of cloth or finished fabric prior to being embroidered. In the light of these undisputed findings, especially when the Revenue have not placed before us any material nor brought to our notice any contrary decision so as to enable us to take a different view in the matter and claim of the assessee for depreciation having been allowed by the AO himself, we are not inclined to interfere. Consequently, ground no.1 in the appeal is dismissed.”

10. Keeping in mind above authorities, we now revert back to the assessee’s case. 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.

11. Not only above, but there is one more peculiar factor in this case of asssessee which too entitles the assessee to claim additional depreciation. The assessee has made following submission very categorically and consciously before Ld. CIT(A) with documentary evidences:

“Here we would like to draw your honour attention towards the packing unit, wherein assesse company also manufactured the packing material such as jar/pouches/bottles form plastic granules by using machinery installed in factory. In this regard we are enclosing copies of purchase bills of plastic granule/raw material. Kindly refer page no. 2 to 3”

This 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”.

12. In view of above and for the reasons stated above, 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.

In the result, this appeal of assessee is allowed. Order pronounced in open court on 21.09.2022.