The ACIT, Circle-2, Surat V. Shri Deepak G.Kherajani, Surat

ITA 2113/AHD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6649 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 06-05-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 21-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G D BALVADR
• Assessee Lawyers: MK PATELAR
• Keywords: Depreciation; Business expenditure; Additional depreciation
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI T K SHARMA,JM & SHRI A N PAHUJA,AM ITA NO.2113/AHD/2010 (ASSESSMENT YEAR:-2007-08) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-2, ROOM NO. 110, AAYAKAR BHAVAN, MAJURA GATE, SURAT V/S SHRI DEEPAK G KHERAJANI, 1104, SHREE MAHALAXMI MARKET, RING ROAD, SURAT PAN: AIIPK 0116 F [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI G D BALVA,DR ASSESSEE BY:- SHRI M K PATEL,AR O R D E R A N PAHUJA: THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATED 29- 03-2010 OF THE LD. CIT(APPEALS)-II, SURAT FOR THE A SSESSMENT YEAR 2007-08, RAISES THE FOLLOWING GROUNDS:- [1] ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE OF R S.9,12,112/- ON ACCOUNT OF DISALLOWANCE OF ADDITIONAL DEPRECIATION CLAIMED ON THE EMBROIDERY MACHINES. [2] ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE OF R S.34,054/- ON ACCOUNT OF THE 20% DISALLOWANCE OUT OF CONVEYANCE, GENERAL, STAFF WELFARE AND TELEPHONE EXPENSES. [3] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. [3] IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE CIT(A) MAY BE SET-ASIDE AND THAT OF AO MAY BE RESTORED TO THE ABOVE EXTENT. 2. ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL, F ACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCO ME OF RS.7,85,249/- FILED ON 08-10-2007 BY THE ASSESSEE, WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2 ) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS THE ACT] ON 27-09-2008. THE ASSESSEE IS A PROPRIETOR OF TWO CONCERNS, NAMELY, ( I) M/S EKTA ITA N O.2113/AHD/2010 2 EXPORTS (TRADING A/C.) ENGAGED IN THE BUSINESS OF T RADING OF ART SILK CLOTH AND (II) M/S EKTA EXPORTS (EMBROIDERY A/C.) E NGAGED IN EMBROIDERY ON JOB WORK BASIS .DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOT ICED THAT THE ASSESSEE CLAIMED DEPRECIATION(INCLUDING ADDITIONAL DEPRECIATION) OF RS.15,96,196/- @ 17.5% ON PLANT AND MACHINERY OF THE VALUE OF RS.91,51,492/-INSTALLED IN THE SECOND HALF OF THE F INANCIAL YEAR UNDER CONSIDERATION. BUT IN THE DEPRECIATION CHART ATTACH ED WITH THE COMPUTATION OF INCOME, THE ASSESSEE HAD SHOWN THE VALUE OF SAID MACHINERY AT RS.1,00,63,604/-. TO A QUERY BY THE AO , THE ASSESSEE SUBMITTED A COPY OF LEDGER ACCOUNT ALONG WITH BILLS IN RESPECT OF 'MACHINERY', REVEALING THE COST OF MACHINERY INST ALLED DURING THE YEAR - RS.91,21,122/-. IN RESPONSE TO A SHOW-CAUSE DATED 20-11- 2009, SEEKING TO DISALLOW ADDITIONAL DEPRECIATION O F 10% OVER AND ABOVE THE NORMAL RATE OF 7.5%, THE ASSESSEE DID NOT FURNISH ANY REPLY. CONSEQUENTLY, THE AO CONCLUDED THAT THE ASSE SSEE IS ELIGIBLE FOR DEDUCTION OF DEPRECIATION TO THE EXTENT OF RS.6 ,84,084/- ONLY, I.E. AT @ 7.5% AND DISALLOWED THE CLAIM FOR ADDITIONAL D EPRECIATION OF RS.9,12,112/- ON THE GROUND THAT THE ASSESSEE IS ENGAGED IN THE ACTIVITY OF DOING ONLY EMBROIDERY WORK ON FABRICS, WHICH IS ONE OF THE PROCESS OF A SERIES OF DIFFERENT PROCESSES, CONSTITUTING MANUFACTURE O F FABRICS AND THAT THERE WAS NO TRANSFORMATION OF GOODS TO THE EXTENT THAT THEY WER E COMMERCIALLY KNOWN DIFFERENTLY. IN NUTSHELL, THE AO CONCLUDED THAT TH E ACTIVITY OF EMBROIDERY CONSTITUTED ONLY VALUE ADDITION AND NO DIFFERENT PR ODUCT WAS MANUFACTURED BY APPLYING THE PROCESS OF EMBROIDERY WHILE THE EMBROI DERY MACHINES DID NOT QUALIFY EVEN IN THE LIST OF ARTICLES OR THINGS GIVEN IN THE PRIORITY AS WELL AS NON-PRIORITY SECTOR OR THE ELEVENTH SCHEDULE READ WITH THE PROVI SIONS OF SEC 32 OF THE ACT, RESULTING IN DISALLOWANCE OF ADDITIONAL DEPRECIATIO N OF RS.9,12,112/- 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 ITA N O.2113/AHD/2010 3 ENGAGED IN MANUFACTURING OF TEXTILES YET, AN INDUST RY ENGAGED IN ONE OR TWO ACTIVITIES OR PROCESSES IN THE SERIES, SHOULD A LSO BE CONSIDERED AS A MANUFACTURER. IT HAS BEEN FURTHER SUBMITTED THAT TH E ASSESSEE, IN ADDITION TO JOB-WORK, IS ENGAGED IN MANUFACTURING AND TRADIN G OF EMBROIDERED DUPATTAS, SAREES AND DRESS MATERIALS. THE WORK DONE BY EMBROIDERY MACHINES CHANGES THE BASIC FORM OF THE FABRIC IN TH E 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 EM BROIDERED SAREES, DUPATTAS AND DRESS MATERIALS: IN SUPPORT OF HIS CON TENTIONS, THE AR HAS PLACED RELIANCE ON THE VARIOUS PROVISIONS OF SECTIO N 32(1)(IIA) OF THE IT ACT AND ON THE FOLLOWING CASE-LAWS, AND HAS PLEADED THA T THE ADDITION BE DELETED. (I) S. S. M. BROS. (P) LTD. & ORS. V/S CIT 2000 243 ITR 418 (SC) (II) CIT V/S KASHIRAM TEXTILES MILLS (P) LTD. 2002 177 CTR 395 (GUJ) (III) CIT V/S J.B.KHARWAR & SONS 1987 163 ITR 394 ( GUJ) (IV) CIT V/S J.K.K. TEXTILES PROCESSING MILLS 2000 249 ITR 487 (MAD) (V) CIT V/S MYSORE MINERALS LTD. 2001 250 ITR 725 ( KAR) (VI) CIT V/S DALJEET TYRES 2006 287 ITR 344 (ALL) (VII) SINGH ENGG. WORKS PVT. LTD V/S CIT 1979 119 I TR 891 (ALL) (VIII) ORIENT PAPER & INDUSTRIES LTD. V/S STATE OF MP AND ORS. VOL (7) 20 V.RE. (IX) CIT V/S SOVRIN KNIT WORKS 1993 199 ITR 679 (P & H) (X) EMPTEE POLY-YARN PVT. LTD V/S CIT MUMBAI IN CIV IL APPEAL NO, 787 TO 792 OF 2010 (XI) ORACLE SOFTWARE INDIA PVT. LTD V/S CIT REPORTE D IN 2010 (1) SCALE 425. DECISION 6. I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS. AT THE OUTSET, IT IS NECESSARY TO REFER TO THE PROVISIONS UNDER WHICH AD DITIONAL DEPRECIATION WAS CLAIMED BY THE ASSESSEE, WHICH IS SECTION 32(1) (IIA): (IIA) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OT HER THAN SHIPS AND AIRCRAFT), WHICH HAS BEEN ACQUIRED AND INSTALLED AF TER 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 (I I). IT IS EVIDENT THAT SOME OF THE NEW MACHINERIES OR P LANTS 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 O F MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING. IT IS IMPORTANT TO NOTE THE USE OF THE WORD ITA N O.2113/AHD/2010 4 OR BETWEEN THE WORDS MANUFACTURE AND PRODUCTION, WHICH MEANS THAT, FOR ADDITIONAL DEPRECIATION TO BE ADMISSIBLE, THE ASSES SEE WOULD HAVE TO BE ENGAGED IN EITHER MANUFACTURE OR PRODUCTION. 6.1 P. RAMANATHAN AIYER'S, THE LAW LEXICON, WHICH I S EDITED BY HON'BLE JUSTICE Y.V.CHANDRACHUD, FORMER CJI, SAYS: THE WORD 'PRODUCTION' OR 'PRODUCE' WHEN USED IN JUXTA-POSITION WITH THE W ORD ''MANUFACTURE' TAKES IN BRINGING INTO EXISTENCE NEW GOODS BY A PROCESS W HICH 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 L EVY OF THE EXCISE DUTY AS ''SOME EXPENDITURE OF HUMAN SKILL AND LABOUR IN BRI NGING THE GOODS CONCERNED INTO THE CONDITION WHICH WOULD ATTRACT TH E DUTY. THEY SHOULD BE PRODUCED IN THE SENSE THAT SOME HUMAN ACTIVITY SHOU LD BE SPENT ON THEM AND THEY SHOULD BE SUBJECT TO SOME PROCESSES IN ORD ER THAT THE THEY MAY BE BROUGHT TO THE STATE IN WHICH THEY BECOME FIT FO R CONSUMPTION' (ALUMINUM CORPORATION OF INDIA LTD. V/S COAL BOARD, AIR 1959 CAL, 222 ,226) 6.2 THUS, THE WORD 'PRODUCTION' DOES NOT NECESSARIL Y 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 CONSUMPT ION. 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-HEA DING NO. 5810.92 OF THE FIRST SCHEDULE TO THE CENTRAL EXCISE TARIFF ACT, 1985 @ 8%. HOWEVER, THE CENTRAL GOVERNMENT VIDE NOTIFICATION N O. 30/2004- CENTRAL EXCISE DATED 09-07-2004 HAS EXEMPTED ALL THE EXCISA BLE GOODS FALLING UNDER CHAPTER 58 (EXCEPT 5804.90, 5805.90, 58,07 AN D 5808.10) FROM THE LEVY OF EXCISE DUTY, (SEE ANNEXURE-2). THUS, EVEN I F 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 T HE HONBLE SUPREME IN THE CASE OF S.S.M.BROS. (P) LTD. & ORS. V/S CIT (2000) 243 ITR 418. IN THIS CASE, THE HONBLE SUPREME COURT HAS DEALT WITH THE APPLICATION OF THE PROVISIONS OF SECTION 33(1)(B)(B)(I) AND HAS HELD T HAT, WHEN READ TOGETHER WITH ITEM 32 OF SCHEDULE-V, THE MACHINERY OR PLANT INSTALLED FOR THE PRODUCTION OF TEXTILES INCLUDING THOSE DYED, PRINTE D OR OTHERWISE PROCESSED, MADE WHOLLY OR MAINLY OUT OF COTTON, THE ASSESSEE I S ENTITLED TO DEDUCTION ON ACCOUNT OF DEVELOPMENT REBATE UNDER THE SAID SEC TION. 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 BEE N PRODUCING ITA N O.2113/AHD/2010 5 EMBROIDERED CLOTH WHICH STARTED FROM SCRATCH I.E., WITH COTTON, THE COURT OBSERVED THAT IT WOULD MAKE NO DIFFERENCE IF THE AS SESSEE BOUGHT THE CLOTH AND THEN PROCESSED IT USING THE MACHINERY FOR EMBRO IDERING, 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 TH E ASSESSEE'S CASE, EVEN THOUGH, THE HON'BLE SUPREME COURT DEALT WITH DEVELO PMENT REBATE YET, SUB-CLAUSE-(B) TO SECTION 33(1) ALLOWS FOR THE GRAN T OF DEVELOPMENT REBATE ON NEW MACHINERY OR PLANT WHICH IS INSTALLED FOR TH E PURPOSE OF CONSTRUCTION 'OR' MANUFACTURE 'OR' PRODUCTION OF AN Y ONE OR MORE OF THE ARTICLES SPECIFIED IN THE FIFTH SCHEDULE. AS ALREAD Y 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 ACTI VITIES CONSTITUTE MANUFACTURE OR PRODUCTION, IS LISTED OUT IN THE FIF TH SCHEDULE. ITEM-32 OF THE FIFTH SCHEDULE LISTS: (32) TEXTILES (INCLUDING THOSE DYED, PRINTED OR OTH ERWISE PROCESSED) MADE WHOLLY OR MAINLY OF COTTON, INCLUDING COTTON Y ARN, HOSIERY AND ROPE, THE HON'BLE SUPREME COURT HAS HELD THAT THE ACTIVIT Y 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 AD DITIONAL 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 HE LD THAT THE TERM MANUFACTURE IMPLIES A CHANGE, BUT, EVERY CHANGE I S 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 MANU FACTURE NEEDS TO BE SEEN IN THE CONTEXT OF THE ABOVE PROCESS. IF AN OPE RATION / 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 A RE 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 P URPOSE 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 EMBR OIDERY ON THE KAMEEZ WOULD HAVE TO BE A SPECIFIC DESIGN WHICH IS SUITA BLE 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 ITA N O.2113/AHD/2010 6 BOXES AND EXPORTED THEM. THIS MEANT THAT THE END PR ODUCT WAS COMPLETELY DIFFERENT FROM THE BALE OF CLOTH OR FINISHED FABRIC PRIOR TO BEING EMBROIDERED. IN OTHER WORDS, THE MARKET RECOGNITION OF THE EMBRO IDERED FINISHED PRODUCT NECESSARILY HAD TO BE DIFFERENT FROM THE FINISHED F ABRIC PRIOR TO BEING EMBROIDERED. TO THIS EXTENT, SUCH ACTIVITY OF EMBRO IDERY COULD ALSO BE TREATED AS MANUFACTURE. 6.6 IN VIEW OF THE DISCUSSION ABOVE, IT IS HELD THA T 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 T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LD. DR WHILE RE LYING ON THE ORDER OF THE AO CONTENDED THAT THE LD. CIT(A) HAS NOT AP PRECIATED 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 '. THEREBEING ,NO 'MANUFACTURE' WITHIN THE MEANING OF SECTION 32(1)(IIA) FOR THE PU RPOSE OF ALLOWANCE OF 'ADDITIONAL DEPRECIATION', THE ASSESSEE BEING ENGAGED IN THE BU SINESS OF EMBROIDERY WORK ON JOB WORK BASIS ALONE, THE LD. CIT(A) WAS NOT JUSTIF IED IN DELETING THE DISALLOWANCE, THE LD. DR ADDED. THE LD. AR ON BEHALF OF THE ASSES SEEE ,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 T HE ADDITIONAL DEPRECIATION ON THE SAME MACHINERY ON THE GROUND T HAT 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 T HE END PRODUCT WAS COMPLETELY DIFFERENT FROM THE BALE OF CLOTH OR FINI SHED FABRIC PRIOR TO BEING EMBROIDERED. THE MARKET RECOGNITION OF THE EMBROIDE RED FINISHED PRODUCT NECESSARILY HAD TO BE DIFFERENT FROM THE FINISHED F ABRIC PRIOR TO BEING EMBROIDERED ITA N O.2113/AHD/2010 7 AND THUS, THE ACTIVITY OF EMBROIDERY COULD ALSO BE TREATED AS MANUFACTURE. SINCE ADDITIONAL DEPRECIATION COULD BE ALLOWED ONLY IF T HE ASSESSEE WAS ENGAGED IN EITHER MANUFACTURE OR PRODUCTION, RELYING ON A NU MBER 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-MAD E FABRICS. THE WORDS USED IN SEC. 32(1)(IIA) OF THE ACT ARE MANUFACTURE OR P RODUCTION. 'THE WORD 'PRODUCTION' HAS A WIDER CONNOTATION THAN THE WORD 'MANUFACTURE' . WHILE EVERY MANUFACTURE CAN BE CHARACTERISED AS PRODUCTION, EVERY PRODUCTIO N NEED NOT AMOUNT TO MANUFACTURE. THE WORD 'PRODUCTION' OR 'PRODUCE' WHE N USED IN JUXTAPOSITION WITH THE WORD 'MANUFACTURE' TAKES IN BRINGING INTO EXIST ENCE 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 O F MANUFACTURE . HERE WE MAY REFER TO A DECISION OF THE HONBLE APEX COURT RELIE D 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. HONBLE APEX CO URT 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 T HIS DEVELOPMENT REBATE. IT IS NOT DISPUTED, FAIRLY, THAT IF THE ASSESSEE HAD BEEN PRO DUCING THE EMBROIDERED CLOTH STARTING FROM SCRATCH, THAT IS, BY STARTING WITH CO TTON, 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, B Y EMBROIDERING IT, HONBLE APEX COURT CONCLUDED . ACCORDINGLY, THE CLAIM OF TH E 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 MANUF ACTURE, 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 BOXE S AND EXPORTED THEM IMPLYING THEREBY THAT THE END PRODUCT WAS COMPLETE LY DIFFERENT FROM THE BALE OF CLOTH OR FINISHED FABRIC PRIOR TO BEING EMBROIDERED . IN THE LIGHT OF THESE ITA N O.2113/AHD/2010 8 UNDISPUTED FINDINGS, ESPECIALLY WHEN THE REVENUE H AVE NOT PLACED BEFORE US ANY MATERIAL NOR BROUGHT TO OUR NOTICE ANY CONTRAR Y DECISION SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MATTER AND CLAIM OF TH E ASSESSEE FOR DEPRECIATION HAVING BEEN ALLOWED BY THE AO HIMSELF , WE ARE NOT INCLINED TO INTERFERE. CONSEQUENTLY, GROUND NO.1 IN THE APPEAL IS DISMISS ED. 6. GROUND NO.2 IN THE APPEAL RELATES 20% DISALLOWA NCE OUT OF CONVEYANCE, GENERAL, STAFF WELFARE AND TELEPHONE EX PENSES. THE, THE AO NOTICED THAT THE ASSESSEE DEBITED THE FOLLO WING EXPENSES, WHICH WERE ON VERY HIGHER SIDE, AND SOME OF THE EXP ENSES WERE FOR PERSONAL / NON BUSINESS PURPOSE:- (A) M/S EKTA EXPORTS (TRADING A/C.):- (1) CONVEYANCE EXP. RS. 8,364 (2) GENERAL EXPENSES RS. 28,627 (3) STAFF WELFARE EXP. RS. 29,875 (4) TELEPHONE EXPENSES RS. 12,521 RS.79,387 -------------- (B) M/S EKTA EXPORTS (EMBROIDERY A/C.):- (1) CONVEYANCE EXP. RS.12,412 (2) GENERAL EXPENSES RS.42,109 (3) STAFF WELFARE EXP. RS.17,089 (4) TELEPHONE EXPENSES RS.19,274 RS.90,884 -------------- ------------ TOTAL RS.1,70,271 6.1 ON VERIFICATION OF THE BOOKS OF ACCOUNT AND VO UCHERS, THE AO FOUND THAT SOME OF THE PAYMENTS TOWARDS THE AFORESA ID EXPENDITURE WERE MADE IN CASH AND COMPLETE BILLS / VOUCHERS WER E NOT AVAILABLE WITH THE ASSESSEE WHILE SOME OF THE VOUCHERS DID NO T CONTAIN PROPER SIGNATURES OF THE RECIPIENTS OR COMPLETE DETAILS OF PAYMENTS. SINCE THE ASSESSEE DID NOT RESPOND TO A SHOW CAUSE NOTICE , PROPOSING TO DISALLOW AN AMOUNT OF RS.34,054/-,BEING 20% OF RS.1 ,70,271/-, THE AO WHILE RELYING ON DECISIONS IN CIT V/S. CALCUTTA AGENCY LTD. [1951] 19 ITR 191 (SC) LAKASHIMARATAN COTTON MILLS CO. LTD. V /S. CIT [1969] 73 ITR 634 SC) DALMIA JAIN & CO. LTD, V/S, CIT [1958] 33 ITR 2 94 (PAT)DEY'S MEDICAL STORES ITA N O.2113/AHD/2010 9 MFT. PVT. LTD, V/S. CIT [1986] 162 ITR 630 (CAL) LI BERTY CINEMA V/S. CIT [1964] 52 ITR 153 (CAL) HOTZ TRUST V/S. CIT [1952] 21 ITR 149 (PUNJ),L.H. SUGAR FACTORY & OIL MILLS PVT. LTD, V/S. CIT [1980] 125 ITR 293 (SC ),CIT V/S, CHANDRAVILAS HOTEL [1987] 164 ITR 102 (GUJ) AND STATE OF MADRAS V/S. G J, COELHO [1964] 53 ITR, 186 (SC) CONCLUDED THAT IN ABSENCE OF ANY PROOF, TH E ELEMENT OF PERSONAL AND NON BUSINESS EXPENDITURE INCURRED BY THE ASSESSEE C OULD NOT BE RULED OUT. CONSEQUENTLY, AMOUNT OF RS. 34,054/- WAS DISALLOWED 7. ON APPEAL, THE LEARNED CIT(A) DELETED THE DISALL OWANCE IN THE FOLLOWING TERMS:- 9. THE AR HAS VERY BRIEFLY SUBMITTED THAT ALL THE EXPENSES WERE INCURRED FOR BUSINESS PURPOSES. THE OFFICE EXPENSES WERE INCURRED IN CASH AND WERE INCURRED ON TEA, COFFEE, ETC. IT IS THE CO NTENTION OF THE AR THAT THE EXPENSES WERE VERY PETTY IN NATURE AND WERE INCURRE D IN THE ROUTINE COURSE OF BUSINESS. IT HAS BEEN PLEADED THAT THE ADDITION BE DELETED OR REDUCED. DECISION 10. I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS. AS REGARDS CONVEYANCE EXPENSES, GENERAL EXPENSES AND S TAFF WELFARE EXPENSES, I AM OF THE CONSIDERED VIEW THAT SUCH EXPENSES ARE ALWAYS VERY PETTY IN NATURE AND COMPRISE OF SMALL ITEMS INCURRED IN THE DAY-TO-DAY RUNNING OF ANY BUSINESS. THE PERSONS TO WHOM SUCH PAYMENTS ARE MADE DO NOT USUALLY HAVE ANY BANK ACCOUNT WHICH MEANS MOST OF SUCH EXPENSES HAVE TO BE INCURRED IN CASH. NOR DO T HEY PROVIDE ANY BILL OR VOUCHER OR EVEN A CASH RECEIPT WHICH MEANS THAT THE BUSINESSPERSON HAS TO PREPARE HIS OWN VOUCHERS AFTER CONSOLIDATION OF SUCH EXPENSES ON WEEKLY OR MONTHLY BASIS. THEREFORE, NO DISALLOWANCE CAN BE MADE OR SHOULD BE MADE OUT OF SUCH EXPENSES SIMPLY ON THE G ROUND OF NON- VERIFIABILITY. IN ANY CASE, THERE CANNOT BE ANY PER SONAL ELEMENT IN SUCH EXPENSES. THE AO ON HIS PART HAS NOT BEEN ABLE TO S HOW OR PROVE ANY ITEM OF EXPENDITURE INCLUDED UNDER THE SAID HEAD WH ICH WAS EITHER NOT GENUINE OR NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THEREFORE, THE DISALLOWANCE MADE OUT OF SUCH EXPENS ES WILL STAND DELETED. 8. THE REVENUE IS NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR SUPP ORTED THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE AS SESSEE RELIED ON THE FINDINGS OF THE LD. CIT(A). ITA N O.2113/AHD/2010 10 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. INDISPUTABLY AND AS POINTED OUT BY THE LD. CIT(A) , EXPENSES ARE PETTY IN NATURE AND COMPRISE SMALL AMOUNTS . SINCE THE A O HAS NOT IDENTIFIED ANY SPECIFIC ITEM OF EXPENDITURE, INCURRED FOR PERSO NAL OR NON BUSINESS PURPOSES AND MERELY DISALLOWED AN ADHOC AMOUNT WHILE THE R EVENUE HAVE NOT PLACED BEFORE US ANY MATERIAL SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MATTER, WE ARE NOT INCLINED TO INTERFERE. THEREFORE, GROU ND NO.2 IN THE APPEAL IS ALSO DISMISSED. 10. GROUND NOS. 3 & 4 BEING MERE PRAYER AND NO SE PARATE SUBMISSIONS HAVING BEEN MADE , THESE GROUNDS DO NO T REQUIRE ANY SEPARATE ADJUDICATION AND ARE, THEREFORE, DISMISSED . 11. IN THE RESULT, APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 13-05-2011 SD/- SD/- (T K SHARMA) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 13-05-2011 COPY OF THE ORDER FORWARDED TO: 1. SHRI DEEPAK G KHERAJANI, 1104, SHREE MAHALAXMI M ARKET, RING ROAD, SURAT 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -2, ROOM NO. 110, AAYAKAR BHAVAN, MAJURA GATE, SURAT 3. CIT CONCERNED 4. CIT(A)-II, SURAT 5. DR, ITAT, AHMEDABAD BENCH-D, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD