M/s Kasuthi Garments (P) Ltd., Bangalore V. CIT, Bangalore

ITA 611/BANG/2011

• Counselvise Citation: 61121114 RSA 2011
• Duration Of Justice: 1 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 01-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 25-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: V CHANDRASHEKAR
• Keywords: Depreciation; Audit objection; Additional depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.611/BANG/2011 ASSESSMENT YEAR : 2006-07 M/S. KASTHURI GARMENTS (P) LTD., NO.1888, 9 TH MAIN ROAD, BANASHANKARI 2 ND STAGE, BANGALORE 560 070. PAN : AAACK 8509M VS. THE COMMISSIONER OF INCOME-TAX-I, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI V. CHANDRASHEKAR, ADVOCATE RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) DATE OF HEARING : 01.10.2012 DATE OF PRONOUNCEMENT : 05.10.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 22.03.2011 OF THE COMMISSIONER OF INCOME-TAX (CIT ), BANGALORE-I, BANGALORE RELATING TO ASSESSMENT YEAR 2006-07. 2. THE CIRCUMSTANCES UNDER WHICH THE ORDER U/S. 263 OF THE ACT WAS PASSED BY THE CIT ARE AS FOLLOWS. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF CARRYING OUT COMPUTERIZE D EMBROIDERY WORK ACCORDING TO THE REQUIREMENT OF ITS CUSTOMERS. THE CUSTOMERS SUPPLY PLAIN ITA NO.611/BANG/11 PAGE 2 OF 7 GARMENTS TO THE ASSESSEE. THE ASSESSEE PROCESSES T HE GARMENTS AND DELIVERS THE EMBROIDERED GARMENTS TO THE CUSTOMERS. 3. FOR THE A.Y. 2006-7, THE ASSESSEE FILED RETURN O F INCOME DECLARING TOTAL INCOME OF B 13,46,960 ON 24.11.2006. IN THE RETURN OF INCOME , THE ASSESSEE HAD CLAIMED ADDITIONAL DEPRECIATION U/S. 3 2(1)(III) OF THE ACT. THE AFORESAID PROVISIONS PROVIDE THAT IN THE CASE OF AN Y NEW MACHINERY OR PLANT WHICH HAS BEEN ACQUIRED AND INSTALLED AFTER 31.03.2 005 BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTIO N OF ANY ARTICLE OR THING, A FURTHER DEPRECIATION EQUAL TO 25% OF THE A CTUAL COST OF MACHINERY OR PLANT, SHALL BE ALLOWED AS A DEDUCTION. THERE ARE CERTAIN EXCEPTIONS LAID IN THE PROVISO TO SECTION 32(1)(IIA) OF THE ACT. IN T HE PRESENT CASE, ADMITTEDLY, THE PROVISO DOES NOT HAVE ANY APPLICATION. 4. THE CLAIM FOR DEPRECIATION UNDER THE AFORESAID P ROVISIONS IS AN ALLOWANCE OVER AND ABOVE THE NORMAL DEPRECIATION. WE SHALL REFER TO THIS CLAIM AS ADDITIONAL DEPRECIATION. 5. THE ASSESSING OFFICER PASSED AN ORDER U/S. 143(3 ) OF THE ACT ON 08.12.2008 ALLOWING THE CLAIM OF THE ASSESSEE FOR A DDITIONAL DEPRECIATION. IT IS NOT IN DISPUTE BEFORE US THAT THERE IS NO DIS CUSSION ON THE CLAIM OF THE ASSESSEE FOR ADDITIONAL DEPRECIATION NOR IS IT THE CASE OF THE ASSESSEE THAT THE AO MADE ENQUIRIES WITH REGARD TO THE CLAIM OF T HE ASSESSEE FOR ADDITIONAL DEPRECIATION. 6. THE CIT IN EXERCISE OF HIS POWERS U/S. 263 OF TH E ACT WAS OF THE VIEW THAT THE AFORESAID ORDER OF THE AO DATED 08.12.2002 PASSED U/S. 143(3) OF THE ACT ALLOWING THE CLAIM OF THE ASSESSEE FOR ADDI TIONAL DEPRECIATION WAS ITA NO.611/BANG/11 PAGE 3 OF 7 ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE R EVENUE. THE CIT WAS OF THE VIEW THAT THE ASSESSEE WAS ONLY DOING JOB WORK. THE ASSESSEE WAS CARRYING OUT COMPUTERIZED EMBROIDERY WORK ON PLAIN CLOTH GIVEN BY THE CUSTOMERS. INCOME EARNED BY THE ASSESSEE WAS IN TH E NATURE OF LABOUR CHARGES. THEREFORE THE ASSESSEE, ACCORDING TO THE CIT, WAS NOT ENGAGED IN ANY MANUFACTURING/PRODUCTION OF ANY ARTICLE OR T HING AND THEREFORE THE CLAIM OF THE ASSESSEE FOR ADDITIONAL DEPRECIATION O UGHT NOT TO HAVE BEEN ALLOWED BY THE AO. 7. IN REPLY TO THE SHOW CAUSE NOTICE OF THE CIT, TH E ASSESSEE POINTED OUT THAT INPUT WAS A PLAIN GARMENT AND OUTPUT WAS A N EMBROIDERED GARMENT. THE ASSESSEE THUS POINTED OUT THAT THE FI NISHED PRODUCT WAS ENTIRELY DIFFERENT FROM THE RAW MATERIAL AND THEREF ORE THE ASSESSEE WAS DOING A MANUFACTURING PROCESS WITH THE AID OF COMPU TERIZED EMBROIDERY MACHINES. THE ASSESSEE SUBMITTED THAT THE FACT THA T THE ASSESSEE HAS SHOWN RECEIPTS FROM CARRYING OUT THE EMBROIDERY WOR K AS JOB WORK CHARGES WILL NOT IN ANY WAY AFFECT THE RIGHT OF THE ASSESSE E TO CLAIM ADDITIONAL DEPRECIATION. THE ASSESSEE ALSO POINTED OUT THAT T HE INCOME-TAX ACT, 1961, DOES NOT LAY DOWN THAT THE PERSON WHO PROCESS ES GOODS BELONGING TO OTHERS CANNOT BE SAID TO BE ENGAGED IN THE BUSIN ESS OF MANUFACTURE. THE ASSESSEE ALSO POINTED OUT THAT THERE ARE SEVERA L DECISIONS LIKE SCIENTIFIC ENGINEERING HOUSE PVT. LTD. V. CIT 157 I TR 86 (SC), CIT V. DARSHAK LTD. 247 ITR 489 (KARN.) AND CIT V. PEERLESS CONSULTANCY & SERVICES PVT. LTD. 248 ITR 178 (SC) , WHEREIN A VIEW HAS BEEN EXPRESSED THAT JOB WORK ALSO CONSTITU TES MANUFACTURE OR PRODUCTION OF ARTICLE OR THING. THE ASSESSEE POINT ED OUT THAT THE ISSUE IS ITA NO.611/BANG/11 PAGE 4 OF 7 HIGHLY DEBATABLE AND TWO VIEWS ARE POSSIBLE ON THE ISSUE. IN SUCH CIRCUMSTANCES, IT WAS SUBMITTED THAT WHERE TWO VIEW S ARE POSSIBLE AND THE AO HAS TAKEN ONE OF THE POSSIBLE VIEWS, JURISDICTIO N U/S. 263 OF THE ACT CANNOT BE INVOKED. IN THIS REGARD, THE ASSESSEE RE LIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. MAX INDIA LTD. 295 ITR 292 (SC) , MALABAR INDUSTRIAL CO. LTD. V. CIT 243 ITR 83 (SC) . 8. THE ASSESSEE ALSO POINTED OUT THAT PRIOR TO INVO KING JURISDICTION U/S. 263 OF THE ACT, THE ASSESSING OFFICER HIMSELF INITI ATED PROCEEDINGS U/S. 154 OF THE ACT BASED ON AN AUDIT OBJECTION WITH REGARD TO THE ALLOWANCE OF CLAIM OF ADDITIONAL DEPRECIATION. THE ASSESSEE HAD GIVE N A REPLY TO THE SHOW CAUSE NOTICE U/S. 154 ISSUED BY THE AO AND NO FURTH ER PROCEEDINGS TOOK PLACE U/S. 154 OF THE ACT. 9. THE CIT HOWEVER DID NOT ACCEPT THE PLEA OF THE A SSESSEE. HE FIRSTLY HELD THAT THE AO DID NOT APPLY HIS MIND TO THE MATT ER AND WITHOUT ASCERTAINING AS TO WHETHER THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING, HAD ALLOWED THE CLAIM OF THE ASSESSEE FOR ADDITIONAL DEPRECIATION. THE CIT, THEREFORE, HELD THAT THE ORDER OF THE AO WAS ERRONEOUS AND PREJUDICIAL TO TH E INTERESTS OF THE REVENUE. THE CIT ALSO OBSERVED THAT THE FACT THAT THE AO INITIATED PROCEEDINGS U/S. 154 OF THE ACT AND LATER DID NOT C OMPLETE THE PROCEEDINGS WILL NOT BE A BAR TO THE CIT TO INVOKE JURISDICTION U/S. 263 OF THE ACT. THE CIT THEREAFTER HELD AS FOLLOWS:- ITA NO.611/BANG/11 PAGE 5 OF 7 IN VIEW OF THE ABOVE, THE RELEVANT ASSESSMENT ORD ER PASSED BY THE ASSESSING OFFICER IS HELD TO BE ERRONEOUS AN D PREJUDICIAL TO THE INTEREST OF THE REVENUE. IT IS NECESSARY FOR THE ASSESSING OFFICER TO EXAM INE THE ALLOWABILITY OF THE ADDITIONAL DEPRECIATION CLAIMED U/S. 32(1)(IIA) AFTER EXAMINING AND ASCERTAINING THE NATURE OF THE BUSINESS ACTUALLY CARRIED ON BY THE ASSESSEE DURING THE RELE VANT PREVIOUS YEAR WITH REFERENCE TO THE FACTS OF THE CASE AND TH E SUBMISSIONS MADE BY THE ASSESSEE IN COURSE OF THE REVISION PROC EEDINGS. IN VIEW OF THE ABOVE, THE ASSESSMENT ORDER, WHICH HAS BEEN HELD TO BE ERRONEOUS AND PREJUDICIAL TO THE IN TEREST OF THE REVENUE IS SET ASIDE AND THE ASSESSING OFFICER IS D IRECTED TO MAKE A FRESH ASSESSMENT IN THE LIGHT OF MY OBSERVATIONS ABOVE, AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEI NG HEARD. 10. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REL IED ON THE CASE OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. J.B. KHARWAR & SONS 163 ITR 394 (GUJ) . IN THE AFORESAID CASE, THE QUESTION FOR CONSIDER ATION WAS AS TO WHETHER THE ASSESSEE WAS ENTITLED TO DEDU CTION U/S. 80J OF THE ACT. DEDUCTION U/S. 80J WAS AVAILABLE TO PROFITS D ERIVED BY AN INDUSTRIAL UNDERTAKING. ONE OF THE REASONS AS TO WHY THE DEDU CTION U/S. 80J WAS DENIED TO THE ASSESSEE WAS THAT THE ASSESSEE WAS DO ING ONLY JOB WORK I.E., THE BUSINESS OF DYEING AND PRINTING CLOTH OF ITS CU STOMERS AND NOT ITS OWN CLOTH. THE HONBLE GUJARAT HIGH COURT HELD WHEN TH E ASSESSEE SUBJECTS GREY CLOTH TO THE PROCESS OF DYEING AND PRINTING, I T MAKES OR PRODUCES DISTINCT ARTICLE HAVING DISTINCT USE AS DISTINGUISH ED FROM THE GREY CLOTH THOUGH GREY CLOTH IS STILL SUBSISTING. AS A RESULT OF THE PROCESS TO WHICH GREY CLOTH IS SUBJECTED TO THERE IS TRANSFORMATION OF GR EY CLOTH INTO A NEW COMMODITY COMMERCIALLY KNOWN AS A DISTINCT AND SEPA RATE COMMODITY HAVING ITS OWN CHARACTER, USE AND NAME. TRANSFORMAT ION OF GREY CLOTH TO ITA NO.611/BANG/11 PAGE 6 OF 7 THE EXTENT THAT IT BECOMES COMMERCIALLY DIFFERENT C OMMODITY IS SUFFICIENT TO HOLD THAT THERE IS MANUFACTURE OR PRODUCTION OF ART ICLES WITHIN THE MEANING OF CL. (III) OF SUB-S. (4) OF S. 80J. THE ACTIVITY WHICH THE ASSESSEE CARRIES ON IS MANUFACTURING ACTIVITY IRRESPECTIVE OF THE FA CT WHETHER THE GREY CLOTH BELONGS TO IT OR ITS CUSTOMERS. ( EMPHASIS SUPPLIED ). 11. THE LD. COUNSEL FOR THE ASSESSEE THUS SUBMITTED THAT THE AFORESAID DECISION OF THE HONBLE GUJARAT HIGH COURT IS A COM PLETE ANSWER TO THE CASE PUT FORTH BY THE REVENUE BEFORE US. IT WAS THEREFO RE SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ORDER OF THE AO A LLOWING THE CLAIM OF THE ASSESSEE WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO T HE INTERESTS OF THE REVENUE AND THEREFORE JURISDICTION U/S. 263 OF THE ACT COULD NOT HAVE BEEN INVOKED BY THE CIT. 12. THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT J URISDICTION U/S. 263 WAS INVOKED BY THE LD. CIT ON THE GROUND THAT THE A O FAILED TO MAKE PROPER ENQUIRIES WHICH HE OUGHT TO HAVE MADE. IT WAS HIS SUBMISSION THAT IN SUCH CIRCUMSTANCES, THE MOMENT IT IS ESTABLISHED THAT TH E AO HAS NOT MADE DUE ENQUIRIES OR APPLIED HIS MIND TO A PARTICULAR ISSUE , THEN THAT BY ITSELF IS SUFFICIENT TO INVOKE JURISDICTION U/S. 263 OF THE A CT. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT I S NO DOUBT TRUE THAT FAILURE TO MAKE ENQUIRIES WHICH THE AO OUGHT TO HAV E MADE, BY ITSELF IS SUFFICIENT TO HOLD THAT THE ORDER OF THE AO IS ERRO NEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. REFERENCE IN THIS REGARD MAY BE MADE TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF G.V. ENTERPRISES V. CIT 99 ITR 375 (DEL) . HOWEVER, IN THE LIGHT OF THE DECISION OF THE ITA NO.611/BANG/11 PAGE 7 OF 7 HONBLE GUJARAT HIGH COURT REFERRED TO ABOVE, WE AR E OF VIEW THAT THE PROCEEDINGS BEFORE THE AO FOR AGAIN EXAMINING THE I SSUE WILL BE PURELY ACADEMIC. WE ARE THEREFORE OF THE VIEW THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE LIGHT OF CLEAR PRONOUNCEMENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF J.B. KHARWAR & SONS (SUPRA) , THE ORDER U/S. 263 OF THE ACT CANNOT BE SUSTAINED. WE THEREFORE Q UASH THE ORDER U/S. 263 AND ALLOW THE APPEAL BY THE ASSESSEE. 14. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 5 TH DAY OF OCTOBER, 2012. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDIC IAL MEMBER BANGALORE, DATED, THE 5 TH OCTOBER , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.