COMMISSIONER OF INCOME-TAX VS ANJANI KUMAR & CO. (PVT) LTD.
1999 P T D 2503
[227 I T R 786)
[Rajasthan High Court (India)]
Before V.K. Singhal and M.A.A. Khan, JJ
COMMISSIONER OF INCOME-TAX
Versus
ANJANI KUMAR & CO. (PVT) LTD.
D.B. Income-tax Reference No. 81 of 1983, decided on 06/05/1996.
(a) Income-tax--
----Depreciation---Initial depreciation---Conversion of grey cloth into finished calendered cloth---Does not amount to manufacture of a new and different article ---Assessee not entitled to initial, depreciation---Indian Income Tax Act, 1961, S.32(1)(vi) & Sched. IX, Item No.21.
(b) Income-tax---
----Business expenditure---Entertainment expenditure---Providing coffee and tea to factory workers in factory---Does not amount to entertainment expenditure---Indian Income Tax Act, 1961, S.37(2-A), Expln. 2.
The benefit under section 32(1)(vi) of the Income Tax Act, 1961, could be claimed if the assessee is engaged in the business of manufacturing of one of the articles included in Schedule IX. In the manufacturing of articles the article produced must be commercially different from that from which it is made.
The assessee was carrying on the business of purchase of grey cloth and after applying certain mechanical and chemical process it converted the grey cloth into finished calendered cloth. The assessee claimed that the business of the assessee was manufacturing of textiles as referred to at Item No-21 of Schedule IX to the Income Tax Act, 1961, and it was entitled to initial depreciation under section 32(1)(vi) of the Income Tax Act, 1961. The Income-tax Officer took the view that initial depreciation could be claimed only if it could be shown that it was engaged in the manufacture of one of the articles included in Schedule IX to the Act, that the process of converting the grey cloth into finished calendered cloth did not amount to a manufacturing process and that since the assessee was not manufacturing anything, the assessee was not entitled to initial depreciation under section 32(i)(vi). The Commissioner of Income-tax (Appeals) affirmed the order of the Income-tax Officer. The Tribunal held that the conversion of grey cloth into calendered cloth amounted to manufacture and the finished goods in the assessee's case were, calendered cloth for dhoties, sarees and other apparel, that the two commodities were entirely different in nature and that, therefore, the assessee was entitled to initial depreciation under section 32(1)(vi). The Tribunal also held 'that the expenditure on providing tea and coffee, etc., to employees in the factory was not an expenditure in the nature of entertainment expenditure. On a reference:
Held, (i) that the production of grey cloth had already made it marketable, and calendering had not changed its basic character. The textile was already manufactured and the benefit under Schedule IX was given for the manufacturing of textiles to the textile unit. The further processing could not be considered as manufacturing the textile. Therefore, the Tribunal was not justified in holding that the assessee was engaged in the manufacturing of items referred to in Schedule IX to the Income Tax Act, 1961, and allowing initial depreciation under section 32(1)(vi).
(ii) That the food or breakfast provided by the assessee to its employees in the factory and other places of working was excluded from the definition of entertainment expenditure and in view of the finding by the Tribunal that the expenditure was for providing tea and coffee to the factory workers in the factory, the Tribunal was right in holding that the expenditure of Rs.7,140 was 'not entertainment expenditure under Explanation 2 to subsection (2-A) of section 37 of the Act.
Empire Industries Ltd. v. Union of India (1986) .162 ITR 846 (SC) ref
K.S. Gupta for G.S. Bapna for the Commissioner.
JUDGMENT
V.K. SINGHAL, J.---The Income-tax Appellate Tribunal has referred the following questions of law arising out of its order, dated December 30, 1982, in respect of the assessment year 1976-77 under section 256(1) of the Income Tax Act, 1961:
"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee was engaged in manufacturing of items referred to in the Ninth Schedule to the Income Tax Act, 1961, and in allowing initial depreciation under section 32(1)(vi)?
Whether, on the facts and in circumstances of the case, the Tribunal was right in upholding the decision of the Commissioner of Income-tax (Appeals) that expenditure of Rs.7,140 was not entertainment nature?"
The claim of the assessee under section 32(1)(vi) for initial depreciation of new machinery was disallowed. The assessee is carrying on the business of purchase of grey cloth and after applying certain mechanical and chemical process it converted the grey cloth into finished calendered cloth. It was claimed that the business of the assessee is to manufacture textiles as referred to in item No.21 of the Ninth Schedule to the Income-tax Act. The Income-tax Officer was of the opinion that the initial depreciation can be claimed only if it could be shown that it was engaged in the manufacture of one of the articles included in the Ninth Schedule to the Income-tax Act and since the assessee was not manufacturing anything, therefore, he was not entitled for the benefit. The process of converting the grey cloth into finished calendered cloth was not considered to be a manufacturing process and, therefore, the claim under section 32(1)(vi) was disallowed.
In appeal before the Commissioner of Income-tax (Appeals) it was agreed that the assessee has consumed stores worth Rs.46.7 lakhs, incurred wage bills of Rs.2.22 lakhs and consumed electricity worth Rs.1.83 lakhs in converting the grey cloth to calendered cloth and, therefore, it cannot be said to be merely processing of some textile. The initial and final product was claimed to be entirely different. The contention was not accepted and ultimately the matter was challenged before the Income-tax Appellate Tribunal.
The Tribunal found that the assessee is entitled to succeed because the raw material being used by the assessee was cloth. It was grey cloth which could not have been used as finished goods for the manufacture of apparel. The finished goods in the assessee's case were calendered cloth for dhoties, sarees and other apparel. The two commodities are entirely different in nature. The claim was, therefore, allowed.
In respect of the claim of Rs.7,140 on account of factory tea and coffee expenses, the Tribunal found that it was not an expenditures in the nature of entertainment.
Item No.21 of the list of articles or things as specified in the Ninth Schedule (deals with) "textiles" including those dyed, printed or otherwise processed, made wholly or mainly of cotton, including cotton yarn, .hosiery and rope.
In Empire Industries v. Union of India (1986) 162 ITR 846 (SC), with reference to Central Excise, bleaching, dyeing and printing of cloth whether amounts to manufacture or not was considered and the apex Court observed that the process of bleaching, dyeing and printing is not a process of manufacture.
The benefit under section 32(1)(Vi) could be claimed if the assessee is engaged in the business of manufacturing one of the articles included in the Ninth Schedule. A certain process may amount to manufacture, but it is not necessary that all of them have to be considered as manufacture. In the manufacturing of articles produced it must be commercially different from that from which it is made. What is contemplated by entry 21 of the Ninth Schedule is that there must be manufacture of textiles. The word "textiles" including dyeing, bleaching and printing or otherwise processed textiles which can be possible in a composite unit where for Manufacturing of the fabric/textile even if they were dyed, printed or otherwise processed. The word "textile" has further been clarified that the manufacturing is to be done from cotton including cotton yarn, hosiery, rope etc., and therefore, the manufacturing of textile must be from cotton yarn and/or rope and if in that process of manufacturing, the unit is having the facility of dyeing, printing or calendering, etc., then such unit would also be entitled for the benefit under section 32(1)(vi). If the textile is already manufactured and purchased as manufactured one, then simply by dyeing, printing or calendering, it cannot be said that there is manufacturing from the textile. The view of the Tribunal that in converting the grey cloth into calendered cloth there is manufacturing and the articles are different as it is used for sarees, dhotis and other clothing material is not correct.
The production of grey cloth in the present case has already made it marketable, and calendering has not changed the basic character. The textile was already manufactured and the benefit under the Ninth Schedule was given for the manufacturing of textiles to a textile unit. The further processing cannot be considered that by that the assessee has manufactured the textile. In these circumstances, we are of the view that the Income-tax Appellate Tribunal was not justified in holding that the assessee was engaged in the manufacturing of items referred to in Schedule IX of the Income Tax Act, 1961, and allowing initial depreciation under section 32(1)(vi).
So far as expenditure of Rs.7,140 is concerned, Explanation 2 has been added with retrospective effect by the Finance Act, 1983, from April 1, 1976, in which it was provided that for the removal of doubts it is hereby declared that for the purposes of this subsection and subsection (2-B) as it stood before the first day of April, 1977, "entertainment expenditure" includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.
The food or breakfast provided by the assessee to its employees in the factory and other places of working is excluded from the definition of entertainment expenditure and in view of the finding by the Tribunal that the expenditure was for providing tea and coffee to the factory workers in the factory, we are of the view that the Tribunal was right in holding that the expenditure of Rs.7,140 was not of entertainment nature.
The second question is, therefore, answered in favour of assessee and against the Revenue. A copy of this order be sent to the Income-tax Tribunal for information and: necessary action.
M.B.A./2078/FC???????????????????????????????????????????????????????????????????????????????? Order accordingly