Income Tax Appellate Tribunal - Bangalore
M/S Kasuthi Garments (P) Ltd.,, ... vs Assessee on 1 October, 2012
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., Vs. The Commissioner of
No.1888, 9th Main Road, Income-tax-I,
nd
Banashankari 2 Stage, Bangalore.
Bangalore - 560 070.
PAN : AAACK 8509M
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
ORDER
Per N.V. Vasudevan, Judicial Member
This is an appeal by the assessee against the order 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 computerized 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 the garments and delivers the embroidered garments to the customers.
3. For the A.Y. 2006-7, the assessee filed return of 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. 32(1)(iii) of the Act. The aforesaid provisions provide that in the case of any new machinery or plant which has been acquired and installed after 31.03.2005 by an assessee engaged in the business of manufacture or production of any article or thing, a further depreciation equal to 25% of the actual 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 the present case, admittedly, the proviso does not have any application.
4. The claim for depreciation under the aforesaid provisions 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 additional depreciation. It is not in dispute before us that there is no discussion 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 the assessee for additional depreciation.
6. The CIT in exercise of his powers u/s. 263 of the 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 additional depreciation was ITA No.611/Bang/11 Page 3 of 7 erroneous and prejudicial to the interests of the revenue. 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 the nature of labour charges. Therefore the assessee, according to the CIT, was not engaged in any manufacturing/production of any article or thing and therefore the claim of the assessee for additional depreciation ought not to have been allowed by the AO.
7. In reply to the show cause notice of the CIT, the assessee pointed out that input was a plain garment and output was an embroidered garment. The assessee thus pointed out that the finished product was entirely different from the raw material and therefore the assessee was doing a manufacturing process with the aid of computerized embroidery machines. The assessee submitted that the fact that the assessee has shown receipts from carrying out the embroidery work as job work charges will not in any way affect the right of the assessee to claim additional depreciation. The assessee also pointed out that the Income-tax Act, 1961, does not lay down that the person who processes goods belonging to others cannot be said to be engaged in the business of manufacture. The assessee also pointed out that there are several decisions like Scientific Engineering House Pvt. Ltd. v. CIT 157 ITR 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 constitutes manufacture or production of article or thing. The assessee pointed 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 views are possible and the AO has taken one of the possible views, jurisdiction u/s. 263 of the Act cannot be invoked. In this regard, the assessee relied on the decision of the Hon'ble 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 invoking jurisdiction u/s. 263 of the Act, the Assessing Officer himself initiated 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 given a reply to the show cause notice u/s. 154 issued by the AO and no further proceedings took place u/s. 154 of the Act.
9. The CIT however did not accept the plea of the Assessee. He firstly held that the AO did not apply his mind to the matter 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 the 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 complete 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/11Page 5 of 7
" In view of the above, the relevant assessment order passed by the Assessing Officer is held to be erroneous and prejudicial to the interest of the revenue.
It is necessary for the Assessing Officer to examine 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 relevant previous year with reference to the facts of the case and the submissions made by the assessee in course of the revision proceedings.
In view of the above, the assessment order, which has been held to be erroneous and prejudicial to the interest of the revenue is set aside and the Assessing Officer is directed to make a fresh assessment in the light of my observations above, after giving the assessee a reasonable opportunity of being heard."
10. Before us, the ld. counsel for the assessee relied on the case of Hon'ble Gujarat High Court in the case of CIT v. J.B. Kharwar & Sons 163 ITR 394 (Guj). In the aforesaid case, the question for consideration was as to whether the assessee was entitled to deduction u/s. 80J of the Act. Deduction u/s. 80J was available to profits derived by an industrial undertaking. One of the reasons as to why the deduction u/s. 80J was denied to the assessee was that the assessee was doing only job work i.e., the business of dyeing and printing cloth of its customers and not its own cloth. The Hon'ble Gujarat High court held when the assessee subjects grey cloth to the process of dyeing and printing, it makes or produces distinct article having distinct use as distinguished 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 grey cloth into a new commodity commercially known as a distinct and separate commodity having its own character, use and name. Transformation of grey cloth to ITA No.611/Bang/11 Page 6 of 7 the extent that it becomes commercially different commodity is sufficient to hold that there is manufacture or production of articles 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 fact 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 Hon'ble Gujarat High court is a complete answer to the case put forth by the revenue before us. It was therefore submitted by the ld. counsel for the assessee that the order of the AO allowing the claim of the assessee was neither erroneous nor prejudicial to the 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 jurisdiction u/s. 263 was invoked by the ld. CIT on the ground that the AO 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 the 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 Act.
13. We have considered the rival submissions. It is no doubt true that failure to make enquiries which the AO ought to have made, by itself is sufficient to hold that the order of the AO is erroneous and prejudicial to the interests of the revenue. Reference in this regard may be made to the decision of the Hon'ble Delhi High Court in the case 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 Hon'ble Gujarat High Court referred to above, we are of view that the proceedings before the AO for again examining the issue 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 Hon'ble 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 quash the order u/s. 263 and allow the appeal by the assessee.
14. In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 5th day of October, 2012.
Sd/- Sd/-
( N. BARATHVAJA SANKAR ) ( N.V. VASUDEVAN )
Vice President Judicial Member
Bangalore,
Dated, the 5th 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.