Madras High Court
Commissioner Of Income-Tax vs Rajalakshmi Textile Processors Ltd. ... on 17 June, 1996
Equivalent citations: [1999]235ITR718(MAD)
JUDGMENT K.A. Thanikkachalam, J.
1. In compliance with the direction given by this court dated April 18, 1983, the Tribunal referred the following two questions for the opinion of this court under Section 256(2) of the Income-tax Act, 1961 :--
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee would be entitled to initial depreciation and development rebate in respect of certain machineries installed in its factory in terms of item 21 of the Ninth Schedule and item 32 of the Fifth Schedule to the Income-tax Act, 1961, and hence the withdrawal of the same was not justified ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the reopening of the assessment under Section 147(b) was based on the change of opinion on the part of the Income-tax Officer and therefore it was not valid in law ?"
2. The assessee is a company engaged in bleaching and finishing of raw cloth as well as dyeing and finishing of cloth and yarn. In the original assessment for the assessment year 1975-76, the Income-tax Officer allowed initial depreciation as well as development rebate treating the assessee as one engaged in the production or manufacture of textiles. Later on, he withdrew the allowance by the reassessment based on an audit note which was of the view that the assessee could not be considered to be engaged in the production of goods listed in item 21 of the Ninth Schedule.
3. Aggrieved the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner on the merits held that the assessee is entitled to initial depreciation in terms of item 32 of the Fifth Schedule and item 21 of the Ninth Schedule and, therefore, the reassessment is unwarranted. Accordingly, the reassessment was set aside and the original assessment was restored.
4. Aggrieved, the Department filed a second appeal before the Appellate Tribunal. The Appellate Tribunal held that the assessee is entitled to initial depreciation and development rebate and accordingly, the Tribunal confirmed the view taken by the Commissioner of Income-tax (Appeals) on this aspect. The Tribunal was also of the opinion that the reassessment itself was not validly initiated.
5. In so far as question No. 1 is concerned it relates to entitlement to initial depreciation and development rebate in terms of item 21 of the Ninth Schedule and item 32 of the Fifth Schedule to the Income-tax Act, 1961. The assessee is a company engaged in bleaching and finishing of raw cloth as well as dyeing and finishing of cloth and yarn. The assessee in the assessment year 1975-76 claimed initial depreciation and development rebate treating the assessee as one engaged in the production and manufacture of textiles. In the original assessment, the Income-tax Officer granted initial depreciation and development rebate treating the assessee as one engaged in the production and manufacture of textiles. But later on by exercising jurisdiction under Section 147(b) of the Act, he withdrew the initial depreciation as well as the development rebate granted in the original assessment treating the assessee as one not engaged in the production and manufacture of textiles.
6. A similar issue came up for consideration before this court in the case of CIT v. S. S. M. Finishing Centre [1990] 186 ITR 597. Here also, the assessee purchased grey cloth manufactured or produced by others and expended its labour thereon by carrying out some operations and sold the resultant product. The assessee claimed development rebate at the higher rate of 25 per cent, on the ground that it had installed plant and machinery for the manufacture and production of an article falling under item 32 of the Fifth Schedule to the Act. On these facts this court held that there was no manufacture or production of any article mentioned in the Fifth Schedule to the Act. Hence, the assessee was not entitled to development rebate at a higher rate. This decision was rendered by following the earlier decision of this court in CIT v. S. S. M. Finishing Centre [1985] 155 ITR 791, in the case of the same assessee. On similar facts a similar view was taken by this court in T. C. No. 809 of 1983 by a judgment dated March 27, 1996, in the case of CIT v. S. S. M. Processing Mills [1997] 227 ITR 596. Therefore, on the merits, the assessee is not entitled to initial depreciation and higher development rebate since the assessee is not either manufacturing or producing textiles. Accordingly, we answer the first question referred to us in the negative and in favour of the Department.
7. In so far as question No. 2 is concerned it relates to the validity of reopening of the assessment under Section 147(b) of the Act. As already pointed out, in the original assessment for the assessment year 1975-76, the Income-tax Officer allowed initial depreciation as well as development rebate treating the assessee as engaged in the production and manufacture of textiles. Later on, the Income-tax Officer reopened the assessment under Section 147(b) of the Act and withdrew both the allowances already granted on the basis of an audit note. Both the Appellate Assistant Commissioner and the Tribunal came to the conclusion that the reopening was done under Section 147(b) of the Act on the basis of change of opinion.
8. Learned standing counsel appearing for the Department submitted that the Tribunal was not correct in holding that the reopening was done on a mere change of opinion. It was submitted that the audit party has pointed out only the factual position that the assessee is only processing the textiles and not manufacturing or producing the same. Bleaching and finishing of raw cloth as well as dyeing and finishing of cloth and yarn would amount to manufacture or production depending upon different interpretations. The Punjab and Haryana High Court in CIT v. Sovrin Knit Works [FB], held that dyeing, bleaching, printing and embroidering of grey cloth constitute production and manufacture in terms of item 32 of the Fifth Schedule to the Income-tax Act, 1961. A contrary view was taken by this court in CIT v. S. S. M. Finishing Centre [1985] 155 ITR 791 and CIT v. S. S. M. Finishing Centre [1990] 186 ITR 597 (Mad). Therefore, when two interpretations or two views are possible, the audit party cannot point out that the assessee's activities do not constitute manufacture or production. All the materials were placed before the Income-tax Officer while making the original assessment. The pointing out, viz., that the assessee is not a manufacturer or a producer would virtually amount to interpretation of the provisions contained in Sections 32 and 33 of the Income-tax Act. Therefore, the reopening was done on a mere change of opinion. Further, in view of the decision rendered by the Supreme Court in Indian and Eastern Newspaper Society v. CIT , on the basis of the audit report, it is not possible for the Income-tax Officer to reopen the assessment under Section 147(b) of the Act. Accordingly, the order passed by the Tribunal in holding that the reopening under Section 147(b) of the Act is bad, is in order. Accordingly, we answer question No. 2 in the affirmative and against the department.
9. It is significant to note that when we are answering question No. 2, it is not necessary for us to answer question No. 1. But for the sake of completeness we provided our answer to question No. 1 also. No costs.