Integrated production and amended depreciation rules shaped mixed tax treatment of limestone-based industrial activity.

Depreciation on scientific equipment was held unavailable where the related expenditure had already been fully allowed under the incentive provision as amended, and the challenge to the validity of that provision was outside the scope of the reference. By contrast, limestone extraction was treated as part of an integrated industrial process for cement manufacture, so the activity still constituted production of limestone even though the output was not separately sold. Profits attributable to distinct stages of production could be computed separately on a market-value basis, supporting deduction eligibility for that production activity. The overall result was mixed, with one issue decided for the Revenue and the other for the assessee.

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Issues: (i) Whether the assessee was entitled to depreciation in respect of scientific equipment after the related expenditure had already been allowed in full under the incentive provision; (ii) Whether the assessee was engaged in the business of producing limestone so as to qualify for deduction under the incentive provision.

Issue (i): Whether the assessee was entitled to depreciation in respect of scientific equipment after the related expenditure had already been allowed in full under the incentive provision.

Analysis: The claim for depreciation was examined in the light of the statutory amendment and the earlier Supreme Court ruling on the effect of retrospective amendment. The jurisdiction under reference was confined to answering the legal question referred, and the challenge to the validity of the provision could not be entertained in these proceedings. On that basis, the earlier allowance of the expenditure did not sustain a further depreciation claim under the amended provision.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether the assessee was engaged in the business of producing limestone so as to qualify for deduction under the incentive provision.

Analysis: The finding was that limestone extraction formed one stage of an integrated industrial process for manufacture of cement. The profits attributable to the different stages of production could be separately computed on a market-value basis, and the fact that limestone was not sold independently did not destroy the character of the activity as production of limestone. The earlier authorities on apportionment of profits from distinct stages of production supported the view that the production activity was part of the assessee's business and not a merely incidental or unreal activity.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The reference was disposed of with one question answered for the Revenue and the other answered for the assessee, leaving the overall result mixed.

Ratio Decidendi: Where an assessee carries on an integrated production process, profits attributable to a distinct stage of that process may be separately identified for tax purposes, and an industrial activity does not cease to be production merely because the output is used internally in the manufacture of the final product.

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