Depreciation and manufacture relief turn on actual cost basis and direct participation in production, even with contracted fabrication.

Depreciation under section 32 was treated as allowable on assets whose full cost had already been deducted in earlier years under section 35(1)(iv) and section 35(2)(ia), with computation made on the actual cost basis without applying Explanation 1 to section 43(1). The Court also treated the assessee as engaged in manufacture for section 80-1 purposes because it directly participated in the manufacturing process through canvassing orders, preparing designs, placing manufacture orders, supervising production, controlling quality, and assuming responsibility for performance, even though another concern physically produced the machinery under contract.

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Issues: (i) Whether the assessee was entitled to depreciation under section 32 on assets whose full cost had been allowed as deduction in earlier years under section 35(1)(iv) and section 35(2)(ia), and whether the computation had to be made without applying Explanation 1 to section 43(1); (ii) Whether the assessee was engaged in the manufacture of sugar and tea machinery and was entitled to relief under section 80-1.

Issue (i): Whether the assessee was entitled to depreciation under section 32 on assets whose full cost had been allowed as deduction in earlier years under section 35(1)(iv) and section 35(2)(ia), and whether the computation had to be made without applying Explanation 1 to section 43(1).

Analysis: The questions were identical to those already answered by the Court in an earlier reference. The governing principle applied was that where the same issue has already been conclusively determined on the same legal footing, the subsequent reference must follow that view. On that basis, the depreciation was to be allowed in the assessee's favour and the actual cost basis was to be adopted without the restrictive operation of Explanation 1 to section 43(1).

Conclusion: The first two questions were answered in the affirmative and in favour of the assessee.

Issue (ii): Whether the assessee was engaged in the manufacture of sugar and tea machinery and was entitled to relief under section 80-1.

Analysis: An assessee is engaged in manufacture if it is directly involved in the manufacturing process and itself performs part of the manufacturing activity, even if the remaining work is done through another agency under a contract other than a sale contract. The assessee canvassed orders, prepared drawings and designs, placed manufacture orders, supervised the process, controlled quality, and assumed responsibility for proper functioning and after-sale performance. These activities showed substantial direct participation in manufacture, rather than a mere purchase of finished goods from an outside agency.

Conclusion: The assessee was engaged in the manufacture of sugar and tea machinery and was entitled to relief under section 80-1.

Final Conclusion: All the referred questions were answered in favour of the assessee, and the reference was disposed of accordingly.

Ratio Decidendi: An assessee is engaged in manufacture where it directly participates in the manufacturing process and performs substantial preparatory and supervisory functions, even though another concern physically manufactures the goods under contract.

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