2016 (4) TMI 40 - AT - Income Tax

Assessee wins appeal for additional depreciation on pipe manufacturing

M/s Vishwa Infrastructure And Services Ltd. Versus Dy. Commissioner of Income tax, Circle – 3 (3), Hyderabad.

M/s Vishwa Infrastructure And Services Ltd. Versus Dy. Commissioner of Income tax, Circle – 3 (3), Hyderabad. - TMI Issues Involved:1. Eligibility of the assessee to claim additional depreciation under section 32(1)(iia) of the Income Tax Act.2. Determination of whether the assessee's business activities qualify as manufacturing or production.Issue-wise Detailed Analysis:1. Eligibility to Claim Additional Depreciation:The central issue is whether the assessee, engaged primarily in infrastructure projects, qualifies for additional depreciation under section 32(1)(iia) of the Income Tax Act. The assessee claimed additional depreciation on plant and machinery amounting to Rs. 32,25,776/-. The Assessing Officer (AO) disallowed the claim, arguing that the assessee's primary business of executing infrastructure projects does not constitute manufacturing or production. The AO relied on the Hon’ble Madras High Court’s decision in Hi Tech Arai Ltd., which stipulates that additional depreciation is allowable only if the taxpayer is engaged in the business of manufacturing or production of any article or thing.2. Determination of Manufacturing or Production Activity:The assessee argued that it has a separate unit for manufacturing pipes, which are used both for captive consumption in its contract business and sold to external parties. The CIT(A) upheld the AO's decision, stating that the primary business of the assessee is infrastructure projects, and the manufacturing of pipes is merely incidental and not an independent business. The CIT(A) emphasized that the manufacturing activity was not the end activity but a process within the larger business operation.Appellant's Arguments:The assessee contended that it meets the conditions for claiming additional depreciation, as it has invested in new plant and machinery and is engaged in manufacturing pipes. The assessee cited the case of Hi Tech Arai Ltd., arguing that the provision does not require the new machinery to be directly related to the primary business. Additionally, the assessee referenced the case of Lake Palace Hotels and Motels (P.) Ltd., where the court held that incidental business activities could qualify for benefits if they are part of the overall business operations.Respondent's Arguments:The Departmental Representative (DR) argued that the assessee's primary business is construction and infrastructure, which does not qualify as manufacturing or production. The DR maintained that the manufacturing of pipes is not a separate business activity but an ancillary process within the main business. The DR also noted that the assessee's case differs from Hi Tech Arai Ltd., where the new machinery was used for a distinct and separate production activity.Tribunal's Findings:The Tribunal analyzed the submissions and relevant case laws. It referred to the Madras High Court's decision in Hi Tech Arai Ltd., which clarified that the setting up of new machinery or plant does not need to have an operational connection to the primary business. The Tribunal also considered the Rajasthan High Court's decision in Lake Palace Hotels and Motels (P.) Ltd., which supported the view that incidental business activities could qualify for additional depreciation if they are part of the overall business operations.The Tribunal concluded that the assessee's manufacturing activity of pipes, though ancillary to its main business, qualifies as a separate economic activity. The Tribunal held that the assessee is eligible for additional depreciation under section 32(1)(iia) as it is engaged in the business of manufacturing, even if it is an activity within the main business.Conclusion:The Tribunal allowed the appeals of the assessee for both assessment years, holding that the assessee is entitled to claim additional depreciation under section 32(1)(iia) of the Income Tax Act. The judgment emphasized that the manufacturing of pipes, even if part of the larger business operation, qualifies as a manufacturing activity eligible for additional depreciation.