Development rebate on cotton yarn machinery upheld, with cotton yarn treated as textiles and the assessee getting the favourable interpretation.

Development rebate was available on machinery installed and brought into use during the relevant previous year, even though depreciation had not earlier been allowed, and the exact quantum remained for verification by the Income-tax Officer. Cotton yarn manufacturing was treated as manufacture of textiles because Item 32 of the Fifth Schedule expressly includes cotton yarn. Applying the rule that a taxing provision reasonably capable of two interpretations must be construed in favour of the assessee, the higher 35% development rebate under Section 33(1)(b)(B) was held applicable.

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Issues: (i) Whether development rebate was admissible on the machinery installed and put to use during the previous year relevant to the assessment year under appeal and whether the quantum of machinery for that purpose required verification; (ii) Whether cotton yarn manufacturing fell within Item 32 of the Fifth Schedule so as to attract development rebate at 35% under Section 33(1)(b)(B) of the Income-tax Act, 1961.

Issue (i): Whether development rebate was admissible on the machinery installed and put to use during the previous year relevant to the assessment year under appeal and whether the quantum of machinery for that purpose required verification.

Analysis: The assessee's claim could not be rejected on the ground that depreciation had not been earlier allowed. The finding was that the machinery had in fact been installed and brought into use during the relevant previous year, and development rebate was admissible. The exact quantum on which rebate was to be computed was not finally fixed by the appellate authority and had to be verified by the Income-tax Officer in accordance with that finding.

Conclusion: Development rebate was held to be admissible, and the matter of quantification was left to verification by the Income-tax Officer on the basis of the appellate finding.

Issue (ii): Whether cotton yarn manufacturing fell within Item 32 of the Fifth Schedule so as to attract development rebate at 35% under Section 33(1)(b)(B) of the Income-tax Act, 1961.

Analysis: Item 32 of the Fifth Schedule covers textiles made wholly or mainly of cotton, including cotton yarn. Reading the expression in the light of the accepted meaning of textiles and applying the rule that, where two interpretations of a taxing provision are possible, the one favourable to the subject must be adopted, cotton yarn manufacturing was treated as manufacture of textiles for this purpose.

Conclusion: The assessee was entitled to development rebate at 35%.

Final Conclusion: The assessee succeeded on the admissibility and rate of development rebate, and the appellate order was modified to direct allowance of rebate at 35% on the machinery installed and put to use, subject to verification of the relevant quantum.

Ratio Decidendi: Where a taxing provision reasonably admits of two interpretations, the interpretation favourable to the assessee must be adopted, and cotton yarn manufacturing falls within the expression textiles when the schedule expressly includes cotton yarn.

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