1998 (5) TMI 47 - AT - Income Tax

Assessee qualifies for investment allowance under section 32A for photo development

The Tribunal held that the assessee-company, engaged in developing and printing photographs, qualified for investment allowance under section 32A as its ... Investment Allowance Issues Involved:1. Eligibility of the assessee-company for investment allowance under section 32A.2. Classification of the assessee's business activity as manufacturing or production.3. Compliance with statutory reserve requirements for claiming investment allowance.4. Applicability of Eleventh Schedule items to the assessee's business.5. Admissibility of new grounds of appeal at the second appellate stage.Detailed Analysis:1. Eligibility of the Assessee-Company for Investment Allowance:The primary issue was whether the assessee-company, engaged in developing and printing photographs, qualified for investment allowance under section 32A. The Tribunal examined the business activities, noting that the company processed films and produced photographs, which involved a transformation of raw materials into a new product. The Tribunal concluded that the activity amounted to manufacturing or production, thereby making the company eligible for investment allowance.2. Classification of Business Activity as Manufacturing or Production:The Tribunal evaluated whether the company's activities constituted manufacturing or production. The assessee argued that the process of developing films and printing photographs transformed the raw material (unexposed film) into a new product (photographs), which differed significantly from the original material. The Tribunal agreed, citing previous decisions where similar activities were deemed manufacturing. The Tribunal emphasized that the end product was distinct from the raw material, thus qualifying as manufacturing.3. Compliance with Statutory Reserve Requirements:The Assessing Officer contended that the assessee failed to create the statutory reserve required for claiming investment allowance. The Tribunal acknowledged this but noted that the company did not generate profits in the relevant year, which precluded the creation of the reserve. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, which allowed for the creation of the reserve in subsequent profitable years, thereby enabling the claim for investment allowance in the future.4. Applicability of Eleventh Schedule Items:The Tribunal examined whether the assessee's activities fell under the prohibited categories listed in the Eleventh Schedule. The Department argued that items related to photographic apparatus and goods were included in the Eleventh Schedule, thus disqualifying the assessee. However, the Tribunal clarified that the company's activities involved processing films and printing photographs, not manufacturing photographic apparatus. Therefore, the Eleventh Schedule's prohibitions did not apply, and the assessee's claim for investment allowance was valid.5. Admissibility of New Grounds of Appeal:The Department raised an objection regarding the assessee's new ground of appeal, claiming the company was a small-scale industrial undertaking. The Tribunal allowed this new ground, citing sufficient material on record, including the balance-sheet and a certificate confirming the company's status as a small-scale industrial undertaking. The Tribunal referenced previous legal precedents, affirming that new grounds could be admitted at the appellate stage if supported by existing evidence.Conclusion:The Tribunal concluded that the assessee-company's activities constituted manufacturing, making it eligible for investment allowance under section 32A. The company's failure to create a statutory reserve in the relevant year was excused due to the lack of profits, with the possibility of creating the reserve in future profitable years. The Tribunal also determined that the Eleventh Schedule's prohibitions did not apply to the company's activities. Consequently, the Department's appeal was dismissed, and the assessee's claim for investment allowance was upheld.