Commissioner of Income Tax vs S.S. Embroiders

Bharat Bhushan Parsoon, J.—By this common order, we shall dispose of IT Appeal Nos. 201 and 202 of 2012, preferred by the appellant. The two appeals pertain to asst. yrs. 2005-06 and 2006-07.

Details of appeals:

For convenience and clarity, facts have been taken from IT Appeal No. 201 of 2012.

This appeal by the Revenue under s. 260A of the IT Act, 1961 (for short, the 1961 Act) has been filed against order dt. 23rd April, 2012 (Annex. A-3) passed by Tribunal, Amritsar in ITA No. 358/Asr/2010 for the asst. yr. 2006-07, on the following questions of law:

Questions of law:

(i) Whether on the facts and in the circumstances of the case and in law, the learned Tribunal was right in not appreciating the non-inclusion of the word ''embroidery'' by the legislature consciously while making rules for higher depreciation as referred to in new Appendix I ?

(ii) Whether on the facts and in the circumstances of the case and in law, the learned Tribunal was right in not appreciating that if Government provides subsidy in purchase of machinery used in textiles under TUFS, the same is not automatically entitled for higher depreciation as per IT Rules ?

Notwithstanding formulation of so-called ''substantial questions of law'' in para 13 of this appeal by the Revenue, which are neither happily worded nor reflect the real controversy, following substantial question of law is formulated for determination:

Whether the machinery purchased under the Textiles Upgradation Fund Scheme (TUFS) and used for embroidery on unembroidered cloth used in textile industry are eligible for higher depreciation of 50 per cent as has been held by Tribunal ?

Facts of the case

Brief resume of the facts necessary for understanding the matter in controversy, is necessary.

The respondent is engaged in the business of garments and textiles. It has been using its machinery for embroidery work on grey cloth. During the asst. yr. 2006-07, it had claimed depreciation on the machinery purchased under the "Textiles Gradation Fund Scheme (TUFS)", @ 50 per cent to the tune of Rs. 17,36,202. The AO rejected the claim of the respondent on this count and allowed only normal depreciation i.e., @ 15 per cent on the ground that the assessee had not been using its machinery in weaving, processing, manufacturing, etc., which could entitle him for higher depreciation @ 50 per cent.

In appeal preferred by the assessee, CIT(A), vide its order dt. 28th May, 2010 reversing the order of the AO allowed depreciation @ 50 per cent on the machines purchased by the assessee under TUFS, as claimed. In second appeal preferred by the Revenue, Tribunal, Amritsar confirmed the findings of CIT(A) and dismissed the appeal of the Revenue vide order dt. 23rd April, 2012 (Annex. A3).

Rival claims of the parties;

Contention of counsel for the appellant are two-fold. It is averred that to claim higher rate of depreciation @ 50 per cent on machinery and plant purchased under TUFS on or after the 1st day of April, 2001 but before the 1st day of April 2004, compliance with Appendix-I to IT Rules, 1962, requires use of such machinery in weaving, processing and in garment sector of textile industry before 1st April, 2004.

It is canvassed that since the assessee was using its machinery only for embroidery work on grey cloth, it was entitled to only normal depreciation @ 15 per cent and not enhanced rate of 50 per cent.

Plea of the assessee, on the other hand, is that the words "processing" and "garment sector" are wide in amplitude in addition to being dynamic in content and thus, include in their ambit utilization of machinery in any activity in textile industry and thus make the machinery eligible for higher depreciation. In short, it is urged that once it is proved that the machinery purchased by the assessee under TUFS is being used in the garment sector of textile industry, no other conditions of s. 32 of the 1961 Act read with Appendix-I of the IT Rules, 1962, are required to be satisfied for claiming higher depreciation.

Discussion follows:

If s. 32 of the 1961 Act and Appendix I of the rules framed thereunder, regarding eligibility for higher depreciation, are conjointly gone through, it emerges that following conditions must co-exist:

(1) the machinery should have been purchased under TUFS;

(2) such purchase should be between the period from 1st April, 2001 to 31st March, 2004;

(3) such machinery and plant, inter alia, should be used in weaving, processing and garment sector of textile industry.

The Revenue does not dispute that the case of the assessee is in complete conformity with conditions (1) to (3) mentioned earlier but it is asserted that since the machinery purchased by the assessee was being used only for embroidery work on the cloth not manufactured by it, such higher rate of depreciation is not available to it.

Other circumstances supporting eligibility for higher depreciation (on the machinery deployed for embroidery on cloth in textile sector) by the assessee, are as under:

(1) Machinery purchased under TUFS is also eligible for grant of subsidy. The Revenue has not disputed that the assessee got interest subsidy of Rs. 11,33,072 in its term loan account with its bankers;

(2) Assertion of the assessee is that as per Ministry of Textiles, Government of India, in its book "Technology Upgradation Fund Scheme for Textiles and Jute Industry", fabric embroidery machinery is covered under "machinery eligible for loom shed (weaving)" at serial No. 14, Part B and multi-head computerized embroidery machinery is covered in list of eligible machines, for garments/made ups manufacturing in Annex. E at serial No. 42. These contents of the cited book have not been disputed by the Revenue; and

(3) When the textiles were subjected to excise duty, in the asst. yr. 2005-06, the assessee had paid a sum of Rs. 15,52,195 as excise duty establishing that process of embroidering of unembroidered cloth is covered in the ambit and scope of word ''manufacturing'' of garments as well.

Though concededly compliance only of conditions enumerated herein before in points No. (1) to (3) ipso facto would not make the said machinery eligible for higher rate of depreciation, but contention of the Revenue that the machinery having been used only for embroidery work on grey cloth, disentitles such machinery to be eligible for higher rate of depreciation, is not tenable.

There is no stipulation by the Government of India or in law that the machinery purchased under TUFS is necessarily to be deployed in "manufacture" or "production", as has been claimed by the Revenue. Rather, existence of the words "used in weaving, processing and garment sector of textile industry" appearing immediately after the words "machinery and plant" in Appendix I of the rules is not without significance. Even s. 32 of the 1961 Act, to claim depreciation, nowhere restricts user inter alia of the machinery in ''manufacture'' or ''production''. Similarly, conditions of TUFS also do not hedge user of the machinery to activities of manufacture or production only. In nutshell, use of words "processing" and "garment sector" is vibrant enough to include in their fold user of the machinery for any activity in textile industry so as to be eligible to claim higher depreciation.

Even when Item 32 of the Sch. V referred to by the Revenue is gone through, it does not help the Revenue.

Item 32 of the Sch. V is reproduced as under:

Textiles (including those dyed, printed or otherwise processed) made wholly or mainly of cotton, including cotton yarn, hosiery and rope.

The words "otherwise processed" in relation to textiles definitely, would include embroidery done inter alia on any textile cloth. Application of ''embroidery'' on grey cloth is ''processing'' of such cloth which makes the embroidered cloth distinct and set apart as compared to unembroidered cloth. Application of some operation on any commodity which brings about change or alteration in it is "processing" irrespective of the nature, content or sweep of such change. Thus when unembroidered cloth is embroidered, it amounts to processing of textiles.

Plea of the Revenue that non-inclusion of fabric embroidery and textiles in the TUFS as per note 8 of Part B of Appendix I by the Government of India in the form of a Resolution of Ministry of the Textile of 31st March, 1999 is a conscious decision not to allow special depreciation on the machinery deployed for embroidery work on the clothes, is not tenable. When the words in the said note are "weaving, processing and garment sector of textile industry", there was no necessity of mentioning of any other uses to which the machinery purchased under TUFS could be deployed to get depreciation at higher rate, as the words "processing" and ''textile industry'' are potent enough to include embroidery etc. on the cloth. Clearly enough, it appears that the word ''embroidery'' etc. were dropped to avoid verbosity in the text of the Resolution of the Textile Ministry.

Conclusion:

Looking from yet another angle, these words depict that the entire process starting from the weaving stage culminating upto the stage of manufacturing of garments is covered in these words. Embroidery is a sort of process on the clothes so as to turn those clothes into different textile products. In short embroidery is one of several processes which are carried out on cloth to make such cloth different products. In Commissioner of Income Tax Vs. Sovrin Knit Works, , it was held that business of bleaching, dyeing, finishing and embroidery of grey cloth which is not manufactured by the assessee itself but is purchased by it constitutes business of manufacture of producing textiles.

Confirming the order dt. 28th May, 2010 (Annex. A2) of CIT(A). Amritsar, the Tribunal, Amritsar citing decision of its Co-ordinate Bench at Tribunal, Ahmedabad in ITA No. 2892/Ahd/2009 dt. 8th July, 2011 in which, on an identical issue, appeal of the Revenue against allowing of higher depreciation was dismissed, had dismissed appeal of the Revenue in the present case as well. Finding no infirmity in the impugned orders of CIT(A) and Tribunal, as a sequel to the discussion made earlier, the substantial question of law, as framed earlier, is answered in favour of the assessee and against the Revenue. Squally, the appeal is dismissed.