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Judgment
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Sonia Gokani, J.—Revenue has challenged the decision of the Income Tax Tribunal ("the Tribunal" for short) dated 22.3.2013 the present Tax Appeal raising following substantial question of law for our consideration:--
"Whether the ITAT was justified in law in upholding the decision of the CIT(A) in allowing additional depreciation of Rs. 5,82,15,539/- treating the process of making skimmed milk powder from milk as "manufacture" or "production" without appreciating the fact that production of skimmed milk powder is nothing but milk without water content?"
We have heard learned counsel Mr. Ketan Parikh for the appellant and learned Senior Counsel Mr. Soparkar for the assessee respondent.
The assessee respondent had claimed an additional depreciation of Rs. 5.82 crores (rounded off) under section 32(1)(iia) of the Income Tax Act ("the Act" for short) on the ground that a new plant and machinery were installed at Mother Dairy. The assessee is engaged in production and manufacturing of milk powder. It was the case of the assessee that it was engaged in the business of manufacture of milk products which was accepted by the Department in the earlier assessment years. It is also averred that the final product i.e. milk powder was different from the main ingredient milk. It was also the case of the assessee that the manufacturing process led to substantial value addition of milk powder which was much higher than natural milk. It was also averred by the assessee that the excise regulations had been charged on milk powder on nil rate, and therefore, also the production of milk powder would amount to manufacturing. However, the Assessing Officer was not convinced by these submissions and accordingly had denied the entire claim of additional depreciation.
This was when challenged before CIT(Appeals), it had elaborately dealt with the issue and allowed the entire amount of depreciation holding the same in favour of the assessee. CIT(Appeals) relied on various decisions to conclude that the assessee had duly satisfied the conditions incorporated in section 32(1)(iia) of the Act and also that the same was engaged in the business of manufacturing and production of the article or thing and such business of manufacturing was the milk product. Accordingly, the addition of the said sum of Rs. 5.82 lakhs (rounded off) was deleted.
The Revenue challenged the same before the Tribunal. The Tribunal also exhaustively dealt with the entire issue relying on the decision of the Apex Court rendered in the case of ASPINWALL and CO. LTD. Vs. Commissioner of Income Tax, , and other decisions to hold that the additional depreciation is allowable on new machinery or plant acquired and installed by the assessee respondent engaged in the business of manufacture and production. It also sought to rely upon the decision of its coordinate Bench rendered in the case of CIT v. Mehsana District Co-operative Milk Producers Union Ltd. (ITA No. 666/Ahd/2005), which as given to understand has not being challenged by the Revenue.
On hearing both the sides and on having considered the decisions of all the revenue authorities, at the outset, it would be relevant to reproduce the relevant provision i.e. section 32(1)(iia) of the Act:--
"Depreciation
32(1)(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):
Provided that no deduction shall be allowed in respect of--
(A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or
(B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or
(C) any office appliances or road transport vehicles; or
(D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year;"
This provision provides for giving depreciation to the assessee engaged in the business of manufacturing or production of any article or thing in case of any new machinery or plant acquired or installed after 31.3.2005. The assessee, in the instant case, had installed Mother Dairy plant at Gandhinagar for manufacturing milk powder and had accordingly claimed the additional depreciation under section 32(1)(iia) claimed for such powder plant to the tune of Rs. 4,00,95,506/- and for other plant and machinery and old powder plant respectively the sum of Rs. 53,807/- and of Rs. 1,80,66,227/- had been claimed, totalling to Rs. 5,82,15,539/-. The fact is not disputed that the appellant is engaged in the business of manufacturing of milk products and the assessee respondent had been assessed since many years on regular basis where the Revenue has at no point of time disputed the aspect of its being in the activity of manufacturing and production.
The plant here is of making milk powder and process of producing the milk powder is complex and it is a completely different commercial commodity from the main ingredient milk.
At this stage, the decision of the Apex Court rendered in the case of Aspinwall & Co. Ltd. (supra) requires reference where the Apex Court has said that the word "manufacturing" has not been defined in the Income-tax Act but in the absence definition of word "manufacture" has to be given a meaning as is understood in a common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article, then the same would amount to manufacturing activity. The say of the respondent assessee that final product i.e. the milk powder was completely different from the main ingredient and the manufacturing process leads to the substantial value addition cannot be disputed nor has the same been in any manner challenged by the Revenue. Thus, the very issue is rightly appreciated by both the authorities concurrently and their findings give rise to no perversity warranting interference.
We can take note of the complex process explained by the assessee in making milk powder which is completely a different commodity. There is no way in which the final product could be restored to the original product. This process involves four different stages namely (i) Standardization (ii) Pre-heating (iii) Evaporation and (iv) Spray dying, as noted in the order of Assessing Officer, they are as under:--
''Standardization: The conventional process for the production of milk powders starts with taking the raw milk received at the dairy factory and pasteurising and separating it into skim milk and cream using a centrifugal cream separator.
Preheating: The next step in the process is "preheating" during which the standardized milk is heated to temperatures between 75 to 120C and held for a specified time from a few seconds up to several minutes.
Evaporation: In the evaporator the preheated milk is concentrated in stages or "effects" from around 9.0% total solids content for skim milk and 13% for whole milk, up to 45-52% total solids. This is achieved by boiling the milk under a vacuum at temperatures below 72_C in a falling film on the inside of vertical tubes, and removing the water as vapour.
Spray Drying: Spray drying involves atmoising the milk concentrate from the evaporator into fine droplets. This is done inside a large drying chamber in a flow of hot air (up to 200_C) using either a spinning disk atomiser or a series of high pressure nozzles. The milk droplets are cooled by evaporation and they never reach the temperature of the air.''
A distinct commodity is thus arising from the entire complex process and it is a commercially distinct marketable commodity resulting from this process and such transformation is irreversible and thus, the plant and machinery installed by the assessee for the purpose of manufacturing the milk powder has been rightly given the benefit of additional depreciation by the authorities.
Supreme Court in the case of Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, , has held that for determining whether manufacturing can be said to have taken place is where the commodity which is subject to the process of manufacturing can no longer be regarded as the original commodity but is recognized in a trade as a new and distinct commodity.
Reference needs to be made to the decision rendered in the case of Commissioner of Income Tax Vs. Prabhudas Kishordas Tobacco Products Pvt. Ltd., , wherein it was held:--
"9. The tests to ascertain whether an activity amounts to manufacture or production of an article or thing have been laid down and reiterated by various decisions of the apex court and this High Court. Broadly, the requirement is that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end-product after the raw material undergoes the process of manufacture. In other words, the goods purchased as raw material should go in as inputs in the process of manufacture and the result must be manufacture of other goods. The article produced must be regarded by the trade as a new and distinct article having an identity of its own, an independent market after the commodity is subjected to the process of manufacture. The nature and extent of the process would vary from case to case, and in a given case, there may be only one stage of processing, while in another case, there may be several stages of processing, and perhaps, a different kind of process at every stage. That with every process, the commodity would experience a change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, that it can be said that the commodity used as raw material has been consumed in the manufacture of the end-product. To put it differently, the final product does not retain the identity of the raw material after it has undergone the process or processes of manufacture."
Thus, the whole process of conversion of the raw material when leads to production of new article and when its character, use and nature also indicate complete transformation bringing into existence the new product altogether. The assessee has rightly been allowed the benefit of additional depreciation by both the revenue authorities. In light of the discussion hereinabove, we hold that the substantial question raised in this appeal by the Revenue has been appropriately and aptly addressed and answered requiring no further indulgence, resulting into dismissal of present Tax Appeal.