Embroidery work on Sari is manufacturing; machinery used for it eligible for additional depreciation : ITAT

By | October 5, 2015
(Last Updated On: May 21, 2018)

Embroidery work performed on grey synthetic cloth i.e. sari amounted to manufacturing activity and, thus, machinary used in said activity was entitled to receive additional depreciation


Income-tax Officer, Ward – 6 (4), Surat


Yash Creation


IT APPEAL NO. 1107 (AHD.) OF 2012
CO. NO. 154 (AHD.) OF 2012

AUGUST  21, 2015

Pravin Kumar, DR for the Appellant.


Rajpal Yadav, Judicial Member – The Revenue is in appeal before us against the order of the ld. CIT(A)-IV, Surat dated 16.2.2012 passed for Asstt. Year 2008-09.

2. On receipt of notice in the Revenue’s appeal, the assessee filed cross-objection bearing no. 154/Ahd/2012.

3. Solitary grievance of the Revenue is that the ld. CIT(A) has erred in deleting the disallowance of Rs. 32,89,944/-.

4. Brief facts of the case are that the assessee is a firm engaged in the business of embroidery work on grey synthetics cloth. It has filed its return of income on 29.9.2008 declaring NIL income. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued on 8.8.2009 which was duly served upon the assessee. On scrutiny of the accounts, it revealed to the AO that the assessee has claimed depreciation of Rs. 60,87,545/- on the plant & machinery of having value of Rs. 1,69,46,773/-. The assessee had calculated the depreciation at normal rate of 15% plus additional depreciation at 20%. This calculation has been made as under:

Total depreciation as per computation:Rs. 60,87,530/-
Less: Depreciation where no addl.
Depreciation is claimed:Rs. -27,97,586/-
Total additional depreciation claimed:Rs. 32,89,944/-

5. The ld. AO has disallowed the claim of the assessee on the ground that it is engaged in the job work activity of embroidery work on the sarees. According to the AO, saree remained saree whether or not the embroidery work is being done on the same. Its name also does not change. The basic features of item are also not changed. The only change effected in it is, in terms of value. Thus, the embroidery work does not constitute any manufacturing activity and assessee is not entitled to for additional depreciation. The ld. AO in this way disallowed the claim of Rs. 32,89,944/-.

6. On appeal, the ld. CIT(A) has allowed the claim of the assessee by observing as under:

“2. All the grounds of appeal pertain to just one grievance of the appellant, i.e. not admitting claim of additional depreciation u/s. 32(l)(iia) of Rs. 32,89,944/- on the ground that the appellant was not eligible as he was carrying on embroidery work on sarees & dress materials which did not amount to manufacturing or production. I find that the A.O. did not allow the claim of additional depreciation of Rs. 32,89,9447- u/s. 32(l)(iia) as he was of the opinion that an activity of embroidery constitutes only value addition and cannot be considered as manufacture, a prerequisite for grant of additional depreciation. Aggrieved the assessee is in appeal. Before me, it has been argued that the embroidery on fabric amounts to manufacturing process and eligible for additional depreciation u/s. 32(l)(iia). It was further submitted that the issue is covered by the decision of the IT AT, Ahmedabad by its decision in the case of M/s. Aswani Industries, Surat (213/Ahd/2010, dated 29.10.2010) and Haripriya Processors Pvt. Ltd. (1569/Ahd/2010, dated 08.09.2009) wherein it was held that embroidery work done was an activity of manufacturing and entitled to additional depreciation u/s. 32(l)(iia).

2.1 I have gone through the facts of the case. There is no dispute regarding purchase and ownership of machinery as normal depreciation has been allowed. The only dispute is regarding grant of additional depreciation which has not been allowed only for the reason that the appellant is engaged in embroidery work which does not amount to manufacture or production. I find that the issue is covered in favour of the assessee by the decisions of the Hon’ble ITAT, Ahmedabad in the cases cited above. Respectfully following the above decisions, it is held that the appellant is entitled to additional depreciation u/s. 32(l)(iia). The A.O. is therefore directed to allow the claim of additional depreciation. This ground is allowed.”

7. With the assistance of learned DR, we have gone through the record carefully. Section 32(1)(iia) of the Income Tax Act provides that in the case of any new machinery or plant, 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, a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii). Meaning thereby, if an assessee has acquired and installed machinery after 31st March, 2005, and such assessee is engaged in the business of manufacturing and production of any article or thing, then apart from normal depreciation the assessee would get 20% of the actual cost as additional depreciation. As far as the applicability of this section is concerned, that has not been disputed by the parties. The dispute is whether embroidery work carried out by the assessee amounts to manufacturing activity or not.

8. The expression “manufacture” has been defined in section 2(29)(B)(a) which read as under:

‘(29BA) “manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing,-

(a)resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b)bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.’

9. However, expression “production” has not been defined in the Act. The expression “manufacture” as well as production have fallen for their interpretation and construction not only at the level of ITAT but before the Hon’ble Supreme Court also and the Hon’ble Court has explained both these expressions in detail. A reference to the decision of Hon’ble Supreme Court in the case of CIT v. Arihant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79 India Cine Agency v. CIT[2009] 308 ITR 98, CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 and to the following decision of Hon’ble Gujarat High Court can be made :

(a)CIT v. Neekarna [1982] 137 ITR 879
(b)CIT v. Anglo French Drug Co. Ltd. [1991] 191 ITR 92
(c)CIT v. Prabhudass Kishoredas Tobacco Products [2006] 282 ITR 568.

10. Let us bring at home the meaning of expression “manufacture and production” as propounded in the various authoritative pronouncements of the Hon’ble Supreme Court as well as of Hon’ble High Court.

11. In the case of India Cine Agency, Hon’ble Supreme Court has considered the judgment rendered in the case of Sesa Goa Ltd. (supra) and all other decisions on the point which contemplate the meaning of expression “manufacture” as well as “production”. The relevant discussion made by the Hon’ble Court reads as under:

‘2. As noted above, the core issue is whether activity undertaken was manufacture or production.

3. In Black’s Law Dictionary (5th Edition), the word “manufacture’ has been defined as, “the process or operation of making goods or any material produced by hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine”. Thus by process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. (See Dy. CST (Law), Board of Revenue (Taxes) Coco Fibres [1992] Supp. 1 SCC 290).’

12. Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass.

13. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise v. Rajasthan State Chemical Works [1991] 4 SCC 473).


14. To put it differently, the test to determine whether a particular activity amounts to “manufacture’ or not is: Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes ‘manufacture’ takes place and liability to duty is attracted. Etymologically the word ‘manufacture’ properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union of India [1985] 3 SCC 314).


15. In this case, assessee was carrying on business of conversion of Jumbo Rolls of photographic films into small flats and rolls in desired sizes. It claimed deduction under sec. 80-HH and 80-I as well as investment allowance under sec. 32AB. The controversy arose whether conversion of jumbo rolls into small sizes amounts to manufacture or production, eligible for deduction under sec. 32AB or deduction under sections 80-HH and 80-I of the Income-tax Act, 1961. Hon’ble Supreme Court has held that this activity amounts to manufacture or production. Thus, we think it is not necessary to recapitulate and recite all the decision on the construction expression “manufacture”. But suffice to say that core of all the decisions of the Hon’ble Supreme Court or Hon’ble High Court is to the effect that broadly manufacture is a transformation of an article, which is commercially different from the one which is converted. It is a change of one object to another for the purpose of marketability. It brings something into existence, which is different from that, which originally existed. The new product is a different commodity physically as well as commercially. The Hon’ble Court also explained broader test to determine whether manufacture is there or not, it is propounded that when a change or series of changes are brought out by application of processes which take the commodity to the point where, commercially, it cannot be regarded as the original commodity but is, instead recognized as a distinct and new article that has emerged as a result of the process.

16. Thus, in our opinion, the moment the assessee has carried the embroidery work, the character of sari had changed. It does not remain the original grey synthetic cloth. It has its independent market and value in the market other than the grey synthetic cloth. Thus, the learned AO failed to appreciate this aspect.

17. We further, find that the ld. First Appellate Authority has appreciated the controversy in right perspective as well as followed the order of the ITAT, wherein, it has been held that the embroidery work is an activity of manufacture. In view of the above discussion, we do not find any merit in the appeal of the Revenue. It is dismissed.

CO No.154/Ahd/2012

18. As far as CO is concerned, section 253(4) authorizes the respondent to file CO on receipt of notice in appeal. Such CO would be verified in the prescribed manner, and it is to be filed against any part of the impugned order. In the present case, the assessee has not pointed out its grievance against any part of the CIT(A)’s order. The CO is being filed in support of the CIT(A)’s finding, therefore, it is not maintainable. In view of the above discussion, CO is also rejected.

19. In the result, appeal of the Revenue and the CO of the assessee are dismissed.

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