Commissioner of Income Tax vs Rajalakshmi Textile Processors Ltd. (No. 1)

K.A. Thanikkachalam, J.—In compliance with the direction given by this court dated April 18, 1983, the Tribunal referred the following two

questions for the opinion of this court u/s 256(2) of the Income Tax Act, 1961 :--

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee would be entitled to

initial depreciation and development rebate in respect of certain machineries installed in its factory in terms of item 21 of the Ninth Schedule and

item 32 of the Fifth Schedule to the Income Tax Act, 1961, and hence the withdrawal of the same was not justified ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the reopening of the assessment

u/s 147(b) was based on the change of opinion on the part of the Income Tax Officer and therefore it was not valid in law ?

The assessee is a company engaged in bleaching and finishing of raw cloth as well as dyeing and finishing of cloth and yarn. In the original

assessment for the assessment year 1975-76, the Income Tax Officer allowed initial depreciation as well as development rebate treating the

assessee as one engaged in the production or manufacture of textiles. Later on, he withdrew the allowance by the reassessment based on an audit

note which was of the view that the assessee could not be considered to be engaged in the production of goods listed in item 21 of the Ninth

Schedule.

Aggrieved the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner on the merits held

that the assessee is entitled to initial depreciation in terms of item 32 of the Fifth Schedule and item 21 of the Ninth Schedule and, therefore, the

reassessment is unwarranted. Accordingly, the reassessment was set aside and the original assessment was restored.

Aggrieved, the Department filed a second appeal before the Appellate Tribunal. The Appellate Tribunal held that the assessee is entitled to initial

depreciation and development rebate and accordingly, the Tribunal confirmed the view taken by the Commissioner of Income Tax (Appeals) on

this aspect. The Tribunal was also of the opinion that the reassessment itself was not validly initiated.

In so far as question No. 1 is concerned it relates to entitlement to initial depreciation and development rebate in terms of item 21 of the Ninth

Schedule and item 32 of the Fifth Schedule to the Income Tax Act, 1961. The assessee is a company engaged in bleaching and finishing of raw

cloth as well as dyeing and finishing of cloth and yarn. The assessee in the assessment year 1975-76 claimed initial depreciation and development

rebate treating the assessee as one engaged in the production and manufacture of textiles. In the original assessment, the Income Tax Officer

granted initial depreciation and development rebate treating the assessee as one engaged in the production and manufacture of textiles. But later on

by exercising jurisdiction u/s 147(b) of the Act, he withdrew the initial depreciation as well as the development rebate granted in the original

assessment treating the assessee as one not engaged in the production and manufacture of textiles.

A similar issue came up for consideration before this court in the case of Commissioner of Income Tax (Central), Madras Vs. S.S.M. Finishing

Centre, . Here also, the assessee purchased grey cloth manufactured or produced by others and expended its labour thereon by carrying out some

operations and sold the resultant product. The assessee claimed development rebate at the higher rate of 25 per cent, on the ground that it had

installed plant and machinery for the manufacture and production of an article falling under item 32 of the Fifth Schedule to the Act. On these facts

this court held that there was no manufacture or production of any article mentioned in the Fifth Schedule to the Act. Hence, the assessee was not

entitled to development rebate at a higher rate. This decision was rendered by following the earlier decision of this court in Commissioner of

Income Tax Vs. S.S.M. Finishing Centre, , in the case of the same assessee. On similar facts a similar view was taken by this court in T. C. No.

809 of 1983 by a judgment dated March 27, 1996, in the case of Commissioner of Income Tax Vs. S.S.M. Processing Mills, . Therefore, on the

merits, the assessee is not entitled to initial depreciation and higher development rebate since the assessee is not either manufacturing or producing

textiles. Accordingly, we answer the first question referred to us in the negative and in favour of the Department.

In so far as question No. 2 is concerned it relates to the validity of reopening of the assessment u/s 147(b) of the Act. As already pointed out, in

the original assessment for the assessment year 1975-76, the Income Tax Officer allowed initial depreciation as well as development rebate

treating the assessee as engaged in the production and manufacture of textiles. Later on, the Income Tax Officer reopened the assessment u/s

147(b) of the Act and withdrew both the allowances already granted on the basis of an audit note. Both the Appellate Assistant Commissioner and

the Tribunal came to the conclusion that the reopening was done u/s 147(b) of the Act on the basis of change of opinion.

Learned standing counsel appearing for the Department submitted that the Tribunal was not correct in holding that the reopening was done on a

mere change of opinion. It was submitted that the audit party has pointed out only the factual position that the assessee is only processing the

textiles and not manufacturing or producing the same. Bleaching and finishing of raw cloth as well as dyeing and finishing of cloth and yarn would

amount to manufacture or production depending upon different interpretations. The Punjab and Haryana High Court in Commissioner of Income

Tax Vs. Sovrin Knit Works, , held that dyeing, bleaching, printing and embroidering of grey cloth constitute production and manufacture in terms

of item 32 of the Fifth Schedule to the Income Tax Act, 1961. A contrary view was taken by this court in Commissioner of Income Tax Vs.

S.S.M. Finishing Centre, and Commissioner of Income Tax (Central), Madras Vs. S.S.M. Finishing Centre, . Therefore, when two interpretations

or two views are possible, the audit party cannot point out that the assessee''s activities do not constitute manufacture or production. All the

materials were placed before the Income Tax Officer while making the original assessment. The pointing out, viz., that the assessee is not a

manufacturer or a producer would virtually amount to interpretation of the provisions contained in Sections 32 and 33 of the Income Tax Act.

Therefore, the reopening was done on a mere change of opinion. Further, in view of the decision rendered by the Supreme Court in Indian and

Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , on the basis of the audit report, it is not possible for the

Income Tax Officer to reopen the assessment u/s 147(b) of the Act. Accordingly, the order passed by the Tribunal in holding that the reopening

u/s 147(b) of the Act is bad, is in order. Accordingly, we answer question No. 2 in the affirmative and against the department.

It is significant to note that when we are answering question No. 2, it is not necessary for us to answer question No. 1. But for the sake of

completeness we provided our answer to question No. 1 also. No costs.