1. The dispute arising in this appeal of the assessee for the assessment year 1977-78 revolves round the interpretation of the expression "for the purposes of business of manufacture" occurring in Clause (vi) of Section 32(1) of the Income-tax Act, 1961 ("the Act").
The previous year of the assessee ended 23-10-1976. It started its business from 1-4-1976. The ITO took the view that there was no business of manufacture or production within the meaning of Section 32(1)(w) of the assessee during the previous year, relevant to the year under appeal, and, therefore, the assessee was not entitled to initial depreciation under Section 32(1 )(vi). He observed that manufacturing work was done "just on trial basis". On appeal, the AAC held in para 8 of his order that "... no doubt that the plant and machinery was installed for the purpose of manufacturing of specified items" but he concurred with the ITO that the assessee was not entitled to initial depreciation under Section 32(1 )(vi) as the manufacturing work "was given up during the previous year only" and the assessee shifted to anodising work.
2. Shri Ranka, learned counsel for the assessee, urges before me that all the conditions of Section 32(1)(vi) have been fulfilled and the assessee is entitled to initial depreciation at the rate of 20 per cent of the actual cost of the machinery. I agree with his submission. The only objection of the AAC is that the assessee started the manufacturing work during the previous year relevant to the year under appeal and that he had shifted to anodising work. So the AAC accepted that the assessee had carried on the business of manufacturing during the year under appeal. The question is whether Section 32(1)(vi) enjoins upon the assessee to continue the business of manufacture for the whole year and whether the claim of initial depreciation can be disallowed merely on the ground that the assessee shifted to some other business during the year under appeal. The only requirement of Section 32(1)(vi) is that the assessee, small scale industrial undertaking, should install machinery for the purposes of business of manufacture or production. The machinery installed by the assessee can be used for several purposes including manufacture of certain items. The assessee did carry on manufacturing of certain items for some time as per the AAC's order. The statement of Shri Ram Lal, one of the partners, was recorded by the ITO. He stated that manufacturing, except one of the items, namely, milk cooker, was discontinued during the year under appeal as the product was not found marketable. He stated that the manufacturing remained merely as testing manufacturing.
When a machinery is useful for several purposes including manufacture of some items, it cannot be said that main business was not of manufacture, because the assessee started anodising work in the present instance. The order of starting the business will not determine the principal or the subsidiary business. The business started in the beginning cannot be said to be the principal business and the business started later on cannot be labelled as subsidiary or ancillary one. In my view, the authorities below failed to appreciate the facts of the case in the right perspective. It is not a case where the assessee started the business of manufacture without the intention of carrying on such business. The assessee did start the business of manufacture with the intention to carry on the same but as the product was found to be unmarketable, the manufacturing was discontinued. On these facts, it cannot be said that the machiney was not installed for the purposes of business of manufacture. For the reasons, I hold that the assessee is entitled to initial depreciation as it carried on the business of manufacture during the year under appeal, though on a small scale and for a small period.