1999 INSC 0014
                                      S. S. M. Brothers (P) Ltd. and Others

                                                           Vs

                                Commissioner of Income Tax (Central) Madras

                            Civil Appeals No. 931 of 1991 with No. 1775 of 1992

                                     (S. P. Bharucha, N. Santosh Hegde JJ)

                                                      12.01.1999

                                                        ORDER

1. These appeals by special leave impugn the correctness of the view taken by a Division Bench of
the High Court at Madras in TC No. 146 of 1979 and followed in TC No. 140 of 1980. The
questions before the High Court were :

                  (1) Whether on the facts and in the circumstances of the case, it has been rightly held
                  by the Tribunal that the assessee was entitled to the higher rate of development rebate
                  at 35% under Section 31(1)(b)(B)(i) in respect of the machinery used by it in its
                  business ?

                  (2) Whether on the facts and in the circumstances of the case, the Tribunal was right
                  in holding that the assessee-Company was engaged in the construction, manufacture
                  or production of the textiles (otherwise processed) so as to be entitled for the higher
                  rate of development rebate ?

2. The Tribunal in its order has stated that the assessee-appellant Purchased cloth and on that cloth
embroidery work was done with the aid of imported machines. In some cases, the cloth was
thereafter dyed again to obtain a uniform colour. It said that "after the embroidery the finished
product is something which in the realm of textile would be considered to be cloth entirely different
from the basic cloth on which such embroidery work was done". Upon this basis, it came to the
conclusion that the assessee was entitled to the benefit of development rebate at an enhanced rate
under the provisions of Section 33(1)(b)(B)(i) of the Income Tax Act, 1961. It said that the mere
fact that the assessee started with basic cloth would not bar the assessee from being entitled to the
higher development rebate because the end product of the assessee could be described as "textile
otherwise processed" within the meaning of Item 32 of Schedule V of the Income Tax Act, 1961.

3. The High Court took the contrary view. It said that the operations that were carried on by the
assessee on the cloth purchased by it were not in the nature of manufacturing or processing or
production operations nor could such operations relate to the manufacture or production of textile.
The cloth which would be covered by the expression "textile" had already been manufactured or
produced by someone else, it was merely purchased by the assessee. That cloth, even after being
embroidered and dyed, was not transformed into any other different or distinct commercial article or
product but essentially retained its basic character and structure and was identifiable as cloth. The
operation done by the assessee on the cloth did not bring into existence a commercially different and
distinct commodity from the feed-in material.
4. Section 33(1)(b)(B)(i), insofar as it is relevant, reads thus :

                  "33. (1)(b)(B)(i) Where the machinery or plant is installed for the purposes of
                  business of construction, manufacture or production of any one or more of the
                  articles or things specified in the list in the Fifth Schedule, -"

5. Item 32 of the Fifth Schedule to the Act reads thus :

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

6. When both the provisions are read together this is the result : where the machinery or plant is
installed for the purposes of the business of production of textiles, including those dyed, printed or
otherwise processed, made wholly or mainly out of cotton, the assessee is entitled to the deduction
of the development rebate thereunder. What is important is that this development rebate is available
if the machinery or plant is installed for the purposes of the business of the production of textiles,
including those "otherwise processed". If the machinery or plant is required to be utilised in the
production of such textiles, at whatever stage, the assessee is entitled to the benefit of this
development rebate. It is not disputed fairly that if the assessee had been producing the embroidered
cloth starting from scratch, that is, by starting with cotton, this machinery would have been entitled
to be considered for the purposes of such development rebate.

7. We are of the view that it makes no difference that in the particular case the assessee buys the
cloth and then processes it, using the machinery, by embroidering it and, in some cases, by dyeing
it. The assessee utilises the machinery in the production of processed textiles. Therefore, the
machinery is entitled to the development rebate under Section 33(1)(b)(B)(i). The question has,
therefore, to be answered in the affirmative and in favour of the assessee.

8. The appeals are allowed accordingly. There shall be no order as to costs.