Income Tax Appellate Tribunal - Bangalore
God Granites vs Income Tax Officer on 19 May, 1997
Equivalent citations: [1998]65ITD302(BANG)
ORDER
S. Bandyopadhyay, A.M.
1. The appeal has been filed by the assessee against the order of the CIT(A) confirming some of the additions as made in the assessment order.
2. The assessee is engaged in the business of export of granite blocks extracted from quarries. For this year, one nil return, revised by another nil return showing a different figure of income, claiming exemption of the entire amounts of income as shown in the returns under the provisions of s. 80HHC, were filed successively. The AO processed the returns filed by the assessee under s. 143(1)(a) by disallowing the claim of the assessee towards exemption under s. 80HHC. The plea of the AO was that inasmuch as the assessee was exporting rough granites, it would not be entitled to the deduction under s. 80HHC in view of the prohibition contained in sub-cl. (ii) of cl. (b) of sub-s. (2) of s. 80HHC r/w item No. (x) of the Twelfth Schedule to the IT Act. It was furthermore stated in the adjustment note accompanying the intimation under s. 143(1)(a) that the matter had been clarified by the Circular of CBDT No. 693, dt. 17th November 1994.
3. The assessee filed a writ petition before the Karnataka High Court against the above-mentioned action of the AO challenging firstly the validity of the Circular No. 693, dt. 17th November, 1994, and secondly the legality of the adjustment made in the intimation under s. 143(1) (a) disallowing the claim of the assessee under s. 80HHC therein. The High Court dismissed the first contention of the assessee and held the Circular to be valid. As regards the adjustment made in the intimation under s. 143(1)(a) is, however, concerned, the High Court held the said adjustment to be illegal and beyond the scope of "prima facie adjustments" as envisaged under s. 143(1)(a) and struck down the disallowance.
In the present assessment under s. 143(3), the AO once more referred to the above mentioned circular of the CBDT No. 693, dt. 17th November, 1994 and disallowed the claim of the assessee towards deduction under s. 80HHC. The action of the AO was confirmed in first appeal.
4. According to the provisions of cl. (b) of sub-s. (2) of s. 80HHC, the deductions allowable under that section does not apply to the goods and merchandise as mentioned in the said cl. (b). Sub-cl. (ii) of the said clause reads as below :
"(ii) Minerals and ores other than processed minerals and ores specified in the Twelfth Schedule."
Item (x) of the aforesaid Schedule enumerates the items as below :
"(x) Cut and polished minerals and rocks including cut and polished granite, Explanation - For the purpose of this Schedule, "processed" in relation to any mineral or ore, means :
(a) dressing through mechanical means to obtain concentrates after removal of gangue and unwanted deleterious substances or through other means without altering the minerological identity;
(b) pulverisation, calcination or micronisation;
(c) agglomeration from fines;
(d) cutting and polishing;
(e) washing and levigation;
(f) benefication by mechanical crushing and screening through dry process;
(g) sizing by crushing, screening, washing and classification through wet process; and
(h) other upgrading techniques such as removal of impurities through chemical treatment, refining by gravity separation, bleaching, floatation or filtration."
Para. 3 of Circular No. 693, dt. 17th November, 1994, as referred to above reads as below :
"3. The entry in the Twelfth Schedule is very clear and unambiguous and uses the term "cut and polished". Therefore, for availing of the benefit under s. 80HHC, it is necessary that the rocks is not only cut into blocks but also polished before it is exported. This is in line with Government's policy to encourage export of polished granite and other rocks where value addition before export is high and to discourage export of raw blocks where value addition is low."
5. During the course of the hearing of the appeal before us, the learned counsel for the assessee has brought it to our notice that by a subsequent Circular No. 729, dt. 1st November, 1995, the CBDT has retracted its earlier view on the question of availability of deduction under s. 80HHC on export of granite blocks and has taken a new view, very much favourable to the exporters. Para 3 of the new circular reads as below :
"3. The Board is, therefore, of the view that while granite can alone be considered as mineral, any process applied to granite would deprive the quality of rough mineral from the dimensional blocks of granite, which is a value added marketable commodity. When rough granite is cut to dimensional blocks of uniform colour and size, it not only undergoes mechanical process of cutting and also certain amount of dressing and polishing is involved to remove various natural flaws such as colour variations, grain variations, joints, fissures, moles, patches, hair line cracks, etc. The profits derived from the export of such granite dimensional blocks would accordingly be eligible for deduction under s. 80HHC of the Act."
The learned counsel for the assessee has also relied on the order of this Bench of Tribunal dt. 16th July, 1996 in ITA No. 607/Bang/1995 in the case of a similar organisation viz., Ruby Granite (asst. yr. 1993-94), in which case, in similar circumstances, the Tribunal held that in view of the latter circular of the CBDT, dt. 1st November, 1995, the assessee would be entitled to deduction under s. 80HHC.
The learned Departmental Representative during the course of his arguments before us, has strongly contended that the circulars of the CBDT are not binding on the Tribunal whereas the judgments of jurisdictional High Courts are binding. Reliance has been placed in this connection on the following two judgments of Supreme Court, in which cases, however, it has been merely held that the CBDT is not competent to give directions to its subordinate authorities regarding exercise of judicial powers by them :
Sirpur Paper Mills Ltd. vs. CWT (1970) 77 ITR 6 (SC) and J. K. Synthetics Ltd. & Ors. vs. CBDT & Ors. (1972) 83 ITR 335 (SC).
It has furthermore been contended that CBDT has clarified by its communication dt. 12th February, 1997 to the Chief CIT, Karnataka, that the above-mentioned Circular No. 729, dt. 1st November, 1995, would be applicable prospectively from asst. yr. 1996-97 only and not in respect of the earlier years. The learned Departmental Representative has also relied on the discussions made by the Supreme Court at reported p. 139 of 158 ITR of its judgment in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC), in which it has been held that circulars of CBDT cannot detract from the provisions of statute. Finally, the learned Departmental Representative has relied on the reported judgment of the Karnataka High Court in the assessee's own case in the writ petition against the adjustment made under s. 143(1)(a) for this very year (as discussed above) - God Granites vs. Under Secretary, CBDT & Ors. (1996) 218 ITR 298 (Kar) in which the High Court has held the earlier circular of the CBDT dt. 17th November, 1994, to be valid and applicable to the cases of exporters of granite. It is contended by the learned Departmental Representative that since the latter circular of the CBDT dt. 1st November, 1995, had not yet been tested by the High Court, it should not be taken resort to in preference to the earlier circular.
6. We have perused the judgment of the Karnataka High Court in the assessee's own case as referred to above. The point taken up by the assessee before the High Court in that case was that the adjective "cut and polished" as used in item No. (x) of the Twelfth Schedule before the word "minerals" should not be extended to the next word i.e., "rocks". In other words, the contention of the assessee was that rocks, in any form, should be considered to be covered by the aforesaid item No. (x) and since granites are nothing but rocks, even uncut granites also should qualify for the deduction under s. 80HHC. The High Court negatived the contention of the assessee in this regard and held that minerals include rocks and rocks include granites and furthermore that item No. (x) of the Twelfth Schedule referred to only cut and polished granites. The High Court held that the Circular No. 693, dt. 17th November, 1994 was perfectly valid and in accordance with the same, export of granites which were not cut into blocks and also polished would not entitle the exporter to the deduction under s. 80HHC. There is no doubt about the fact that in the aforesaid judgment, the High Court made the following obiter :
"In this case, admittedly, the "rock" or "granite" exported by the petitioner has not undergone any of the processes including polishing and cutting, listed in the Explanation to the Twelfth Schedule. Hence, the petitioner is not entitled to claim deduction under s. 80HHC in regard to the profits derived by export of such unpolished granite while computing its total income."
7. There is no doubt about the fact that in delivering the above judgment, the Hon'ble Judge of the Karnataka High Court was influenced by the idea expressed by the CBDT in its Circular dt. 17th November, 1994 to the effect that ordinary exporters of granite like the assessee do not export "cut and polished" granites. The said view of the CBDT was, however, revised on factual basis in its latter Circular dt. 1st November, 1995. We cannot pay any attention to the Departmental contention that this latter circular should be considered to be applicable from asst. yr. 1996-97 onward. This latter circular modifies the view of the CBDT about some facts relating to the condition in which granite blocks are exported. This is not on the basis of a change in the procedure undertaken by the exporters of late. On the other hand, the CBDT had a wrong view about the nature of state of export of granite blocks and on full appraisal of facts, it expressed a correct factual view in its latter circular. Hence, the latter circular must be considered to be applicable to the trade of export of granites in a general manner even covering a period prior to the issue of the latter circular.
There cannot be any doubt about the facts, which has also been admitted by the CBDT in its latter circular that before being exported, the granite ores and boulders extracted from the quarries, are cut to certain suitable sizes. In the language of CBDT, in this process, dimensional blocks of granite are made. The CBDT also admits that not only the granite boulders are cut into dimensional blocks, also certain amount of dressing and polishing is given to them to remove various natural flaws such as colour variations, grain variations, joints, fissures, moles, patches, etc. What is required under the Twelfth Schedule is that only cut and polished minerals including granites should be exported for entitlement to deduction under s. 80HHC. The Act does not prescribe the degree or extent of cutting and polishing to be applied to granite ores or boulders. The Act certainly does not specifically say that the minerals and granites should be given the final cut and be finally polished before they are exported. Indeed, if such a view be taken, then the entire purpose of allowing the benefit to cut and polished minerals including granite blocks towards deduction under s. 80HHC, would get frustrated. Firstly, it is the ultimate users of granites who would determine the shape, size and thickness of the granite blocks to be used by them and hence, it is required that the final cutting of the granite blocks would have to take place at their end. The same consideration also applies to the case of final polishing. The extent of final polishing required to granite blocks would depend on their actual use. It is upto everybody's knowledge that for granite blocks being used for flooring purpose, the polishing need not be very fine as there would be chances of people slipping on the same, whereas, on the other hand, granite blocks to be used as decorative pieces on walls and other places would require a very fine and mirror-like polishing. Furthermore, the exports of granite blocks are required to be made essentially in the form of large pieces of blocks, otherwise, it will not be possible for the blocks to withstand the hazard of rough handling during the process of export. Needless to say, final polishing cannot be given before exporting the blocks inasmuch as the polish is apt to be damaged considerably during the rough handling of granite blocks in the process of export. Ultimately, therefore, we are of the view that although some amount of cutting and polishing is rendered to the granite blocks before export, it is not physically plausible to put them into finally cut and polished form at that stage. The Karnataka High Court came to the conclusion, on the basis of the earlier circular of CBDT that only crude granite blocks without any processing are exported by the assessee. On the basis of the factual submissions before us and also the latter circular of CBDT dt. 1st November, 1995, however, we finally come to the conclusion that it is the "cut and polished" granite blocks (although may not be finally cut and precisely polished), which are being exported by the assessee and hence they qualify for the deduction under s. 80HHC in accordance with the Twelfth Schedule of the Act. We, therefore, reverse the decisions of the lower authorities and direct the AO to allow the aforesaid deduction under s. 80HHC in respect of the export income.
8. The other issue relates to valuation of closing stock. The assessee in its accounts, showed 329.280 cubic metres of granite valued at Rs. 21,73,000 to form its closing stock. When the assessee was asked to state whether any stock statement had been furnished to the bank to obtain credit facilities, the assessee came up with copy of such statement which showed that in addition to the aforesaid amount of 329.280 cu. mt. of granite lying at Mangalore harbour, the assessee had also declared stock at quarry in respect of 97.090 cu. mt. It is the plea of the assessee that the above-mentioned stock at quarry does not have any value and hence, the same has not been included within the closing stock. The learned CIT(A) and also the Departmental Representative appearing before us have come up with the argument that it is not proper for the assessee to show a different figure even in respect of quantum in the closing stock furnished before the IT authorities, than what had been shown before the bank in connection with getting credit facilities. Our attention has been drawn to the discussions made by the Madras High Court on this issue, in its judgment in the case of Coimbatore Spinning & Weaving Co. Ltd. vs. CIT (1974) 95 ITR 375 (Mad) :
"We are not convinced that any such practice is shown to exist or that it has been recognised in the Commercial Circles or by Courts. Even assuming that such a practice exists, the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessees so as to enable them to go back on their own sworn statement given to the banks as to the stocks held and hypothecated by them to banks."
The learned Departmental Representative has also relied on the following two further decisions in support of his argument in this regard :
Dhansiram Agarwal vs. CIT (1993) 201 ITR 192 (Gau) and Tiptop Plastic Industries (P) Ltd. vs. ITO (1995) 214 ITR 778 (Mad).
We are not convinced with the argument put forward by the assessee that the stock of granite lying at the quarry did not have any value. It may be that processing by way of cutting the same into dimensional blocks was not done to the said stock. That however, does not render the said stock as completely valueless. It is also worthwhile to note that the assessee has followed the system of valuing the closing stock at cost only, and not at cost or market value, whichever is lower. There is no doubt about the fact that quarrying expenses were incurred on raising this stock of granite now lying at the quarries. The amount of such expenses corresponding to the said stock is, therefore, required to be taken into consideration for evaluating the value of the same at cost. We, therefore, uphold the action of the lower authorities in including the quantity of 97.090 cu. mt. of granite lying at the quarry also within the closing stock of the assessee.
9. The other issue relates to the method of valuation employed. The assessee has taken into consideration only the following 4 items of expenses included within the broad head "Quarrying Expenses" for the purpose of evaluation of the closing stock :
Rs.
Purchases 38,58,543 Consumables 17,00,500 Labour charges 38,88,826 Raising charges 26,62,256
The AO has, however, included the following other items also in the process of evaluation of closing stock :
Rs.
B.D. Hire charges 2,04,450
Repairs and maintenance 9,45,675
Insurance 85,718
Quarry development expenses 48,89,679
Besides the same, the AO has also included 90 per cent. of welfare expenses of Rs. 7,33,639 shown by the assessee under the head "operating expenses".
10. The arguments put forward by the counsel for the assessee are that B.D. hire charges and repairs and maintenance charges do not directly relate to the quarrying process. Furthermore, repairs and maintenance charges are claimed to be items of P&L a/c and not of trading account. Similar is claimed to be the case of insurance charges. So far as the quarry development expenses are concerned, the learned counsel for the assessee strongly contends that these were expenses incurred by the assessee for making and creating facilities for excavation and did not have anything to do with the process of raising the granite blocks as such. It is thus claimed that all these expenses should not be considered as direct expenses involved in quarrying and hence they should not be included towards evaluation of the closing stock.
The learned Departmental Representative on the other hand strongly contends that since all the other expenses are shown by the assessee under the broad head 'quarrying expenses', they form part of the raising expenses. As regards the welfare expenses, it is contended that such expenses were incurred for maintaining and repairing the health of the people engaged in quarrying and hence, the AO has been correct in including 90 per cent. of such expenses for stock-valuation purpose.
11. On a careful consideration of the facts of the case, we are of the view that the assessee's description of the head "quarrying expenses" is rather a misnomer. The quarry development expenses clearly seem to be of the nature of expenses incurred not in connection with the day-to-day quarrying process, but towards creating the infrastructure. This is evident from the fact that whereas in this particular year, heavy expenses to the extent of Rs. 49 lakhs approximately were incurred. In this connection, not a single paisa was, however, incurred in the immediately preceding year. Whether the expenses are required to be disallowed as capital expense or not is altogether a different question. Anyway, the AO has not attacked the issue from that angle and hence, we are unable to give any judgment from this angle. The B.D. hire charges and the repairs and maintenance expenses in connection thereto also seem to be items not directly related to the quarrying process, but towards maintaining the infrastructure. These, again, appear to be items to be included in the P&L a/c only. The same applies to the insurance expenses. So far as the welfare expenses are concerned, we fail to understand that when salaries, wages, bonus and also the medical expenses of the staff have not been considered by the AO, how and why he has taken into consideration the welfare expenses alone. The welfare expenses are certainly not directly related to the quarrying process. Finally, therefore, we are of the view that the assessee has rightly taken into consideration the direct expenses involved in the quarrying process and in evaluating its closing stock in that manner. We, therefore, reverse the decisions of the lower authorities and direct that the process of evaluation of the closing stock be done by taking into consideration only such expenses as considered by the assessee in its valuation of closing stock.
12. In the result, the appeal filed by the assessee is partially allowed to the above-mentioned extent.