Income Tax Appellate Tribunal - Jodhpur
Asstt. Cit vs Wolkem India Ltd. on 23 November, 2006
ORDER
R.S. Syal, Accountant Member
1. This appeal by the revenue and the cross-objection by the assessee arise out of the order passed by Commissioner (Appeals) on 30-9-2004 in relation to assessment year 2000-01.
2. Ground No. A(a) of the revenue's appeal is against the allowability of deduction of Rs. 77,55,056 claimed under Section 80-IA/80-IB.
3. Briefly stated the facts of this ground are that the assessee continued to derive income from mining, processing and grinding of minerals. It had shown consolidated sales of Rs. 43.35 crores of all units with net profit of Rs. 3.41 crores giving net profit rate of 7.88 per cent as against the net profit rate of 4.89 per cent in the preceding year. It claimed deduction under Section 80-1 in respect of its Madri Unit and Wolkron Unit, both of which started functioning with effect from the assessment year 1995-96. On being called upon to explain the justification in support of deduction, the assessee submitted a note on business/manufacturing activities of both of its units, which has been incorporated on pp. 2 and 3 of the assessment order. The assessing officer confronted the assessee with the decision of the Hon'ble Supreme Court in the case of Divisional Dy. CST and Anr. v. Bherhaghat Mineral Industries in which it was held that the crushing of dolomite lumps into chips is not a process of manufacture that brings about a new commercial commodity. The assessee distinguished the said decision by making elaborate submissions, which have been incorporated on pp. 3 to 6 of the assessment order. The assessing officer opined that Section 80-I was not relevant in respect of the assessment year in question and on the contrary the case of the assessee could be considered under Section 80-IA. He went on to consider the details furnished by the assessee in support of claim for deduction and finally came to the conclusion that deduction under Section 80-I/80-IA in respect of both the units was not available because in both the units only the form of Wollastonite and Calcite is changed from pieces or granules of 1/4th inch to 3 inches size to powder of different mesh and hence there is no transformation and no new or different article having distinct name, character or use has come into existence. The learned Commissioner (Appeals) overturned the impugned order on this issue after considering a host of decisions/judgments of the Hon'ble Supreme Court and High Courts. He, therefore, allowed deduction under Section 80-IA/80-IB amounting to Rs. 77.55 lakhs.
4. We have heard both the sides and perused the relevant material on record. The learned Departmental Representative, at the very outset, emphasized on the fact that the case of the assessee was covered by the order passed by the Third Member in the case of Arihant Tiles & Marbles (P) Ltd. v. Income Tax Officer (2006) 104 TTJ (Jd)(TM) 149 in which, claim of deduction under Section 80-IA was held to be inadmissible. Per contra, the learned counsel for the assessee has relied on the same order to contend that the Tribunal in this case has held the assessee to be entitled to deduction where it was doing integrated activity of extracting granite, cutting the same into slabs/tiles, polishing and selling the end product in the market. In order to appreciate the rival contentions, it is foremost important to appreciate the nature of activity carried out by the assessee. As is evident from the assessment order itself that the assessee continued to derive income from mining, processing and grinding of minerals. The mines of the assessee are located near Pindwara, District Sirohi and a new industrial undertaking known as Wolkron Division is situated at Sirohi Road and the second new industrial unit known as Madri Unit is located at Madri Industrial Area, Udaipur. The assessee is manufacturing and selling Calcite and Wollastonite group of products manufactured/produced by carrying out several processes from ROM (Run of the Mines) mined, excavated from other mines in District Sirohi. The minerals excavated from the mines (ROM) contain both Wollastonite and Calcite along with other minerals and impurities. These are separated, sorted out and after removing the impurities, one manufacturing unit manufactures/produces Wollastonite group of products and the other carries on various activities of production of Calcite group of products. The processes in the case of Madri Unit after extraction of Wollastonite from ROM consist of sorting, conveyor belt dressing, grading, coarse grinding, beneficiation, blending and micronizing. In the Wolkron Unit after extraction of Calcite from ROM, activities consist of sorting, washing and conveyor belt dressing, grading, beneficiation, blending and micronizing. The learned Commissioner (Appeals), during the course of first appellate proceedings, called upon the assessee to submit the details of plant and machinery installed in both the units. Such detail was given with the names of machines and the relevance of the working of these machines in the manufacturing process, which is contained in pp. 33 to 35 of the impugned order. The sum and substance of the above is that in the Madri Unit, the assessee manufactured a number of different types of products of Wollastonite group. Before reaching the final product, the Wollastonite extracted from ROM passes through several processes of beneficiation, blending and micronizing, etc. Blending is the process where high grade material is mixed with low grade material such that the overall mix of the material as per the standard specification required for production of final product of the company. Blending is done on the basis of colour, whiteness and brightness of the material. Micronizing is a process required for production of fine powder of Wollastonite with uniform particle size distribution. It is carried out in closed circuit through classification of the mineral. The assessee produces different types of products of Wollastonite group and each such product had distinct chalacteristic or usage. In Wolkron Division the manufacturing of final products of Calcite group is carried out. Before reaching the final'product, the Calcite extracted from ROM passes through several processes, such as, washing, conveyor belt dressing, grading, beneficiation, blending and micronizing. Each product produced by the assessee has distinct physical and chemical properties, characteristics and usage. Thus the narration of processes discussed above clearly goes to show that the assessee was not only involved in the processing and production of Wollastonite and Calcite products but was also doing the mining activity. The reliance of the learned departmental Representative on the case of Arihant Tiles & Marbles (P) Ltd. (supra) is clearly misconceived because in that order the Tribunal has laid down that the mere cutting of marble blocks into slabs may not amount to manufacture or production of an article or thing. If, however, there is only integrated activity of extracting granite, cutting the same into slabs/tiles, polishing and selling the end products in the market, that would amount to production of an article or thing. The nutshell of this order is that the integrated activity of mining, cutting into slabs/tiles, polishing and selling the end products in the market would amount to manufacture/ production, whereas if the assessee only purchases granite/marble from outside market and thereafter carries out further processes like cutting, polishing, etc. it would not amount to manufacture/production. On a pointed query raised from the Bench, the learned departmental Representative conceded that the activity carried out by assessee under consideration is an integrated activity as the assessee had done mining, manufacturing, processing and production of Wollastonite and Calcite products. The same finding is contained on p.1 of the assessment order as well. The learned Commissioner (Appeals) has exhaustively dealt with all the processes of the assessee right from mining till the sale of end product which could not be controverted by the learned departmental Representative. The position, which arises is that the assessee was not only processing and grinding minerals, but was also doing mining as well. The observations contained in paras 13 to 16 of the order in the case of Arihant Tiles & Marbles (P) Ltd. (supra) are fully applicable to the instant case entitling the assessee to deduction under Section 80-IA/80-IB. Insofar as the decision of the Hon'ble Supreme Court in the case of Divisional Dy. CST and Anr. v. Bherhaghat Mineral Industries (supra) relied upon by the revenue is concerned, we find the same to be distinguishable on facts inasmuch as this judgment was rendered in the context of Sales Tax Act and the term 'manufacture' the subject-matter of consideration in that case, was with reference to Section 2(j) of Madhya Pradesh General Sales Tax Act, 1958 and notification dated 11-10-1977. On the contrary we find that the Hon'ble Supreme Court in the case of Lucky Minmat (P) Ltd. v. CIT considered the judgments of Hon'ble Rajasthan High Court in the cases of CIT v. Lucky Mineral (P) Ltd. and CIT v. Best Chem & Limestone Industries (P) Ltd. (1993) 113 CTR (Raj) 298 and finally drew a line of distinction between the two cases by holding that conversion of limestone into lime and lime dust or concrete by stone crusher could legitimately be considered as manufacturing process where mere mining of limestone and marble and cutting before the same was sold in the market could not be so considered. In a case where the assessee was engaged in the business of extracting limestones and its sales, either as such, or after converting into lime or lime dust or concrete by stone crusher, the same was held to be rightly entitled to deduction in the case of Best Chem & Limestone Industries (supra). Recently, the Hon'ble Supreme Court in the case of CIT v. Sesa Goa Ltd. has held that extraction and processing of ore amounts to production within the meaning of Section 80-1 and hence deduction in respect of mining activity cannot be denied. Adverting to the facts of the instant case, we find that the assessee has done integrated activity by mining, processing and grinding of Wollastonite and Calcite products, Similar view has been taken by the Jodhpur Bench of the Tribunal in Income Tax Officer v. Choudhary & Co. (ITA No. 677/Jd/2005) vide its order dated 17-3-2006. In our considered opinion, the learned Commissioner (Appeals) was fully justified in granting deduction under Section 80-IA/80-IB of the Act. We, therefore, endorse his opinion on this aspect. This ground is dismissed.
5. Ground A(b) is against the reduction in addition made on account of obsolete stores.
6. Facts of this ground are that the assessee claimed deduction of Rs. 68,59,108 as obsolete stores written off under the head 'Plant and machinery repairs' account. The detail was furnished in respect of various units for claiming write off of obsolete stores, which are as under :
1.
Sirohi Works Rs.
3,96,938
2. Wolkron Division Rs.
8,45,953
3. Belka Mines Rs.
22,23,347
4. Madri Unit I Rs.
33,92,870 In justification of this claim the assessee cited the AS - 2 (Revised) issued by the Institute of Chartered Accountants of India on valuation of inventory, which came into force and was mandatory with effect from 1-4-1999. Regarding valuation of obsolete stores the assessee stated that all the items had been valued at estimated scrap price @ 5 per cent of the actual cost i.e. the stores of Rs. 72,20,111 of different units had been valued at Rs. 3,61,003 and a sum of Rs. 68,59,108 was written off. The assessing officer did not accept the assessee's claim on the ground that Section 145A of the Income Tax Act did not permit such type of valuation. He further noted that the assessee had valued thousands of items at 5 per cent of the cost irrespective of the year of purchase or condition of the item. He still further observed that the assessee had even valued the items purchased in January and February, 2000 @ 5 per cent of the cost. An addition of Rs. 68,59,108 was, therefore, made. In the first appeal the learned Commissioner (Appeals) enhanced the valuation of obsolete stores at 10 per cent by considering the judgment of the Hon'ble Bombay High Court in the case of Alfa Laval India Ltd. v. Dy. CTT (2004) 186 CTR (Bom) 390. Both the sides are in appeal against their respective stands.
7. We have heard both the sides and perused the relevant material on record. The point, which falls for our consideration is to decide the deductibility of obsolete stores along with its valuation. Section 145A provides that the inventory shall be valued in accordance with the method of accounting employed by the assessee. The assessee has valued the inventories, such as, nut, bolt, glass fuse, bearing, bushes, lock pin, pipe, screw, clip, filter, ring, gasket, element, washer, valve, spring, ball bearing, etc. at cost or net realizable value, whichever is lower. Such stores were non-moving and unusable on account of obsolescence/damage/deterioration. Most of the items were 5 to 6 years old. The assessee also made attempts to dispose of the same by giving advertisement in local newspaper, for which necessary evidence is placed at p. 72 of paper book onwards. It then valued the obsolete items at 5 per cent on the recommendation of Shri R.C. Bhatnagar, General Manager (Com). The statutory auditors in their report dated 19-8-2000 have opined that the valuation of stock is fair and proper in accordance with normally accepted principles of accounting and complies with the revised AS-2 issued by ICAI. This AS-2 was made effective from 1-4-1999 and the same is binding on all companies from assessment year 2000-01. As per Section 211 of the Companies Act, it is mandatory for the company to comply with the accounting standards, non-observance of which is punishable with fine and also imprisonment. It is noticed that the assessee was valuing his stock at the cost or market price whichever is less, in the past. Now the question for decision is 'market price' of the stores which were obsolete to a greater extent and were unusable. It is seen that the details of inventory so written off were disposed of and consumed in the subsequent years, the details of which are incorporated on p. 52 of the impugned order as under :
Original value 100% WDV (5%) Consumed till 1-3-2004 on WDV basis Sold upto 31-3-2004 Balance as on 31-3-2004 Profit on sale upto 31-3-2004 1.4.2000 71.74 3.59 2.08 2.05 1.41 1.41 1.4.2000 39.08 1.95 (Sale value Rs. 3.46 lakhs) Total 110.82 5.54 2.08 2.05 1.41 1.41 On the perusal of the above table, it transpires that the stores which were valued by the assessee at Rs. 3.59 lakhs @ 5 per cent, were partly consumed in the subsequent years at Rs. 2.08 lakhs and remaining portion was sold at Rs. 3.46 lakhs. Thus the total value of the stores consumed/sold in the subsequent period comes to Rs. 6.54 lakhs against the value estimated by the assessee at Rs. 3.59 lakhs. The Hon'ble Bombay High Court in the case of Alfa Laval India Ltd. (supra) considered a similar issue, viz., valuation of obsolete items made by the assessee at 10 per cent of the cost. The Hon'ble High Court held 10 per cent valuation to be reasonable by considering the sales realization in the subsequent year. Adverting to the facts of the case, we find the valuation at 5 per cent of the total cost is on lower side when the amount of stores consumed/sold in the subsequent years is taken into consideration. In our considered opinion, the learned Commissioner (Appeals) was fully justified in valuing the stores at 10 per cent of the cost. We, therefore, uphold the impugned order on this deduction.
8. The other effective ground of the assessee's cross-objection with regard to the deduction under Section 80-IB has become academic because of our finding given against ground A(a) of the revenue's appeal upholding the impugned order accepting the claim of the assessee on this deduction.
9. Order was pronounced in open court at the conclusion of hearing on 16-11-2006.
10. In the result the appeal of the revenue as well as the cross-objection of the assessee are dismissed.