Income Tax Appellate Tribunal - Jodhpur
Aravali Minerals And Chemicals ... vs Assistant Commissioner Of Income Tax on 18 August, 2006
Equivalent citations: [2007]292ITR361(JODH), (2006)104TTJ(JODH)195
ORDER
R.S. Syal, A.M.
1. This appeal by the assessee arises out of the order passed by CIT(A) on 10th Aug., 2004 in relation to the asst. yr. 2001-02.
2. First ground is against the denial of deduction under Section 80HHC on export of processed and dressed marble blocks. The facts leading to this controversy are that the assessee effected export turnover to the tune of Rs. 84,81,553 of marble blocks to M/s Petro Import Export Ltd., Canada, through five invoices. The sale proceeds were realized within six months. During the course of assessment proceedings, it was noted by the AO that the auditor in his report in Form No. 10CCAC and its annexure had mentioned about the cost of ... (illegible) expenses of Rs. 12,10,752, packing credit interest Rs. 1,97,662, foreign exchange fluctuation Rs. 13,502 and dressing charges of Rs. 64,450), proportionate indirect expenses of Rs. 8,21,571 and had shown export profit of Rs. 43,07,338, on which deduction under Section 80HHC at the rate of 80 per cent was claimed at Rs. 34,45,870. On examination of the sales invoices and the bills of lading, certificates of origin etc., it was found that the assessee had exported only dressed marble blocks, which were not polished. It was also noticed that the assessee had not shown any polishing charges under the head direct expenses in its audit report, On being called upon to explain the position, the assessee vide its reply dt. 16th Feb., 2004 submitted that it had purchased marble blocks and the same were processed from outside party. It was further claimed that the assessee had exported the marble blocks after processing as was evident from the export invoices. By elaborating further it was put forth that the rough marble blocks purchased by it underwent the process of dressing etc. and had been changed to dimensional blocks of uniform colour and size and in the said process of dressing, the polishing was also involved to remove various flaws. Copies of bills (4 in total) for processing of the marble blocks were also submitted to the AO. On the perusal of these invoices the AO noticed that the payment was made by the assessee basically for "dressing charges" as the amounts in said invoices were written against the "dressing charges" only but in invoices "polishing charges" were also ticked. In order to verify the authenticity of the invoices of M/s Vinayak Marmo (P) Ltd., Udaipur, who had done the job of dressing the marble blocks, summons under Section 131 was issued to produce the office copies of the said invoices. Shri Anil Suhalka, the director of the company, attended on the same day and his statement, was recorded. When the copies of invoices from the assessee's record were shown to him, he, on verification of the office copies of his invoices stated that only "dressing charges" were ticked in three invoices and not the polishing charges. It was further stated that in invoice No. 113 even the "dressing charges" were not ticked. The assessee was required to reconcile the position. In response, it was stated that the assessee-company had exported processed and dressed marble blocks as per the photo copies of invoices and bills of lading and such dressing of marble blocks was carried out through mechanical process to obtain concentrates after removal of unwanted deleterious substances. It was also explained that during the said process, one side of the marble blocks was also manually polished and as such the assessee-company was entitled to deduction under Section 80HHC. The assessee vide its reply dt. 5th March, 2004 filed copies of purchase orders of M/s Petro Import Export Ltd. in respect of the abovereferred marble blocks. A copy of fax letter was also filed to the effect that the said marble blocks were exported after dressing through mechanical process of cutting and were one side manually polished as per their instructions, The AO requested the assessee to produce the executive officer of the Canadian party for examination on 22nd March, 2004, but he was not produced. The AO held that the subsequent faxed letter of the importer was false. He considered the provisions of Section 80HHC and also. Twelfth Schedule along with Circular No. 693, dt. 17th Nov., 1994 [(1994) 122 CTR (St) 8] and Circular No. 729, dt. 1st Nov., 1995 [(1995) 129 CTR (St) 1]. It was concluded that the assessee had only cut the marble blocks and no polishing was done and hence the deduction under Section 80HHC was not available. It was also opined the Circular No. 729 was applicable to granite only and for other rocks including the marble, the earlier Circular No. 693 was to have force. In the backdrop of this position, the claim for deduction under Section 80HHC was jettisoned. The assessee failed to convince the learned CIT(A) to fall in line with its submissions.
3. Before us it was contended by the learned Authorised Representative that the authorities below had erred in appreciating the factual and legal position in assessee's case because the polishing was done and there was a substantial value' addition in the marble blocks exported by it. Referring to p. 5 of his written submissions, it was stated that the raw material cost was only Rs. 18,66,778 on which dressing charges were incurred at Rs. 64,450 while other direct expenses amounted to Rs. 14,21,416. The proportionate indirect expenses were to the extent of Rs. 8,21,571 making the total cost of the goods exported at Rs. 41,74,215- It was against this that the export worth Rs. 84,81,553 was made, which resulted into the export profit of Rs. 43,07,338. It was further argued that Circular No. 729, dt. 1st Nov., 1995 was fully applicable to the export of marble blocks and was not confined only to granites as has been interpreted by the learned CIT(A). He invited our attention towards the definitions of marble and granite to buttress his point that both were two kinds of rocks. He further demonstrated samples of marble slabs in the condition of purchase and the position after carrying out the process of dressing etc. to argue that marble blocks before and after the process of dressing etc. are different in value and substance. He relied on certain judgments of the Hon'ble Courts and the orders passed by Tribunals, which we would refer at the appropriate stage, to contend that the deduction was wrongly denied.
4. In the opposition the learned Departmental Representative, at the commencement of his arguments, submitted that the issue was covered against the assessee by the order of the Tribunal dt. 30th June, 2006 in the case of Arihant Tiles and Marble (P) Ltd. v. ITO, in ITA Nos. 86 and 87/Ju/2004 [reported as (2006) 104 TTJ (Jd)(TM) 149-- Ed.]. In the second leg of his arguments he submitted that the learned CIT(A) was fully justified in not allowing the deduction under Section 80HHC because the assessee exported marble blocks and Circular No. 729 was applicable only to the granites. He also pointed out certain salient features distinguishing the marble from granite. Through his extensive study of the rocks, he submitted that granite was an igneous rock whereas marble was metamorphic rock. It was explained that granite is a very hard rock and the process of its origin and formation is different from that of marble. He also referred to certain judicial precedents, which we would refer at the appropriate stage, to submit that the deduction was not allowable. He still further invited our attention towards the factual aspects of the case to submit that there was a very nominal value addition inasmuch as the assessee had incurred only a sum of Rs. 64,450 as dressing charges of the marble blocks worth Rs. 18.66, lakhs giving only 3.45 per cent. It was stated that the twin requirements for the eligibility for deduction under this section, as per the Twelfth schedule are cutting and polishing of the marble blocks and since the assessee had only got the process of cutting, therefore the deduction could not be granted. His further arguments were reiteration of the reasoning recorded by the learned CIT(A) in negativing the benefit of deduction.
5. We have heard both the sides in extenso and perused the relevant material on record in the light of precedents relied upon. In so far as the preliminary argument of the learned Departmental Representative about the applicability of the Third Member decision in the case of Arihant Tiles and Marbles (P) Ltd. (supra) is concerned, we are not inclined to accept the same for the reason that the said decision has been rendered in the context of Section 80-IA, the provisions of which are materially different from those of Section 80HHC under consideration. The former Section deals with the deduction in respect of profits and gains derived from any business of industrial undertaking etc. engaged in the 'production or manufacture' of specified articles or, things and hence the availability of deduction is directly connected with the manufacture or production. On the other hand Section 80HHC is not restricted in its scope for granting deduction only on manufacture or production of specified articles, but extends to the export out of India of 'any goods or merchandise'. The availability of deduction under this Section has direct link with the export, which may be of manufactured or produced or traded goods. So long as export proceeds are flowing in India, subject to the provisions of this section, the benefit of deduction remains intact. It does not make any difference as to whether the assessee is a manufacturer, or a processor or a trader, in so far as the entitlement to the deduction under Section 80HHC is concerned. Since the order in the case of Arihant Tiles and Marbles (P) Ltd. has been rendered depriving the benefit of deduction under Section 80-IA, the same, per se, does not hold good for the eligibility of deduction under Section 80HHC.
6. Now we will proceed to examine and evaluate the facts of the case to determine the entitlement or otherwise of deduction under Section 80HHC. It has been discussed in the foregoing para that there is no restriction on the availability of deduction under this Section whether the assessee is a manufacturer or a trader. However the embargo is contained in Sub-section (2)(b) to provide that this Section does not apply to (i) mineral oil; and (ii) minerals and ores (other than processed minerals and ores specified in Twelfth Schedule). The bracketed portion of Clause (ii) has been inserted by the Finance (No. 2) Act, 1991, w.e.f. 1st April, 1991. Thus it is clear that upto asst. yr. 1990-31, all minerals and ores, without exception, whether processed or not, were excluded from the ambit of Section 80HHC. It is in this pre-amendment era that the decision of the Hon'ble apex Court, relied upon by the learned Departmental Representative in Stone Crafts Enterprises v. CIT was rendered, which disentitled the assessees, being the exporters of granite from deduction under Section 80HHC, by holding that all minerals extracted from the earth including granite must be held to be covered by the provisions of Sub-section (2)(b) of Section 80HHC. So all the judgments/decisions delivered for the period upto asst. yr. 1990-91 are not applicable to the instant case, which concerns with the asst. yr. 2001-02. It is only from asst. yr. 1991-92 that an exception has been carved out by providing that the specified minerals and ores, which are processed, listed in the twelfth schedule, will be exception to the total exclusion of minerals and ores from Section 80HHC. Thus for and from asst. yr. 1991-92, profit from export of processed minerals and ores specified in the Twelfth Schedule has been made eligible for deduction under Section 80HHC. Item (x) of the twelfth schedule reads as: "Cut and polished minerals and rocks including cut and polished granite". Explanation to this schedule gives meaning to "processed" in relation to the cls. (a) to (h). When this schedule is read in entirety the position which emerges is that the items at (i) to (x) should be processed within the meaning of cls. (a) to (h). It is not disputed that the case of the assessee falls under item (x) which has mandatorily to be processed under Clause (d) of the Explanation because the words "cut and polished" are prefixed to "minerals and rocks" in the item (x). Thus if an assessee claims deduction for export of "rock", then it should be a "processed rock" which here means that it has undergone the process (d) of Explanation, viz., "cutting and polishing.
7. At this juncture it would be appropriate to consider the relevant circulars referred to by both the sides, which have clarified the position. Circular No. 693, dt. 17th Nov., 1994 reads as under:
Benefit of Section 80HHC for export of processed minerals--Clarification regarding export of cut and polished dimensional blocks granite or other rocks.
Section 80HHG of the IT Act allows a deduction from the gross total income of the entire profits derived from export of goods other than minerals. Finance (No. 2) Act, 1991, extended the benefit to export of processed minerals and ores mentioned in the Twelfth Schedule to the IT Act. Item (x) of the Schedule mention "cut and polished minerals and rocks including cut and polished granite.
2. Some organizations and individual taxpayers have raised doubts whether the deduction under Section 80HHC is available in respect of export of granite or other rocks that are cut and exported as raw blocks after being washed and cleaned.
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 Section 80HHC, it is necessary that the rock 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.
On going through the above circular it becomes manifest that for availing of the benefit under Section 80HHC it is imperative that the rock is not only cut into blocks but also polished before it is exported. Thereafter representation was made by granite association and CAPEXIL by highlighting that rough granite is cut to dimensional blocks in uniform colour and dimension and export proceeds are realized on volume and dimensional basis and thus the dimensional blocks of granite are exported only after going through a mechanical process involving substantial value addition to rough granite. The board reconsidered the entire issue and issued Circular No. 729 on 1st Nov., 1995, which runs as under:
The deduction under Section 80HHC is available, as at present, in respect of "cut and polished minerals and rocks including cut and polished granites" w.e.f. 1st April, 1991 by virtue of insertion of item (x) in the Twelfth Schedule to the IT Act, 1961. The export of dimensional blocks of granite is presently ineligible for the benefit of Section 80HHC in view of the CBDT Circular No. 693, dt. 17th Nov., 1994.
2. On the representation made by the granite association and CAPEXIL, the issue has been reconsidered. The representation basically brings to light that rough granite is cut to dimensional blocks in uniform colour and dimension and export proceeds are realized on volume and dimensional basis. Thus, the dimensional blocks of granite are exported only after going through a mechanical process, involving substantial value addition to rough granite.
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, but also, a 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 Section 80HHC of the Act.
8. The case of the Revenue is that Circular No. 729 is confined to granite alone and the satisfaction of the dual conditions of "cut and polished" in the twelfth schedule still hold good for other rocks including marbles as provided in earlier circular. On the contrary the claim made on behalf of the assessee is that marble and granite are kinds of rock and hence the clarification issued in the later circular is fully applicable to the export of marbles as well. In this connection, there are three vital points, which require adjudication one by one.
I. Granite and marble--Whether one and the same thing ?
9. In order to answer this question it would be apt to understand the meaning of terms rock, marble and granite. 'Rock' has been defined in Britannica Ready Reference Encyclopaedia as "In geology, in naturally occurring and coherent aggregate of minerals. The three major classes of rock--Igneous, Sedimentary and Metamorphic--are based on the process that formed them. These three classes are further sub-divided on the basis of various factors, especially chemical, mineralogical, and textural attributes." As per Wikipedia Encyclopaedia "marble is a metamorphic rock resulting from the metamorphism of limestone, composed mostly of Calcite (a crystalline form of calcium carbonate).
Similarly granite has been defined as "a common and widely occurring type of intrusive, felsi, igneous rock." It has further been elaborated that "granite is an igneous rock and is formed from magma". In the light of the above definitions, it becomes apparent that both marble and granite are species of rock. Igneous rock has been defined as "any of various crystalline or glassy, non-crystalline rocks formed by the cooling and solidification of molten earth material (Magma)". Metamorphic rock has been defined as "any of a class of rocks that result from the alteration of pre-existing rocks in response to changing geological conditions, including variations in temperature, pressure and mechanical stress. The pre-existing rocks may be igneous, sedimentary or other metamorphic rocks." Thus it is clear that igneous rocks are quite distinct from metamorphic rocks. Whereas the igneous rocks are primary rocks formed by the cooling of Lava and Magma and are hard and strong containing metallic minerals, the metamorphic rocks are one of the three types of rocks having undergone a change due to excessive heat and pressure.
10. Here, it would be relevant to note that the expression used in the Twelfth Schedule is 'cut and polished minerals and rocks' including 'cut and polished granite'. Similar expression has been used in Circular No. 693 and 729, both in headings and contents. From the use of the expression "minerals and rocks including granite", the intention of the legislature has been clearly divulged that granite has been given a separate identification from the marble. If both these terms viz. marble and granite had to have the same treatment for the purposes of deduction under Section 80HHC, there was no need to specifically mention 'including granite' which is a kind of rock as 'marble'.
11. At this stage, it would be appropriate to note that all mineral exported by an assessee do not entitle him to claim deduction under Section 80HHC. It was in 1984 vide Board's Circular F. No. 178/206/83-IT (A-l) dt. 22nd May, 1984 that the export of cut and polished diamonds was brought within the scope of this Section Here, it would be relevant to note the meaning of diamond as per Britannica Ready Reference Encyclopaedia, which is as under:
Mineral composed of pure carbon, the hardest natural occurring substance known and a valuable gemstone. Diamonds are formed deep in the earth by tremendous pressure and temperatures over long periods of time.
The same encyclopaedia defines mineral as:
Any naturally occurring homogenous solid that has definite [but not fixed] chemical composition and a distinctive internal crystal structure. Minerals are usually formed by inorganic process. Minerals combine with each other to form rocks.
The Hon'ble Supreme Court in the case of Gem Granites v. CIT observed:
It is clear from the language used that the CBDT gave its understanding of Sub-section (2)(b) of Section 80HHC as it stood prior to 1991 amendment with regard to diamonds and gem stones alone having regard to the peculiar facts and features relating to the export and import of diamonds. Apart from the fact that the circular contains no reference to granite at all, we are not prepared to extend the understanding of the Board with regard to the exclusion of cut and polished gems from the word 'minerals' to granite in the absence of special features mentioned in 1984 circular, more so when the statue itself has not drawn any such distinction.
It was further observed in para 14 as under:
It may be that the object of the introduction of Section 80HHC was to encourage export and as an incentive to exporters to increase exports for the purpose of earning foreign exchange to bolster up the country's exports, But the object can be given effect to only if the statutory expression is ambiguous. There was no ambiguity in Section 80HHC(2)(b) prior to its amendment. It does not in any event appear that the Government had sought to grant blanket incentive to all exports. There is in the circumstances no warrant for reading the word 'minerals' as occurring in Section 80HHC in any other manner or in any restricted sense on the basis of any policy of the Government at the relevant point of time. On the contrary, the history of Section 80HHC as narrated by us would show that there has been a cautious and gradual extension of the field of operation of Section 80HHC.
From the above discussion and the observations of the Hon'ble apex Court in the above judgment, it is clear that the benefit of deduction under this Section has been increased in a phased manner, inasmuch as diamond, which is a mineral composed of pure carbon was made eligible for deduction by the circular of 1984. The Hon'ble Summit Court has observed that there are no words of restriction which qualify the word 'minerals' and it would be reasonable to assume that in the absence of any such limitation, the word must be read to include all kinds of minerals in all its forms, i.e., whether subjected to any process or not as long as it continued to retain the characteristics of the mineral. It was in 1991 that the processed minerals and ores specified in Twelfth Schedule were made eligible for deduction under this Section after the diamonds were so qualified in 1984 which, in turn, contains Clause (x) as cut and polished minerals and rocks including cut and polished granite. Albeit, both 'granite' and 'marble' are species of 'rock', yet they are formed differently, their composition is different and both of them are known differently in commercial world having different monetary values. We are, therefore, of the considered opinion that it is incorrect to equate marble with granite or using these two terms interchangeably.
The learned Authorised Representative has relied on Notification No. 280 of 2004 dt. 16th Nov., 2004 reported at (2004) 192 CTR (St) 32 onwards by laying emphasis on entry at Code 011 : "Marble and granite". According to him this entry clearly indicates that both marble and granite have been treated as one and the same thing insofar as the classification is concerned. We are not agreeable with this view canvassed by the learned Authorised Representative for the reason that the inclusion of marble and granite in one code is not conclusive of the recognition of these items as having same meaning. If all the entries grouped in one code had same meaning, as put forth by the learned Authorised Representative then the flour and rice would also become one and the same thing as these two items have been grouped in Code No. 0109: "Flour and rice mills". We are, therefore, of the considered opinion that the classification as per this notification is not determinative and conclusive for deciding the controversy as to whether Circular No. 729 applies to marble as well.
12. It has further been contended on behalf of the assessee that Circular No. 729 included not only granite but marble also. The learned Authorised Representative has contended that the making of clarification in para No. 3 of Circular No. 729 to granite has emanated from the fact that it was only the granite association and CAPEXIL which took up the matter with the CBDT and hence the clarification given in para 3 should be read as relevant to both marble and granite. He has invited our attention towards the fact that the heading of both the circulars is the same. We have extracted the relevant contents of both the circulars in the preceding paras. Circular No. 693 made it clear that for availing of benefit under Section 80HHC it is necessary that rock is not only cut into blocks but also polished before it is exported. On the contrary, the extension of relief as provided by Circular No. 729 in para 3 is confined to export of granite dimensional blocks and not other forms of rock including marble. The things become very clear when we read para 1 of Circular 729, which clearly mentions that. "The export of dimensional blocks of granite is presently ineligible for the benefit of Section 80HHC in view of Circular No. 693 dt. 17th Nov., 1994". Thus, when we read the circular in entirety, there remains no doubt that the benefit extended as per para 3 of Circular No. 729 relates only to dimensional blocks of granite and no other form of rock, If the intention had been to extend the benefit, as put forth by the learned Authorised Representative, then the expression 'rocks including granite' or 'rock' simpliciter would have been employed to cover all the forms of rock including marble and granite. Since this benefit is extended only to granite, we hold that the word 'marble' cannot be inferred by necessary implication in this circular. It is further found that the Hon'ble Supreme Court in the case of Gem Granites v. CIT (supra) has found in para 17 as under :
The 1995 circular modified the rigour of the 1994 circular to the extent that it recognized some other processes as falling within the phrase "cut and polished". Both the circulars clearly state that the benefit of Section 80HHC was available to cut and polished granite only w.e.f. 1st April, 1991, by virtue of insertion of Item No. (x) in the Twelfth Schedule to the Act." From the above interpretation by the Hon'ble apex Court it is clear that the scope of circular has to be restricted to granite only. We have held in an earlier para that although both marble and granite are forms of rocks, yet they are heterogeneous, being different in nature, composition and value, etc. and it is wholly incorrect to call them as one and the same thing. To sum up, we hold that Circular No. 693 applies to all rocks including marble and the later circular is a sort of extension of the earlier circular confined to a particular specie of rock which liberalized rigour to 'granite' alone. No other kind of rock including marble can have access to the concession granted in the Circular No. 729 to granite alone. This contention of the learned Authorised Representative, being devoid of merits, is hereby repelled.
II. Cutting and polishing Having come to the conclusion that Circular No. 729 liberalized the benefit of Section 80HHC to the export of granite dimensional blocks, we would now examine as to when and how the benefit of deduction extends to export of marble. Whereas the latter circular emphasized upon the mechanical process of cutting of granite as impliedly including dressing and polishing as well, the earlier circular specifically points out that for availing of benefit under Section 80HHC, it is necessary that rock is not only cut into block but also polished before it is exported. We, therefore, restrict ourselves in examining as to whether or not both the conditions included in the Twelfth Schedule reiterated in Circular No. 693, being cutting and polishing have been fulfilled. If the assessee is found to have cut the marble and also polished it before export, then the benefit of deduction is available and vice versa. The case of the Revenue is that the assessee had exported marble after cutting but without polishing. Apart from that, it is not disputed that if the assessee had undertaken the job of polishing also then the benefit of deduction would not have been denied. Thus insofar as the cutting of marble blocks is concerned, the same has been accepted by the Departmental authorities and the controversy is only restricted to the polishing aspect.
13. The word "polish" has been defined at p. 921 of the Eighth Edition of The Concise Oxford Dictionary of Current English' edited by R.E. Allen. As under:
Polish (v) : Make or become smooth or glossy by rubbing Polish (n) : Smoothness or glossiness produced by friction
14. From the above definition of 'polish' as per Concise Oxford Dictionary, it is obvious that it refers to "making or becoming smooth or glossy by rubbing". Thus, the relevant consideration for bringing a case within the purview of polish is either to make the substance smooth by rubbing or glossy by rubbing. The use of the word 'or' between 'smooth' and 'glossy' clearly brings out the distinction between the extent and level of polishing. The primary type of polishing is akin to making smooth by rubbing and the advanced stage of polishing refers to making glossy by rubbing. Thus, if a substance is made smooth alone without making it glossy, the same can be rightly said to have been polished. It is the extent and degree of polishing which makes it either primarily smooth or secondly glossy. Turning to the Twelfth Schedule, we find that the word used is 'polished'. This polishing may be of a primary degree [making smooth] or of advanced degree [making glossy]. In the absence of the legislature having used the prefix like 'finally' before the word 'cut' and 'polish' it clearly brings out the intention that any level of cutting or polishing enables the assessee to take advantage of the provision. The Hon'ble Karnataka High Court in the case of CIT v. God Granites (1999) 156 CTR (Kar) 327 : (1999) 240 ITR 343 (Kar) had an occasion to interpret of the words 'cutting and polishing' in the same context. It observed as under:
Under the Twelfth Schedule what is required is only cut and polished minerals including granites should be exported for entitlement to deduction under Section 80HHC. In the explanation to the Twelfth Schedule 'processed' has been defined to mean in relation to any mineral or ore mentioned in items (a) to (h). The Act does not prescribe the degree or extent of cutting and polishing to be applied to granite ores or boulders, Any process applied to the rough mineral, which adds value to the marketable commodity would create an eligibility for deduction. When rough granites are cut into dimensional blocks of uniform colour and size and also certain amount of dressing and polishing which would remove various natural flaws such as colour variations, etc. would certainly amount to processing of the granite and adds value to its marketability. The Act does not specifically say that the minerals and granites should be given the final cut and be finally polished before they are exported. If such a view is taken the purpose of allowing the benefit to cut and polished minerals include granite blocks towards deduction under Section 80HHC would get frustrated. It is 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 he final cutting of the granite blocks would have to be taken at their end. The same consideration would apply to the final polishing. The extent of final polishing required to granite blocks would depend on their actual use.
The said judgment has been affirmed by the Hon'ble apex Court in the case of CIT v. God Granites .
15. Thus, any level of polishing entitles the assessee to the benefit under this Section It is more important to note that the size of final cutting and the level of final polishing depends upon the nature of use of the marble. When the marble blocks are exported as such, the importer may utilize them for any purpose either by using such blocks as they are or may further cut into slabs. The final cutting or polishing is thus dependent upon the nature of the intended use of the marble blocks.
16. Adverting the facts of the instant case we observe that the claim of the assessee ab initio was that the rough marbles purchased by it had undergone the process of dressing etc. and had changed the dimensional blocks to uniform colour and size and in the said process of dressing, polishing was also involved to remove various flaws. In support of this claim, the assessee had furnished all the four invoices of Vinayak Marmo (P) Ltd., Udaipur, claiming that the polishing job was also done. The AO issued summons under Section 131(1) and recorded the statement of the director of M/s Vinayak Marmo (P) Ltd., who stated that as per office copies of the above invoices "polishing charges" were not ticked by his office. He confirmed that only the "dressing charges" were ticked in three invoices and in invoice No. 113, even the dressing charges were also not ticked.
17. The learned Departmental Representative has placed before us a copy of the statement of Shri Anil Suwalka, director, along with the invoices in which polishing was not ticked.
18. We have gone through his one page statement in which only one question was asked to explain as to whether the polishing charges were ticked in the office copies of other invoices or not, to which he replied in negative. Nowhere any question was raised as to whether any polishing was done by the processor or not. In these circumstances, could it be presumed that the jobber has done only cutting and not polishing? If we go by this statement alone, then it would turn out that he had neither done any cutting nor polishing in respect of Invoice No. 113 dt. 31st March, 2001 for Rs. 22,000 because as per this invoice neither dressing charges nor polishing charges were ticked.
19. On the contrary, it has been emphasized by the assessee from the assessment stage itself that during the process of dressing, one side of the marble block was manually polished. At this stage, it would be relevant to note p. 14 of the paper book, being the certificate issued by the importer, Petro Import Export Ltd., Canada, to the following effect:
It is further certified that the said marble blocks were exported after dressing through mechanical process of cutting and were one side manually polished as per our instruction.
When the certificate of the importer to the effect that the marble blocks purchased by him were one side manually polished is seen along with the claim of the assessee, it becomes apparent that the blocks so exported by the assessee were manually polished on one side. The non-making of enquiry by the ITO from Shri Anil Suwalka as to whether the blocks processed by him were polished or not, establishes the truthfulness of the assessee's claim with regard to the polishing by the jobber. It is a settled legal position that the viewpoint of the assessee cannot be rejected on the ipse dixit of the AO. If he intends to make departure from the assessee's claim, it is obligatory to establish its untruthfulness, more so when the AO proceeds to the extent of examining the parties as well. In the instant case, he examined Shri Anil Suwalka but did not raise any query as to whether the polishing was done by him or not. The assessee cannot be penalized for misfeasance of the AO. Under these circumstances, we are not persuaded to draw adverse inference against the assessee, more specifically when the exporter has certified that the marble blocks received by him were one side manually polished as per his instructions.
III. Value addition The essential condition as brought out by Circular No. 693 is that the rocks should have high value addition before export since the emphasis of the Government is upon discouraging export of raw blocks where value addition is low. This brings us to the determination of the next question as to the quantum of value addition made by the assessee through the process. It has been discussed in the factual matrix above that the total cost of marble blocks exported comes to Rs. 41.74 lakhs and its export value is at Rs. 84.81 lakhs giving export of Rs. 43.07 lakhs. The claim of the Revenue is that the value addition refers to the cost incurred by the assessee on the processing of the marble blocks, which in this case is as low as Rs. 64,450 only. It has been contended by the learned Departmental Representative that in percentage terms it comes to nominal 3.45 per cent of the raw material cost. On the contrary, the learned Authorised Representative has submitted that the making of export at such exorbitant figure is the high value addition to the cost of the marble blocks.
20. Let us understand the process of dressing the marble block, which was got done by the AO [sic-assessee). When a rough marble block comes from the quarry, its all sides are rough because one cannot see cracks, black spots, crinkles, veins, patches, colour variations, etc. In the process of dressing, a block is taken into the factory, it is lifted by the crane from the truck and taken into the dressing machine. A dressing machine is made of iron frame with the dimension of 10m x 4m x lmtr. fitted with various hydraulic jacks. Electrical panels, hydraulic pistons, oil tanks, water tank, cutting block, trolley for shifting the blocks, installed on concrete structure of 3m x 10m. The crane unloads the undressed block on dressing trolley. Dressing trolley brings down the block under the blade, which consists of diamond segments, then the cut is made as required. A single cut takes around 4-6 hours for dressing as per useable size of cut and process. After dressing, one can see the quality of the block and if any spots, cracks patches, crinkles, colour variations are there, it can be removed by more dressing cuts. The process of dressing enables the ascertainment of the beauty of the block, its colour, design grains, etc.
21. We are not convinced with the view canvassed by the learned Departmental Representative on the value addition for the reason that the object of this provision, being the realization of high export proceeds from the rocks cannot be ignored while interpreting it. Recently, the Hon'ble Supreme Court in P.R. Prabhakar v. CIT had an occasion to interpret Section 80HHC, where it held:
It is now a well settled principle of law that although exemption provisions are to be construed strictly as regards the applicability thereof to the case of the assessee, once it is found that the exemption is applicable, the provisions are required to be interpreted liberally. An exemption is to be granted unless it is expressly taken away.
It has rightly been emphasized in Circular No. 693 that the Government's policy is to encourage export of polished granites and other rocks where value addition is high. The value addition in this context does not refer to the input cost of processing but the ultimate output value, which such rocks fetch after undergoing the process of cutting and polishing. It is wholly unfair to interpret the word 'value addition' in such a restricted manner, which, if brought to the logical conclusion would defeat the very purpose of this Section When we examine the facts of the case in hand it becomes crystal clear that after undergoing the process of cutting and polishing, the export of marbles fetched profit at rate of 103 per cent, which is nothing but a high value addition.
22. Thus, we find that the cutting and polishing done by the assessee to its marble blocks led to the high value addition and hence there cannot be any question of denial of deduction under Section 80HHC. By overturning the impugned order, we direct for the grant of deduction under this section.
23. Ground No. 2 is against the confirmation of disallowance under Section 43B in respect of PF and ESI contributions which were deposited beyond due dates under the provisions of the respective Acts.
24. The AO had drawn a chart on p. 7 of the assessment order to show that the assessee failed to deposit the contributions within the prescribed period amounting to Rs. 4,71,415 and hence disallowed the claim under Section 43B. No relief was allowed in the first appeal.
25. We have heard both the sides and perused the relevant material on record. Without entering into the details of the submissions made by both the parties, we find that the issue involved in this ground is squarely covered in assessee's favour by a recent Special Decision of the Tribunal in Kwality Milk Foods Ltd. v. Asstt. CIT (2006) 102 TTJ (Chennai)(SB) 1 : (2006) 100 ITD 199 (Chennai)(SB) in which it has been held that the amendment brought out by the Finance Act, 2003, enabling the assessee to deduction even if the payment is made before the due date of furnishing return under Section 139(1) is retrospective and hence applicable to the earlier years as well. From the chart prepared by the AO in the assessment order, it is noticed that the cheques for the deposit of the EPF and ESI contributions were got cleared much prior to the due date under Section 139(1). We, therefore, hold that the assessee is entitled to deduction in respect of this amount. This ground is allowed.
26. Last ground is against the confirmation of disallowance of Rs. 44,685 towards sales commission expenses. Facts apropos of this ground are that the assessee had claimed sales commission at Rs. 7,09,030. On examination of details, it was found by the AO that a sum of Rs. 44,685, represented by four bills, related to the earlier year and hence addition was made. No relief was allowed in the first appeal.
27. It was contended by the learned Authorised Representative that the amount in question related to the earlier year and further on the verification of details it was stated that the bills were also raised in the preceding year. It was however contended that the deduction should not be denied in this year because the expenditure was genuinely incurred by the assessee and the rate of tax in the preceding as well as instant year is the same and ultimately there is no loss to the Revenue. Per contra the learned Departmental Representative strongly relied on the impugned order to contend that deduction of earlier year's expenses could not be granted.
28. We are unable to accept the contention of the learned Authorised Representative for the obvious reason that the assessee-company is following mercantile system of accounting as per which deduction can be allowed only for the expenses on which the liability is incurred in this year. Thus the important thing to be decided is the timing of crystallization of liability and not when the actual payment is made. This is the fine distinction between mercantile and cash system of accounting. Whereas in the latter case deduction is granted at the time of payment, in the former it is allowed when the liability finally crystallizes. If the contention of the learned Authorised Representative is accepted that even though the expenditure was not claimed as deduction in the preceding year, the deduction should not be denied in the instant year because the rates of tax in both the years are same, it would amount to negating the very concept of mercantile system of accounting and the provisions of Section 145(1) would become redundant. Since the liability in respect of commission payment of Rs. 44,685 got crystallized in the preceding year, there is no question of allowing deduction in the instant year. We, therefore, uphold the impugned order on this score.
29. In the result, the appeal is partly allowed.