2007-VIL-330-ITAT-JDP
Equivalent Citation: ITD 112, 328, TTJ 111, 149,
Income Tax Appellate Tribunal JODHPUR
Date: 19.01.2007
ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 2, UDAIPUR.
Vs
TIRUPATI MICROTECH (P.) LIMITED.
BENCH
Member(s) : R. S. SYAL., HARI OM MARATHA.
JUDGMENT
Per R.S. Syal, Accountant Member.-This appeal by the revenue is directed against the order passed by the CIT(A) on 5-1-2006 in relation to assessment year 2001-02.
2. First ground against the deletion of trading addition of Rs. 3 lakhs.
3. Briefly stated, the facts of this case are that the assessee is engaged in the business of Zircon Sand/Micro ZR (Opacifier). In the year under consideration, total sales worth Rs. 6.86 crores were made and other incomes of Rs. 12.50 lakhs was shown as against last year's sale of Rs. 5.91 crores including other incomes, etc. The Gross Profit rate declared in this year at 10.61 per cent was found to be on the lower side as against 12.6 per cent shown in the immediately preceding year. The Assessing Officer noted that the assessee had shown the value of closing stock at Rs. 1,03,01,207, which included value of finished goods at Rs. 37,01,064. The method of valuation of closing stock was "cost or net realizable value whichever is less". The finished goods consisted of different grades of Zircon powder, such as, Zircon 500, 325, 240, 100, 10, 5, etc. The manufacturing cost as per the working given by the assessee was at Rs. 19,722.04 PMT in all cases. However, the Net Realizable Value (hereinafter called as 'NRV') was different in these cases. In the case of Zircon 100 'NRV average' was shown at Rs. 17,473.61 against the manufacturing cost at Rs. 19,722.04. The value of this item was taken at Rs. 17,473, being the average NR V and other items at cost. The Assessing Officer noticed that Zircon 100 was the main item of the closing stock of finished goods, which was valued at the rate less than the manufacturing cost by Rs. 2,248.43 PMT, which was incredible. The Assessing Officer further conc1uded that there was a difference of Rs. 2,42,749 in the valuation of closing stock of this product only. By considering these facts, he made a lump sum trading addition of Rs. 3 lakhs, which came to be deleted in the first appeal.
4. We have heard both the sides and perused the relevant material on record. The only dispute in this ground is regarding the valuation of closing stock. Admittedly, the assessee was following "cost or net realizable value whichever is less" method for valuation of the closing stock of its finished products. The ld. CIT(A) has noted that the average selling price prevailing during the concerned financial year adopted by the assessee for the purpose of valuing the closing stock is at Rs. 17,473. Page 140 of the PB is the sale bill of micronized zircon powder 100 dated 30.3-2001 as per which the sale price was at Rs. 17,500. Since the closing stock has to be valued at the end of the year, the natural corollary that follows is that the NRV is also be considered as at the end of the year and not the average selling price prevailing throughout the year. We, therefore, hold that the ld. CIT(A) was not justified in approving the rate of Rs. 17,473 as the basis for valuation. In our considered opinion, the rate of Rs. 17,500 PMT should be applied which represents NRV as at the end of the year. The Assessing Officer is directed to value the relevant closing stock at this rate and workout the sustainable addition. This ground is partly allowed.
5. Ground No. 2 is against the deletion of addition of Rs. 5,10,583 on account of disallowance of Mill Lining expenses.
6. Facts apropos of this ground are that the assessee had claimed amortization of mill lining expenses in the manufacturing account at Rs. 1,41,457. However, in the computation of income, deduction was claimed for total expenditure on mill lining purchased in the year at Rs. 6,52,040. On being called upon to furnish the justification for deduction for the full amount it was stated by the assessee vide its reply dated 15-3-2004 that the mill lining is layer of 90 per cent high alumina bricks affixed on ball mill to protect the finished goods from any type of contamination. Mill lining was claimed as recurring cost in the nature of revenue expenditure but its useful life was broadly dependent on production taken from it. The Assessing Officer did not allow deduction for Rs. 5,10,583 (Rs. 6,52,040 minus Rs. 1,41,457). The ld. CIT(A) accepted the assessee's claim and deleted the addition.
7. We have heard both the sides and perused the relevant material on record. The claim of the assessee before the authorities below is that the mill lining is affixed on ball mill to protect the finished goods from any type of contamination and such mill lining is a recurring expenditure. The Assessing Officer has not disputed the nature of mill lining but proceeded to make the disallowance only on the ground that the assessee was supposed to claim deduction only for mill lining expenses claimed in the P&L account and unamortized amount could not have been claimed as revenue expenditure. Thus, the position, which emerges is that the nature of mill lining expenses has been established to be a recurring cost, which falls upon the assessee from time to time and hence cannot be treated a capital expenditure. Once this conclusion is reached, there is no justification for making disallowance for the expenditure incurred in this year notwithstanding the fact that in the books of account a different treatment has been given. If the expenditure is of revenue nature, the same would call for deduction in the year in which it is incurred. In our considered opinion, the ld. CIT(A) was justified in granting deduction for this sum.
8. Ground No. 3 is against the deletion of addition of Rs. 75,833 on account of 2/3rd disallowance out of ISO 9002 certification expenses, which were meant for three years.
9. Briefly stated, the facts of this ground are that the assessee claimed ISO 9002 certification expenses under the head 'Administration expenses' at Rs. 1,13,750. On being called upon to explain the nature of this expenditure, it was stated that these are generally incurred for getting a certification from the International Standardization Organization on a periodical basis for systems and procedures of operations implemented in the organization which are in accordance with the standards laid down by these international bodies. The Assessing Officer observed from the letter of this organization dated 14-12-2003 that the ISO certificate was valid for at least three years. Accordingly, he allowed deduction for 1/3rd of the expenses at Rs. 37,917 and remaining amount of Rs. 75,833 was disallowed as relatable to the subsequent years. The ld. CIT(A) allowed the assessee's claim in this regard.
10. We have heard both the sides and perused the relevant material on record. The only controversy raised in this ground is about the deducibility or otherwise of the expenditure incurred in obtaining ISO 9002 certification. This certificate is basically issued and renewed from time to time to bring forth the fact that the systems and procedures of operations implemented in the organization are in accordance with the standards laid down. The Assessing Officer has allowed deduction @ 1/3rd of the total expenditure on the ground that its vvalidity was for three years. Now the question arises as to whether any expenditure incurred for enduring benefit spreading more than one year is always to be treated as capital expenditure or can qualify for deduction if it does not operate in the capital field. The answer to this question need not be searched by wandering here and there because the Hon'ble Apex Court has, on several occasions, dealt with such type of expenses. In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 the Hon'ble Supreme Court has laid down the test for the determination of the nature of expenditure by providing that if the advantage received on incurring expense facilitates the carrying on of the business more efficiently and more profitably leaving the fixed capital untouched, expenditure would be treated as revenue in nature. The principle, which follows is that the advantage resulting from the incurring of the expenditure may extend beyond the year in question. It would be treated as capital expenditure only if it enhances the capital structure by way of addition to the assets. If, however, the fixed capital remains unchanged, the incurring of expenditure would be taken as revenue if it simply facilitates the carrying on of business more efficiently and profitably. Adverting to the facts of the case, we note that by making payments for obtaining ISO 9002 certification, the fixed capital of the company has not enhanced in any manner. It rather created a positive image of the products of the assessee for the smooth conduct of the business. In our considered opinion, the ld. CIT(A) was justified in treating the entire amount as revenue in nature. This ground is, therefore, not allowed.
11. Last ground is against the allowing of deduction under section 80-IB(3)(ii) amounting to Rs. 8,33,264.
12. The Assessing Officer observed that the assessee was engaged in the grinding of Zircon Sand and Dolomite powder, etc.
The assessee was show caused as to why the claim of deduction under section 80-IB(3)(ii) be not jettisoned in view of the Hon'ble Supreme Court decision in the case of Dy. CST v. Bherhaghat Minerals Industries [2000] 246 ITR 230 in which it was held that the crushing of dolomite and other lumps into chips and powder could not treated as a manufacturing activity. The assessee explained its manufacturing process and also submitted that Zircon Sand purchased by it was different from micronized Zircon flour (powder) of various grades. It also stated the uses of Zircon Sand and Zircon powder to explain that both were different items and served entirely different purposes. It was further put forth that no deduction on account of dolomite was claimed by the assessee. Not convinced the Assessing Officer did not allow deduction under section 80-IB(3)(ii) which action was reversed in the first appeal.
13. We have heard both the sides and perused the relevant material on record. Section 80-IB(3)(ii) provides deduction in respect of profits and gains derived from any business referred to in sub-sections (3) to (11B) if the conditions provided for in this section are fulfilled. There is no dispute on the compliance of other conditions except that the Assessing Officer has come to the conclusion that the activity done by the assessee does not amount to 'manufacture' whereas the assessee has built up its case that it qualifies for deduction as it is manufacturing Zircon powder which is a product different from its raw material, viz., Zircon sand. In order to decide the controversy it is important to bear in mind that every process does not tantamount to manufacture. It is only when the process results in the emergence of a new and different article having a distinctive name and character or use that 'manufacture' can be said to have taken place. The Hon'ble Supreme Court in the judgment relied upon by the Assessing Officer has laid d6wn that the crushing of dolomite and lumps into chips and powder does not amount to manufacture. This decision was primarily rendered in the context of interpretation of section 2(j) of the Madhya Pradesh Commercial Sales Tax Act, 1958. Further the claim of the assessee that it has not claimed deduction in dolomite powder has not been negatived by the Assessing Officer. The other decision taken note of by the Assessing Officer is Lucky Minmat (P.) Ltd. v. CIT [2000] 245 ITR 830 (SC) which lays down that no manufacturing process is involved in the mining of lime stones and marble blocks and cutting and sizing the same. There are sizeable number of decisions by the Hon'ble Supreme Court as per which the processes of cutting and crushing etc. do not amount to manufacture. The Hon'ble Supreme Court in the case of Sacs Eagles Chicory v. CIT [2002] 255 ITR 178 has ruled that no manufacture or production is involved in the preparation of chicory powder or chicory roots and therefore, the assessee engaged in such activity cannot be allowed deduction under sections 80HH and 80-I.
14. The case of the ld. A.R. before us is that the assessee is neither involved in crushing nor cutting and sizing of Zircon Sand. Our attention was drawn towards pages 48 and 49 of the impugned order to show the Flow sheet for production/manufacture of Zircon Opacifiers, which is reproduced as under:
Screening; of raw Zircon sand using a Vibratory
Screen for removal of tramp
|
Transferred to feed SILO through Bucket Elevators
|
Magnetic Separation
|
Closed circuit milling using Ball Mills lined
with High Alumina
|
Materil sent to "Gyrotor" Air Classifier
For separation
|
Aero Dynamite Cyclone
|
Pulse Jet Bag Filter
15. It is noticed that the assessee purchased raw material viz., Zircon Sand by virtue of licence from Government and the finished product is Micronised Zr. Powder. Now we will have to analyze the above processes to determine as to whether they amount to manufacture or fall short of it. First is the screening of raw zircon sand by using a vibratory screen. It has been explained on behalf of the assessee that with the help of this process the unwanted particles, which can be identified with screen, are separated from zircon sand. This process cannot be said to result into manufacture because it is a sort of cleaning and separation of something from the raw material. Second process is the magnetic separation, which as per the ld. A.R. helps in extracting the iron contents from the zircon sand. This process also does not per seamount to manufacture, because it amounts to the further filtering of zircon sand. Third process is the closed circuit milling using ball mills lined with high alumina. The ld. A.R. has explained that in this stage the purified and demagnetized material is fed to the Closed Circuit Milling system using Ball Mills through a vibratory/screw feeder with variable frequency drives. It has been explained by way of note of this process, which has remained uncontroverted, that the purified material enters the Ball Mill for micronization through high Alumina Liners and Media. The Chemical composition of High Alumina lines is AI203 (90 per cent Alumina di oxide). The Alumina Lining and Media is used specifically as the Zircon Opacifiers are used in ceramics and any other material would result in contamination of the end-product. Alumina itself acts as a whitening agent. Thus, high Alumina liners are used so as to result in a uniform mixing of Alumina (AI203) in the product without causing any damage to the end-product while micronizing. The micronizing of the final product takes place in the ball mill with the help of Alumina liners and Alumina media with temperatures in the ball mill ranging between 80 degrees to 100 degrees. In the next stage the product quality is determined and this gyrotor segregates the product into processed finished goods or semi-processed material, which is returned back to the mill for further processing. On taking note of the above processes cumulatively, it becomes clear that the zircon sand purchased by the assessee, being used as raw material, finally gets converted into micronized zircon powder. A certificate has been placed on record of M/s. Indian Rare Earth Ltd. [An undertaking of the Government of India under the department of Atomic Energy] to the effect that "Process of manufacture of micronized Opacifier from Zircon Sand is irreversible". In other words, after production of micronized Opacifier by the assessee from zircon sand, it is technically not possible to convert the micronized Opacifier into zircon sand again. Moreover, the use/application of micronized Opacifier are overwhelmingly different. To put simply, the processes undertaken by the assessee initially filter out the zircon sand at two different levels and then in the ball mill the micronization is done with high Alumina liners and media using temperatures at a very high level. The final product, which emerges is known differently in the commercial world from the one which is used in the raw material. Not only that, the uses of zircon sand (raw material) and Opacifier (finished product) are qualitatively different in as much as the zircon sand is used for refractory bricks and for foundry shells whereas zircon, Opacifier is used for ceramic glazes, foundry flux and for TV glass shells, etc. It is not that the original raw material has been simply crushed and converted into small particles of the same thing. On the contrary, the input is a different thing and what emerges after going through processes employed by the assessee is an entirely different thing.
16. The decision of the Hon'ble Supreme Court in the case of Sacs Eagles Chicory is not applicable because in that case chicory roots were roasted and after that they were powdered. Both the chicory powder and chicory roots were found to be one and the-same thing. It was observed that mere change in the form of commodity did not necessarily involve change of identity. On the other hand, the zircon sand and opacifier are two different things with different compositions as it emanates from the certificate of Indian Rare Earth Ltd., discussed above, that the process done on zircon sand for converting into opacifier is irreversible and both have different uses/applications. The next decision relied upon by the Assessing Officer is the case of Hon'ble Supreme Court in Lucky Minmat (P.) Ltd. In this case it was held that no manufacturing process was involved in cutting and sizing of the marble blocks and mining lime stones. In other words, if an item of larger substance is cut into small pieces by how so ever mechanical processes and inherent values and quality of the original items and cut out pieces remains the same, it cannot be said that any manufacturing process has been carried out. Again, we are at a loss to appreciate as to how this decision can be held to be applicable because primarily there is no cutting and sizing of the sand. The assessee has produced a different product from the one used as raw material. The uses and applications of both the raw material and finished product are different. We, therefore, hold that this decision is not applicable to the facts of the instant case.
17. We are reminded of the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Best Chem & Lime Stone Industries (P.) Ltd. [1994] 210 ITR 883 (Raj.) in which the assessee was engaged in extracting lime stone and converting in the form of lime and Rodi. The Hon'ble High Court held that "crushing of the mineral so extracted which resulted in production of Rodi and powder is a process of manufacture". So far as the conversion of the mineral in the form of Rodi and powder is concerned, it is evident that it does not retain the physical characteristics, which the raw material has and is understood as a different commercial commodity by the business community. In these circumstances, the Tribunal was held to be justified in coming to the conclusion that the crushing of lime stone into Rodi or lime dust is a process of manufacture. In the case of CIT v. Lucky Minerals (P.) Ltd [1997] 226 ITR 245 (Raj.) the Hon'ble Jurisdictional High Court had an occasion to consider the process of cutting of marble stones into slabs and it was held that the assessee was not entitled to deduction under section 80HH/80-I as the assessee was not engaged in the manufacture or production of goods. It is this decision, which was subsequently approved by the Hon'ble Supreme Court, which has been relied upon by the Assessing Officer. In this case the earlier decision rendered in the case of Best Chem & Lime Stone Industries (P.) Ltd. was also considered and distinguished on the ground that in that case the assessee converted boulders into powder chips or any other article commercially known by another name and used as a different article. The position which comes out is that the judgment in the case of Best Chem & Lime Stone Industries (P.) Ltd. is a binding precedent as per which the conversion of boulders into powder, etc., amounts to manufacture. Another decision which applies with full force to the facts of the case is CIT v. Shree Krishna Pulverising Mills [2000] 241 ITR 262 (AP) in which it was held that the business of crushing barites is production of an article and the assessee is entitled to deduction under section 80HH/80-I. Adverting to the facts of the case, here also, we find that the zircon sand and opacifiers both are distinct and separate articles with different uses and compositions. In the case of Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323 (SC) the assessee after plucking or receiving raw coffee berries made it undergo nine processes to give it the shape of coffee beans. The assessee claimed itself entitled to allowance as being engaged in manufacture or production which was not accepted by the revenue authorities. Finally, when the matter travelled to the Hon'ble Supreme Court, it was observed that the process is a manufacturing process when it brings about a complete transformation in the original article so as to produce a commercially different article or commodity and, therefore, the assessee engaged in such activity was held to be entitled to investment allowance. In view of the legal position emanating from the foregoing judicial precedents, we note that the assessee is engaged in the manufacture of opacifiers/zircon powder from the raw material! zircon sand. The processes involved in converting raw material into finished product bring out a complete transformation from raw material to finished product. Not only the uses of the two products are different but also their chemical composition. Both are known differently in the commercial world. the finished product cannot be reversed back to the original raw material because of the processes through which it had undergone.
18. This case has another interesting aspect also. The assessee has admittedly claimed this deduction in the preceding years, which was allowed by the Assessing Officer. It is only in this year that the claim was refused. The well-settled principle of consistency has been consistently followed by all the courts of the country to hold that the view adopted by the Assessing Officer in a particular year should not be deviated from in the subsequent years unless there is some change in the legal or factual scenario justifying departure therefrom. In the case of CIT v. A.R.J. Security Printers [2003] 264 ITR 276 (Delhi) when the department wanted to negative the assessee's claim, which was accepted in the past, the Hon'ble High Court held that; "having accepted in three assessment years that the assessee's business activity of printing lottery tickets fall within the ambit of section 80-I, the revenue cannot be allowed to turn around and contend that the deduction under the said section is not allowable in respect of the assessment years in question". The SLP filed by the revenue against this judgment stands dismissed in [2004] 266 ITR 4 (St.).
19. The principle of consistency has been followed by the other High Courts in several cases including the following:
1. Arihant Builders Developers & Investors (P.) Ltd v. ITAT [2005] 277 ITR 239 (MP)
2. Asstt. CIT v. Gendalal Hazarilal & Co. [2003] 263 ITR 679 (MP)
3. CIT v. Neo Poly Pack (P.) Ltd [2000] 245 ITR 492 (Delhi)
4. Dhansiram Agarwalla v. CIT [1996] 217 ITR 4 (Gauhati).
The Hon'ble Apex Court has also affirmed the above referred principle in several cases including:
1. CIT v. Shiv Sagar Estate [2002] 257 ITR 59 (SC).
2. Union of India v. Satish Pannalal Shah [2001] 249 ITR 221 (SC).
In the case of CWT v. M.K. Gupta [1990] 185 ITR 393 (Delhi) the Tribunal applied the same value of property which was considered in the case of other co-owners. The Hon'ble High Court declined to interfere with the Tribunal's view by dismissing the revenue's appeal. In view of the foregoing legal position emanating from the judicial pronouncements, it is clear that the principle of consistency does not empower the Assessing Officer to deviate from the stand taken by him in the previous year unless factual or legal position justifies departure in the instant year. In our considered opinion, the ld. CIT(A) was not justified in refusing deduction under section 80-IB. This ground is allowed.
20. In the result, the appeal of the revenue is partly allowed.
DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.