1997 (5) TMI 75 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under Section 80HHC for export of granite blocks.
2. Valuation of closing stock.
3. Method of valuation employed for closing stock.

Issue-Wise Detailed Analysis:

1. Deduction under Section 80HHC for Export of Granite Blocks

The primary issue in this appeal was whether the assessee was entitled to a deduction under Section 80HHC of the Income-tax Act for the export of granite blocks. The Assessing Officer disallowed the claim based on the prohibition in sub-clause (ii) of clause (b) of sub-section (2) of Section 80HHC, read with item No. (X) of the Twelfth Schedule, supported by CBDT Circular No. 693 dated 17-11-1994. This Circular clarified that only 'cut and polished' granite was eligible for the deduction, aligning with the government's policy to encourage the export of high-value polished granite over raw blocks.

The assessee challenged this disallowance, and the Karnataka High Court upheld the validity of Circular No. 693 but struck down the adjustment made under Section 143(1)(a) as beyond the scope of 'prima facie adjustments.' However, in the assessment under Section 143(3), the Assessing Officer again disallowed the claim, which was confirmed on first appeal.

During the ITAT hearing, the assessee cited a subsequent CBDT Circular No. 729 dated 1-11-1995, which revised the earlier view and deemed profits from the export of granite dimensional blocks eligible for deduction under Section 80HHC. The ITAT noted that the latter Circular should apply retrospectively, as it corrected a factual misunderstanding about the nature of granite exports. The Tribunal concluded that the granite blocks exported by the assessee were 'cut and polished' to a sufficient degree to qualify for the deduction, reversing the lower authorities' decisions.

2. Valuation of Closing Stock

The second issue involved the valuation of the closing stock of granite. The assessee valued 329.280 cubic meters of granite at Rs. 21,73,000 but did not include an additional 97.090 cubic meters of granite lying at the quarry, which was declared in a stock statement to the bank. The assessee argued that the quarry stock had no value and was therefore excluded from the closing stock.

The CIT(Appeals) and the DR contended that the assessee should not show different figures to the IT authorities and the bank. Citing various judgments, they argued that the stock at the quarry should be included in the closing stock valuation. The ITAT upheld this view, noting that the granite at the quarry had incurred quarrying expenses and thus had value. The Tribunal confirmed the inclusion of the 97.090 cubic meters of granite in the closing stock.

3. Method of Valuation Employed for Closing Stock

The final issue was the method of valuation for the closing stock. The assessee included only specific expenses (Purchases, Consumables, Labour charges, and Raising charges) in the valuation. The Assessing Officer added BD Hire charges, Repairs and maintenance, Insurance, Quarry development expenses, and 90% of Welfare expenses to the valuation.

The assessee argued that these additional expenses were not directly related to the quarrying process and should not be included. The ITAT found that the additional expenses were indeed not directly related to the quarrying process but were more about maintaining infrastructure. The Tribunal ruled that the assessee had correctly included only the direct quarrying expenses in the valuation of the closing stock and reversed the decisions of the lower authorities.

Conclusion

The appeal filed by the assessee was partially allowed. The ITAT directed the Assessing Officer to allow the deduction under Section 80HHC for the export of granite blocks and to evaluate the closing stock by considering only the direct quarrying expenses as done by the assessee.