Tribunal upholds reassessment due to excessive relief under section 80HHC

The tribunal upheld the Assessing Officer's decision to reopen the assessment proceedings under section 147 of the Act due to excessive relief allowed under section 80HHC. The tribunal found that the deduction under section 80HHC was allowed without proper application of law, leading to the dismissal of the assessee's appeal. Additionally, the tribunal affirmed the withdrawal of the deduction under section 80HHC as the exported product did not undergo the required processing specified in the Twelfth Schedule of the Income-tax Act. Consequently, the appeal of the assessee was dismissed.

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Issues Involved:
1. Validity of reopening of assessment under section 147 of the Act.
2. Withdrawal of deduction of Rs. 1,00,190 allowed under section 80HHC of the Act.

Issue-wise Detailed Analysis:

Ground No. 1: Validity of Reopening of Assessment Under Section 147 of the Act

The brief facts of the case are that the assessee derives income from the sale/export of soapstone and powder. The regular assessment order under section 143(3) was passed by the Assessing Officer on 7-3-1994 on a total income of Rs. 18,54,750. The Assessing Officer allowed a deduction of Rs. 1,00,190 under section 80HHC as per the Audit Report. The deduction under section 80HHC was claimed by the assessee in the return of income on the export of soapstone powder amounting to Rs. 6,44,116. The Assessing Officer reopened the assessment proceedings under section 147 on the ground that excessive relief under section 80HHC was allowed to the assessee and that thereby income chargeable to tax was under assessed. The Assessing Officer was of the view that minerals exported were not processed and accordingly, no deduction under section 80HHC was allowable.

The ld. AR submitted that after the Tax Laws (Amendment) Act, 1987, in a large number of cases it had been held that the reassessment proceedings on the basis of change of opinion are ab initio void. He relied upon the following case laws:
1. CWT v. Kedar Nath [2003] 259 ITR 563 (Raj.)
2. CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 (Delhi) (FB)
3. CIT v. Foramer France [2003] 129 Taxman 72 (SC)

The ld. DR relied upon the order of the ld. CIT(A) and submitted that for the first order dated 7-3-1994, the Assessing Officer had allowed the claim with remarks "deduction under section 80HHC as per audit report". This means that the Assessing Officer had not applied his mind to the facts and he has not found any opinion. He also submitted that this case will not fall under the proviso of section 147 of the Act as the assessment had been reopened within the limit of 4 years. For this purpose, he relied upon the following case laws:
1. Praful Chunilal Patel v. Makwana (M.J.)/ACIT (Guj.) [1999] 236 ITR 832 (Guj.)
2. Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC)
3. Ess Ess Kay Engineering Co. (P.) Ltd. v. CIT [2001] 247 ITR 8181 (SC)

After hearing the rival submissions and perusing the materials available on record, the tribunal found that the Assessing Officer had allowed the deduction under section 80HHC without discussing the provisions of law or Schedule XIIth to the Income-tax Act. He allowed the deduction only with the remarks that the same is allowable on the basis of the audit report. He had not applied his mind to the facts of the case. Therefore, the tribunal did not agree with the contention of the ld. AR that this case falls under the category of change of opinion and the case laws relied upon by the ld. AR are of no help. The tribunal found that the case laws relied upon by the ld. DR are very much relevant on the subject. Consequently, the order of the ld. CIT(A) was sustained, and this ground of the assessee was dismissed.

Ground No. 2: Withdrawal of Deduction of Rs. 1,00,190 Allowed Under Section 80HHC of the Act

In this ground, the Assessing Officer had withdrawn the deduction allowed under section 80HHC of the Act for the reasons discussed in para 5 of his order. The ld. CIT(A) confirmed the order of the Assessing Officer for the reasons mentioned at pages 6 to 9 of his order. In this order, he relied upon the order of the ld. CIT(A), Raj. I Jaipur dated 29-3-1996 in appeal No. 5/95-96 for the assessment year 1992-93. It was held in paragraphs 1.20 to 1.27 in pages 27 to 34 of the aforesaid appellate order dated 29-3-1996 that the assessee's case was not covered by Item No.(iv) of the XIIth Schedule to the I.T. Act. For the same reasons, the claim of the assessee for this year was also rejected by him.

The ld. AR made the following submissions:
"The assessee company for the above assessment year exported soapstone powder amounting to Rs. 6,44,116. Photostat copies of the invoices relating to the export of soapstone powder i.e. Pulverized or Micronised talk were submitted before the Assessing Officer. Photostat copy of report in Form No. 10CCAC by M/s. Karnavat & Co., Chartered Accountants, Jaipur, certifying the claim for deduction under section 80HHC were also submitted to the Assessing Officer during the course of assessment proceedings. In this connection, it is relevant to add that as per clause (1) of the Twelfth Schedule to the Income Tax Act, soapstone powder which is also named as pulverized talc is one and the same thing and thus deduction under section 80HHC was rightly claimed and also rightly allowed by the Assessing Officer. The Photostat copy of Twelfth Schedule is placed before the Hon'ble Bench for kind perusal. The ld.CIT(A) in para 5 of his appellate order dated 1-10-1996 had stated that mineral talc can be said to be processed, if it is pulverized or micronized."

The ld. DR relied upon the orders of the lower authorities and also relied upon the order of the ld. CIT(A) for the assessment year 1992-93.

After hearing the rival submissions and perusing the materials available on record, the tribunal found that the Assessing Officer had not accepted the claim of the assessee for the reason that mineral talc can be said to be processed if it is pulverized or micronized. The Explanation to the Schedule XIIth for the word 'processed' even if considered applicable to talc, also does not fit in any of the categories from (a) to (h). The vital ingredients of (b) & (f) of the Explanation to the Schedule XIIth are not met. From all evidences and indications, such as invoices/customs clearance, it is evident that there was a meeting of minds between the seller and the purchaser, in the sense that what was being exported was also talc and this talc could only be pulverized and/or mechanized to become eligible for deduction as per Schedule XIIth. Even the processed talc would not come under the exempted category and in fact, even beneficiated talc/soap stone, would fall short of the requirements of XIIth Schedule. The beneficiation involves mechanical processing and screening through dry process, which too are lacking. As such, in the facts and circumstances of the case, the exports of the assessee were not held eligible for deduction under section 80HHC, to be dealt in as such, with all attendant consequences.

The ld. CIT(A) discussed this issue in detail from pages 6 to 9 of his order. The ld.CIT(A) has given his finding in para 2.3 from pages 8 and 9 of his order. Section 80HHC deals with deduction in respect of profits earned from export of goods. Sub-section (ii) of clause (b) of sub-section (2) of this section provided that no such deduction was allowable on the export of Minerals and Ores. However, to expand the scope of provisions of section 80HHC and to allow exporters of processed minerals and Ores, also the benefit of this section, the Finance (No. 2) Act, 1991 w.e.f. 1-4-1991 wherein it was laid down that "processed mineral and ores specified in the Twelfth Schedule would be considered for deduction under section 80HHC. The same Finance Act inserted the Twelfth Schedule. This Schedule provides the list of the processes which the minerals and ore specified therein should undergo for being covered by the exception provided in section 80HHC(2)(b)(ii) of the Act. On being asked by the ld. CIT(A), the assessee submitted his reply vide letter dated 6-11-1996 which is as under:
"As per Explanation to Twelfth Schedule the processing in relation to mineral or ores means dressing through mechanical means to obtain concentrates after removal of gangue and unwanted deleterious substances or through other means without altering the minerological identity. During the year under consideration, we exported soapstone powder. The lumps excavated from the earth were beneficiated through application of various process and thereafter the same were grinded resulting in the production of soapstone powder. Therefore, our case falls within the purview of item (iv) of the Twelfth Schedule and the ld.Assessing Officer, after examining the issue rightly allowed our claim under section 80HHC, the question of withdrawing the same does not arise."

It is clear from the explanation of the assessee dated 6-11-1996 before the ld. CIT(A) that it had relied upon the provisions of item (iv) of the Twelfth Schedule for deduction under section 80HHC. The tribunal found that for not accepting the claim of the assessee, the ld. CIT (A) has given detailed reasons for the assessment year 1992-93 in his order dated 29-3-1996 in appeal No. 5/95-96 in paras 1.20 to 1.27 from pages 27-34. The ld. CIT(A) held at page 27 of his order for assessment year 1992-93 that talc is synonyms of soap powder and that Item No. (i) of Twelfth Schedule alone is applicable in this case. This issue has been dealt with at length by dealing with issue Nos. 1 and 2.

The tribunal agreed with the reasons given by the ld.CIT(A). However, the claim raised in this issue was also discussed to show that the assessee has no case in Item No. (iv) of the said Schedule as the exported product did not undergo the relevant process (f) of the Explanation. The process listed as (f) reads:
"A beneficiation of mechanical crushing and screening through dry process;"
(i) There should be beneficiation of mineral and ore;
(ii) The beneficiation should be by mechanical crushing and screening and
(iii) The process should be dry.

There is no dispute that the word beneficiation means treatment of raw minerals, ores to improve their properties. Further, there is no dispute that the processes used by the appellant's suppliers were 'dry'. The dispute is only regarding ingredient No.(ii) above i.e. as to whether the appellant did the following:
(a) Mechanical crushing to beneficiate the talc; and
(b) Mechanical screening to beneficiate the talc;

There is no reference of beneficiation by mechanical crushing. It is simply stated that the process lumps are cut into pieces of 4-6" and packed in 50m bags. The photographs filed before the DCIT during the course of assessment proceedings and available in the assessment records do not show any mechanical crusher in operation. The use of a crusher was first brought on record by the appellant in para 1.6(viii) see para 1.4 in page 8 of its written submission dated 21-7-1995. Here also it was submitted that sometimes the cutting of boulders is done manually.

It has been clarified in para 1.6(viii) of the said written submission that the crusher is used to reduce the size of the boulders to the desired sizes. There is no beneficiation of mineral and ore merely by reducing the size of its boulders. Shri S.K. Jain, Reader in Malviya Regional Engineering College, Jaipur and the author of the book "Ore Processing", Oxford I D H Publication, clarified in the hearing on 21-3-1996 that the crushing was used by the supplier of 'talc' to make the 'mineral and ore' in the desired sizes for the use in pulverized or direct sale. It is also clear from Shri Jain's certification dated 1-3-1996 reproduced in para 1.8 page ante and the aforesaid order sheet entry dated 21-3-1996 that the crushing of the 'talc' was the last process before its backing and dispatch for export. No beneficiation of the Ore is done by simply reducing its size in a crusher i.e. merely reduction of size does not amount a process of beneficiation whereby percentage of the ore content increases. Therefore, the vital requirement of the process (f) of the Explanation to the Twelfth Schedule was not met and satisfied by the appellant.

Now coming to another process of 'mechanical screening it is seen that there is no whisper about it in the letter of the appellant dated 16-12-1994 filed before the DCIT (see para 1.23 Page 29 ante). The mention of the word 'screening' was made by the appellant for the first time during the appellate proceedings vide para 1.6 (ix) in its aforesaid letter dated 21-7-1995 reproduced in para 1.4 in page 8. The photograph No. 12 relied upon by the appellant shows that the labourers are putting manually 'lumps of talc' on iron screen to segregate the 'ruffa'. It is clear from this photograph that the screening was done manually by both the suppliers of the appellant. This fact was brought to the notice of the appellant by the ld.CIT(A). It was argued on behalf of the appellant that word 'mechanical' used in process (f) of the said Explanation does not qualify the word 'screening'. It was argued that the said process (f) should be read to have two separate limbs independent of each other, viz. first the beneficiation by mechanical crushing and second screening through dry process. This argument of the appellant was rejected as being clearly against the simple interpretation of the words used in the said process (f). Any doubt in the matter was clarified during the hearing of this appeal by making a reference to the Hindi Version of beneficiation (CIT(A) page 32 of the order for assessment year 1992-93).

It becomes very clear from the Hindi Version of the said process (f) that the words 'mechanical' and 'dry process' governed and qualify both the process of 'crushing' and 'screening'. As seen above, the appellant had just reduced the sizes of the ore of talc by mechanical crushing. It did not mechanically screen the product. Therefore, it did not satisfy any requirement of the said process (f) read with item No. (iv) of the said Twelfth Schedule. The appellant in the spirit of never say die made a last ditch attempt to salvage its case by stating that the photographs submitted and relied on by it vide submission dated 21-7-1995 related to M/s. UMDSPL. It was claimed that M/s. UMDSPL, the major supplier of 'processed talc' to the appellant mechanically screened the goods and after mechanically crushing them. Two photographs No. 16 and 17 were also enclosed to support its case. It was also suggested that the appellant has no objection if the Officers of the department visited the site to verify their claim. The appellant also clarified in its aforesaid last letter dated 21-3-1996 filed on 25-3-1996 that the screening by mechanical process or manually was done after crushing and not prior to crushing.

The claim made by the appellant in its letter filed on 25-3-1996 are not acceptable as correct. It is observed that the appellant kept on changing the basic facts about the various 'processes' from proceedings to proceedings and hearing to hearing. As discussed above, in its first explanation dated 16-12-1994 about its various processes before the DCIT, the appellant did not make any reference of crushing and screening. It was explained that the lumps were cut into pieces of 4-6" of size. In this letter the appellant clearly mentioned the other processes conducted by mechanical means. For example, it was stated that for making French Chalk Pieces, the lumps were processed by mechanical means like crushers, cutters and vibrators. No such reference was made in respect of the processed lumps of talc. However, the appellant in its detailed letter dated 21-7-1995, made a reference of 'mechanical crushing and manual screening.' Further, it was conceded that a part of the cutting was also done manually. Thus, a part of mineral and ore was exported even without passing through the process (f) of the Explanation.

The appellant had very seriously and diligently argued before ld. CIT(A) that the word 'mechanical' did not qualify the word 'screening' in the said process (f). It would not have submitted such an argument had the 'screening' of 'talc', if any, was really done mechanically by its suppliers during the relevant period. The appellant, after realizing that its argument has no force and not acceptable, sought to change the basic facts of its case. The case of the appellant is rejected because it is not in consonance with the facts it had stated earlier before the DCIT and in these appellate proceedings before the ld.CIT(A).

To sum up, the claim of the appellant that it had beneficiated the ore of talc by mechanical crushing and screening was also rightly rejected by the ld.CIT(A). It is held that the mineral and ore exported by the appellant did not satisfy the specific conditions laid down in the Twelfth Schedule of the Income-tax Act.

In view of the above, the order of the ld.CIT(A) is sustained for the reasons given in appeal of the assessment year 1992-93. This ground of the assessee is dismissed.

Conclusion:
In the result, the appeal of the assessee is dismissed.

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