Deduction denied for unpolished granite under Income-tax Act. Assessing Officer's decision set aside.

The court held that unpolished granite does not qualify for deduction under section 80HHC of the Income-tax Act, 1961, as the term "processed" in the Twelfth Schedule is exhaustive and includes only "cut and polished" granite. The validity of Circular No. 693, which specified the eligibility criteria for the deduction, was upheld as it aligns with the legislative intent. Additionally, the court ruled that the Assessing Officer cannot disallow deductions without providing an opportunity for a hearing, setting aside the adjustment made under section 143(1)(a) and directing reconsideration under section 143(2).

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Issues Involved:

1. Whether unpolished granite qualifies for deduction u/s 80HHC of the Income-tax Act, 1961.
2. Validity of Circular No. 693 dated November 17, 1994.
3. Legality of the adjustment made by the Assessing Officer u/s 143(1)(a) without a hearing.

Summary:

Issue 1: Deduction u/s 80HHC for Unpolished Granite

The petitioner, an exporter of unpolished granite, claimed a deduction u/s 80HHC of the Income-tax Act, 1961, arguing that unpolished granite falls under item (x) of the Twelfth Schedule. The Assessing Officer disallowed this deduction, stating that the Twelfth Schedule allows deductions only for "cut and polished granites." The court held that the term "processed" in the Twelfth Schedule, which includes "cut and polished," is exhaustive and applies to rocks and granite. Therefore, unpolished granite does not qualify for the deduction u/s 80HHC.

Issue 2: Validity of Circular No. 693

The petitioner challenged Circular No. 693 dated November 17, 1994, which clarified that only "cut and polished" granite qualifies for the deduction u/s 80HHC. The court upheld the validity of the circular, stating it aligns with the provisions of section 80HHC and the Twelfth Schedule, which aim to encourage the export of high-value-added polished granite and discourage the export of raw blocks.

Issue 3: Adjustment u/s 143(1)(a) Without Hearing

The petitioner argued that the Assessing Officer could not disallow the deduction u/s 80HHC by making an adjustment u/s 143(1)(a) without a hearing. The court agreed, stating that the inadmissibility of the deduction was not prima facie evident from the return and accompanying documents. The court held that the Assessing Officer should have issued a notice u/s 143(2) and provided an opportunity for a hearing. Consequently, the intimation dated March 31, 1995, was set aside, and the Assessing Officer was directed to reconsider the return under section 143(2).

Disposition:

1. The petition to declare Circular No. 693 as illegal was rejected.
2. The intimation dated March 31, 1995, was set aside, and the Assessing Officer was directed to reconsider the return u/s 143(2).
3. The sum of Rs. 15 lakhs deposited by the petitioner shall be held on account until the completion of the assessment.
4. Parties to bear their respective costs.

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