Manufacture requires a new commercial commodity: iron ore processing, unlawful purchase costs and transport claims were largely disallowed.

Processing run-of-mine iron ore by screening, washing and blending was treated as mere removal of impurities and value addition, not manufacture or production, because no new and distinct commercial commodity emerged; deduction under section 10B was therefore denied. Freight and transport-related amounts attributable beyond the customs station were reduced from export turnover, and corresponding transport expenditure disallowed under section 40(a)(ia) could be adjusted in computing business profit for section 80HHC. Expenditure on illegally mined iron ore was held inadmissible under section 37(1) as it was incurred for an unlawful purpose. Mere ledger entries did not prove actual transport expenditure. Closing stock addition was sustained, while depreciation on the crushing plant was remitted for fresh examination.

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Issues: (i) Whether deduction under section 80HHC was to be recomputed by reducing freight and transport related amounts from export turnover and by adjusting disallowed transport expenditure in direct cost; (ii) Whether processing of run-of-mine iron ore by screening, washing, blending and similar activities amounted to manufacture or production so as to qualify for deduction under section 10B; (iii) Whether expenditure incurred for purchase of illegally mined iron ore was allowable under section 37(1) and whether the assessment framed under section 153A was invalid for want of proper jurisdiction; (iv) Whether transport expenditure and transport liability entries were allowable when the assessee failed to substantiate actual incurrence; (v) Whether the additions relating to closing stock and the disallowance of depreciation on crushing plant were sustainable.

Issue (i): Whether deduction under section 80HHC was to be recomputed by reducing freight and transport related amounts from export turnover and by adjusting disallowed transport expenditure in direct cost.

Analysis: The assessee failed to produce evidence showing that the disputed expenditure was incurred as clearing and forwarding charges within the customs station. The Tribunal held that the amount attributable to freight and insurance related movement beyond the customs station could be reduced from export turnover. It further held that where transport expenditure had been disallowed under section 40(a)(ia), the corresponding amount could be adjusted in the computation of business profit and direct cost for section 80HHC purposes to maintain parity.

Conclusion: The recomputation made by the lower authorities was upheld and the assessee did not succeed on this issue.

Issue (ii): Whether processing of run-of-mine iron ore by screening, washing, blending and similar activities amounted to manufacture or production so as to qualify for deduction under section 10B.

Analysis: The Tribunal applied the settled test that manufacture requires emergence of a new and distinct commercial commodity having a different name, character or use. It held that the assessee merely removed impurities and improved the marketability of iron ore, but the end product remained iron ore and no commercially distinct article emerged. The process was therefore treated as value addition without transformation into a new commodity.

Conclusion: Deduction under section 10B was rightly denied and the assessee failed on this issue.

Issue (iii): Whether expenditure incurred for purchase of illegally mined iron ore was allowable under section 37(1) and whether the assessment framed under section 153A was invalid for want of proper jurisdiction.

Analysis: The Tribunal accepted the finding that the iron ore purchased by the assessee was illegally mined and that the transactions were in violation of the Mines and Minerals (Development and Regulation) Act, 1957 and opposed to public policy. It held that expenditure incurred for an unlawful purpose falls squarely within the prohibition in the Explanation to section 37(1) and cannot be allowed as business expenditure. On the jurisdictional objection, it held that the assessment was not invalid merely because of the section invoked in the order, since section 292B cures such mistakes when the proceeding is otherwise in conformity with the Act.

Conclusion: The disallowance under section 37(1) was sustained and the challenge to jurisdiction failed.

Issue (iv): Whether transport expenditure and transport liability entries were allowable when the assessee failed to substantiate actual incurrence.

Analysis: The Tribunal held that mere ledger entries, cash-book entries or journal entries do not prove actual incurrence of expenditure. In the absence of supporting vouchers, corroborative evidence or proof of business nexus, and in view of the circumstances noted by the Assessing Officer, the assessee did not discharge the burden of proving that the expenditure was laid out wholly and exclusively for business.

Conclusion: The disallowances of transport expenditure and of the payable transport liability were upheld against the assessee.

Issue (v): Whether the additions relating to closing stock and the disallowance of depreciation on crushing plant were sustainable.

Analysis: The assessee did not produce evidence to substantiate the valuation of closing stock or to show that the disputed stock had no realizable value. The addition was therefore sustained. As regards depreciation on the crushing plant, the Tribunal held that the question turned on actual user of the asset in the business and noted that depreciation had been allowed in earlier years; this issue was remitted for fresh examination by the Assessing Officer.

Conclusion: The addition relating to closing stock was sustained, while the depreciation issue was remanded for de novo consideration.

Final Conclusion: The Tribunal sustained the major disallowances and denial of deduction, but restored only the depreciation issue to the Assessing Officer for fresh adjudication, resulting in a partly allowed disposal overall.

Ratio Decidendi: Mere processing that only removes impurities or improves marketability does not amount to manufacture unless it brings into existence a new and distinct commercial commodity; expenditure incurred in violation of law is not deductible as business expenditure.

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