1998 (3) TMI 163 - AT - Income Tax

Issues Involved:
1. Deletion of Rs. 36,12,666 disallowed under Section 40A(3).
2. Deletion of Rs. 8,73,621 disallowed for lack of verification and under Section 40A(3).
3. Deletion of Rs. 32,92,327 disallowed due to excess process loss in production.
4. Sustaining an addition of Rs. 11,92,392 out of Rs. 44,84,719 due to excess process loss claim.
5. Depreciation on machinery cost after deducting government subsidy.
6. Deduction under Sections 32A, 80HH, and 80-I for the business of refining cottonseed oil.

Detailed Analysis:

1. Deletion of Rs. 36,12,666 disallowed under Section 40A(3):
The CIT(A) deleted the addition of Rs. 36,12,666 under Section 40A(3), which was based on the ground that payments were made in cash. The CIT(A) referenced the ITAT's order for the assessment year 1986-87, where similar disallowances were deleted. The Tribunal upheld the CIT(A)'s decision, emphasizing consistency with the earlier ruling and noting that the seized documents should be considered as a whole.

2. Deletion of Rs. 8,73,621 disallowed for lack of verification and under Section 40A(3):
Similarly, the CIT(A) deleted the disallowance of Rs. 8,73,621 under Section 40A(3) and for lack of verification, referencing the ITAT's earlier decision for the assessment year 1986-87. The Tribunal agreed with the CIT(A), maintaining consistency with the previous year's ruling and rejecting the Revenue's arguments for reconsideration.

3. Deletion of Rs. 32,92,327 disallowed due to excess process loss in production:
The CIT(A) allowed a process loss of 2% and sustained an addition of Rs. 11,92,392 out of the total Rs. 44,84,719 disallowed by the AO. The AO had claimed that the process loss should be limited to 0.6%. The Tribunal found that the CIT(A)'s allowance of 2% process loss was reasonable, considering the literature from Vulcan Laval, which suggested a process loss range of 2.65% to 4.25%. The Tribunal directed the AO to delete the sustained addition of Rs. 11,92,392.

4. Sustaining an addition of Rs. 11,92,392 out of Rs. 44,84,719 due to excess process loss claim:
The CIT(A) sustained an addition of Rs. 11,92,392 while allowing relief of Rs. 32,92,327. The Tribunal, however, directed the deletion of the entire addition, finding the process loss claim of 2.48% reasonable and supported by the literature from Vulcan Laval. The Tribunal also noted that the excess production shown in the seized diaries was already considered in computing the total income, leaving no further justification for additional disallowance.

5. Depreciation on machinery cost after deducting government subsidy:
The CIT(A) upheld the AO's action of granting depreciation on the cost of machinery after deducting the government subsidy. The Tribunal adjudicated this issue in favor of the assessee, referencing the Supreme Court decision in CIT vs. P.J. Chemicals, which held that the subsidy should not be deducted from the actual cost of the machinery for depreciation purposes.

6. Deduction under Sections 32A, 80HH, and 80-I for the business of refining cottonseed oil:
The CIT(A) held that the assessee was entitled to deductions under Sections 32A, 80HH, and 80-I, considering the refining of cottonseed oil as a manufacturing activity. The Tribunal admitted the additional ground raised by the Revenue but ultimately upheld the CIT(A)'s decision. The Tribunal referenced various judicial decisions supporting the view that the refining process constitutes manufacturing, creating a commercially distinct product. The Tribunal also noted the principle of finality in legal proceedings and consistency in judicial decisions, citing Supreme Court rulings in Parshuram Pottery Works Co. Ltd. vs. ITO and Radhasoami Satsang vs. CIT.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, affirming the CIT(A)'s decisions on all contested issues and directing the deletion of the sustained addition of Rs. 11,92,392. The Tribunal maintained consistency with earlier rulings and upheld the principle of finality in legal proceedings.

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