2006 (2) TMI 207 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of the addition of Rs. 53,76,000 made by the Assessing Officer on account of notional sale of rice-bran and phuck.
2. Whether the rice-bran and phuck given in exchange for milling services can be considered as a sale.
3. Impact on deduction under section 80HHC due to the treatment of the transaction.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of Rs. 53,76,000:
The department's appeal concerns the deletion of an addition of Rs. 53,76,000 made by the Assessing Officer. The Assessing Officer had treated the rice-bran and phuck given to M/s. Balaji Rice & General Mills as domestic sales, calculating the quantity at 13,440 quintals and applying a rate of Rs. 400 per quintal. This resulted in a notional sale value of Rs. 53,76,000, which was added to the assessee's income, thereby reducing the deduction under section 80HHC.

2. Whether the Rice-bran and Phuck Given in Exchange for Milling Services Can be Considered as a Sale:
The CIT (Appeals) reversed the Assessing Officer's decision, stating that the by-products given to the miller as lease/milling charges did not constitute a sale. The CIT (Appeals) relied on the Supreme Court's ruling in CIT v. Motors & General Stores (P.) Ltd., which held that exchange or barter cannot be treated as sales. The assessee's agreement with the miller specified that by-products would be the miller's property as lease charges, and such transactions were common in the industry. The CIT (Appeals) concluded that the property in the by-products never passed to the assessee, and the transaction increased the cost/purchase value, ultimately merging into the valuation of closing stock.

3. Impact on Deduction Under Section 80HHC:
The Assessing Officer's treatment of the transaction as a sale reduced the deduction under section 80HHC. However, the CIT (Appeals) and the Tribunal found that the transaction did not meet the criteria of a sale as defined under the Sale of Goods Act, 1930. The essential component of a sale is the transfer of property in goods for a price, which was absent in this case. The Tribunal cited multiple judicial pronouncements, including the Supreme Court's rulings in Sri Srinivasa Sales Circulation and New India Sugar Mills Ltd., to support the view that the transaction was an exchange or barter, not a sale. Consequently, the notional value of the by-products could not be included as local sales, and the deduction under section 80HHC should not be reduced.

Conclusion:
The Tribunal upheld the CIT (Appeals) decision, concluding that the transaction between the assessee and the miller was an exchange or barter, not a sale. Therefore, the addition of Rs. 53,76,000 by the Assessing Officer was unjustified, and the deduction under section 80HHC should not be affected. The appeal by the department was dismissed.