2006 (8) TMI 257 - AT - Income Tax

Summary

Issues Involved:
1. Denial of deduction under section 80HHC on export of processed and dressed marble blocks.
2. Confirmation of disallowance under section 43B in respect of PF and ESI contributions deposited beyond due dates.
3. Confirmation of disallowance of sales commission expenses related to the earlier year.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 80HHC on Export of Processed and Dressed Marble Blocks:

The primary issue was the denial of deduction under section 80HHC for the export of processed and dressed marble blocks by the assessee. The assessee exported marble blocks worth Rs. 84,81,553 to a Canadian company and claimed a deduction under section 80HHC. The Assessing Officer (AO) noted discrepancies in the invoices and bills, particularly that the marble blocks were only dressed and not polished, as required by the Twelfth Schedule and Circular No. 693. The AO concluded that the assessee did not qualify for the deduction since the marble blocks were not polished. The CIT(A) upheld this decision.

The assessee argued that substantial value addition was made to the marble blocks through dressing and polishing, and that Circular No. 729, which applied to granite, should also apply to marble. The revenue countered that Circular No. 729 was specific to granite and did not extend to marble, which required both cutting and polishing as per Circular No. 693.

The Tribunal examined whether marble and granite could be treated the same under the law. It concluded that marble and granite are distinct types of rocks with different compositions and commercial values. The Tribunal held that Circular No. 729 applied only to granite and not to marble. Therefore, the requirement for both cutting and polishing as per Circular No. 693 remained applicable to marble.

The Tribunal also discussed the extent of polishing required, concluding that any level of polishing, whether making the marble smooth or glossy, would suffice for the deduction under section 80HHC. The assessee provided evidence, including a certificate from the importer, that the marble blocks were manually polished on one side. The Tribunal found the AO's investigation inadequate and accepted the assessee's claim that the marble blocks were polished.

Regarding value addition, the Tribunal emphasized that the significant increase in export value (from Rs. 41.74 lakhs to Rs. 84.81 lakhs) constituted high value addition, meeting the requirement for the deduction under section 80HHC. Consequently, the Tribunal directed the grant of the deduction.

2. Confirmation of Disallowance under Section 43B in Respect of PF and ESI Contributions:

The second issue pertained to the disallowance of PF and ESI contributions amounting to Rs. 4,71,415, which were deposited beyond the due dates under the respective Acts. The AO disallowed the claim under section 43B, and the CIT(A) upheld this decision.

The Tribunal noted that the issue was covered in favor of the assessee by the Special Bench Decision in Kwality Milk Foods Ltd. v. Asstt. CIT, which held that the amendment by the Finance Act, 2003, allowing deductions if payments were made before the due date of filing the return under section 139(1), was retrospective. Since the contributions were deposited before the due date of filing the return, the Tribunal allowed the deduction.

3. Confirmation of Disallowance of Sales Commission Expenses:

The third issue involved the disallowance of Rs. 44,685 towards sales commission expenses related to the earlier year. The AO disallowed the claim, and the CIT(A) upheld this decision.

The assessee argued that the expenditure was genuine and should be allowed since the tax rates in the preceding and current years were the same. However, the Tribunal emphasized that under the mercantile system of accounting, expenses are deductible when the liability is incurred, not when paid. Since the liability crystallized in the preceding year, the deduction could not be allowed in the current year. The Tribunal upheld the disallowance.

Conclusion:

The Tribunal partly allowed the appeal by granting the deduction under section 80HHC for the export of processed and dressed marble blocks and allowing the deduction for PF and ESI contributions. However, it upheld the disallowance of sales commission expenses related to the earlier year.