DCIT, Bellary V. B. Kumar Gowda, Sandur

ITA 1053/BANG/2012

• Counselvise Citation: 105321114 RSA 2012
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 31-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 17-08-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: BALAKRISHNAN
• Keywords: Capital asset; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH A, BANGALORE BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER ITA NOS.1053 & 1054(BANG) 2012 (ASSESSMENT YEARS : 2008-09 & 2009-10) THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-1 BELLARY APPELLANT VS SHRI B. KUMARA GOWDA, MINE OWNERS, BKG HOUSE, KB COLONY, SANDUR RESPOND ENT PAN NO.AFUPG1387B C.O.NO.39(BANG)/2013 (IN ITA NO.1053(BANG)/2012) (ASSESSMENT YEAR: 2008-09) SHRI B. KUMARA GOWDA, MINE OWNERS, BKG HOUSE, KB COLONY, SANDUR CROSS OBJECT OR PAN NO.AFUPG1387B VS THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-1 BELLARY RESPONDENT REVENUE BY : SHRI BALAKRISHNAN, JCIT ASSESSEE BY : SHRI TATAKRISHNA, ADVOCATE DATE OF HEARING : 31-07-2014 DATE OF PRONOUNCEMENT : 2 8-08-2014 O R D E R ITA NOS.1053 & 1054(BANG)2012 2 PER SHRI ABRAHAM P GEORGE, AM: APPEALS BY THE REVENUE ARE DIRECTED AGAINST ORDERS DATED 05-01- 2013 OF CIT(A), HUBLI FOR THE IMPUGNED ASSESSMENT Y EARS CROSS OBJECTION FILED BY THE ASSESSEE IS FOR ASSESSMENT YEAR 2008-0 9. APPEALS OF THE REVENUE ARE TAKEN UP FOR DISPOSAL FIRST. 2. GROUNDS TAKEN BY THE REVENUE FOR BOTH THE YEARS ARE SIMILAR EXCEPT FOR GROUND RELATING TO VALUATION OF CLOSING STOCK WHICH APPEAR ONLY IN ASSESSMENT YEAR 2008-09. 3. VIDE ITS GROUND 1 TO 5, GRIEVANCE RAISED BY THE REVENUE IS THAT THE CIT(A) DELETED THE DISALLOWANCE OF LEGAL FEE OF RS. 2,35,64,266/- FOR ASSESSMENT YEAR 2008-09 AND RS.98,11,890/- FOR ASSE SSMENT YEAR 2009- 10. 4. FACTS APROPOS THAT ASSESSEE HAD DEBITED LEGAL EX PENDITURE INCURRED IN DEFENDING CERTAIN WRIT PETITIONS FILED BY M/S JSW STEELS LTD AND M/S SATHAVAHANA ISPAT LTD., THROUGH WHICH THEY SOUGHT QUASHING OF GOVERNMENT NOTIFICATIONS GRANTING MINING LEASE TO T HE ASSESSEE. AO PUT THE ASSESSEE ON NOTICE THAT HE INTENDED TO DISALLOW THE CLAIM OF LEGAL EXPENDITURE. ACCORDING TO HIM, IT WAS CAPITAL IN NATURE. REPLY OF THE ASSESSEE WAS THAT THE LEGAL EXPENSES CLAIMED BY IT DID NOT RELATE TO GRANT OF LEASING OF MINING RIGHTS. ACCORDING TO THE ASSESS EE THE EXPENDITURE INCURRED WAS ONLY TO PROTECT THE LEASE WHICH WAS AL READY GIVEN TO IT BY THE GOVERNMENT. IT WAS ONLY DEFENDING THE CLAIM MADE BY THIRD PARTIES AND ITA NOS.1053 & 1054(BANG)2012 3 DID NOT IN ANY WAY CURE, COMPLETE OR PERFECT THE MI NING LEASE. THE ASSESSEE POINTED OUT THAT LEASE WAS GIVEN TO IT BY THE DEPARTMENT OF MINES AND GEOLOGY IN THE YEAR 2006. RELIANCE WAS PLACED BY THE ASSESSEE ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF D ALMIA JAIN & CO., LTD., VS CIT 81 ITR 754(SC). ASSESSEE ALSO BROUGHT TO T HE NOTICE OF THE AO THE RELIEF AND PRAYERS MADE BY THE PARTIES IN THEIR WRI TS. AS PER THE ASSESSEE IT WAS ONLY TO RESIST THE PROCEEDINGS THAT IT INCURRED LEGAL EXPENDITURE. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HON BLE APEX COURT IN THE CASE OF SREE MEENAKSHI MILLS LTD., VS CIT 63 ITR 20 7(SC). 5. HOWEVER, AO WAS NOT IMPRESSED BY THE ABOVE SUBMI SSIONS. ACCORDING TO HIM, LEGAL EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR PROTECTING THE SOURCE OF INCOME AND NOT FOR PROTECT ING OR DEFENDING THE BUSINESS INTEREST. ACCORDING TO HIM, LEGAL EXPENDIT URE WHICH WERE INCURRED FOR THE PURPOSE OF CURING, COMPLETING AND PERFECTIN G MINING LEASE GRANTED THROUGH LEASE DEED VIDE NO.ML2516 DATED 14-03-2006 HAD TO BE CONSTRUED AS A CAPITAL OUTGO. THE AO ALSO HELD FACTS OF THE TWO DECISIONS OF THE APEX COURT MENTIONED ABOVE, RELIED ON BY THE ASSESSEE TO BE AT VARIANCE WITH THE FACTS IN ASSESSEES CASE. HE, THUS, CONCLUDED THAT LEGAL EXPENDITURE INCURRED WAS PRIMARILY ATTRIBUTABLE TO CAPITAL FIEL D AND NOT BUSINESS INTEREST. PLACING RELIANCE ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF EMPIRE JUTE CO.,LTD VS CIT 124 ITR 1(SC) AN D THAT OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF HINDUSTAN GENERA L ELECTRICAL CORPN.LTD., 81 ITR 243(CAL.) THE AO HELD THAT EXPEN DITURE INCURRED BY THE ITA NOS.1053 & 1054(BANG)2012 4 ASSESSEE WAS NOT CORRELATABLE TO CARRYING OUT OR CO NDUCT OF ITS BUSINESS AND WAS NOT AN INTEGRAL PART OF ITS PROFIT EARNING PROCESS. AS PER THE AO IT WAS FOR ACQUISITION OF AN ASSET OF PERMANENT CHARAC TER. FURTHER, ACCORDING TO HIM, THE LITIGATIONS WERE STILL PENDING AND HAD NOT REACHED THE FINALITY. IN THIS VIEW OF THE MATTER, HE DISALLOWED THE CLAIM . 6. IN ITS APPEAL BEFORE THE CIT(A) ARGUMENT OF THE ASSESSEE WAS THAT LEGAL EXPENDITURE WAS NOT A CAPITAL OUTGO. ACCORDI NG TO IT, MINING OPERATION HAD STARTED IN THE YEAR 2006 ITSELF. M/S JSW STEEL LTD., AND M/S SATHAVANAHA ISPAT LTD., HAD FILED WRIT PETITIONS AG AINST THE LEASE GRANTED TO THE ASSESSEE. BY DEFENDING THESE SUITS ASSESSE E HAD NOT ACQUIRED ANY NEW MINING LEASE NOR PURCHASED ANY CAPITAL ASSET. LEARNED CIT(A) WAS APPRECIATIVE OF THESE CONTENTIONS. ACCORDING TO HI M, EVEN IF THERE WAS AN ADVANTAGE OF ENDURING NATURE UNLESS THE ADVANTAGE W AS IN THE CAPITAL FIELD EXPENDITURE COULD NOT BE DISALLOWED. IF THE ADVANT AGE CONSISTED OF FACILITATING BETTER CONDUCT OF ASSESSEES TRADING O PERATION, LEAVING THE FINANCIAL CAPITAL UNTOUCHED, THE OUTGO WOULD STILL BE IN THE REVENUE FIELD. AS PER THE LEARNED CIT(A) DECISION OF THE HONBLE A PEX COURT IN THE CASE OF EMPIRE JUTE CO.,LTD., HELPED THE ASSESSEE. LEARNED CIT(A) ALSO PLACED RELIANCE ON CIT VS MAHESHWARI DEVI JUTE MILLS LTD., 57 ITR 36(SC). LEARNED CIT(A) THUS, ALLOWED THE CLAIM OF THE ASSES SEE. 7. NOW BEFORE US, LEARNED DR STRONGLY ASSAILING THE ORDER OF THE LEARNED CIT(A) SUBMITTED THAT ASSESSEE WAS PERFECT ING ITS TITLE AND PROTECTING ITS SOURCE OF BUSINESS WHEN IT WAS DEFEN DING THE WRIT PETITIONS ITA NOS.1053 & 1054(BANG)2012 5 FILED BEFORE THE HONBLE HIGH COURT. THE LEGAL EX PENDITURE WAS FOR PROTECTING AND CURING THE MINING LEASE. HENCE THE OUTGO HAD TO BE TREATED AS CAPITAL EXPENDITURE. ACCORDING TO LEARNED DR, THE CIT(A)THEREFORE, FELL IN ERROR IN DELETING THE DISALLOWANCE. 8. PER CONTRA, LEARNED AR SUBMITTED THAT ASSESSEE W AS ONLY TRYING TO DEFEND ITS POSITION. IT WAS ONLY PROTECTING ITS R IGHTS, WHICH WAS ALREADY THERE AND NO NEW RIGHTS WERE CREATED. RELIANCE WA S ONCE AGAIN PLACED ON THE DECISION OF THE APEX COURT IN THE CASE OF DALMI A JAIN & CO., SUPRA. 9. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. THERE IS NO DISPUTE THAT EXPENDITURE INCURRED FOR D EFENDING WRIT PETITIONS FILED BY THE THIRD PARTIES IN WHICH THE GRANT OF MI NING LEASE TO THE ASSESSEE BY THE GOVERNMENT WAS CHALLENGED. IT IS ALSO NOT D ISPUTED THAT THE LEASE OF THE MINES WERE GRANTED TO THE ASSESSEE IN THE YEAR 2006, AND IT HAD STARTED COMMERCIAL PRODUCTION, FROM THAT YEAR ITSELF. THUS , IN OUR OPINION, ASSESSEEE WAS ONLY PROTECTING A RIGHT WHICH IT WAS ALREADY ENJOYING UNDER THE MINING LEASE. IT HAD A TURNOVER OF RS.41.30CR ORES IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2008-09 WITH A NET PROF IT OF RS.20.02 CRORES FROM MINING BUSINESS. THUS, THE ASSESSEE WAS ALREA DY EXPLOITING THE MINING LEASE AND DOING BUSINESS BY VIRTUE OF THE LE ASE. THE LITIGATION EXPENDITURE INCURRED BY THE ASSESSEE TO DEFEND THE SUITS DID NOT IN ANY WAY CREATE A NEW ASSET NOR HELP IN IMPROVING THE LE ASE IN SUCH A MANNER SO AS TO GIVE IT AN ADVANTAGE WHICH WAS IN THE CAPI TAL FIELD. THOUGH, THE LEARNED AO HAS MADE EVERY EFFORT TO DISTINGUISH THE JUDGMENT OF THE ITA NOS.1053 & 1054(BANG)2012 6 HONBLE APEX COURT IN THE CASE OF DALMIA JAIN & CO. ,LTD., RELIED BY THE ASSESSEE, WE ARE OF THE OPINION THAT THE SAID JUDGM ENT CLEARLY HELPS THE ASSESSEE. THERE ALSO THE ASSESSEE CONCERNED WAS RE SISTING A SUIT FOR PROTECTING ITS BUSINESS AND NOT WITH A VIEW GET A N EW LEASE. HONBLE APEX COURT IN THE CASE OF SREE MEENAKSHI MILL LTD., HAS CLEARLY HELD THAT TAXABILITY OF EXPENDITURE MUST DEPEND ON THE PURPOS E OF THE LEGAL PROCEEDING, IN RELATION TO THE BUSINESS AND CANNOT BE COMPUTED BY THE FINAL OUTCOME OF THE PROCEEDINGS. WE ARE THEREFORE , OF THE OPINION THAT THE CIT(A) WAS JUSTIFIED IN HOLDING THAT THE EXPENSES O F LITIGATION EXPENSES MADE BY THE AO. GROUND NO.1 TO 5 OF THE REVENUE ST ANDS DISMISSED. 10. VIDE ITS GROUNDS 6 & 7 REVENUE IS AGGRIEVED THA T CIT(A) ALLOWED A CLAIM OF MINES DEVELOPMENT EXPENDITURE RS.68,37,553 /- FOR AY: 2008-09 AND RS.1,36,75,066/- FOR AY: 2009-10, WHICH WERE DI SALLOWED BY THE AO. 11. FACTS APROPOS THAT THE ASSESSEE HAD CLAIMED THE ABOVE AMOUNTS AS NET PRESENT VALUE (NPV) PAID TO FOREST DEPARTMEN T FOR AFFORESTATION OF LAND AND FOR EXTRACTING IRON ORE. ASSESSEE HAD CLA IMED1/10 TH OF SUCH EXPENDITURE IN ITS P&L ACCOUNT CARRYING THE BALANCE IN ITS BALANCE SHEET FOR WRITE OFF IN SUBSEQUENT YEARS. AO REQUIRED THE ASS ESSEE TO EXPLAIN AS WHY ITS CLAIM SHOULD BE ALLOWED. REPLY OF THE ASSESSEE WAS THAT IT WAS ELIGIBLE FOR SUCH CLAIM U/S 35E OF THE IT ACT, 1961. AS PER THE ASSESSEE THE NPV PAID TO FOREST DEPARTMENT WAS IN THE NATURE OF DEFE RRED REVENUE EXPENDITURE AND HENCE, 1/10 TH OF SUCH EXPENDITURE COULD BE CLAIMED BY IT EVERY YEAR. HOWEVER, THE AO DID NOT ACCEPT THIS EXPLANATION. ACCORDING ITA NOS.1053 & 1054(BANG)2012 7 TO HIM, THE PAYMENT MADE TO FOREST DEPARTMENT WAS P RIOR TO COMMENCEMENT OF MINING. IT WAS A PRE-CONDITION FOR UNDERTAKING MINING ACTIVITY. AS PER THE AO FOR A CLAIM TO BE MADE U/S 35E OF THE ACT THE EXPENDITURE INCURRED NECESSARILY HAD TO IN THE OPER ATIONS RELATING TO PROSPECTING OF ANY MINERAL. HERE, THE PAYMENT OF NPV WAS A PRE-CONDITION FOR GETTING THE MINING LICENSE. THE AO ALSO NOTED THAT THE ASSESSEE HAD FAILED TO FURNISH THE AUDIT REPORT, AS PRESCRIBED A UDIT U/S 35E(6) OF THE ACT. HE THEREFORE, DISALLOWED THE CLAIM. 12. BEFORE THE CIT(A) ARGUMENT OF THE ASSESSEE WAS THAT THE PAYMENT TO DEPARTMENT OF FOREST WAS MADE IN THE YEAR 2004 A ND IT HAD NOT RESULTED IN ACQUISITION OF ANY CAPITAL ASSET. IN THE GROUN DS RAISED BEFORE THE CIT(A) ASSESSEE HAD ASSAILED THE DISALLOWANCE OF CLAIM U/S 35E OF THE IT ACT, 1961 ALONE. HOWEVER, IT SEEMS IT HAD ALSO ALTERNAT IVELY PLEADED FOR ALLOWING THE CLAIM U/S 37(1) AS WELL. FOR THIS, AS SESSEE RELIED ON A DECISION OF THE KOLKATA BENCH OF THE TRIBUNAL IN THE CASE OF RUNGTA SONS (P)LTD., VS DEPT, OF IT IN ITA NO.933/KOL/2009 DATED 05-08-2 011. AS PER THE ASSESSEE IN THE ABOVE DECISION, IT WAS HELD BY THE SAID BENCH THAT THE NPV PAYMENT TO FOREST DEPARTMENT WAS ALLOWABLE AS BUSIN ESS EXPENDITURE. LEARNED CIT(A) ACCEPTING THE PLEA OF THE ASSESSEE A LLOWED THE CLAIM. 13. NOW BEFORE US, LEARNED DR STRONGLY ASSAILING TH E ORDER OF THE CIT(A) SUBMITTED THAT THE ASSESSEES CLAIM BEFORE T HE AO WAS UNDER SECTION 35E OF THE IT ACT, 1961 AND NOT UNDER SECTION 37(1) OF THE IT ACT, 1961. IT HAD NEVER MADE A CLAIM BEFORE THE AO THAT THE EXPEN DITURE WAS ALLOWABLE ITA NOS.1053 & 1054(BANG)2012 8 AT ONE GO. EVEN IF IT WAS SO ALLOWABLE IT SHOULD HAVE MADE THE CLAIM IN THE YEAR IN WHICH IT HAD PAID THE AMOUNT AND NOT IN A GRADATED MANNER IN A SUBSEQUENT YEAR. BY MAKING A 1/10 TH CLAIM, ASSESSEE HAD ITSELF APPLIED SEC.35E. LEARNED CIT(A)FELL IN ERROR WHEN HE ALLOW ED THE CLAIM RELYING ON SEC.37(1) OF THE IT ACT, 1961. 14. PER CONTRA, LEARNED AR SUBMITTED THAT THE CIT(A ) WAS JUSTIFIED IN APPLYING SEC.37(1). ACCORDING TO HIM, THE NPV WAS PAID FOR AFFORESTATION, SINCE STATE WAS DEPRIVED OF LARGE TRACTS OF FOREST LAND THROUGH THE MINING ACTIVITY. THAT NPV PAID TO THE FOREST DEPARTMENT WA S AN ALLOWABLE EXPENDITURE HAS BEEN ACCEPTED BY THE KOLKATA TRIBUN AL IN THE CASE OF RUNGTA SONS (P) LTD., SUPRA. THUS, ACCORDING TO HI M, THE CIT(A) WAS JUSTIFIED IN ALLOWING THE CLAIM. 15. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT THE NPV PAYMENT WAS MADE B Y THE ASSESSEE MUCH PRIOR TO THE RELEVANT PREVIOUS YEAR. CLAIM OF THE ASSESSEE BEFORE THE AO WAS U/S 35E OF THE ACT. THIS IS CLEAR FROM THE FAC T THAT IT HAD PREFERRED TO STAKE A CLAIM FOR ONLY 1/10 TH OF THE TOTAL EXPENDITURE INCURRED BY IT ON NPV. IN THE GROUNDS RAISED BY THE ASSESSEE BEFORE THE CI T(A), ASSESSEE HAD NOT MADE ANY ALTERNATIVE CLAIM U/S 37(1) OF THE IT ACT, 1961. HOWEVER, IN PARA-SEVEN OF HIS ORDER, LEARNED CIT(A) DOES MENTIO N THAT THE ASSESSEE HAD CLAIMED THE OUT GO TO BE REVENUE EXPENDITURE ALLOWA BLE U/S 37(1) OF THE ACT. HOWEVER, WE FIND THAT LEARNED CIT(A) HAD NOT LOOKED INTO THE ASPECT WHETHER EXPENDITURE HAVING BEEN INCURRED LONG BACK, COULD BE ALLOWED ON ITA NOS.1053 & 1054(BANG)2012 9 A PIECEMEAL BASIS IN SUBSEQUENT YEARS. THOUGH, HE HAS EXTENSIVELY QUOTED FROM KOLKATA TRIBUNAL IN THE CASE OF RUNGTA SONS (P )LTD., CITED SUPRA, HE HAS NOT IN ANY WAY DECIDED THE ISSUE INDEPENDENTLY. HE HAS SIMPLY MENTIONED THAT THE ASSESSEES GROUND OF APPEAL WAS ALLOWABLE BASED ON THE FACTS OF THE CASE, CONTENTS OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSIONS FURNISHED BY THE ASSESSEE. HE HAS ALS O NOT DISCUSSED AS TO HOW THE ASSESSEE COULD HAVE RAISED AN ALTERNATIVE C LAIM BEFORE HIM, WHEN ALL ALONG HE HAD MADE THE CLAIM BEFORE THE AO U/S 3 5E OF THE ACT. WE ARE THEREFORE, OF THE OPINION, THE MATTER NEEDS A FRESH LOOK BY THE CIT(A). WE THEREFORE, SET ASIDE THE ORDER OF THE LEARNED CIT(A ) ON THIS ASPECT AND REMIT THE ISSUE BACK TO THE LEARNED CT(A) FOR DISPOSAL IN ACCORDANCE WITH LAW. 16. VIDE ITS GROUND 8 TO 10 WHICH APPEAR IN APPEAL FOR THE ASSESSMENT YEAR 2008-09, GRIEVANCE RAISED BY THE R EVENUE IS THAT AN ADDITION OF RS.98,11,890/- MADE BY THE AO FOR DIFF ERENCE IN VALUATION OF CLOSING STOCK WAS DELETED BY THE LEARNED CIT(A). A LONG WITH THIS WE ARE ALSO CONSIDERING THE CROSS APPEAL OF THE ASSESSEE WHICH ALSO DWELLS ON THE SAME ISSUE. 17. FACTS APROPOS THIS ISSUE ARE THAT THE CLOSING S TOCK OF IRON ORE AS PER THE BOOKS OF ACCOUNTS WAS 40,596 MT. HOWEVER, THE CLOSING STOCK AS PER THE RETURN FILED BY THE ASSESSEE BEFORE THE DIR ECTOR OF MINES & GEOLOGY WAS 45,728 MT. THERE WAS A DIFFERENCE OF 5132 MT. EXPLANATION OF THE ASSESSEE WAS SOUGHT BY THE AO. ASSESSEE STATED THA T THE DISPATCH PARTICULARS WERE APPROXIMATELY MENTIONED IN THE RET URNS FILED BEFORE THE ITA NOS.1053 & 1054(BANG)2012 10 DIRECTOR OF MINES & GEOLOGY. AS PER THE ASSESSEE T HE RETURNS FILED BEFORE IBM ALONE COULD BE CONSIDERED AS FINAL. 18. THE AO ALSO SOUGHT DETAILS OF THE VALUATION OF CLOSING STOCK. DETAILS FURNISHED BY THE ASSESSEE READ AS UNDER; QUANTITY(MT) COST PER MT AMOUNT(RS.) LUMPS PROCESSED 5000 350 17,50,000 LUMPS UNPROCESSED 6304 50 3,15,000 FINES PROCESSED 15000 350 52,50,000 UNPROCESSED 14292 50 7.14,600 TOTAL 40596 80,29,800 ASSESSEE HAD VALUED CLOSING STOCK AT RS.350 PER MT, FOR PROCESSED LUMPS AND PROCESSED FINES WHEREAS FOR THE UNPROCESSED LUM PS AND FINES VALUATION WAS MADE ON AT RS.50/- PER MT. THE AO W AS OF THE OPINION, THAT THE COST OF PRODUCTION WORKED OUT BY THE ASSES SEE AT RS.350/-PER MT WAS INCORRECT. HE RE-WORKED THE COST OF PRODUCTION AND ARRIVED AT A COST OF RS.390/PER MT CONSIDERING AFFORESTATION EXPENSES, M INES OFFICE EXPENSES, ROAD MAINTENANCE CHARGES, REPAIRS AND MAINTENANCE E XPENSES, ROAD TRANSPORTATION EXPENSES AND LOADING CHARGES, AS PAR T OF THE COST. AO SUBSTITUTED THE RATE OF RS.350/- PER MT WITH RS.390 /PER MT. AO ALSO REJECTED THE CLAIM OF THE ASSESSEE THAT THERE WERE ANY STOCK WHICH WAS OF SUB-STANDARD GRADE, NOT MARKETABLE. ACCORDING TO T HE AO, THE IBM REPORTS ITA NOS.1053 & 1054(BANG)2012 11 REFLECTED THE CLOSING STOCK AS OF A GRADE BETWEEN 6 2% TO 65% FERROUS CONTENT. THUS, HE REJECTED THE CLOSING STOCK QUAN TITY FURNISHED BY THE ASSESSEE AND SUBSTITUTED IT WITH THE CLOSING STOCK QUANTIFY SHOWN BY THE ASSESSEE IN ITS RETURN FILED BEFORE THE DIRECTOR OF MINES AND GEOLOGY. THEREAFTER, HE APPLIED THE RATE OF RS.390/- PER MT FOR ARRIVING AT THE CLOSING STOCK VALUE OF RS.98,04,120/- DISREGARDING THE CLAIM OF ANY SUBSTANDARD STOCK. 19. IN ITS APPEAL BEFORE THE CIT(A), THE ASSESSEE A SSAILED THE ADDITION IN CLOSING STOCK. ACCORDING TO THE ASSESSEE IT WAS CONSISTENTLY FOLLOWING A METHOD BY WHICH SUB-GRADE IRON ORE WAS VALUED AT A LOWER COST SINCE IT REQUIRED SUBSTANTIAL EXPENDITURE FOR MAKING IT SELL ABLE. WITHOUT ANY REASON AO HAD DISTURBED THE CONSIST METHOD FOLLOWED BY IT. FURTHER, AS PER THE ASSESSEE THE AO HAD DISTURBED THE WORKING O F THE COST OF PRODUCTION. HE HAD CONSIDERED AFFORESTATION EXPEND ITURE, MINES OFFICE EXPENSES, REPAIRS AND MAINTENANCE, ROAD MAINTENANCE , PLOT TRANSPORT CHARGES, SORTING & LOADING CHARGES, AS PART OF DIRE CT COST. ACCORDING TO THE ASSESSEE SUCH EXPENDITURE WERE INDIRECT COSTS NOT C ONNECTED WITH PRODUCTION OF IRON ORE. FURTHER, ACCORDING TO IT, VALUING SUB-GRADE AND FINISHED ORE AT THE SAME COST WAS NOT FAIR. RELIAN CE WAS PLACED ON JUDGMENT IN THE CASE OF HON. APEX COURT IN THE CASE OF BRITISH PAINTS INDIA LTD., 188 ITR 144. 20. LEARNED CIT(A) WAS PARTLY APPRECIATIVE OF THE A BOVE CONTENTIONS. ACCORDING TO HIM, ASSESEEE WAS FOLLOWING A CONSISTE NT METHOD OF VALUATION ITA NOS.1053 & 1054(BANG)2012 12 AND THE AO OUGHT NOT HAVE DISTURBED SUCH A METHOD. AS PER THE CIT(A) WHEN ASSESEE APPLIED SAME PRINCIPLES FOR VALUING OP ENING STOCK AND CLOSING STOCK AND THIS METHOD WAS APPLIED CONSISTE NTLY, THERE WAS NO REASON TO DISTURB SUCH METHOD. HE HELD THAT THERE WAS NO DEFECT IN THE METHOD FOLLOWED BY THE ASSESSEE. HOWEVER, ACCORDI NG TO HIM, VALUATION OF SUB-GRADE IRON ORE AT RS.50 PER MT WAS ABYSMALLY LO W. HE SUBSTITUTED THIS WITH RS.80/- PER TON. BUT FOR THIS, HE DELETE D THE ADDITION MADE BY THE AO. 21. NOW BEFORE US, REVENUE IS CHALLENGING THE DELET ION OF DISALLOWANCE, WHEREAS ASSESSEE IN ITS CROSS OBJECTI ON IS CHALLENGING THE ENHANCEMENT OF VALUE OF SUB-GRADE IRON ORE FROM RS. 50.PER TON TO RS.80 PER TON. ASSESSEE IS ALSO AGGRIEVED THAT LEARNED C IT(A) DID NOT ADDRESS THE ISSUE REGARDING DIFFERENCE IN QUANTITY OF STOCK. 22. LEARNED DR IS SUPPORT OF REVENUES GROUNDS SUBM ITTED THAT THERE WAS NO BASIS FOR THE ASSESSEE TO FIX RS.50/- PER MT AS AGAINST THE COST OF UNPROCESSED ORE, WHEN THERE WAS NO SUCH ORE AS PER ASSESSEES OWN RECORDS . ACCORDING TO HIM, THE CIT(A) HAD SIMPLY D ELETED THE ADDITIONS MADE BY THE AO EVEN THOUGH A PART OF THE ADDITION W AS FOR QUANTITY VARIATION IN CLOSING STOCK. WITHOUT ANY BASIS, HE HAD FIXED RS.80/- PER TON AS THE COST FOR SUB-GRADE IRON ORE AGAINST RS.50/- ESTIMATED BY THE ASSESSEE. IN THE RETURNS FILED BY THE ASSESSEE BEF ORE THE IBM ENTIRE STOCK WAS SHOWN AS IRON ORE AND LUMP WITH GRADING OF 60 T O 65% OF FERROUS CONTENT. ITA NOS.1053 & 1054(BANG)2012 13 23. PER CONTRA, AND IN SUPPORT OF ITS CROSS OBJECTI ON, LEARNED AR SUBMITTED THAT THE CITA) HAD FAILED TO ADDRESS ASSE SSEES GRIEVANCE IN FULL. ACCORDING TO HIM, HE HAD ENHANCED THE VALUE OF SUB STANDARD IRON ORE ARBITRARILY, WHEN ASSESSEE HAD CONSISTENTLY SHOWN R S.50-/ PER MT AS THE COST OF SUCH SUB-STANDARD IRON ORE. IN ANY CASE, A CCORDING TO HIM, THE CIT(A) FAILED TO GIVE A FINDING ON THE ALLEGED VARI ATION IN QUANTITY OF CLOSING STOCK. 24. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT UNPROCESSED LUMPS AND FINE S WERE VALUED BY THE ASSESSEE AT RS.50-/ PER MT, WHEREAS THE AO CONSIDER ED THE WHOLE OF THE STOCK AS PROCESSED AND VALUED IT AT RS.390/- PER MT . RATE OF RS.390/-PER MT WAS ARRIVED BY THE AO BY ADDING EXPENDITURE IN T HE NATURE OF AFFORESTATION EXPENSES, MINES OFFICE EXPENSES,, ROA D MAINTENANCE CHARGES, REPAIRS AND MAINTENANCE, PLOT TRANSPORTATION AND LO ADING CHARGES AS PART OF THE COST. THERE IS NOTHING ON RECORD TO SHOW H OW THE ASSESSEE HAD WORKED OUT THE VALUE OF RS.50/- PER MT FOR THE SUB- GRADE IRON ORE. ADDITION MADE BY THE AO WAS NOT ONLY ON ACCOUNT OF DIFFERENCE IN VALUATION BUT ALSO FOR DIFFERENCE IN QUANTITY. LEARNED CIT (A) DELETED THE WHOLE OF THE DISALLOWANCE EXCEPT FOR ENHANCING THE VALUE OF THE SUB-GRADE IRON ORE IN STOCK FROM 50/- PER MT TO RS.80/- PER MT. NO RE ASON HAS BEEN GIVEN BY HIM FOR ENHANCING THE VALUE AND NO FINDING HAS BEEN GIVEN AS TO WHETHER THERE INDEED WAS ANY SUBSTANDARD STOCK. HE HAS ALSO NOT ADDRESSED THE ISSUE REGARDING DIFFERENCE IN CLOSING STOCK QUANTIT Y, VIS--VIS WHAT WAS ITA NOS.1053 & 1054(BANG)2012 14 RETURNED BY THE ASSESSEE. IN OTHER WORDS, LEARNED CIT(A) IN OUR OPINION, HAS NOT PROPERLY ADJUDICATED THE ISSUE REGARDING TH E ADDITION MADE TO THE CLOSING STOCK. WE ARE THEREFORE, OF THE OPINION TH AT THE MATTER REQUIRES A FRESH LOOK BY THE CIT(A). HENCE, WE SET ASIDE THE ISSUE REGARDING VALUATION OF CLOSING STOCK BACK TO THE FILE OF THE CIT(A) FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. 25. IN THE RESULT, GROUND NO.8 TO 10 OF THE REVENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE ARE TREATED AS ALLO WED FOR STATISTICAL PURPOSES. TO SUMMARIZE THE RESULT, THE APPEAL OF THE REVENUE FOR BOTH THE ASSESSMENT YEARS ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES, WHEREAS THE CROSS OBJECTION OF THE ASSESSEE IS TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 28-08-2014. SD/- SD/ - (N.V.VASUDEVAN) (ABRAHAM P GEORGE) JUDICAL MEMBER AC C OUNTANT MEMBER BANGALORE: D A T E D : 28-08-2014 AM* COPY TO : 1 APPELLANT 2 RESPONDENT ITA NOS.1053 & 1054(BANG)2012 15 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE