Case Law Details
Trimex Sands Pvt. Vs PCIT (ITAT Chennai)
Introduction: The Income Tax Appellate Tribunal (ITAT) in Chennai recently delivered a landmark ruling in the case of Trimex Sands Pvt. Ltd. Vs Principal Commissioner of Income Tax (PCIT). The crux of the judgment hinges on the classification of “extraction of minerals from beach sand” as a manufacturing process under section 2(29BA) of the Income Tax Act. The tribunal has thereby permitted income tax deductions for the said activity. This article offers a comprehensive analysis of this significant legal development.
Controversy Surrounding Jurisdiction Under Section 263: Trimex Sands Pvt. Ltd. contended that the PCIT failed to assume valid jurisdiction under section 263 of the Income Tax Act. They argued that various judicial decisions have held the same and also questioned the lack of detailed reasoning from PCIT’s side.
The Debate on “Manufacturing” and “Production”: The core issue revolved around whether the extraction of minerals from beach sand should be considered a “manufacturing” process. The PCIT contended that Trimex Sands Pvt. Ltd. did not engage in manufacturing, as defined by section 2(29BA). However, the assessee argued that the term “production” is wider and that their activities did indeed result in a new and distinct product, fulfilling the criteria for a manufacturing process.
Additional Depreciation Under Section 32(1)(ii): Both the parties had a conflicting interpretation of additional depreciation under Section 32(1)(ii). The PCIT insisted that additional depreciation could only be applicable from AY 2016-17, an interpretation disputed by the assessee.
Disallowance Under Section 14A: The ITAT found that since the assessee hadn’t earned any exempt income, disallowance under section 14A would not be applicable. This aligned with the ruling in the case of Chettinad Logistics P Ltd.
ITAT’s Final Verdict: The ITAT ruled in favor of Trimex Sands Pvt. Ltd. The judgment laid emphasis on the definition of “manufacturing” under section 2(29BA) and clarified that the extraction of minerals from beach sand qualifies as a manufacturing process. Hence, the assessment order was not erroneous or prejudicial to the interest of the revenue.
Conclusion: The ITAT Chennai’s decision in the Trimex Sands Pvt. Ltd. Vs PCIT case has set a precedent by classifying mineral extraction from beach sand as a manufacturing process, thereby allowing income tax deductions. This is an important ruling that could have far-reaching implications, particularly for companies engaged in similar activities. It also clarifies several key points of law, making it a landmark case in the realm of income tax jurisprudence.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. By way of this appeal, the assessee assails the invocation of revisionary jurisdiction u/s 263 as exercised by Ld. Pr. Commissioner of Income Tax, Chennai-3 (Pr. CIT) vide impugned order dated 31-03-2021 in the matter of an assessment framed by Ld. AO u/s.143(3) of the Act on 28-1 2-2017. The grounds taken by the assessee are as under:
1) The order of the Principal Commissioner of income Tax Chennai 3 passed order u/s.263of the ACT is contrary to the law facts of case and material on the record.
2) The PCIT failed to assume valid jurisdiction under section 263 of Income tax ACT as held by the various judicial decisions.
2.2. The PCIT ought to have detailed the reasons as to how the decisions relied by the appellant company are distinguishable.
3. The PCIT erred in not appreciating that the word production appearing in sec. 32AC has a wider connotation in comparison to “manufacturer”
3.2. The PCIT failed to appreciate that any activity which brings a commercially a new product into existence constitute production.
3.3. The PCIT erred is not considering the appellant submission that the issue with regard to additional depreciation has already been decided by the Jurisdictional High Court in favour of the appellant and that the jurisdictional High Court ruling is binding.
4. The PCIT has erred in not following the Jurisdictional High Court decision in the case of Chettinad Logistics P Ltd. wherein their Lordships have held that the sec 14A cannot be involved where no exempt income was earned in the relevant year especially when the SLP filed by the department was dismissed.
5. The PClT failed to appreciate that the issues on which the notice u/s.263 was issued have already been decided against the department and in the favour of the assessee and hence that the PCIT’s opinion that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue has no foot to stand.
2. The Registry has noted delay of 39 days in the appeal which stand condoned in the light of the fact that that the time available to prefer the appeal fall within the Lockdown situation arising out of Covid-19 Pandemic. The Ld. AR advanced arguments supporting the case of the assessee which has been controverted by Ld. Sr. DR. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.
3 .Upon perusal of impugned order, it could be seen that the assessment is subjected to revision on three issues viz. (i) claim of deduction u/s 32AC; (ii) claim of additional depreciation u/s 32(1)(ii); & (iii) Disallowance u/s 14A.
4. On the issue of claim of deduction u/s 32AC, the Ld. Pr. CIT observed that the assessee was only extracting / separating minerals such as granite, limenite, rutile, zircon, monazite etc. in its original form from mineral sand available in certain beaches. It was noted that the aforesaid minerals were extracted by the assessee from the sand and thereafter, plain sand was dumped back in to beaches. The assessee thus does not manufacture any items and the stated extraction process do not fit into the definition of ‘manufacturing’ in terms of sec 2(29BA). Thus, investment allowance claimed u/s 33AC for Rs. 612.61 Lacs was required to be withdrawn.
Regarding additional depreciation, the same was claimed for additions made in second-half of AY 2014-1 5. The Ld. Pr. CIT held that since the proviso to Sec 32(1)(ii) was applicable only from AY 2016-17, the aforesaid claim for Rs.223.30 Lacs was required to be withdrawn.
On the issue of disallowance u/s 14A, it was observed that the assessee had made Investment which would attract disallowance u/s 14A for Rs.44.59 Lacs but Ld. AO failed to consider the same while completing the assessment. Accordingly, the assessee was put to show cause notice.
5. The assessee assailed the revision on the ground that the definition of manufacturing u/s 2(29BA) include ‘production’. This term, as per the decision of Hon’ble Supreme Court in CIT vs. Sesa Goa Ltd. (271 ITR 331), is much wider in its scope. Anything that results from any production process or as a result of effort of human activity, the same can be regarded as production. Reliance was placed on many other decisions to support the submissions. Finally, the assessee justified the aforesaid claim of deduction u/s 32AC.
On the issue of additional depreciation, the assessee submitted that the intention of the statutory provisions was always to incentivize the investment in plant and machinery in the manufacturing and power sector. Reliance was placed on various decisions including the decision of Hon’ble High Court of Madras in the case of CIT vs. T.P. Textiles Private Limited (79 Taxmann.com 411), wherein the balance additional depreciation was allowed for AY 2011-12.
On the issue of disallowance u/s 14A, the assessee relied in various decisions to submit that in the absence of any exempt income, the provisions of Sec.14A could not be invoked.
6. However, Ld. Pr. CIT distinguished the case of Sesa Goa Ltd. (supra) on the ground that in that case, the assessee was extracting iron ore whereas in the present case, the assessee was merely extracting minerals from beach sand. Pertinently, in the original return of income, the assessee made claim u/s 35(2AB) but withdrew the same which would lead to conclusion that assessee conceded that it was not fulfilling the conditions under those provisions. The Ld. AO should have verified the claim made u/s 32AC. Further there was regrouping of asset under plant and machinery. The AO did not examine whether the assets were eligible assets u/s 32AC or not. The assessment order failed to verify the same and the claim was allowed without making requisite enquiries which call for revision in terms of Explanation 2 to Sec. 263(1). The Ld. Pr.CIT further held that third proviso to sec 32(1)(ii) would apply only from AY 2016-17. The Ld. AO was accordingly directed to verify the same.
Rejecting disallowance u/s 14A, Ld. AO was directed to re-examine the same. Aggrieved as aforesaid, the assessee is in further appeal before us.
7. We find that the assessee being resident corporate assessee is stated to be engaged in certain manufacturing activities. Upon perusal of assessment order dated 28-12-2017, it could be seen that during the course of assessment proceedings, various details were called by Ld. AO from the assessee. After examining these details, Ld. AO framed assessment after making certain additions in the hands of the assessee including disallowance u/s 35(2AB), donations paid by the assessee and CSR expenditure incurred by the assessee. This order is subjected to revision by revisionary authority on the ground that impugned issues were not considered by Ld. AO during the course of assessment proceedings.
8. So far as the disallowance u/s 14A is concerned, the undisputed position that emerges is that the assessee has not earned any exempt income during this year. In such a case, no disallowance u/s 14A is called for in terms of binding decision of Hon’ble High Court of Madras in Chettinad Logistics Ltd. (80 Taxmann.com 221). So far as the issue of additional depreciation is concerned, we find that ratio of decision of Hon’ble High Court of Madras in T.P. Textiles P. Ltd. (supra) would apply wherein similar additional depreciation has been allowed for AY 2011-12. Therefore, the assessment order could not be termed as erroneous or prejudicial to the interest of revenue on both these scores.
9. So far as the assessee’s eligibility to claim deduction u/s 32AC is concerned, we find that this issue is covered in assessee’s favor by the decision of co-ordinate bench of this Tribunal in DCIT vs. M/s Indian Ocean Garnet Sand Company (ITA NO 1271/Mds/2016 dated 26/10/2017). In that case, the assessee was engaged in similar activity of separation of garnet sand from beach sand and claimed the same to be manufacturing process. The bench, relying on the cited decision of Apex Court in Sesa Goa Ltd. (supra), held that this process is one of manufacturing. We find that the term ‘manufacture’ as defined in Sec. 2(29BA) means a change in a non-living physical object or article or thing resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. We find that the extraction of minerals from beach sand involve change in non-living physical object / article into a new and distinct object / article having different name and use. Thus, the same would amount to manufacture. Respectfully following the ratio laid in cited case laws, we would hold that the activities carried out by the assessee amount to manufacture and the claim was in order. Therefore, no interference is called for in the assessment order, on this issue also. This being the case, the revision of the order fails on merits. Accordingly, by quashing the same, we allow the appeal of the assessee.
10. The appeal stands allowed in terms of our above order.
Order pronounced on 7thAugust, 2023
