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2011 (10) TMI 499 - AT - Income TaxDeduction u/s 10BA - denial on non fulfillment of conditions mentioned in clauses (a),(b),(c),(d)and (e) of Section 10BA(2) - assessee engaged in the business of manufacturing and export of wooden handicraft articles - Held that - It is undisputed that the appellant is not using any imported raw materials and mainly wood is used as a raw material - appellant is manufacturing eligible articles - commercially different article or thing is produced, hence said activity has to be treated as manufacturing activity - appellant would be treated as engaged in the manufacturing of articles, in respect of the purchases of semi finished goods from job-workers who manufacture goods under the supervision/control and as per the requirements and specifications of the appellant - mainly labour is used in the manufacturing - there are elements of innovation, imagination and creativity in the articles produced. Therefore, appellant has fulfilled the conditions of clause (a) of S. 10BA(2) Conditions of S10BA(2)(b) and (c) - Held that - Issue in hand, which is identical to the requirements of S80-IB(2)(i)and (ii) respectively, is directly covered in favour of the appellant by ITAT, in the appellant s own case for A.Y. 2005-06 Conditions of S10BA(2)(d) - Held that - Explanation (d) to S10BA requires the use of wood as the main raw material, which means that there is no prohibition for some use of the other materials (other than the wood) in the manufacturing/production of the eligible articles or things. It is also observed that none of those articles/goods was found to be made up of metal alone. Further, requirement of aforesaid clause is that 90% or more of the sales during the relevant previous year should be by way of exports of the eligible articles or things and not the sale proceeds received in convertible foreign exchange during that year. Therefore, C&F expenses related to the forwarding of goods in India upto the sea port were to be included in the export turnover, thereby fulfilling requirement of 90% of export sales. Thus it is held that the appellant fulfilled the conditions of Sec 10BA(2)(a),(b),(c)&(d) hence, the appellant was entitled to the claimed deduction u/s 10BA - Decided in favor of assessee. Trading addition - rejection of books of account - Held that - Upholding the order of CIT(A) in holding that AO was fully justified in rejecting the appellant s books of account u/s 145(3) and applying the GP rate of 17.20%. However, AO was not justified in estimating the sales without bringing any adverse material/evidence on record, indicating any out of books sale by the appellant. Therefore, trading addition is confirmed to the extent of Rs. 24,11,395/-, against the trading addition of Rs. 28,24,170/- made by the AO. Dis-allowance u/s 43A(3) - Held that - Firstly, amended provisions of S40A(3) were not applicable in the appellant s case in the A.Y. 2006-07, under consideration of this appeal. Secondly, when the GP rate has been estimated in this case (which has been upheld ), no separate addition is called for u/s 40A(3) in respect of any manufacturing/trading expenses - Decided against the Revenue.
Issues Involved:
1. Deduction under Section 10BA. 2. Trading addition. 3. Disallowance under Section 40A(3). Issue-wise Detailed Analysis: 1. Deduction under Section 10BA: - Facts: The assessee, engaged in manufacturing and exporting wooden handicraft articles, claimed a deduction of Rs. 62,72,439/- under Section 10BA. The AO disallowed the deduction, arguing that the assessee did not fulfill the conditions of Section 10BA(2). - AO's Reasons for Disallowance: - Clause (a): The AO contended that the assessee used imported raw materials, purchased finished goods, and used power-run machinery extensively, which disqualified the goods from being considered handmade or of artistic value. - Clause (b): The AO argued that the business was an extension of an old business (M/s Indian Art Palace) and not a new undertaking. - Clause (c): The AO claimed that the assessee used old machinery from the previous business. - Clause (d): The AO stated that less than 90% of sales were from exports of eligible articles, as many exported items were made of iron, not wood. - CIT(A) Findings: The CIT(A) allowed the deduction, noting that: - The assessee mainly used wood as raw material and performed various manufacturing processes to produce commercially different articles. - The use of machinery was minimal, and the majority of the work was manual. - The business was not formed by splitting or reconstructing an existing business. - The assessee's export sales constituted more than 90% of total sales. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, confirming that the assessee met all the conditions under Section 10BA(2) and was entitled to the deduction. 2. Trading Addition: - Facts: The AO found defects in the assessee's books of account, such as the absence of a stock register and day-to-day manufacturing records. Consequently, the AO applied a GP rate of 17.20% and made a trading addition of Rs. 28,24,170/-. - CIT(A) Findings: The CIT(A) confirmed the rejection of books under Section 145(3) but reduced the trading addition to Rs. 24,11,395/-, noting that the AO's estimation of sales was unjustified without evidence of out-of-books sales. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, confirming the reduced trading addition and the consequential adjustment to the deduction under Section 10BA. 3. Disallowance under Section 40A(3): - Facts: The AO disallowed 20% of certain cash payments made by the assessee, arguing that they violated Section 40A(3). - CIT(A) Findings: The CIT(A) deleted the disallowance, noting that no single payment exceeded Rs. 20,000/- and that the amended provisions of Section 40A(3) were not applicable for the assessment year in question. Additionally, since the GP rate was estimated, no separate addition under Section 40A(3) was warranted. - Tribunal's Decision: The Tribunal confirmed the CIT(A)'s findings, upholding the deletion of the disallowance for both assessment years. Conclusion: The Tribunal dismissed the department's appeals, confirming the CIT(A)'s decisions on all issues. The assessee was entitled to the deduction under Section 10BA, the trading addition was appropriately reduced, and the disallowance under Section 40A(3) was correctly deleted.
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