2012 (12) TMI 16 - AT - Income Tax

Deduction u/s 10AA - SEZ - appellant engaged in the business of manufacturing and export of jewellery - dis-allowance on ground of various objections - AY 08-09 - Held that - On first objection of AO that building was not ready for commencement of the production, it is observed that merely because some gate fitting was not done, it cannot be said that the building was not ready - second objection that the machine purchased is not adequate for manufacture of the jewellery it is observed that in the next year, the claim of the assessee was allowed by passing the assessment order u/s 143(3). Hence, if the same machineries were sufficient for effecting the export sale in A.Y.2009-2010, the claim of the assessee in the present year working of about six months cannot be doubted. Regarding third and fourth objection it is observed that it can not be said that merely because some electric installation for socket and PVC cable was done in March, 2008, commercial production had not started in August, 2007 - next objection that first electricity bill of the unit was received in the month of November, whereas the assessee has claimed export in the months of September and October it is observed that this is not the fact of the present case that there was a bill in August and October, 2007 also in which there was no power consumption and power consumption has started from November, 2007 only. When there is no bill for the months of August, September and October, 2007, it cannot be said that there was no power consumption during that period - Other objection are held to be invalid rejecting claim on ground that printer, AC, and steel safe was purchased after the first export bill. Since none of the objections raised by the AO is valid for rejecting the claim of the assessee for exemption u/s 10AA, particularly, when the same claim was allowed by the AO himself in the next year, deduction u/s 10AA is allowed in the present year. Addition u/s 68 - unexplained cash credit - capital introduced by partners - Held that - Issue is now fully and squarely covered in favour of the assessee by decision in case of CIT Vs. Pankaj Dyestuff Industries (2005 (7) TMI 601 - GUJARAT HIGH COURT) wherein it was held that the Revenue is at liberty to examine the issue in the hands of the partners, and if such partners are not able to satisfy regarding the source of investment, then the addition can be made in the hands of the partners, but no addition can be made in the hands of the firm in respect of introduction of capital by the partners. In view of aforesaid, addition is deleted.

Summary

Issues Involved:
1. Disallowance of deduction claimed under Section 10AA of the IT Act.
2. Addition of capital introduction by partners as unexplained cash credit.

Detailed Analysis:

1. Disallowance of Deduction Claimed under Section 10AA:

The primary issue in this appeal is the disallowance of a deduction amounting to Rs. 3,87,83,095/- claimed by the assessee under Section 10AA of the IT Act. The Assessing Officer (AO) scrutinized the documents related to the unit established at Surat SEZ, Gujarat, and observed several discrepancies indicating that the appellant was not in a position to manufacture the jewellery in its SEZ unit. The AO made several observations, including:

- The factory building was still under construction as of mid-September 2007.
- The machinery purchased was deemed inadequate for manufacturing.
- Furniture and other essential items were purchased after the claimed commencement of production.
- The electricity bill for the unit was received only in November 2007, despite claims of manufacturing activities in September and October.

The AO concluded that the assessee had not actually manufactured jewellery in the SEZ unit and had merely carried out trading activities to claim the special deduction under Section 10AA. Consequently, the AO rejected the deduction claim.

Upon appeal, the CIT(A) upheld the AO's decision, agreeing that the objections raised were valid. However, the assessee argued that the disallowance was without basis, providing detailed explanations and evidence to counter each of the AO's objections. The assessee highlighted that the factory building was completed before production started, the machinery purchased was sufficient for the production shown, and the commercial production had indeed commenced on 16th August 2007, as certified by the Development Commissioner of SEZ, Surat.

The Tribunal examined the objections raised by the AO and the explanations provided by the assessee. It found that:

- The civil works related to the outside gate did not affect the commencement of production.
- The machinery purchased was adequate, as evidenced by the AO allowing the same claim in the subsequent year without additional machinery.
- The purchase of furniture, fan, and other items after the commencement date did not impact the manufacturing process.
- The explanation regarding the electricity bill being issued in November due to meter reading was plausible.

The Tribunal concluded that none of the AO's objections were valid for rejecting the claim under Section 10AA. It noted that the same claim was allowed by the AO in the subsequent year, reinforcing the assessee's position. Consequently, the Tribunal directed that the claim under Section 10AA should be allowed.

2. Addition of Capital Introduction by Partners as Unexplained Cash Credit:

The additional ground raised by the assessee concerned the addition of Rs. 2,90,000/- on account of capital introduction by the partners, treated as unexplained cash credit by the AO. The assessee cited the judgment of the Hon'ble Gujarat High Court in the case of CIT Vs. Pankaj Dyestuff Industries, which held that the Revenue could examine the source of investment in the hands of the partners, but no addition could be made in the hands of the firm regarding the introduction of capital by the partners.

The Tribunal found that this issue was fully covered in favor of the assessee by the cited judgment. It noted that the amount was introduced by the partners towards their capital and, following the Gujarat High Court's judgment, deleted the addition. The additional ground was thus allowed.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the AO to allow the deduction under Section 10AA and deleting the addition of Rs. 2,90,000/- on account of capital introduction by the partners.