2013 (11) TMI 274 - AT - Income Tax

Deduction u/s 10AA - manufacturing/production and export of handicraft - unit setup in SEZ - disallowance on the ground of goods traded and not manufactured by it as eligible articles. - income in respect of income received/accrued from DEPB / duty drawback (DDB) Held that - In the preceding assessment years 2007-08 and 2008-09, the deduction claimed by the assessee under section 10AA of the Act was allowed while passing the assessment orders under section 143(3) of the Act - In the instant case, nothing is brought on record to substantiate that there is any change in the facts of the present year vis- -vis to the earlier years - On the principle of consistency also, the claim of the assessee was allowable Also, reliance has been placed upon the judgment in the case of M/s. Suraj Exports India Sardar Shahar, Churu Vs. ITO, Churu 2013 (11) TMI 262 - ITAT JODHPUR - Deduction u/s 10AA allowed Decided against the Revenue.

Issues Involved:
1. Whether the CIT(A) erred in appreciating the facts and giving a finding that a new marketable item with substantial value addition came into existence.
2. Whether the CIT(A) erred in deleting the disallowance of the claim made under Section 10AA for goods traded and not manufactured.
3. Whether the CIT(A) erred in relying on facts and scrutiny assessment orders for previous years in allowing exemption under Section 10AA.
4. Whether the CIT(A) erred in relying upon various certificates and registrations obtained under different statutes.
5. Whether the CIT(A) erred in allowing exemption under Section 10AA for total profit based on labor and consumable expenses, ignoring the AO's finding that there was no manufacturing activity.
6. Whether the CIT(A) erred in not bringing on record any documentary evidence proving manufacturing activities as defined in relevant laws.
7. Whether the CIT(A) erred in relying on photographs without correlating them with specific processes and purchase/sale bills.
8. Whether the CIT(A) erred in relying on decisions of other ITAT benches without appreciating different facts.
9. Whether the CIT(A) erred in allowing deduction under Section 10AA for income received/accrued from DDB.
10. Whether the CIT(A) erred in not following the Supreme Court's decisions in similar cases.
11. Whether the CIT(A) erred in ignoring the similar expression used in Section 10AA and Section 80IA.
12. Whether the CIT(A) erred in giving a finding that Section 10BA provisions are similar to Section 80HHC.

Issue-wise Detailed Analysis:

1. Substantial Value Addition and New Marketable Item:
The CIT(A) observed that the assessee was engaged in the business of handicraft items and purchased raw materials, including VAT-exempted purchases. The CIT(A) noted that the AO presumed the assessee exported purchased items in the same form without any manufacturing process. However, the assessee provided illustrations with photographs showing that VAT-exempted items were unfinished handicraft items. The CIT(A) found that the assessee carried out various manufacturing processes, resulting in new marketable items with substantial value addition.

2. Deletion of Disallowance under Section 10AA:
The AO disallowed the claim under Section 10AA, stating that the assessee exported trading items, not manufactured goods. The CIT(A) disagreed, noting that the assessee's unit was in a Special Economic Zone (SEZ) and engaged in manufacturing activities. The CIT(A) emphasized that the assessee fulfilled all conditions for exemption under Section 10AA, supported by voluminous records and certifications from customs authorities.

3. Reliance on Previous Years' Scrutiny Assessments:
The CIT(A) relied on scrutiny assessments for previous years (2007-08 and 2008-09), where the AO had allowed the exemption under Section 10AA after verifying SEZ activities. The CIT(A) noted no change in the business activities of the assessee compared to earlier years, justifying the continued allowance of the exemption.

4. Certificates and Registrations:
The CIT(A) considered various certificates and registrations obtained by the assessee under different statutes, indicating the unit's recognition as a manufacturing entity. These included registrations with the District Industrial Centre, Chief Inspector of Factories, Export Promotion Council for Handicrafts, and others.

5. Total Profit Based on Labor and Consumable Expenses:
The CIT(A) observed that the assessee incurred significant expenses on labor, consumables, and other manufacturing-related costs. The CIT(A) found that the AO's restriction of the deduction to Rs. 53,87,127/- was unjustified, as the assessee's activities amounted to manufacturing, resulting in finished products with distinct names, characters, and uses.

6. Documentary Evidence of Manufacturing Activities:
The CIT(A) noted that the assessee provided detailed records, including purchase vouchers, export invoices, and manufacturing expenses, demonstrating the manufacturing processes carried out. The CIT(A) found the AO's claim of lack of documentary evidence unsubstantiated.

7. Reliance on Photographs:
The CIT(A) acknowledged the use of photographs to illustrate the transformation of raw materials into finished products. The CIT(A) found these photographs, along with other records, sufficient to establish the manufacturing activities of the assessee.

8. Decisions of Other ITAT Benches:
The CIT(A) referred to decisions of the ITAT Jaipur and Jodhpur benches, supporting the assessee's claim of manufacturing activities. The CIT(A) found these decisions relevant and applicable to the assessee's case.

9. Deduction for Income from DDB:
The AO disallowed the deduction for income from DDB, relying on the Supreme Court's decision in Liberty India. The CIT(A) allowed the deduction, following the ITAT's decision in the case of M/s. Suraj Exports India, which distinguished the facts from Liberty India and found the income eligible for deduction under Section 10AA.

10. Supreme Court's Decisions:
The CIT(A) considered the Supreme Court's decisions cited by the AO but found them not directly applicable to the assessee's case. The CIT(A) relied on relevant ITAT decisions and the specific facts of the assessee's activities.

11. Similar Expression in Sections 10AA and 80IA:
The CIT(A) addressed the AO's argument about the similar expression in Sections 10AA and 80IA, noting that the assessee's activities met the specific conditions of Section 10AA, justifying the exemption.

12. Comparison with Section 80HHC:
The CIT(A) found the provisions of Section 10BA more comparable to Section 80HHC than Section 80IA. The CIT(A) noted that the assessee's activities aligned with the conditions for exemption under Section 10AA, similar to those under Section 80HHC.

Conclusion:
The CIT(A) concluded that the assessee was engaged in manufacturing activities, transforming raw materials into finished products with substantial value addition. The CIT(A) found the AO's disallowance of the claim under Section 10AA unjustified and allowed the exemption, supported by detailed records, certifications, and relevant ITAT decisions. The appeal of the department was dismissed, upholding the CIT(A)'s order.

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