2016 (2) TMI 513 - AT - Income Tax

Exemption u/s 10B - Disallowance of foreign participation expenses - bifurcation between two units - Held that - What is to be seen is when the initial deposit was made, whether it was claimed as an expense in the profit and loss account or shown as an advance in the balance sheet. In the instant case as submitted by the ld. AR, the initial deposit was shown in the balance sheet as an advance in the account of Gem & Jewellery Export Promotion Council. Therefore it cannot be said conclusively that the said advance pertains to unit-I only. The assessee has not brought on record any specific documentation to substantiate that the foreign participation relates to the goods being manufactured at unit-I only. Merely by paying the initial deposit and showing the same as an advance in the balance sheet of unit- I, it cannot be said that the expenses pertains to unit-I only, as per the well laid down principle of the law that the entry in the books of accounts are not determinative of real nature of the transactions. Given that both the units are in the same business and 100% of its production is exported and there was no local sale in unit-I held by the AO, and in absence of any contrary facts brought to our notice by ld. AR, a more logical view which emerges is that the booking of stalls in the exhibition was done for both the units and the expenses should relate to both units. In light of above, we are of the considered view that the AO has rightly apportioned the foreign participation cancellation expenses in the hands of both the units and necessary additions/ disallowances have been made in the hands of the respective units - Decided against assessee Proportionate addition in hands of unit-II which is 100% EOU @ 25% of unverifiable purchases - Held that - We have gone through the submissions of the ld. AR as well as the order of the lower authorities. Given that the said disallowance relates to unverifiable purchases and the fact that the said disallowance is in hands of unit-II which is enjoying tax exemption u/s 10B of the Act. We do not like to interfere with the order of the ld. CIT(A). - Decided against assessee

Summary

Issues:
1. Disallowance of foreign participation expenses in unit-I and corresponding addition in unit-II.
2. Trading addition in unit-II based on unverified purchases.

Issue 1 - Disallowance of foreign participation expenses:
The appellant, engaged in the business of manufacturing and trading stones and jewelry, had two units - unit-I and unit-II. Unit-II was a 100% Export Oriented Unit eligible for exemption u/s 10B. The AO disallowed expenses related to foreign exhibition participation in unit-I, increasing exempt income in unit-II and decreasing taxable income in unit-I. The appellant contested the addition in unit-II. The appellant had paid for booth booking for an exhibition, later canceled due to business exigencies. The Tribunal noted that the initial deposit was shown as an advance in unit-I's balance sheet, indicating a lack of conclusive evidence that the expenses pertained only to unit-I. As both units were in the same business with 100% export, the expenses were deemed to relate to both units. The Tribunal upheld the AO's decision to apportion expenses between the units, dismissing the appeal.

Issue 2 - Trading addition based on unverified purchases:
The second issue concerned a proportionate addition in unit-II due to unverifiable purchases. The Tribunal reviewed the submissions and lower authorities' orders, noting the disallowance was in unit-II, enjoying tax exemption u/s 10B. Considering the nature of the disallowance and the unit's tax status, the Tribunal declined to interfere with the CIT(A)'s decision. Consequently, this ground of appeal was dismissed. Overall, the appellant's appeal was dismissed, with the order pronounced in open court on 13/01/2016.