2017 (8) TMI 562 - AT - Income Tax

Exemption u/s 10A - reconstruction of the existing unit or new unit - scope of manufacturing - splitting up or reconstruction of an existing business for the purpose of section 10A - Assessee is manufacturer and exporter of jewellery - proof of purchases - Held that - As per the condition of the allotment of plot for establishing the industry at SEZ, Sitapura, Jaipur, the assessee to export the assessee s products and the unit is to be achieve positive net foreign exchange earner every year. This is evident from terms and conditions No. 6 of RIICO allotment letter, which is placed at page No. 85 of the paper book All the narrations in the bills support the contention of the assessee that the assessee has purchased uncut, unpolished precious and semi precious stones and also unmounted silver and gold jewellery. The assessee has mounted the semi precious and precious stones in the silver and gold jewellery and then polished and made it marketable, then exported the same from the SEZ unit, thus, the revenue s claim that the assessee was only trading in the goods, is not factually correct. The statements taken by the revenue of two of the suppliers were never confronted to the assessee. No opportunity to cross examine these persons were provided. Further as stated in the above part of the order, the purchase bills of Tulsi Jewellers itself mentioned that the assessee has purchased unmounted, unpolished jewelery. The sales bill also suggest that the assessee has sold cut and polished semi precious stones, gold jewellery setted with diamond and precious stones, silver jewellery beads with diamond and cut and polished semi precious stones. Further there was no carry forward stock from any old firm, the entire input and out coming stock was new, therefore, it cannot be said that this unit was out of the reconstruction of the existing unit. Considering all these factual aspects, the assessee deserves for benefit of Section 10A of the Act. - Decided in favour of assessee.

Summary

Issues:
- Denial of exemption under section 10A of the Income Tax Act, 1961
- Assessment of manufacturing and export activities for exemption eligibility

Analysis:
1. The appeal concerns the denial of exemption under section 10A of the Income Tax Act, 1961, by the Assessing Officer and the subsequent affirmation of this decision by the ld CIT(A). The appellant, engaged in manufacturing and exporting jewelry, claimed exemption for the A.Y. 2010-11, but it was disallowed. The primary contention revolved around the initiation of manufacturing activities in a new unit situated in a Special Economic Zone (SEZ) and the eligibility for exemption under section 10A.

2. The appellant argued that it had transitioned from a trading business to manufacturing jewelry with precious stones in the SEZ. The appellant emphasized fulfilling all conditions required for claiming exemption under section 10A, asserting that the manufacturing unit was operational during the relevant assessment year. The appellant presented evidence of manufacturing activities, export sales, and compliance with SEZ regulations to support its claim for exemption.

3. The appellant highlighted the procedural approvals obtained for establishing the new manufacturing unit in the SEZ, emphasizing the distinct nature of the manufacturing process involving raw materials like unmounted jewelry and rough semi-precious stones. The appellant disputed the authorities' characterization of its activities as trading, presenting bills and invoices demonstrating the purchase of raw materials and the subsequent manufacturing, polishing, and export of finished goods.

4. Conversely, the Revenue contended that the appellant did not engage in manufacturing activities, citing supplier statements and minimal machinery purchases as evidence. However, the appellant refuted these claims, emphasizing the transformation of raw materials into finished goods through cutting, polishing, and setting of precious stones, which were then exported from the SEZ unit.

5. Upon review, the ITAT considered the documentary evidence, purchase bills, and sales transactions presented by the appellant. The ITAT found that the appellant indeed conducted manufacturing activities in the SEZ unit, refuting the Revenue's assertions of mere trading. The ITAT noted the absence of carry-forward stock from the previous trading business, supporting the conclusion that the SEZ unit was a new establishment for manufacturing and exporting jewelry and precious stones.

6. Consequently, the ITAT allowed the appeal, recognizing the appellant's eligibility for exemption under section 10A of the Income Tax Act, 1961. The decision was based on a comprehensive analysis of the appellant's transition to manufacturing activities, compliance with SEZ regulations, and the factual evidence demonstrating the manufacturing, polishing, and export processes carried out in the SEZ unit.