2017 (10) TMI 1263 - AT - Income Tax

Claim for deduction under section 10AA denied - as per AO all the karigars were located outside SEZ Unit and the assessee has no findings to show that the said karigars had taken permission from the Customs Authority to work within the SEZ Unit - AO held that no manufacturing activity was carried on by the assessee company in its SEZ Unit during - Held that - As submitted that the assessee even has a sufficient evidence to show that the karigars had actually worked in its SEZ unit during the year under consideration to manufacture gold articles from the 24 carat gold by using the machinery installed in the SEZ unit. On being asked by the bench, he has submitted that the assessee can produce such evidence to meet the objections raised by the AO and to support and substantiate its claim for deduction under section 10AA if the matter is again sent back to the Assessing Officer for fresh consideration. Keeping in view all the facts of the case, we consider it fair and proper and in the interest of justice to sent back this matter to the file of the AO for fresh consideration. Even the learned DR has not made any material objection in this regard. The impugned order of the Ld. CIT (A) on this issue is therefore set aside and the matter is restored to the file of the AO for deciding the same afresh in accordance with law after giving one more opportunity to the assessee to support and substantiate its claim for deduction under section 10AA. Addition on account of making charges of 22 carat gold ornaments - Held that - The market value of 22 carat gold ornaments gets increased only when they are finally ready and it remains as good as raw gold at the semi-finished stage because of the various reasons explained by the assessee. It, therefore, follows that the market value of 22 carat gold ornaments at semi-finished stage remains equivalent to raw gold price and since the valuation of the same was done by the assessee without including making charges as per the method of cost or market whichever is lower that was being consistently followed, we find ourselves that the Ld. CIT (A) that there was no under valuation of stock of 22 carat gold ornaments in process by the assessee as alleged by the AO. The addition made by the AO on this issue, therefore, was not sustainable and we find no infirmity in the impugned order of the Ld. CIT (A) in deleting the same Disallowance for depreciation on the machinery installed in SEZ unit - Held that - As the learned representatives of both the sides have agreed that this issue is consequential to the issue involved in ground no 1 in as much as if the assessee is found to have carried on the manufacture activity in its SEZ unit making it eligible for deduction under section 10AA, the depreciation on machinery installed in the said unit is liable to be allowed as a corollary. Since the issue involved in ground no 1 has been sent back by us to the Assessing Officer for deciding the same afresh, we also send back the issue involved in ground no 3 to the Assessing Officer for deciding the same afresh depending on his ultimate decision on the issue involved in ground no 1.

Summary

Issues Involved:
1. Deletion of disallowance of ?79,69,851/- claimed under section 10AA of the Income Tax Act, 1961.
2. Deletion of addition of ?22,54,476/- on account of making charges of 22 carat gold ornaments.
3. Deletion of disallowance of ?7,52,639/- on account of depreciation on machinery installed in SEZ unit.

Detailed Analysis:

1. Deletion of Disallowance of ?79,69,851/- Claimed Under Section 10AA:

The revenue challenged the CIT (A)'s action in deleting the disallowance made by the AO on the assessee’s claim for deduction under section 10AA. The AO disallowed the claim on two grounds: the karigars were located outside the SEZ Unit without Customs Authority permission, and the purchase invoices of 24 carat gold were addressed outside the SEZ Unit and not stamped by Customs. Consequently, the AO concluded that no manufacturing activity occurred in the SEZ Unit.

The assessee argued that separate books of accounts were maintained for SEZ and DTA divisions, and various expenses indicated manufacturing activities in the SEZ Unit. The assessee also contended that karigars, though residing outside, worked within the SEZ premises, and the purchase of gold bars from the Bank of Nova Scotia did not require Customs stamping due to its status as an authorized canalizing agent.

The CIT (A) found the AO's conclusions based on conjectures and surmises, noting the absence of independent verification. The CIT (A) observed that the AO did not reject the books of account or find specific defects. The CIT (A) directed the AO to allow the deduction under section 10AA, as the assessee fulfilled the necessary conditions.

Upon appeal, the Tribunal noted the arguments from both sides and decided to remand the matter back to the AO for fresh consideration, giving the assessee another opportunity to substantiate its claim for deduction under section 10AA.

2. Deletion of Addition of ?22,54,476/- on Account of Making Charges of 22 Carat Gold Ornaments:

The AO noticed that the assessee did not include making charges in the valuation of 22 carat semi-finished gold articles, leading to an addition of ?22,54,476/-. The assessee explained that the market rate for such items does not include making charges, a practice prevalent in the jewellery industry.

The CIT (A) agreed with the assessee, citing established commercial practices and legal precedents that support the valuation of closing stock at cost or market value, whichever is lower. The CIT (A) noted that the AO did not reject the books of account and that the assessee consistently followed the same valuation method. The CIT (A) deleted the addition, finding the AO's method unjustified.

The Tribunal upheld the CIT (A)'s decision, agreeing that there was no under-valuation of stock by the assessee and dismissing the revenue’s appeal on this ground.

3. Deletion of Disallowance of ?7,52,639/- on Account of Depreciation on Machinery Installed in SEZ Unit:

Both parties agreed that the issue of depreciation on machinery in the SEZ unit is consequential to the primary issue of manufacturing activity in the SEZ unit. Since the Tribunal remanded the primary issue back to the AO for fresh consideration, it also sent back the issue of depreciation for a fresh decision based on the outcome of the primary issue.

Conclusion:

The appeal was partly allowed for statistical purposes, with the primary issue of deduction under section 10AA and the related depreciation issue remanded back to the AO for fresh consideration. The addition on account of making charges was dismissed, upholding the CIT (A)'s decision.