2014 (10) TMI 430 - AT - Income Tax

Non-speaking order by the CIT(A) - Rejection of books of accounts us 145(3) - Allowability of exemption u/s 10AA Failure to establish the manufacturing of goods in SEZ or not - The assessee claimed exemption u/s. 10AA on the ground of income derived from manufacturing and export of diamond studded gold and silver jewellery from its SEZ unit Held that - Revenue pointed out that nowhere in the operative portions of the order, the CIT(A) has given a finding about the adverse observation of the AO in respect of availing of time for manufacturing of silver articles of 317 pieces and the abnormally low consumption of electricity during the relevant period - assessee could not controvert the submission of the revenue to the effect that the order of the CIT(A) is a non-speaking order and was passed without dealing with the findings of the Assessing Officer the order of the CIT(A) could not be sustained as nothing has been stated in t in respect of the merit of the issue involved - simply because after rejecting the books of account, if turnover and profit as claimed in the return is not varied by the AO, it cannot be held that the claim for deduction u/s. 10AA has also to be accepted CIT(A) has not dealt with the relevant observations made by the AO for deriving an adverse inference against allowability of exemption u/s. 10AA thus, the matter is to be remitted back to the CIT(A) for fresh adjudication after passing speaking order on the issue Decided in favour of revenue.

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) erred in allowing the exemption claimed by the assessee under Section 10AA of the Income Tax Act.
2. Whether the Assessing Officer was justified in rejecting the books of accounts maintained by the assessee under Section 145(3) of the Income Tax Act.

Detailed Analysis:

Issue 1: Exemption under Section 10AA
The primary issue revolves around the exemption of Rs. 10,00,653/- claimed by the assessee under Section 10AA of the Income Tax Act. The Assessing Officer (AO) disallowed this exemption on multiple grounds, including the inability of the assessee to establish the manufacturing of exported goods within the Special Economic Zone (SEZ) in Sachin, Surat. The AO observed that the assessee commenced production on 22.02.2007 and exported goods worth Rs. 32,93,111/- by 05.03.2007. The AO found it improbable that such a volume of goods could be produced within 12 days, especially given the low electricity consumption of 170 units during that period.

On appeal, the Commissioner of Income Tax (Appeals) allowed the exemption. The Commissioner noted that the AO had rejected the books of accounts but accepted the sales and profit figures, which indicated inconsistency in the AO's approach. The Commissioner also pointed out that the AO did not provide specific defects in the books of accounts that would justify disallowing the exemption. The Commissioner concluded that the assessee's claim of exemption appeared genuine and should be allowed.

However, the Departmental Representative argued that the Commissioner failed to rebut the AO's findings adequately, particularly regarding the time required for manufacturing and the low electricity consumption. The Tribunal found merit in this argument, noting that the Commissioner's order was a non-speaking order that did not address the AO's specific observations. Consequently, the Tribunal decided to remand the issue back to the Commissioner for a fresh adjudication with a detailed and speaking order.

Issue 2: Rejection of Books of Accounts under Section 145(3)
The second issue pertains to the AO's rejection of the assessee's books of accounts under Section 145(3) of the Income Tax Act. The AO cited several reasons for this rejection, including the absence of proper records for day-to-day purchases and consumption of materials, discrepancies in the details of creditors, and the improbability of manufacturing the claimed quantity of goods within the stated period. The AO also noted that the assessee had revised its return of income without corresponding adjustments in the annexures and fixed assets.

The Commissioner of Income Tax (Appeals) found the AO's rejection of the books of accounts to be unjustified. The Commissioner argued that the AO's acceptance of the sales and profit figures contradicted the rejection of the books of accounts. The Commissioner also noted that the AO failed to link the rejection of the books with the disallowance of the exemption under Section 10AA.

The Tribunal, however, found that the Commissioner did not adequately address the AO's specific findings. The Tribunal emphasized that simply accepting the turnover and profit figures does not automatically validate the exemption claim under Section 10AA. The Tribunal thus remanded the issue back to the Commissioner for a detailed and reasoned adjudication, ensuring that both parties are given a reasonable opportunity to present their cases.

Conclusion
The Tribunal allowed the Revenue's appeal for statistical purposes, remanding the case back to the Commissioner of Income Tax (Appeals) for a fresh adjudication. The Tribunal directed the Commissioner to pass a speaking order addressing all the specific observations made by the AO and to provide both parties with a fair opportunity to present their arguments. The Tribunal emphasized the need for a detailed and reasoned order to resolve the issues comprehensively.

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