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TMI Blog2015 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's activity is as such that it can be done by Karigars with the help of hand tools, which are made and carried by themselves. The assessee also produced the gate pass entry maintained by the SEZ authority to demonstrate that old Nageena machine was brought to the unit of the assessee. The final produce was exported by the assessee on 28/10/2006. The goods were shipped by flight NO. IC 612 dated 29/10/2006, which is evident from the noting on the back of the shipping bills. The invoice and shipping bill was duly signed by the Superintendent, Custom, Jaipur SEZ on 28/10/2006. Therefore, we are of the considered view that the ld CIT(A) was right to allow 10AA deduction in A.Y. 2007-08 and 2009- 10. - Decided in favour of assessee. Disallowances of interest - part of borrowed funds has been utilized in providing interest free loans to M/s Eros Exports - assessee, itself admitted that direct nexus between borrowings and advancing loan - CIT(A) deleted the addition - Held that:- There was no credit entry in the account as claimed by the assessee that there was a business transaction with the proprietory concern namely M/s Eros Craft. The ld CIT(A) has wrongly concluded that thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirming the disallowance of ₹ 1,31,130/- out of interest expenses holding that part of borrowed funds has been utilized in providing interest free loans to M/s Eros Exports, proprietory concern of the partner of the assessee firm by not accepting the explanation that advances were given in commercial expediency and partners otherwise have sufficient capital to give such advance. 1.1 The ld. Commissioner of Income Tax (Appeals) has further erred on facts and in law in directing the A.O. to recomputed the income/gains from exports without allowing the claim of exemption u/s 10AA with reference to disallowance of interest expenses of ₹ 1,31,130/- . Ground in Revenue's ITA No. 631/JP/2013 (A.Y. 2007-08) Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) was justified in :- 1. deleting the disallowance of ₹ 43,33,426/- on account of deduction u/s 10AA made by the A.O. 2. The revenue has filed additional ground in A.Y. 2007-08, which is reproduced as under:- 1. Whether the ld CIT(A) has erred in quashing the order passed U/s 147/143(3) of the Act. 3. The ground No. 1 of both years the revenue's appeal is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0AA of the Act as terms and conditions of SEZ as mentioned in LOP was not fulfilled. The Assessing Officer gave the show cause notice on this issue, which was availed by the assessee vide letter dated 22/12/2011, which has been reproduced by the Assessing Officer on page Nos. 4 to 8 of assessment order. After considering the assessee's reply, he observed that the LOP was valid up to 31/10/2006 and the assessee could not start manufacturing activity on or before 31/10/2006, which also got support from the auditor's comment made in 3CD form. The assessee claimed that purchase of machinery was made on 30/10/2006 but payment was made on 07/11/2006, therefore, it was accounted on 07/11/2006, had also not convinced the Assessing Officer as the assessee made first export sale on 28/10/2006 i.e. without having any machinery in the SEZ unit. The assessee had also not clarified that when the said machinery was reached and installed in the SEZ unit, there was no evidence produced before the Assessing Officer that machinery was installed on 30/10/2006, as such manufacturing and production activities could not commenced without plant and machinery. Further he considered the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking possession of the allotted land within the 3 months of the issue of the approval letter and implementation of the project within the next 6 months. In para 3 of Letter of permission it was mentioned as follows:- This LOP is valid for one year from its date of issue within which you should implement the project and commence production and would automatically lapse if an application for the extension of validity of made before the end of the said period. Date of commencement of production shall be intimated to the Development Commissioner, NSEZ, Noida. The Letter of Permission was granted by the Assistant Development Commissioner, office of the Development Commissioner, Noida Special Economic Zone, Ministry of Commerce and Industry. 2. A corrigendum was issued vide letter No. 1-25/2003- SEZ(J)/Proj/501 dated 06/12/2005 by the Assistant Development Commissioner, SEZ, Sitapura, Jaipur wherein the following was mentioned below: Item No. 3:- Please read this Letter of Permission is valid for 'three' years in place of 'one year'. All other terms and conditions shall remain unchanged. Please keep this corrigendum attached to the original LOP. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.Y. and as per Section 10AA (1)(i), the assessee should have manufactured/produce article or things and exported them by 31/3/2007 to claim exemption under this Section, which has been complied by the assessee. The Assessing Officer was not required to step into the shoes of the inspecting team of the office of the Development Commissioner, SEZ to verify whether the LOP should be cancelled or not by 30/10/2006. This was the job of the Development Commissioner, SEZ and they have not given any adverse finding against the assessee nor have they withdrawn the LOP for non compliance of the terms and conditions specified therein. She further held as under:- Moreover, the assessee has continued to avail exemption U/s 10AA from A.Y. 2007-08. The case of the assessee was selected for scrutiny in A.Y. 2007-08 and these details were furnished before the A.O. in the year of commencement in the said year. Once the Department had reached a conclusion in the year of commencement of production and exports i.e. A.Y. 2007-08, the exemption cannot be withdrawn in subsequent A.Y. without cancelling the order of A.Y. 2007-08 by initiating proceedings either u/s 263 or u/s 147. This has not been d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer U/s 143(3) in his order dated 29/12/2009 and had accepted the assessee's claim U/s 10AA and gave the observation as under:- This is the first year of the assessee. The assessee has claimed deduction U/s 10AA for ₹ 43,33,426/- against total sale of ₹ 1,30,67,585/-. The assessee has started his business from 01/10/2006 at SEZ, Sitapura Industrial Area, jaipur for precious and semi precious stones and jewellery. Sales as well as purchases are vouched and verified. The assessee has shown GP of ₹ 48,89,042/- and after claiming expenses of ₹ 5,55,616/-, NP of ₹ 43,33,426/- is claimed exempt U/s 10AA of the IT Act, 1961. The claim of the assessee for deduction U/s 10AA stand verified from the record of SEZ documents filed by the assessee. After discussion NIL income is assessed. When the ld Assessing Officer concluded that manufacturing activities in SEZ unit had been started from 01/10/2006 in scrutiny assessment. Thereafter reopening on the basis of same issue U/s 148 is tantamount to change the opinion. The AR also relied on the following decisions:- i. NYK Line (India) Ltd. Vs. Dy. CIT (2012) 346 ITR 361 (Bom) (HC) (PB). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reneur and from the conjoint reading of Section 10AA and SEZ Act, the entrepreneur is to be granted approval by the Development Commissioner. In the assessee's case, the LOP was granted for production of gold and silver, plaint studded jewellery and previous and semi precious stones on 31/10/2003, which was valid for one year. Later on, it was extended for three years vide letter dated 06/12/2005, accordingly, the assessee was to implement the project and commenced the production on or before 31/10/2006. It is further provided that if an application for extension of validity is not made before the end of the said period, the LOP would automatically lapsed. In pursuance of the said LOP, the assessee started the production of precious and semi precious stones on or before 31/10/2006. It is evident from the fact that the assessee had purchased rough stone of ₹ 21,84,304/- from M/s Eros Exports proprietor Shri Sanjay Godha on 23/10/2006 and rough stone of ₹ 1,12,725/- from M/s Gunjan Gems on 27/10/2006. The ld AR has also drawn our attention on page No. 16 and 17 of the paper book to show that the assessee made purchases on 23/10/2006 and 27/10/2006. These rough stone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SEZ. This proves that the old machineries were brought to the SEZ unit of the assessee on 23/10/2006 through which production of precious/semi precious stones commenced. These goods were also exported vide invoice and shipping bill dated 28/10/2006. The goods were shipped by flight No. IC 612 dated 29/10/2006 as evident from the noting on the back of shipping bill. The invoice and shipping bill is duly signed by Superintendent (Custom), Jaipur SEZ on 28/11/2006. Thus, there cannot be any dispute that goods were produced by SEZ unit of assessee on or before 28/10/2006. In these facts the deduction U/s 10AA withdrawn by the A.O. is by incorrect appreciation of the fact. 3. Otherwise also as per LOP assessee was not commence production on or before 31/10/2006. Production connotes a continuous series of activities. All the activities which goes to make up the production need not necessarily be stated simultaneously in order that the production may commence. The production would commence when the activity which is first in point in time and which must necessarily proceeds all other activities is started (91 ITR 170 (Guj). In present case there is no dispute as to the fact that assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n both the years are dismissed. 9. Ground No. 2 of the revenue's appeal for A.Y. 2009-10 and ground No. 1 of the assessee's C.O. are against deleting the addition of ₹ 3,09,370/- on account of disallowances of interest and alternate claim allowed deduction U/s 10AA with reference to disallowance of interest at ₹ 1,31,130/-. During the year under consideration, the assessee had taken unsecured loan of ₹ 3.6 crores and paid interest at ₹ 34,58,349/- while on the other hand, the assessee had given interest free loans to M/s Eros Exports to the tune of ₹ 1,00,65,000/- in total on various dates. Whose proprietor is Shri Sanjay Godha, who is also a working partner of assessee firm. Further on perusal of capital account of Shri Sanjay Godha, it was found that he had withdrawn amount of ₹ 5,33,06,426/- out of his total capital of ₹ 5,70,16,905/- in the assessee firm. The Assessing Officer gave show cause notice as to why no interest should not be charged from M/s Eros Exports on total loan amount of ₹ 1,00,65,000/-. The AR of the assessee submitted that the assessee had not charged any interest or not given any interest to the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 8,00,000/- on 21/4/2008. The assessee had not advanced these loans for business purposes to the proprietory concern as during the year under consideration, there is no business transaction as per the copy of account given on page 43. On verification of copy of account of M/s Eros Craft in the books of assessee's account that the assessee had also advanced a loan on 08/10/2008 at ₹ 15,000/- and ₹ 65,00,000/- on 10/10/2008. There was no credit entry in the account as claimed by the assessee that there was a business transaction with the proprietory concern namely M/s Eros Craft. The ld CIT(A) has wrongly concluded that these payments were for business purposes. On verification of the capital account of Shri Sanjay Godha, the opening balance was at ₹ 3,83,56,407/- which was reduced to ₹ 37,10,476/- as on 31/3/2009, which was shows that the assessee had paid ₹ 3,26,00,000/- to partners on various dates as claimed by the AR that neither the partnership provide the interest on capital or charged interest on debit balance of the partner even these facts accepted as such there was interest free advance to the proprietory concern at ₹ 1,00,65,000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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