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2015 (8) TMI 126 - ITAT JAIPUR

2015 (8) TMI 126 - ITAT JAIPUR - TMI - Disallowance of exemption U/s 10AA - No manufacturing activities were executed in premises of the assessee firm situated in SEZ on or before 31/10/2006 - CIT(A) allowed claim - Held that:- The assessee was issued first LOP vide letter dated 31/10/2003 for one year, which was later on extended for three years vide letter dated 06/12/2005. As per this letter, the assessee has to manufacture or produce the article/goods in SEZ unit on or before 31/10/2006. The .....

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or A.Y. 2009-10. - Without machinery the assessee could not have been started production but as claimed by the assessee that the assessee'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 .....

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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 these payments were for business purposes. - the order of the ld CIT(A) is not justified. We confirm the order of the Assessing Officer. Further the assessee's claim .....

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AM The ITA No. 876/JP/2012 filed by revenue and cross objection being C.O. No. 78/JP/2012 by assessee arise from the order dated 18/09/2012 passed by the learned CIT (A)-I, Jaipur for A.Y. 2009-10 and another appeal being ITA No. 631/JP/2013 filed by the revenue filed against the order dated 25/04/2013 passed by the ld CIT(A)-I, Jaipur for A.Y. 2007-08. The grounds of revenue's appeals and grounds of the assessee's C.O. are as under:- Ground in Revenue's ITA No. 876/JP/2012 (A.Y. 20 .....

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lled. So claimed of ₹ 1,98,09,347/- for the A.Y. 2009-10 disallowed U/s 10AA of the I.T. Act, 1961. 2. deleting the addition of ₹ 3,09,370/- on account of disallowance of interest. Assessee has claimed expenses on interest of ₹ 34,58,349/- on the interest bearing loans, whereas it has given non interest bearing funds to the tune of ₹ 1,00,65,000/- to M/s Eros Exports on various dates. Therefore, interest calculated @ 12% per annum on the amounts given to M/s Eros Exports .....

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n 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 cas .....

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ax Act, 1961 (in short the Act). The ld Assessing Officer observed that the assessee is engaged in the business of manufacturing and exporting of gems stone. The assessee firm filed its return for A.Y. 2007-08 on 29/12/2009 at NIL Income and on 26/09/2009 for A.Y. 2009-10 at NIL Income. The assessment for A.Y. 2007-08 was reopened U/s 148 of the Act after recording the reasons. The notice U/s 148 was issued on 10/2/2012 for A.Y. 2007-08. After recording the reasons the assessee challenged the re .....

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0 on this issue. The ld Assessing Officer observed on the basis of detail furnished by the assessee during the course of assessment proceedings that the Development Commissioner, Noida Special Economic Zone, Noida the permission under the Special Economic Zone (SEZ) scheme, to start production of items of precious and semi precious stones/gold jewellery plain and studded/silver jewellery plain and studded, were given for one year from date of issue of letter dated 06/12/2005 allowed for three ye .....

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nt and machinery were purchased during period December, 2006 to March, 2007. The Assessing Officer concluded that no manufacturing activities were executed in the premises of the unit of the assessee firm situated in SEZ on or before 31/10/2006. Therefore, the assessee firm was not entitled for exemption U/s 10AA 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 l .....

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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 a .....

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hipping bill No. 369/06-07 and before export they had duly commenced their production. But in the latter, the installation date of machinery has not been mentioned and when the production was started. As such this certificate was issued on the basis of export bills provided by the assessee to the SEZ authorities. In his letter dated 27/12/2011, the Assistant Development Commissioner, SEZ, Jaipur has accepted that as per SEZ Act/Rules the assessee declared the goods and on self declaration, the C .....

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owed exemption claimed by the assessee at ₹ 1,98,09,347/- for A.Y. 1009-10 U/s 10AA of the Act. The ld Assessing Officer also gave the similar findings for A.Y. 2007-08. He gave the show cause notice on this issue, which was replied by the assessee vide letter dated 07/11/2012 which has been reproduced on page 5 to 8 of the assessment order. The disallowance U/s 10A was made by the Assessing Officer in A.Y. 2007- 08 at ₹ 43,33,426/-. 4. Being aggrieved by the order of the Assessing O .....

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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 .....

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onditions shall remain unchanged. Please keep this corrigendum attached to the original LOP." The Corrigendum read with the original Letter of Permission under the SEZ scheme implied that the assessee had been given an extension for 3 years to start production that is up to 31/10/2006. 3. The assessee purchased semi precious stones worth ₹ 21,84,304/- on 23/10/2006 from Eros Exports and semi precious stones for ₹ 1,12,725/- from Gunjan Gems vide bills dated 27/10/2006. 4. Six lo .....

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ds were sent through a carrier agent by the name of LEMUR Express vide their bill dated 28/10/2006. 6. The shipping bill of export of duty free goods was available on record and showed an export of semi precious stones worth ₹ 7,75,420/- equivalent to $17,100/-. This shipping bill was signed by Superintendent (Customs) SEZ, Sitapura, Jaipur and verified by Inspector, Custom Duty, air cargo complex, Jaipur. 7. A copy of gate register of the SEZ was produced for the relevant period. It shows .....

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of the Act on reestablishment, reconstruction or revival of undertaking referred to in Section 33B of the Act and considered the manufacturing activity carried out by the assessee on page No. 8 and 9 of the order. She further held that in Section 10AA, the assessee's claim of exemption on profit and gain from export or article or thing begun with A.Y. relevant to previous year in which the unit begins to manufacture or produce such article of thing. The I.T. Act is concerned with the A.Y. an .....

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inding 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 .....

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8,09,347/-. 4.1 In A.Y. 2007-08, the case was reopened U/s 148 of the Act by recording the reasons U/s 147 by the Assessing Officer. The ld CIT(A) has held reopening proceeding as invalid. This issue was challenged by the revenue in additional ground made by the revenue. It is argued by the ld DR that A.Y. 2007-08 was the first year for claiming deduction U/s 10AA. The ld Assessing Officer recorded the reasons U/s 147 and copy of reasons was supplied to the assessee. The basis of reason to belie .....

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he export of the country. As per detail submitted by the assessee, the machinery was purchased, later than export was made by the assessee, which was sufficient reason before the Assessing Officer to reopen the case U/s 147 read with Section 148 of the Act. 5. At the outset, the ld AR of the assessee reiterated the arguments made before the ld CIT(A). The AR further submitted that notice U/s 148 can be invoked only if there are reasons to believe that income has escaped assessment. The power of .....

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ity has not started on or before 31/10/2006. This issue had been examined by the Assessing 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 se .....

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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). ii. Titanor Components Ltd. Vs. ACIT & Ors. 343 ITR 183 (Bom)(HC). iii. Jindal Photo Film Ltd. Vs. DCIT 234 ITR 170 (Del.) iv. CIT Vs. Kelvinator of India Ltd. 320 ITR 561/187 Taxman 312 (2010) (SC) v. CIT Vs. Simon .....

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y the assessee and after verification of it, he has allowed the deduction U/s 10AA of the Act. The Assessing Officer has formed opinion in first assessment U/s 143(3) of the Act on deduction U/s 10AA of the Act. The case law relied by the assessee in the case of CIT Vs. Kelvinator of India Ltd. (supra) is squarely applicable in assessee's case, accordingly, the Assessing Officer had changed his opinion by reopening the case U/s 148 of the Act. Therefore, we confirm the order of the ld CIT(A) .....

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has claimed and allowed deduction U/s 10AA on the export made by it from the said unit right from A.Y. 2007-08. During the year under consideration, the assessee declared a net profit of ₹ 1,98,09,347/- from the SEZ units. Section 10AA provides for deduction of 100% of profit or gain derived from export of article or thing manufactured or produced by an entrepreneur from its unit referred to in clause (i) of Section 2 of SEZ Act, 2005 provided that the unit begins to manufacture or produc .....

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. 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 t .....

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n on page No. 22 to 28 of the paper book. The finished precious and semi precious stones were also exported by the assessee on 28/10/2006 to M/s Fine Gems, New York, USA. All these details were provided to the A.O. at the time of assessment proceedings for A.Y. 2007-08. The ld Assessing Officer had concluded that production had been started on or before 31/10/2006. The AR further submitted that the assessee had furnished a certificate dated 19/12/2011 before the Assessing Officer during the asse .....

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ore 31/10/2006, it cannot be held otherwise under the Income Tax Act. It may further be noted that under the Income Tax Act, there is no condition as to the date before which the assessee should commence the production. The only condition is that assessee must commence production after 01/4/2006. Admittedly assessee has commenced production after 01/4/2006. Hence the deduction withdrawn by the A.O. U/s 10AA is against the provisions of the Law. 2. The only objection of the A.O. is that assessee .....

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also evident from the gate pass entry maintained at the SEZ entry gate where on 23/10/2006 there is a reference of old nageena machine brought to the unit of the assessee. This document was also provided to the A.O. by the Assistant Development Commissioner of the 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 da .....

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oduction 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 assessee purchased the raw material on 23/1 .....

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. 8. We have heard the rival contentions of both the parties and perused the material available on the record. The assessee was issued first LOP vide letter dated 31/10/2003 for one year, which was later on extended for three years vide letter dated 06/12/2005. As per this letter, the assessee has to manufacture or produce the article/goods in SEZ unit on or before 31/10/2006. The AR has furnished the evidence for purchase of rough stones and had also furnished the evidence to issue for the same .....

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hout machinery the assessee could not have been started production but as claimed by the assessee that the assessee'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 .....

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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 .....

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arged any interest or not given any interest to the partners on their capital or drawings. Hence, the firm had not charged any interest to the advance given to M/s Eros Exports. The ld Assessing Officer was not satisfied with the explanation made by the assessee, therefore, he charged interest @ 12% on loan at ₹ 1,00,65,000/- to M/s Eros Exports on various dates, which was calculated at ₹ 4,40,500/-, for which he relied on the decision of ld. CIT(A)-I, Jaipur in the case of M/s Mehar .....

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at ₹ 1,31,030/-. The ld CIT(A) had not accepted the assessee's claim on this disallowance of interest deduction U/s 10AA on relying on the decision of the Hon'ble Supreme Court in the case of S.A. Builders Pvt. Ltd. Vs. CIT. 11. Now revenue in appeal and assessee in C.O. before us. The ld DR argued that the interest @ 12% is to be charged on total outstanding of ₹ 1,00,65,000/- made to the proprietory concern of one of the partner Shri Sanjay Godha, proprietor of M/s Eros Ex .....

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If the Hon'ble ITAT is not satisfied with the submission of the assessee, the deduction U/s 10AA may be allowed on disallowance of interest as this income is also derived income from 10B unit. 13. We have heard the rival contentions of both the parties and perused the material available on the record. The assessee, itself admitted that direct nexus between borrowings and advancing loan to the tune of ₹ 3,50,000/- on 14/4/2008 and ₹ 8,00,000/- on 21/4/2008. The assessee had not ad .....

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