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TMI Blog2019 (11) TMI 650X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the various evidences filed by the assessee. He has further erred in confirming the addition of Rs. 2,80,500/- by disallowing 25% of alleged unverifiable purchases of Rs. 11,22,000/- u/s 69C of IT. Act, 1961. 4. The Ld. CIT(A) has erred on facts and in law inconfirming the addition of Rs. 22,440/- being 2% of Rs. 11,22,000/- on account of alleged commission paid for obtaining the accommodation entry. 5. The Ld. CIT(A) has erred on facts and in law in not accepting the contention of assessee to recomputed the deduction u/s 10AA after considering the trading addition of Rs. 2,80,500/- ignoring the CBDT Circular No. 37/2016 dated 02.11.2016." 3. Briefly stated, the facts of the case are that the assessee firm is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones. It has set up its manufacturing and export unit/factory in Special Economic Zone at Sitapura Industrial Area, Jaipur and has started commercial production from 21.04.2008 and has claimed deduction u/s 10AA of the Act. The assessee originally filed its return of income on 23.09.2009 at Nil income after claiming deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation entries to inflate the purchase. The action of the AO was based on information collected and follow up actions taken. The details/ submissions regarding accounting of purchase etc. did not find support in view of investigation mace in this respect. The appellant relied upon number of cases but they are not directly linked to the case and are distinguishable on facts of the case. Considering this, it is held that the AO was justified in making addition u/s 69C of the Act. (ii) The appellant contended that the disallowance made by the AO should be considered as profit of SEZ unit and be exempted u/s 10AA of the Act. As discussed in the Preceding paragraph, the addition made by the AO have been upheld u/s 69C of the Act. The section 69C is a deeming provision where income is taxed as deemed income without specifying any head of income. The proviso to section 69C read as under: "Provided that, notwithstanding' anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income." (iii) Thus, any disallowance u/s 69C of the Act cannot be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fact the AO has disallowed 25% of the purchases. This would only increase the business income and is not an addition falling u/s 69C. Wherever the legislature intended not to allow deduction u/s 10A or 10AA or Chapter VI-A with reference to the addition made to the total income, it has been specifically so provided for and reference can be made to section 92C(4) where it is specifically provided that the arms length adjustment made by the AO which enhances the total income shall not be entitled to deduction under these sections. Therefore, in the absence of any bar in section 10AA, the income increased due to the addition made by the AO is eligible for deduction u/s 10AA. In view of above, even if purchases made from M/s Karishma Diamonds Pvt. Ltd. is held to be bogus, the AO be directed to recompute the deduction u/s 10AA after considering the trading addition of Rs. 2,80,500/-. 8. The ld. DR is heard who has relied on the findings of the ld. CIT(A). It was further submitted that the circular referred by the ld. AR is in the context of deduction on enhanced profit under Chapter VI-A of the Act whereas in the present case, the assessee has claimed deduction u/s 10AA which falls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s view was taken by the court in the following case: * Principal CIT, Kanpur v. Surya Merchants Ltd. IT Appeal no. 248 of 2015, May 03, 2016, Allahabad High Court The above views have been attained finality as these judgments of the High Courts of Bombay, Gujarat and Allahabad have been accepted by the Department. 3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a) (ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI- A is admissible on the profits so enhanced by the disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned." 10. Though the aforesaid circular has been issued by the CBDT in the context of Chapter VI-A of the Act, the deduction u/s 10AA is equally profitlink deduction though the fall under Chapter I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect to the payments of Rs. 1,48,37,899/-, the DRP directed to delete the same as the assessee has submitted the notarized copies of passports, which as per DRP proved that three individuals at s. no 1 to 3 in above chart did not visit India during the relevant year. Hence, the DRP directed that said payments will not be subject to withholding tax u/s. 195 of the Act and accordingly these payment cannot be disallowed u/s. 40(a)(i) of the Act.. The DRP held that these payments to the tune of Rs. 1,48,73,455/- are to be allowed, while, with respect to the 4th person Mr. John Blyzinskyj, the payment of Rs. 1,35,556/- without deduction of tax at source had remained unsubstantiated and the ld. DRP confirmed the addition of Rs. 135,556/- by issuing directions u/s. 144C(5) of the Act, which additions were confirmed by the AO in his assessment order dated 17.12.2014 passed u/s. 143(3) of the Act r.w.s. 144C(13) of the Act in pursuance of directions of DRP.. We have observed that the CBDT has issued Circular No. No. 37/2016 dated 2nd November, 2016, which is reproduced below:- "SECTION 80-IB, READ WITH SECTIONS 32, 40(a)(ia), 40A(3) & 43B, OF THE INCOME-TAX ACT, 1961 - DEDUCTIONS - PROF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance. 4. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon. The above may be brought to the notice of all concerned." The sum, substance and spirit of the afore-stated circular is that the Revenue does not want to continue the litigation with respect to disallowance made by the Revenue u/s. 32,40(a)(ia), 40A(3), 43B etc. of the Act, which ultimately led to increase in profits which are otherwise eligible for profit linked deduction under Chapter VI-A of the Act. The Board has accepted that the disallowance made u/s. 32, 40(a)(ia), 40A(3), 43B etc. of the Act and other disallowance out of specific expenditure related to the business ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso not in dispute that the assessee has only one business undertaking which is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones situated at Sitapura Industrial Area, Jaipur and the total turnover of the business is equivalent to the total turnover of the undertaking as well as the export turnover. The expenditure to the extent of 25% of purchases where are held as non-genuine and disallowed by the Assessing officer relates to the same business activity of manufacture and export in respect of which assessee is held eligible for deduction under section 10AA of the Act. The deduction under section 10AA therefore needs to be allowed on the enhanced profits after taking into consideration the disallowance of Rs. 2,80,500 in light of accepted legal position by the CBDT and following the consistent position taken by the Co-ordinate Benches. The Assessing Officer is therefore directed to recompute the deduction u/s 10AA taking into consideration the addition of Rs. 2,80,500/. In the result, the Ground No. 5 of the assessee's appeal is allowed. 13. In view of the above, we find that rest al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/- Total Turnover Rs. 29,47,26,173/- Total Profits derived by the undertaking Rs. 8,17,62,382/- Deduction u/s 10AA Rs. 4,08,51,049/- (8,17,62,382/29,47,26,173*29,45,08,874)*50% 19. It was submitted that the AO observed that assessee has shown an amount of Rs. 5,75,388/- on account of freight, clearing & insurance expenses as part of export sales and claimed deduction u/s 10AA of the Act. However, as per the definition of export turnover given in Explanation 1 to section 10AA, freight and insurance charges is specifically excluded from the definition. Accordingly, he held that freight, clearing & insurance expenses is assessable as income from other sources and disallowed deduction u/s 10AA at Rs. 2,87,694/- (50% of Rs. 5,75,338/-). The Ld. CIT(A) confirmed the disallowance by upholding the findings of AO. 20. It was further submitted that excess of freight, clearing & insurance receipt over the expenses is a business receipt as it is directly linked to the export. Hence, it is assessable as business income and not income from other sources. However, such receipt is not a part of export turnover as per Explanation 1(i) of section 10AA and accordingly, assessee himself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the ld. AO disallowed the deduction u/s 10AA of Rs. 20,17,500/- for A.Y 2010-11 in respect of the amount comprising surplus of freight, Insurance charges and Misc. Balances w/off on the allegation that the same constituted indirect income not derived from export of goods. 6.8 The next question that arises for consideration is the definition of export turnover which has been defined in explanation 1 to section 10AA of the Act and whether the same would have any effect in the instant case. The term "export turnover " has been defined as consideration in respect of export by the undertaking, being article or thing received in or brought into India by the assessee but doesn't include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India. In our view, the same may not have any effect as where the freight or insurance charges are reduced from the export turnover, the same have to be reduced from the total turnover as well. The same has been the consistent stand of the various Coordinate Benches. 6.9 In light of above discussions and in the entirety of facts and circumstances of the case, we do not find any infirmity ..... X X X X Extracts X X X X X X X X Extracts X X X X
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