M/S MITTAL EXPORT HOUSE,JAIPUR vs. PR. COMMISSIONER OF INCOME TAX, JAIPUR-II, JAIPUR

PER VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the revision order dated 28th March, 2018 passed by the ld. Principal Commissioner of Income Tax, Jaipur-II, Jaipur under section 263 of the I.T. Act for the assessment year 2013-14. The assessee has raised the following grounds of appeal :-

“ 1. In the facts and circumstances of the case the learned Pr. CIT, Jaipur-II, Jaipur has erred in passing the order u/s 263 of the Income Tax Act, 1961 which is void ab-initio deserves to be quashed. 2. In the facts and circumstances of the case the learned Pr. CIT, Jaipur-II, Jaipur has erred in holding that the order passed by learned Assessing Officer u/s 143(3) of the Income Tax Act,

2 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

1961 dated 29.01.2016 was erroneous and prejudice to the interest of the revenue.

The assessee filed its return of income on 30th September, 2013 declaring 2.

total income of Rs. 71,79,770/-. The assessee claimed exemption under section

10AA which was allowed by the AO while completing the assessment under section 143(3) on 29th January, 2016. Subsequently, the ld. Pr. CIT on examination of

assessment record noted that the AO has allowed the claim of deduction under

section 10AA of the Act without proper examination of the matter and particularly

the eligibility for claiming deduction under section 10AA on account of the SEZ unit

set up by splitting up the business already in existence. Accordingly, the ld. Pr. CIT

issued a show cause notice under section 263 on 13.03.2018 proposing to modify

the order on the issue of claim of deduction under section 10AA. In response to the

show cause notice the assessee filed its reply as well as referred the relevant record

in support of the claim of deduction under section 10AA of the Act. The ld. Pr. CIT

was not impressed with the reply and contention of the assessee and held that the

order passed under section 143(3) by the AO is erroneous in so far as it is prejudicial

to the interest of the revenue as the said order was passed by the AO in a routine

and perfunctory manner without verification of deduction under section 10AA of the

Act. Accordingly, the ld. Pr. CIT set aside the assessment order on the issue of

3 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

deduction under section 10AA and directed the AO to re-do the same afresh denovo

in the light of the revision order.

engaged in the business of manufacturing of gold and silver jewellery/ornaments

studded with diamond and precious stones. The entire business is of export and

there are no local sales. The manufacturing unit is located at H-115, SEZ-II,

Sitapura, Jaipur. The ld. A/R has pointed out that all the sales are export sales and

has been approved by the SEZ authorities as evident from the Shipping Bills and

Invoices of sales made by the assessee during the year under consideration. He has

further submitted that the assessee produced all the records during the assessment

proceedings and the AO on examination of the relevant record was satisfied with the

claim of the assessee. Therefore, when the entire sales are export made from the

SEZ Unit engaged in handmade jewellery and role of machinery is nil, then the

revision order passed by the ld. Pr. CIT on the basis of suspicion about the setting

up of SEZ unit by splitting up the existing business and further doubting the

quantum of articles manufactured and sold by the assessee in a short span of time is

not based on any tangible material or fact. The ld. A/R has referred to the purchase

bills and sales vouchers which were duly approved by the SEZ authorities and

submitted that when all the transactions of purchase and sale at SEZ unit were

carried out after approval of the SEZ authorities, then there was no question of

suspecting the purchases and sales made by the assessee from SEZ unit. The AO

thoroughly examined the claim of the assessee and the relevant record. The assessee filed the replies dated 13th July, 2015 and 21st July, 2015 before the AO in

respect of the query raised by the AO. All these replies filed by the assessee are

4 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

available in the assessment record. The assessee specifically explained the business

address of the firm at H-115, SEZ-II, Sitapura, Jaipur and also filed the copy of LOA

for SEZ to show the setting up of a new unit at the SEZ. The agreement for

purchase and sale of SEZ was also furnished. The AO after making necessary

enquiry and examination of the relevant record was satisfied with the claim of the

assessee. The ld. A/R has further contended that it is not a case of splitting up of

business already in existence. In fact, the existing business was discontinued and

the stocks of the same remained lying in Janta Colony Office since 2006 as it is.

This fact was brought to the notice of the AO during the assessment proceedings

vide letter dated 11.1.2016 and also brought to the notice of the ld. Pr. CIT in the

revision proceedings. Therefore, the assessee has brought all the relevant record

and details before the AO to show that manufacturing at SEZ unit has no connection

or relevance with the existing business being carried out at Janta Colony office. The

ld. A/R has then pointed out that the ld. Pr. CIT has doubted the transaction of

purchase and sale as the quantity of sale/article was more than the purchased

quantity. However, the ld. Pr. CIT completely ignored the fact that the difference in

purchase of pure gold quantity and the quantity of sold goods is due to the other

metals and stones in the manufactured jewellery. The ld. A/R has referred to the

purchase and sale bills and submitted that the difference in the weight of the

quantity of purchase and sale is due to the use of other metals and stones in the

gold jewellery. The invoice clearly reflects the quantity of gold being 58.3% of the

gross weight of jewellery and rest of the weight was of precious/semi precious

stones and diamonds. Thus the observation of the ld. Pr. CIT is based on

presumption of wrong facts that sale quantity is more than the purchases made by

5 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

the assessee during the period. Another point raised by the ld. Pr. CIT is the short

span of period during which the assessee has made the first sale of finished goods.

The ld. A/R has submitted that since the assessee is not using machinery in the

manufacturing process but all the manufacturing is done by the artisans who have

been paid wages. He has referred to the chart indicating the names of the artisans,

the work for which he has been engaged and the wages paid to him. Thus when the

assessee has got the jewellery manufactured through artisans and not through the

machinery, therefore, only the workers had carried out the manufacturing job with

their own tools. The assessee, however, purchased the machinery and tools such as

Polish machine and other tools required for the manufacturing activity. He has

referred the list of articles and tools which were purchased by the assessee. Thus

the ld. A/R has submitted that the assessee produced entire relevant record in

support of the claim of manufacturing done by the assessee at SEZ unit and sale of

the finished goods which is duly approved by the SEZ authorities. The purchases

made by the assessee have not been disputed even by the ld. Pr. CIT though he has

doubted only the manufacturing activity done by the assessee within the short span

of time. Since the assessee got all the jewellery manufactured through various

artisans/workers, therefore, raising the objection and doubt by the ld. Pr. CIT is

without any basis. The Pr. CIT has misunderstood the facts regarding purchase and

sale of the goods by considering only the gross weight of the sold jewellery without

considering the net weight of the gold. Hence the ld. A/R has submitted that when

the entire record was produced by the assessee before the AO and after conducting

a thorough examination and enquiry by the AO, the AO was satisfied and accepted

the claim of the assessee, then the ld. Pr. CIT cannot revise and set aside the order

6 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

passed by the AO only for making a fresh assessment. He has pleaded that the

impugned order is not sustainable and the same may be quashed.

assessment order summarily without discussing anything about the claim of

deduction under section 10AA of the Act. The ld. Pr. CIT noted from the record that

the assessee was earlier doing the business of sale of jewellery from Janta Colony

Office as the address of the assessee firm is also shown as Janta Colony, Jaipur.

Therefore, the ld. Pr. CIT noted that the assessee has purchased only a single Polish

machine of Rs. 58,168/- and claimed the turnover of Rs. 1,34,72,590/- during the

year under consideration. Thus this fact indicates that the SEZ Unit was set up by

splitting up the business already in existence and all the machinery already used by

the existing business were shifted to the SEZ unit as the assessee has shown the

purchase of a single machine during the year under consideration. The AO has not

at all verified the claim in terms of provisions of section 10AA whether the assessee

has fulfilled the conditions for eligibility of claim under section 10AA. Thus the order

passed by the AO without conducting the proper enquiry is erroneous so far as

prejudicial to the interest of the revenue. The assessee has not disputed that prior

to the setting up of the SEZ unit, the assessee was having its business from the

Janta Colony and, therefore, the possibility of using the facility at Janta Colony for

the SEZ unit activity cannot be ruled out. The ld. Pr. CIT has clearly made out the

case of more sale than the purchases made by the assessee during the year under

consideration when this is the first year of manufacturing activity of SEZ unit. All

these facts were required to be verified by the AO. However, when the AO has not

7 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

conducted any enquiry then the said order passed by the AO suffers from error and

liable to be set aside. He has relied upon the impugned order of the ld. Pr. CIT.

record. The AO has accepted the returned income while passing the scrutiny

assessment order dated 29.01.2016. However, the AO has stated in the assessment

order that a notice under section 142 as well as under section 142(1) along with a

query letter was issued to the assessee. In compliance, the assessee attended

through its Authorized Representative and filed the necessary details on various

queries made by the AO. The relevant part of the AO’s order is as under :-

“ The case was selected for scrutiny and notice u/s 143(2) was issued on 03.09.2014 by the ACIT, Circle-5, Jaipur which was served on 09.09.2014. On change of incumbent again notices u/s 142(1) along with a query letters were issued on 17.06.2015, in compliance, the case was attended by Shri S.L. Poddar, CA/AR of the assessee and necessary details on the various queries were submitted. The assessee was involved in the business of Trading and manufacturing of Silver and Gold Jewellery, Bullions and Precious and Semi Precious Stones. The regular books of accounts, consisting of cash book & ledger were maintained. The books of accounts were duly audited u/s 44AB and audit report in form No. 3CB were furnished. The case was examined on test check basis and discuss, the return income of the assessee is accepted.”

Thus it is clear from the assessment order that the AO issued the notice under

section 142 along with a questionnaire wherein various queries were asked by the

AO from the assessee. In response to the said notice and query, the assessee filed

8 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

replies dated 13.07.2015 and 21.07.2015 at pages 59 to 61 and pages 62 to 63 of

the paper book as under :-

9 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

10 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

11 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

12 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

It is manifest from the replies filed by the assessee that the assessee has clearly

explained all the details of the partnership firm, nature of business of trading and

manufacturing and further the SEZ unit of the assessee at Sitapura, Jaipur. Thus the

assessee has explained the facts that the original business of the partnership firm

was being carried out from the premises A-129, Janta Colony, Jaipur and a new SEZ

unit was set up at H-115, SEZ-II, Sitapura, Jaipur. The assessee also produced LOA

of SEZ and manufacturing process being done manually. Therefore, the assessee

was not maintaining any register of assets. The comparative turnover details were

also produced by the assessee along with all the relevant details of purchase bills,

sale invoices, manufacturing charges paid to the artisans/workers. The ld. Pr. CIT

after completion of assessment under section 143(3) invoked the provisions of section 263 by issuing the show cause notice dated 13th March, 2018. The ld. Pr.

CIT noted that the partnership firm was not new and, therefore, it has not come into

existence for the first time in the year under consideration, rather it was already

existing and was engaged in the same business of trading and manufacturing of gold

13 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

and silver jewellery. It was also noted that during the assessment proceedings, the assessee had explained the opening stock of finished goods as on 1st April, 2012 and

rest material were lying in the Janta Colony office, and further the SEZ unit was

claimed as an independent manufacturing unit. However, the ld. Pr. CIT noted that

the purchases of new plant and machinery amounting to Rs. 58,268/- only has been

shown during the year. Out of this total amount of purchase of plant and

machinery, Rs. 53,698/- reflect various small articles like wax, buf, kuchhi wire etc.

and the bill amount of Rs. 5560/- reflects purchase of a single Polish machine. Thus

the ld. Pr. CIT doubted the turnover of Rs. 1,34,72,590/- claimed by the assessee

during the year as from the manufacturing activity of the SEZ Unit having only one

Polish machine. In response to the show cause notice, the assessee filed reply and

explained the facts that the entire manufacturing work is done by the

artisans/workers who were using their own tools and the assessee was not required

to have more machinery for carrying out the manufacturing work. The assessee

referred to the relevant documents and evidences as available on the assessment

record including copy of purchase bills and sale vouchers duly approved by the SEZ

authorities. The assessee also explained the nature of manufacturing activity carried

out by the assessee. However, the ld. Pr. CIT was not satisfied with the reply of the assessee and noted that the purchase of gold made by the assessee on 23rd May,

2012 of 509.890 gms whereas the assessee made first export of mixed gold and silver jewellery on 31st May, 2012 having gold net weight at 686.770 gms. The ld.

Pr. CIT has further noted that the total gold purchased during the year was 809.89

grams whereas the sale of jewellery having gold of 1087.388 gms. Thus according

to the ld. Pr. CIT, the sales shown from the SEZ unit apparently exceeds the

14 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

availability of gold at SEZ unit. All these facts as understood by the ld. Pr. CIT led to

the revision of the assessment order. We find that as per the details of purchase

and sale bills, the ld. Pr. CIT has taken the gold weight of jewellery sold vide bill dated 31st May, 2012 at 686.770 gms. However, the pure gold weight of said

jewellery was 402.399 gms as against the purchases of 509.89 gms vide bill dated 23rd May, 2012. These details are also shown in the sale invoices that the gold content is only 402.399 gms as per the bill dated 31st May, 2012 as against the

weight of the gold taken by the ld. Pr. CIT at 686.770 gms. Thus the difference in

the weight taken by the ld. Pr. CIT is due to the purity of gold. It is apparent from

the sale invoice itself that the weight of the pure gold in the jewellery was only

402.399 gms as against the weight of 686.770 gms. The relevant details of the

difference of the gold and the pure gold weight as well as other metals and stones in

the jewellery exported by the assessee during the year are as under :-

Bill No. and Gold net Gold 995 Metal weight Weight taken Date weight weight by Pr.CIT (This is weight 3+4) (1) (2) (3) (4) (5) 01/2012-13 686.770 402.399 284.371 696.770 31.05.2012 EX03/12-13 290.258 170.071 120.187 290.258 18.01.2013 EX03/2012-13 110.360 64.663 45.697 110.360 11.02.2013 1087.388 637.133 450.255 1097.388

All these details are available in the relevant bills which were also considered by the

ld. Pr. CIT while passing the impugned order. However, he took the gold weight of

lesser purity used for manufacturing of jewellery instead of pure gold weight which

can be compared with the purchases made by the assessee of the pure gold.

15 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

Therefore, the ld. Pr. CIT has presumed wrong facts while comparing the purchase

of gold and sale of gold jewellery. The purchases were made of pure gold and,

therefore, quantity of pure gold purchased by the assessee was compared with the

quantity of gold of a lesser purity used for manufacturing of jewellery. The ld.

Pr.CIT has completely over-looked and ignored the weight of pure gold given in the

export bills. Thus pure gold weight of the jewellery as shown in the export bill was

required to be compared and if the same quantity is taken into consideration, we

find that the pure gold weight used in the jewellery sold during the year is lesser

then the purchases made by the assessee. Hence this observation of the ld. Pr. CIT

is based on incorrect facts and misunderstanding of the details provided in the sale

bills.

5.1. The second ground for invoking the provisions of section 263 was doubting

the setting up of SEZ unit by splitting up of the existing business whereas we find

that the assessee has brought this fact during the assessment proceedings that the

earlier business activity from Janta Colony office was discontinued and the stocks

remained lying at Janta Colony office since 2006. The assessee has also shown that

the stocks lying at the Janta Colony office was not disturbed either by the AO or by

the ld. Pr. CIT. These facts were available on the assessment record. We find that

all the relevant details as well as documents were available on the assessment

record and ld. Pr. CIT has also not pointed out that any further record was required

for examination of the claim of deduction under section 10AA of the Act. Rather, the

assessment order was set aside on the ground that the AO has passed the order

without conducting a proper enquiry in respect of the claim made by the assessee

which makes the order erroneous and prejudicial to the interest of the revenue. The

16 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

ld. Pr. CIT has not given a concluding finding that the claim of the assessee is not

allowable but the matter was set aside to the record of the AO for re-doing the

same. Thus once the entire record relevant to the claim of deduction under section

10AA was available on the assessment record and the AO has conducted an enquiry

as it is evident from the assessment record and even the assessment itself manifest

the conducting of enquiry by the AO, it is not a case of lack of enquiry on the part of

the AO though it may be a case of inadequate enquiry on the part of the AO. Once

the case in hand does not fall in the category of lack of enquiry, the order passed by

the AO after considering the relevant record and making an enquiry cannot be said

to be erroneous and prejudicial to the interest of the revenue. The ld. Pr. CIT can

invoke the provisions of section 263 only when it is found that the order passed by

the AO is erroneous as the claim of the assessee is not allowable as per the

provisions of the Act. The ld. Pr. CIT cannot invoke the provisions of section 263

only for the purpose of setting aside the order for making a fresh enquiry once the

AO has conducted an enquiry on the issue. There is a distinction between the case

where the AO does not conduct an enquiry and the case where the AO conducts an

enquiry but the finding recorded is erroneous and which is also prejudicial to the

interest of the revenue. In the case falling in first category where there is a lack of

enquiry on the part of the AO, it would render the order of the AO erroneous and

prejudicial to the interest of the revenue, but where the AO conducts an enquiry and

the ld. CIT was of the view that the order of the AO is erroneous and prejudicial to

the interest of the revenue, then such an order can be revised only when the ld. CIT

finds that on the merits of the issue the order of the AO is erroneous and prejudicial

and not because of lack of enquiry. In the case in hand, undisputedly the AO has

17 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

conducted the enquiry which was found by the ld. Pr. CIT as not a proper enquiry

and, therefore, it may be a case of inadequate enquiry conducted by the AO.

Consequently, the ld. Pr. CIT while invoking the provisions of section 263, is required

to give a finding that the order passed by the AO on merits is erroneous and

prejudicial to the interest of the revenue. The AO has conducted an enquiry and

took a view which is a possible view under the law then even if the view taken by

the AO is not acceptable to the ld. Pr. CIT, it would not render the assessment as

erroneous and prejudicial to the interest of the revenue so as to empower the

Commissioner to invoke the provisions of section 263 of the Act. Undisputedly,

when the case in hand is not in the category of lack of enquiry, then the ld. Pr. CIT

cannot exercise his jurisdiction under section 263 for asking the AO to re-do the

assessment. This view is supported by the decision of Hon’ble Delhi High Court in

the case of ITO vs. D.G. Housing Projects Ltd., 343 ITR 329 (Delhi) wherein the

Hon’ble High Court has held in para 18 as under :-

“18. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. v. Commissioner of Income Tax, [2000] 243 ITR 83 / 109 Taxman 66 (SC), had observed that the phrase 'prejudicial to the interest of Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken

18 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur. by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.”

Thus once all the relevant record and material in respect of the claim of deduction

under section 10AA was available on the assessment record and were examined by

the AO while allowing the claim of the assessee, then the ld. Pr. CIT cannot exercise

his jurisdiction under section 263 only for the purpose of setting aside the order and

directing the AO to re-do the assessment. Hence, in view of the above facts and

circumstances of the case as well as the decision of Hon’ble Delhi High Court in the

case of ITO vs. D.G. Housing Projects Ltd. (supra), we find that the impugned order

passed under section 263 is not sustainable in law. Hence we set aside/quash the

impugned revision order passed by the ld. Pr. CIT under section 263.

Order pronounced in the open court on 20/07/2018. Sd/- Sd/- ¼ HkkxpUn½ ¼ fot; iky jkWo ½ (BHAGCHAND) ( VIJAY PAL RAO ) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 20/07/2018. das/

19 ITA No. 420/JP/2018 M/s. Mittal Export House, Jaipur.

आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant-M/s. Mittal Export House, Jaipur. 2. izR;FkhZ@ The Respondent-The Pr. CIT, Jaipur-II, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File {ITA No.420/JP/2018} vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत