KAMA SCHACHTER JEWELLERY P., LTD,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX 12(3)(1), MUMBAI

This appeal has been filed by the assessee against the order dated 12.04.2017 passed by the Commissioner of Income Tax (Appeals)-56 (for short ‘the CIT (A)’), Pune, for the assessment year 2011-12, whereby the Ld. CIT (A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) r.w.s 144C (3) of the Income Tax Act, 1961 (for short the ‘Act’).

The assessee has challenged the impugned order passed by the Ld.CIT (A) the on the following effective grounds: 1. “The Hon’ble Commissioner of Income Tax (Appeals) [CIT (A)] has erred in confirming the action of the learned AO of not considering reversal of provision for export commission 2 Assessment Year: 2011-12 amounting to Rs. 6,20,268/- as part of the profits of the SEZ unit for computing deduction under section 10AA of the Act. On the facts and circumstances of the case and in law, the Hon’ble CIT (A) ought to have directed the Ld. AO to consider reversal of provision for export commission of Rs. 6,20,268/- as income of SEZ unit eligible for deduction u/s 10AA of the Act. 2. The Hon’ble Commissioner of Income Tax (Appeals) [CIT (A)] has erred in confirming the action of the AO in disallowing purchases amounting to Rs. 1,39,37,806/- on the ground that the genuineness of such purchases was unexplained. On the facts and circumstances of the case and in law, the said disallowance ought to be deleted. 3. Without prejudice to Ground No. 2, the Hon’ble CIT (A) has erred in not adjudicating the ground that in the event, wherein the purchases made from the alleged parties is not proved to be genuine, o additions ought to be made or in the alternative, only a token amount ought to have been disallowed. 4. Without prejudice to ground No. 2 & 3, the Hon’ble CIT (A) has erred in not adjudicating the additional ground taken during the course of appellate proceedings, that consequent to addition made under section 69C of the Act, by treating purchases of Rs. 1,39,37,806/- as bogus, the appellant should have been allowed increased exemption u/s 10AA of the Act. On the facts and circumstances of the case, the Hon’ble CIT (A) ought to have adjudicated the additional ground of the appellant.” 3. The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in confirming the action of the ld. AO in not granting deduction u/s.10AA of the Act in respect of reversal of export commission in the facts and circumstances of the case. 4. We have heard rival submissions. It is not in dispute that the assessee is eligible for deduction u/s.10AA of the Act in respect of profits derived from the 3 Assessment Year: 2011-12 eligible unit. It is also not in dispute that assessee had debited expenditure towards export commission in the earlier year and had claimed reduced deduction u/s.10AA of the Act in that earlier year. From such commission payable which was provided in earlier year, the assessee reversed part of such commission as no longer payable during the year under consideration and duly credited the same to its profit and loss account. Since the reversal of export commission was part of income in the profit and loss account of the assessee, the assessee claimed deduction u/s. 10AA for the same. This was denied by the lower authorities. We notice that the lower authorities have not properly appreciated the facts of the case that in as much as, when deduction towards export commission was claimed by the assessee in the earlier year, the same was accepted by the AO and correspondingly deduction u/s.10AA of the Act was reduced to that extent in earlier year. Hence, when the said export commission is partly reversed during the year and forms part of income of the year under consideration, the assessee is indeed entitled for deduction u/s.10AA of the Act for the said amount. Accordingly, we direct the AO to grant deduction u/s.10AA of the Act in respect of reversal of export commission amounting to Rs.6,20,268/-. Accordingly, ground No.1 raised by the assessee is allowed.

The ground No.2 raised by the assessee is with regard to the action of the Ld. CIT(A) confirming the disallowance made on account of bogus purchases amounting to Rs.1,39,37,806/- as unexplained expenditure u/s.69C of the Act.

We have heard rival submissions. We find that assessee is engaged in the business of manufacturing of Diamond Studded Jewellery and that is the only eligible unit set up in SEZ. Accordingly, the entire profits of the assessee is eligible for deduction u/s.10AA of the Act on which fact there is absolutely no dispute. The alleged bogus purchases or purchases made from non-existent parties were also made for the purpose of assessee’s business being carried out 4 Assessment Year: 2011-12 in the said SEZ unit, on which fact also there is absolutely no dispute. The revenue has not brought any material on record to prove that the assessee was having any other unit other than the eligible unit eligible for deduction u/s.10AA of the Act. The assessee has indeed maintained quantitative details in carats as it is dealing in diamonds. The AO holding that the number of pieces details was not maintained by the assessee rejected the entire claim of the assessee and concluded that purchases were shown made from non- existent parties to support his arguments. The AO also placed reliance on the fact that summons issued to those parties u/s.131 of the Act though served on them were not responded by the concerned suppliers. From the perusal of the materials available on record, we find that the AO had initially issued notice u/s.133(6) of the Act to all the three parties and they had duly responded before him directly by furnishing the necessary details. Merely because the summons issued to those parties were not responded by the concerned suppliers, the assessee cannot be faulted for the same. In any case, we find that since the subject mentioned transaction of purchases are made for the purpose of eligible business carried out by the assessee in its eligible SEZ Unit, irrespective of the amount of disallowance made by the AO, the same would only go to increase the business income of the assessee. We find that assessee had furnished quantitative details of purchases, evidence for consumption of purchased materials and the finished product pursuant to the said consumption of materials and the same had been duly reflected in the accounts of the assessee. Hence, it could be safely concluded that the consumption of materials and the sales made by the assessee using such purchases are not disputed by the revenue. In that scenario, it would be harsh to disallow the entire purchases. Even if the said entire purchases are to be disallowed as non-genuine, then the same would only go to increase the business profits of the assessee from the eligible unit, which in turn would 5 Assessment Year: 2011-12 consequently enhance the claim of deduction u/s.10AA of the Act for the assessee. Hence, the entire exercise becomes revenue neutral.

We find that the AO hasmade this addition treating the alleged bogus purchases as unexplained expenditure u/s.69C of the Act. It is the case of the revenue that assessee had not made any purchase to the tune of Rs.1,39,37,806/- at all. We hold that the basic requirment for invoking the provisions of Section 69C of the Act is that an expenditure involved in outflow of funds had been actually incurred and source for the incurrence of such expenditure had not been satisfactorily proved by the assessee. Only in such circumstances, the provisions of Section 69C of the Act could be invoked. In the instant case, the revenue having conceded the fact of no purchases being made by the assessee to the tune of Rs.1,39,37,806/-, ought not to have invoked the provisions of Section 69C of the Act. Hence, the addition made u/s.69C of the Act deserves to be deleted on this count itself.