SHAIRU GEMS,MUMBAI vs. JT CIT 16(3), MUMBAI

The tax effect involved in the appeal filed by the revenue is less than Rs.10.00 lakhs and hence the same is required to be dismissed in view of the Circular No.21/2015 dated 10-12-2015 issued by CBDT. The Ld D.R did not 2 M/s. Shairu Gems dispute this factual aspect and accordingly we dismiss the appeal of the revenue.

In the appeal filed by the assessee, the solitary ground urged relates to the allocation of expenses relating to the Head office to the SEZ unit.

We heard the parties and perused the record. The assessee is engaged in the business of diamond jewellery export. It is having a unit in SEZ and it is also carrying on the business from its Head office. The AO noticed that the assessee has declared a net profit rate of 0.48% on a turnover of Rs.332 crores declared in the Head office, where as it has declared a net profit rate of 17.42% on a turnover of Rs.23.36 crores shown in its SEZ unit. After examining the expenses booked by the assessee at its head office, the AO came to the conclusion that certain common expenses need to be allocated to SEZ unit. Accordingly he identified certain common expenses and apportioned the same in the ratio of turnover between head office and SEZ unit. Accordingly the AO allocated a sum of Rs.24,09,095/- to SEZ unit out of expenses booked in the Head office. The AO also allocated a further sum of Rs.5.00 lakhs to SEZ unit out of finance and other common expenses, which could not be specifically identified. Thus, a sum of Rs.29,09,905/- in aggregate was allocated to SEZ unit.

The Ld CIT(A) did not agree with the nature of expenses selected by the AO. Accordingly he excluded certain expenses and directed the AO to apportion an aggregate amount of Rs.1,59,14,575/- between Head office and SEZ unit in the ratio of turnover. He sustained the allocation of Rs.5.00 lakhs made out of finance and other expenses. Accordingly the Ld CIT(A) sustained allocation to the extent of Rs.16,29,934/-. The assessee is aggrieved by the order of Ld CIT(A) in partially sustaining the addition.

The Ld A.R submitted that the assessee has maintained separate books of accounts for SEZ unit and all the expenses relating to that unit have been properly booked. He submitted that the SEZ unit was manufacturing diamond stud jewellery by purchasing readymade moulds and studding the diamonds therein. Hence the work carried on by the SEZ unit was not complicated one and hence the same did not require much of general & administrative expenses. He submitted that the books of accounts of earlier and subsequent years for SEZ unit have been accepted. Accordingly he contended that there is no reason for allocating the Head office expenses to the SEZ unit. He submitted that the Head officer itself has carried on the business in diamond, achieving a turnover of Rs.332 crores. He submitted that the Block policy premium expenses of Rs.20,37,223/- pertain to Head office only. He further submitted that the various reasons cited by the Ld CIT(A) are not sustainable.

On the contrary, the Ld D.R submitted that the rate of net profit shown by the assessee in Head office and SEZ unit would show that the assessee did not book certain common expenses in the SEZ unit with the obvious purpose of boosting up the profit of SEZ unit. Since there is common management and interlacing of funds between the Head office and SEZ unit, the Ld CIT(A) was justified in partially confirming the addition.

Having heard rival submissions, we are of the view that there is merit in the contentions of the Ld D.R. It is not in dispute that both Head office and SEZ unit are under common management. Further there is interlacing of funds also. The books of accounts of both the units were maintained by the assessee only. Hence it cannot be altogether ruled out that the benefit of various expenses booked in the Head officer did not go to the SEZ unit. The expenses listed out by the AO and confirmed by Ld CIT(A) such as Foreign tour expenses, motor car

The Ld A.R submitted that the Block insurance policy was taken only for Head office and not for SEZ unit. The submission of the Ld A.R, in our view, requires examination. Accordingly we restore the issue relating to “Block insurance policy” to the file of the AO with the direction to examine the relevant policy documents and if it is found that the same has been paid in respect of Head office only, then the AO should exclude the same from common expenses.

In respect of remaining expenses confirmed by Ld CIT(A), in our view, the order of Ld CIT(A) does not call for any interference, since the allocation of those expenses in the sales ratio appears to be reasonable. Accordingly we confirm the order passed by Ld CIT(A) in respect of remaining expenses.

In the result, the appeal of the assessee is treated as partly allowed and appeal of the revenue is dismissed. Order has been pronounced in the Court on 18.10.2016