ITO 14(3)4, MUMBAI vs. R.S.B.L JEWELS, MUMBAI

PER SHAILENDRA KUMAR YADAV, J.M: This appeal has been filed by Revenue against the order of Commissioner of Income-Tax (Appeals)-25, Mumbai, dated 03.12.2013 for A.Y. 2010-11 on following grounds:

A.Y. 10-11 [ITO vs. M/s. R.S.B.L. Jewels] Page 2

2. Further, the Ld CIT(A) has erred in law as well on the fact by ignoring the fact that the assessee is only involved in the trading business wherein the profit should not be more than 2% of the total turnover as compared with the other assessee engaged in the same line of business having the profit ratio ranging 1% to 4%.”

2.1 Assessee claimed deduction u/s.10AA of the Act amounting to Rs.35,48,810/- and in result, declared Nil taxable income in e-return of income filed for A.Y.2010-11. Case was selected for scrutiny. Assessing Officer passed order u/s.143(3) by disallowing the claim of exemption u/s.10AA of the Act thereby determining total income at Rs.35,73,810/-.

2.1.1 Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee and having considered the same, CIT(A) granted relief to assessee. Same has been opposed before us on behalf of Revenue inter alia submitting that CIT(A) erred in law as well on the fact in allowing deductions u/s 10AA of the Act by A.Y. 10-11 [ITO vs. M/s. R.S.B.L. Jewels] Page 3 ignoring the fact that, the assessee has never conducted manufacturing activities in the premises situated in SEZ at Surat, which is entitled for deduction u/s 10AA of I.T. Act and further CIT(A) erred in law as well on the fact by ignoring the fact that assessee is only involved in trading business wherein profit should not be more than 2% of total turnover as compared with other assessee engaged in same line of business having profit ratio ranging 1% to 4%. So, the order of CIT(A) be set aside and that of Assessing Officer be restored. On other hand, learned Authorized Representative supported the order of CIT(A).

2.1.2 After going through rival submissions and material on record, we find that assessee has carried out manufacturing activity in SEZ unit in the year under consideration. The main issue on which deduction has been disallowed is consumption of electricity. Regarding this, learned Authorized Representative drew our attention to page no.37 of the paper book wherein on 11th August, 2009 to 13th September, 2009, consumption is shown to be 20 units and in this background, it was submitted that it was sufficient consumption of electricity for carrying out manufacturing of medallions from 25kg. Of gold imported by assessee. The said medallions were exported which is not in dispute. Other facts are also not in dispute. In this regard, learned Authorized Representative drew our attention to the order of ITAT ‘G’ Bench in & 6653/Mum/2013 for A.Y 2009-10 in case of Riddi Siddhi Bullions Ltd. vs. ACIT, ITA No.1923/Mum/14 A.Y. 10-11 [ITO vs. M/s. R.S.B.L. Jewels] Page 4 wherein vide para 12, Tribunal decided the issue in favour of assessee by observing as under: “12. Decision of the Tribunal - Claim of Exemption u/s l0A of the Act: We have heard both the parties on the issue of bona fide of the manufacturing activity at SEZ, Surat for earning exempt income of Rs. 6.43 Crs as well as the under valuation of the purchase of gold bars while brining into SEZ, Surat. In this regard, prominent issues for adjudication are the assessee's ability to earn the Exempt income of Rs 6.43cr with manufacturing activity of two days at SEZ, Surat, discrepancy with regard to consumption of minimum units of electricity and non claiming of labour charges involving Mis. S.L. Industries to the extent of 110 kgs of gold medallions. So far as electricity consumption is concerned, it is the claim of the assessee that for use of plant and machinery worth Rs. 16.14 lakhs, around 65.60 units @ 8.2 units per 8 hrs, is enough. The books of accounts supports the same in favour of the claim of the assessee and the consumption is only around 130 units, which is reported in the electricity meters. All other discussions on this issue is debatable and the same is inconclusive. It is a fact that the total units consumed in those two months of September, 2008 (943 units) and October, 2008 (870 units) explains the consumption of electricity in those two months. Therefore, this discrepancy in electricity consumption is inconclusive and it cannot be stated that the machinery was not put to use. It is not the case of the Revenue that the process of making gold medallions involves high voltage plant and machinery requiring huge amount of electricity. AO has not brought any incriminating material to suggest that the assessee suppressed any electricity consumption outside the books. Similar claims u/s10A of the Act re made in earlier AYs since 205-06 and the same are not denied too. Therefore, on this issue, considering the absence any incriminating evidences against the assessee, we approve the contention of the assessee.” A.Y. 10-11 [ITO vs. M/s. R.S.B.L. Jewels] Page 5 Nothing contrary was brought to our knowledge. Facts being similar, so, following same reasoning, we are of the view that assessee would have manufactured medallions 25kg. by consuming 20 units as claimed by assessee. In view of this, order of CIT(A) on the issue is upheld, whereby he has allowed this claim of assessee.

2.2 Coming to the issue of net profit. Assessee firm has shown turnover of Rs.3,81,14,722/- on which gross profit was shown at Rs.41,05,538/- @ 10.77% and net profit was shown at Rs.35,48,810/- @ 9.31%. A survey u/s.133 of the Act was conducted in assessee’s case on 21.09.2010. The survey party visited the SEZ unit at Sachin, Surat and stated that books of accounts were not maintained by assessee, therefore, amount of gross profit and net profit could not be ascertained. The survey party further reported that certain other parties involved in similar business activities had declared gross profit @ 1% to 4% approximately of turnover which is low as compared to those shown by assessee. Accordingly, he restricted the same to 2% of total turnover. In appeal, CIT(A) granted relief to assessee.

2.2.1 Same has been opposed before us on behalf of revenue for the reason as in its ground of appeal above. On other hand, learned Authorized Representative supported the order of CIT(A). A.Y. 10-11 [ITO vs. M/s. R.S.B.L. Jewels] Page 6 2.2.2 After going through rival submissions and material on record, we find this issue before us is regarding reasonableness of the profit disclosed by assessee. Assessing Officer has taken alternative plea that if an appellate authority finds that manufacturing activity took place in SEZ, gross profit be restricted at 2% as against 10.77% declared by assessee and deduction to be allowed accordingly. Assessee had produced relevant records called for and requisite material and documents, whereas Assessing Officer has not brought on record any evidence to doubt the manufacturing activity undertaken by assessee at its SEZ unit. As discussed above, Accounts of assessee were subjected to audit which means that statutory Auditor has looked into purchases and sales invoices and also all the custom and other documents. There is no qualification in Auditors’ report which pointed out any deficiency, which only strengthened the fact as purchases and sales are genuine. Assessing Officer has not pointed out any fault or defect brought on record any defects found in books of account so as to restrict the profit at 2%. In this background, there was no justification for arriving at a figure of 2% specially when basis of which 2% is calculated itself not justified. In view of above, there was no justification for arriving at figure of 2% itself based on incorrect basis. Accordingly, CIT(A) right directed the Assessing Officer to allow deduction u/s.10AA as claimed by assessee. This reasoned finding of CIT(A) needs no interference from our side. A.Y. 10-11 [ITO vs. M/s. R.S.B.L. Jewels] Page 7

Pronounced in the open Court on this the 28th day of October, 2015.