THE ITO, WARD-2,, JUNAGADH vs. M/S D. JEWEL,, JUNAGADH

आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax(Appeals)-3, Jamnagar, dated 30/11/2016 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2013-14.

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4.1 However, the assessee during the assessment proceedings found that the claim under section 10A of the Act was made inadvertently which was otherwise available under section 10AA of the Income Tax Act. The assessee regarding this submitted that the statutory form to claim the exemption u/s 10AA was not Page 2 of 14

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prescribed under the Income Tax Rules. Therefore, to comply the statutory compliance, the assessee approached the auditor to obtain the form 56F which was issued mentioning section 10A in place of section 10AA of the Income Tax Act. The said inadvertent error was also happened at the time of filling of the return of Income. In the Income Tax Form, the exemption under section 10AA should have been mentioned in place of section 10A of the Act. Therefore, the system software failed to consider the provisions of AMT (i.e. Alternate Minimum Tax) which was newly introduced under the provisions of section 115JC of the Act.

4.2 Therefore, the assessee revised its computation of income and claimed the deduction under section 10AA of the Act amounting to Rs. 2,63,41,547/- and adjusted its prepaid taxes while computing the tax in accordance with the provisions of section 115JC of the Act.

4.3 The assessee further in support of the claim of deduction/exemption u/s 10AA of the Act submitted that to take the advantage of section 10AA of the Act it had established a new unit in SEZ with a new purchased plant and machinery. Likewise, the unit was not formed by the splitting/reconstruction of existing business.

4.4 However, the AO during the assessment proceedings found that the assessee has not claimed any exemption/deduction under section 10AA of the Act either in the original return of income or in the revised return of income. According to the AO, the assessee has originally claimed deduction/exemption under section 10A of the Act which was debarred to the newly undertaking/establishment w.e.f. 01st April, 2012.

4.5 The AO further noted that the assessee had not claimed the deduction/exemption under section 10AA of the Act as well as has not filed the statutory form prescribed to claim the deduction u/s 10AA of the Act with the return

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of income. Therefore, it will not be eligible to claim the deduction u/s 10AA of the Act in pursuance to the provisions of section 80A(5) of the Act.

4.6 The AO on perusal of the ITR Form-5 of AY 2015-16 observed that the assessee for the AY 2015-16 had claimed the deduction amounting to Rs. 5,68,63,487/- u/s 10A as well as u/s 10AA and claimed refund of Rs. 1,05,00,000/- paid as advance tax.

4.7 The assessee has also not selected/specified the date in ITR form where it has been asked that “if liable to furnish the audit report u/s 115JC of the Act mentioned the date of furnishing the audit report”. Therefore the contention of the assessee that the calculation of tax under the provisions of section 115JC was not made due to software system error was rejected by the AO on the reasoning that the assessee has specified the deduction amount under the column of section 10AA for the A.Y. 2015-16 still the tax was not computed in pursuance to the provisions of section 115JC of the Act.

4.8 The AO thus was of the view that the assessee in order to avoid the payment of tax under the provisions of section 115JC i.e. Alternate Minimum Tax (AMT) of the Act claimed the exemption u/s 10A of the Act. The assesse with mala fide intention claimed the deduction u/s 10A as the provisions of section 10AA of the Act was covered under the provision of AMT and accordingly the assessee was liable to pay the tax @ 18.5% under the AMT provisions. The assessee had paid prepaid taxes as Advance Tax and Self-Assessment Tax with the intention that if the impugned claim taken into consideration by the Department then it can save itself being held as guilty.

4.9 Besides the above, the AO further found that the assessee is not carrying out any manufacturing activity which is one of the prerequisite condition for claiming the deduction/exemption under section 10AA of the Act. The view of the AO was based on the following reasons: Page 4 of 14

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i. On verification of list of purchases, it was found that the assessee had purchased 22K and 18K gold ornaments in bulk quantity weighing 13,932.59 gms and 606.02 gms valued at Rs. 2,57,39,445/- and Rs. 32,59,881/- respectively from its sister concern. Therefore it was purchasing the finished goods in the form of gold ornaments which were exported without any processing and change in any physical characteristic/ shape on such purchase of gold. ii. On verification of the purchase bill of assets and depreciation account, it was found that there was no plant and machinery used in the manufacturing of gold ornaments purchased. The items, shown in the financial statements under the head plant and machinery were representing CCTV, Godrej Safe, Excide Battery, Computer, EPABX, Water Pump etc. which are not used in the manufacturing activities. iii. To carry out the manufacturing activity of gold ornaments, it was required to purchase the raw materials such as gold bar, melavani and other related tools. But the assessee has not shown the purchases of these items except the purchases of 1,000 gms of gold bar at the end of the year under consideration i.e. 15th March, 2013 and 28th March, 2013 and purchased of melavani in the month of March, 2013. As such there was no opening stock of both the items. The assessee out of the purchases of the gold bar has shown consumption of 3709.546 gms which is not possible without having the basic tools of manufacturing. iv. The assessee had made Purchases of cut and uncut polished diamonds weighing 4618.510 carat and 765.241 carat valued at Rs. 1,56,52,085/- and Rs. 10,15,627/- respectively. The assessee out of those cut and uncut polished diamonds used 3051.770 carat and 721.240 respectively. The assessee had purchase the uncut polished diamonds in small quantity comparatively from cut polished diamonds. As such uncut polished diamonds is subject to further processing however such processing activity is not covered under the manufacturing activity. In addition, the further process like cutting and polishing such uncut diamonds require Page 5 of 14

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special blades, laser equipment and 3D computer analyzing whilst the assessee had no such type of tool which proves that it engaged in the processing activities. v. The conditions as specified under section 10AA of the Act that the manufacturing unit of assessee that should not be formed by purchasing the old plant and machinery which have been used previously, have not been satisfied by the assessee for the reason that it has purchased HP scanner and printer of Rs. 13,000 from its sister concern namely CVM & Co. which is not into the business of computer and ancillary items. vi. The assessee had not obtained the report in form 29C from an accountant who certifies that the Adjusted Total Turnover and Alternate Minimum Tax was in accordance to the provision of section 115JC of the Act and furnished the report on or before the due date of filing the return of income. vii. The assessee in the present case has incurred salary expenses of Rs. 10,000/- only which implies that the assessee has not employed sufficient skilled manpower. Thus in the absence of adequate skilled manpower representing middle level management personal such as supervisors and managers, effective manufacturing activity is not possible to carry out. viii. The Gold Labour Expenses of Rs. 17,79,541/- claimed by the assessee were not proving that the manufacturing activities were carried out as there were not any skilled manpower and any tools & equipment. 4.10 In view of the above, the AO disallowed the claim of the assessee for the exemption claimed under section 10AA of the Act amounting to Rs. 2,63,41,547.00 and added the same to the total income of the assessee.

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u/s 10AA of the Act. The assessee further submitted that it had paid the self- assessment tax of Rs. 54,00,000/- as on 13-09-2013 i.e. date of filing the return of income. If, there would have been the intention to avoid the Alternate Minimum Tax as alleged by the AO then the self-assessment tax would not have been paid on the last day of return filing as on 13-09-2013 and subsequently applying for refund by claiming deduction u/s 10A of the Act. After realizing the mistake, the assessee suo- moto, filed the correct revised computation of income vide letter dated 24th February, 2015 showing the claim of deduction u/s 10AA of the Act and accordingly, paid the tax computed under the provisions of AMT i.e. under section 115JC of the Act.

5.1 The assessee also contended that the claim of the assessee under section 10AA of the Act was disallowed by the AO without issuing any show cause notice which is against the principle of justice.

5.2 The assessee further in support of the claim submitted that it is engaged in the manufacturing activity and eligible to claim the deduction u/s 10AA of the Act based on the following details as given hereunder: a- It has established the unit in SEZ with the object to manufacturing the jewellery and started the manufacturing activity from 25th, February, 2012. b- The unit was approved by the Commissioner of SEZ as manufacturer of gold jewellery. Likewise, the assessee in the VAT registration was categorized as the manufacturer of the gold ornaments & Studded jewellery manufacturing unit. There was no doubt raised either by the commissioner of SEZ/GVAT authorities with respect to the manufacturing activities carried out by the assessee. c- It has entered into an agreement on stamp paper of Rs. 100/- with its sister concern namely Chokshi Vachhraj Makanji & Company to purchase the raw material “Gold Ornaments Components” which is manufactured according to the design specified by the importer of the gold/jewellery items and make it

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Studded Gold Ornaments. The assessee in support of its claim has furnished the copy of the invoice and the agreement. d- The labour charges paid to artisans were supported by the labour charges voucher and gate passes issued by the SEZ authority. e- The manufacturing activity in the SEZ was subject to inspection by SEZ authorities and therefore the manufacturing activity register along with annual returns filed before the SEZ authorities were maintained. f- The bank realization certificates issued by the bankers were evidencing that the manufactured jewellery were exported and foreign exchange was realized with in the statutory time limit. g- After purchasing the Gold Bar Ornaments, further processing activities were done at the unit as mentioned below: Assesmbling of such Ornaments Components like Ghat, Patch, Lathai, back chain fitting rings, O ring, clasp etc. Studding of Precious & Semi Precious stones. Finishing Oxidising (Antic Finish) Packing etc. h- The assessee with respect to the plant and machinery submitted that it has purchased Hand Tools which are used for the manufacturing activities of jewellery. The assessee in support of its contention has filed the copies of the invoices showing the purchase of the Hand Tools. i- With respect to cut and uncut polished diamonds, the assessee submitted that it is engaged in the manufacturing of uncut diamonds and there is no need to cut the diamonds with the necessary tools to justify the manufacturing activity. j- The purchase of the scanner and the printer from the sister concern represents the office equipment which has nothing to do with the manufacturing activity of the assessee. k- With respect to non-furnishing of form 29C on or before the due date of filing the return of income, the assessee placed the reliance on the judgment of Hon’ble Delhi High Court in the case of CIT vs. Web Commerce (India) Private

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Limited reported in 178 taxman 310 where it was held that the report filed along with return of income is directory in nature and not mandatory. l- The manufacturing activities carried out by the labourers which are artisan and incurring huge labour expenses amounting to Rs. 17,79,541/- establishes the fact that the assessee is carrying out the manufacturing activity. 6. The learned CIT-A after considering the submission of the assessee has directed the AO to allow the claim under section 10AA of the Act by observing as under: i- That the assessee had started its manufacturing operation from 25th February, 2012 and the FY 2012-13 was the first operational year. ii- As the claim of deduction in pursuance to the provisions of section 10A stands to be disallowed automatically after 01st April, 2012, therefore, no one can claim the deduction u/s 10A deliberately in its return of income. iii- The assessee was not required to pay the taxes, had it been intending to claim the deduction u/s 10A of the Income Tax Act. iv- The assessee cannot be deprived to enjoy the beneficial section merely it makes some technical error during the filing of the return of income. v- The assessee can also not to be refrained to claim the deduction u/s 10AA of the Act, merely failed to furnish the report in Form-56F/29C along with return of income. Furnishing of the said form along with return of income is merely directory in nature and used to test the allowability of claim made under section 10A/10AA of the Act. Moreover, the AO also not demanded the respective form/ reports before rejecting the claim of the assessee. vi- Scanner and Printer has not made any significance as it has merely used as plant and machinery in the manufacturing activity of jewellery. 7. Being aggrieved by the order of the Ld. CIT-A the Revenue is in appeal before us.

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11.1 The 1st controversy arises for our adjudication so as to whether the assessee was eligible for deduction under section 10A or 10AA of the Act. In this regard, we note that the deduction under section 10A of the Act has been discontinued with effect from A.Y. 2012-13 for the newly undertaking/unit. Therefore, it was not possible for claiming the deduction under this said section. Thus, any deduction claimed under section 10A of the Act cannot be said that it was claimed by the assessee with mala-fide intent. Furthermore, the assessee has already paid the taxes under the advance tax and self-assessment scheme which is an undisputed fact. The assessee being intending to avoid the alternative minimum tax in pursuance to the provisions of section 115JC of the Act, it would have not paid any self-assessment tax on the date of filing the return of Income. The payment of the self-assessment tax does not raise any doubt on the intention of the assessee Page 10 of 14

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merely on the reasoning that the assessee has claimed refund in the income tax return. As such the assessee during the assessment proceedings has come forward and filed the revised return of income declaring income under the provisions of AMT under section 115JC of the Act. Furthermore, the assessee cannot be deprived from the benefit granted under the statute merely on the reasoning that the assessee failed to claim the same in the income tax return. It is incumbent upon the revenue to allow the alleged claimed of deduction for which the assessee is entitled under the provisions of law.

11.2 It is an admitted position that the form 56F is applicable for claiming the deduction under section 10A of the Act. However, we find that at that point of time when the assessee was claiming the exemption under section 10AA of the Act, there was no form prescribed by the CBDT. Thus in the absence of any specific form prescribed by the CBDT, the assessee has opted to use form 56F for claiming the exemption. To our understanding, it was an inadvertent mistake and therefore the assessee cannot be deprived from the benefit available under the provisions of law.

11.3 Furthermore, the assessee has made the claim for the exemption under section 10AA of the Act before the issuance of show cause notice by the Income Tax Department with respect to the deduction claimed under section 10A of the Act. Thus, the revised claim by the assessee was made before detection of the same by the AO.

11.4 We also find that the Hon’ble Rajasthan High Court in the case of CIT versus Rajasthan fasteners Ltd reported in 43 taxmann.com 175 has held as under: “When facts and circumstances reveal that the assessee was eligible even this year for exemption under section 10B and it has been found to be in order except that instead of mentioning exemption under section 10B, while e-filing the return of the income-tax, it was wrongly, on account of typographical error mentioned section 80-IB, it cannot be said to be such a mistake by which the exemption could be disallowed outrightly.

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The mentioning of section 80-IB was only clerical mistake and with all fairness as per the facts and circumstances and as per the previous claims in tax calculation under section 115J, the assessee was legally entitled for this benefit. It is also an admitted fact that the financial statement also remained the same. The spirit behind this statement must be that the assessee should have claimed the exemption in his return and filed the same within due date and in the instant case, the assessee on the facts available on record clearly shows that the claim was duly made but section was inadvertently wrongly mentioned and this fact came to the notice of the assessee at a later point of time when pointed out by the Assessing Officer. The purpose of assessment proceedings before the taxing authorities is to assess the income correctly and the tax liability of an assessee in accordance with law. If such clerical mistake occurred, then, the Assessing Officer was duty bound to inform the assessee that this claim is wrongly claimed and that one may claim exemption under the concerned section. It is also an admitted position that substantial manufacturing activities were being carried out by the assessee within the bonded premises in terms of CBEC Circular No. 65/2002-Cus, dated 7-10-2002 and Notification No. 52/2003-Cus, dated 31-3-2003. [Para 16] In view of the above, once the assessee was found eligible for an exemption under section 10B, it having been allowed such exemption in the past, and merely because a typographical error crept in while e-filing the return and it was mentioned as under section 80-IB instead of section 10B, this being a technical mistake, should not come in the way by disallowing the otherwise allowable/eligible exemption. [Para 18] Accordingly, there is no infirmity or perversity in the order of the Tribunal so as to call for any interference of the High Court. It is essentially a concurrent finding of fact by the two lower appellate authorities and no substantial question arise or is required to be considered. [Para 19]” 11.5 Thus in light of the decision held by the Hon’ble Rajasthan High Court we are of the view that the assessee is entitled to benefit u/s 10AA of the Act though it wrongly claim the deduction u/s 10A of the Act at the time of filing the return of Income.

11.6 Another issue came before us is that whether the assessee is engaged in the manufacturing activity or not. As such to claim the deduction u/s 10AA of the Act one of the prerequisite condition is that the assessee manufactures goods/produce article or things. Regarding this we referred the cl. (iii) of Explanation 1 to the provisions of section 10AA of the Act which is as under; Page 12 of 14

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“10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 222 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services22a during the previous year relevant to any assessment year commencing on or after the 1st day of 23[April, 2006, but before the first day of April, 2021, the following deduction shall be allowed]— ==================” Explanation 1.—For the purposes of this section,— ======= ====== (iii)"manufacture" shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005” 11.7 However the term “manufacture” has defines that the “manufacture” has same meaning as assigned in cl. (r) of section 2 of the SEZ Act where meaning of manufacture was defined as detailed under; (r) “manufacture” means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining; it was defined that the manufacturer who are as under;

11.8 It is undisputed fact that the assessee was established in SEZ located at Sachin. It has granted the letter of permission to begin the manufacturing activity from 25-02-2012 by the SEZ authority. Therefore, we are of the view that the letter of permission was granted by the SEZ authority after satisfying the condition of the term manufacture as discussed above.

11.9 The agreement dated 06-03-2012 entered with the supplier of Gold Ornaments, point no. 9 specified that the assessee is responsible to assemble, studded/mounting of precious and semi-precious stones, Oxidishing, finishing and packaging etc. The assessee has purchased the Gold Ornaments in the form of raw materials with specification and design given by it and make the studded Gold Jewellery for export.

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11.10 The assessee has sufficient labour manpower to manufacture the gold ornaments into studded gold jewellery as seemed from the payment vouchers issued to labourers by it and gate pass issued by the SEZ authorities. Thus in view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the Revenue is hereby dismissed.

Order pronounced in the Court on 24/06/2022 at Ahmedabad.

Sd/- Sd/- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 24/06/2022 Manish

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