Exemption u/s 10A available on undisclosed income surrendered during survey proceeding u/s 133A

Brief about the case

The assessee was a partnership firm manufacturing & exporting gold jewellery. Being located in Noida Special Economic Zone (NSEZ) it claimed exemption of income under section 10A of the Act. The assessee was selected for scrutiny wherein the AO verified and allowed the claim of the assessee for exemption u/s 10A. During the year under consideration a survey u/s 133A of the Act was carried out and physical stock of gold 12kg and some loose leaflets of papers were found which did not reconcile with the books.

The assessee surrendered Rs.11 lakhs to cover up the irregularities of the business and short coming found during the course of survey. The AO made the addition of Rs.1,31,00,000/- on account of suppression of 12kg stock manufacturing charges and other discrepancies.

The issue went to CIT (A) which further affirmed AO’s order.

Thereafter, the assessee appealed to ITAT (Delhi) which partly allowed the appeal considering the fact that The gold recovered by the assessee from the wastage was in its regular course of business of manufacturing and export of gold jewellery and there was no local sale therefore it was eligible for exemption u/s 10A.

Facts of the case:

• The assessee was a partnership firm engaged in manufacturing & Export of Gold Jewellery, located in Noida Special Economic Zone (NSEZ) and was claiming its income exempt u/s 10A of the Act.
• The assessee filed the return of income declaring Nil income on 29.10.2007 after claiming the exemption u/s 10A of the Act.
• The said return was processed u/s 143(1) of the Act on 13.03.2009 and later on selected for scrutiny.
• The claim of the assessee for exemption u/s 10A of the Act was verified by the AO and found the same in order.
• During the year under consideration a survey u/s 133A of the Act was carried out on 03.08.2006 and physical stock of gold was taken. On verification from the books of accounts, a difference of 12kg of gold was found. Some loose papers were also found which did not tally with the entries of books of accounts.
• Thereafter the assessee surrendered a sum of Rs.1,31,00,000/- on account of various discrepancies.
• The AO made the addition of Rs.1,31,00,000/- which was earlier surrendered by the assessee during the course of survey on account of suppression of stock manufacturing charges and other discrepancies.
• The aggrieved assessee went in appeal to CIT(A).
• The assessee submitted before CIT (A) that:
  • The surrender was made under coercion and illegal.
  • the customs has also accepted the fact that jewellery manufacturing units recover gold from wastage as this is a precious item. Further held that 1.6- 1.7% is the wastage and recovery of 25%-35% is feasible.
  • the entire jewellery manufactured was exported outside India to various concerns and 12kg gold which was recovered out of wastage was entered in the books of accounts after the survey and that the jewellery made from the same was also exported. Therefore, the AO having accepted the fact that the income generated from export of jewellery is exempt under section 10A, there was no need on part of the assessee to have gold outside the books of accounts.
• The ld.CIT(A) did not accept the assessee’s claim of genuine possession of gold stock and Accordingly, the addition of Rs.1,31,00,000/- made by the AO.
• The assessee further went in appeal to the ITAT which pronounced that the assessee entered sales in the books of accounts and claimed the exemption u/s 10A of the Act. Therefore, the addition made by the AO was not justified when the assessee had already shown the sales of the impugned amount in the books of accounts, and as such the addition made by the AO and sustained by the ld. CIT(A) for a sum of Rs.1,20,00,000/- was not justified.
• It was also stated that the income of Rs.11 lakhs disclosed by the assessee was in the regular course of export business; therefore, the exemption u/s 10A of the Act was allowable on the said income also.
• The assessee surrendered Rs.11 lakhs to cover up the irregularities of the business and short coming found during the course of survey. Hence the appeal is partly allowed.

Contention of the Revenue

• The accumulated gold amounting to Rs.120 lakhs on account of manufacturing process has never been shown in the stock books nor have any accounts been filed during the course of assessment proceedings.
• The assessee itself accepted the discrepancies of Rs.11 lakhs on account of incomplete/defective books; therefore, merely incorporating these entries later in books of accounts would not negate surrender of the additional income of Rs.11 lakhs.
• There is no evidence or even any sign of any pressure or coercion apart from automatic mental pressure, which is normal during any such survey, especially when huge discrepancies are detected.

Contention of the Assessee

• The CIT(A) has erred in law and on facts in not allowing the deduction u/s 10A on the amount ofRs.1,20,00,000/- on account of excess stock found during survey which was accumulated on account of normal loss of manufacturing process.
• The customs have also accepted the fact that jewellery manufacturing units recover gold from wastage as this is a precious item. Further held that 1.6-1.7% is the wastage and recovery of 25%-35% is feasible.
• The CIT(A) has erred in law and on facts, in upholding the addition of Rs.11,00,000/- which is made without any incriminating document found during survey and without pointing any defect in the books of account.
• The surrender letter was never voluntary and was made under coercion and pressure.

Held by Delhi High Court

• In the present case, it is an admitted fact that the assessee was engaged in the manufacturing of jewellery, during the process of manufacturing on behalf of the customers, the gold wastage in the range of 1.65 to 1.85% was recovered from the gold of the customers, the said wastage was due to dust, impurities etc. and out of the said wastage the assessee was allowing 1% wastage to its worker. In this manner, the assessee was saving gold to the extent of 0.6% to 0.85% and recovered gold accumulated to the extent of 12kg. The gold recovered by the assessee from the wastage was in its regular course of business of manufacturing and export of gold jewellery and there was no local sale.In the present case, the deduction u/s 10A of the Act has not been denied by the AO. Therefore, the addition of Rs.1,20,00,000/- made by the AO and sustained by the ld. CIT(A) was justified but the assessee is entitled for deduction u/s 10A of the Act on the said addition because the said income was directly related to the export business of the assessee. As regards to the another addition of Rs.11 lakhs is concerned, the said amount was disclosed by the assessee itself to cover up the various discrepancies found during the course of survey but that discloser was also related to the regular business of the assessee and it was not from the sources other than thebusiness. On the said income of Rs.11 lakhs disclosed by the assessee, the exemption u/s 10A of the Act was available. The decision of the Hon’ble Madras High Court in the case of CIT Vs S. Khader Khan Son (2008) 300 ITR 157 is of no help to the assessee.
• In view of the above we uphold the addition made by the AO and sustained by the ld. CIT(A), however, the AO is directed to allow the deduction u/s 10A of the Act.
• Therefore, the appeal of the assessee is partly allowed.