Amrapali Exports Vs DCIT (ITAT Jaipur)
The issue under consideration is whether the deduction u/s 10AA is allowed on the enhanced profits after considering the disallowance u/s 69C?
In the present case, assessee engaged in manufacturing and export of gold, silver and base material jewellery plain and studded with precious and semi precious stones was eligible for deduction under section 10AA. AO treated 25% of purchases as claimed by the assessee as non-genuine and made addition under section 69C. Assessee claimed deduction under section 10AA as regards the amount subjected to addition. Revenue denied this on the ground that section 69C is deeming provision where income is taxed as deemed income without specifying any head of income. Thus, any disallowance made under section 69C could not be considered for benefit under any other section. Further, section 10AA considers benefit for SEZ units only to the extent of profits and gains derived from export. As deemed income under section 69C was not the income derived from export activities, addition made could not be considered for granting benefit under section 10AA.
ITAT states that it is not in dispute that the assessee is eligible for claim of deduction u/s 10AA of the Act. It is also not in dispute that the assessee has only one business undertaking which is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones situated at Sitapura Industrial Area, Jaipur and the total turnover of the business is equivalent to the total turnover of the undertaking as well as the export turnover. The expenditure to the extent of 25% of purchases where are held as non-genuine and disallowed by the Assessing officer relates to the same business activity of manufacture and export in respect of which assessee is held eligible for deduction under section 10AA of the Act. The deduction under section 10AA therefore needs to be allowed on the enhanced profits after taking into consideration the disallowance in light of accepted legal position by the CBDT and following the consistent position taken by the Co-ordinate Benches. The Assessing Officer is therefore directed to recompute the deduction u/s 10AA taking into consideration the addition u/s 69C.
Therefore, the appeal filed by the assessee allowed.
FULL TEXT OF THE ITAT JUDGEMENT
These are two appeals filed by the assessee against the respective orders of ld. CIT(A)-1, Jaipur dated 18.12.2018 for Assessment Years 2009-10 & 2014-15 respectively. Since the common issues are involved, both these appeals were heard together and are being disposed off by this consolidated order.
2. In ITA No. 190/JP/19, the assessee has taken the following grounds of appeal:
“1. Ld. CIT(A) has erred on facts and in law in upholding the validity of the order passed u/s 147 of I.T. Act, 1961.
2. The Ld. CIT(A) has erred on facts and in law in upholding the rejection of books of accounts u/s 145(3) of IT. Act, 1961.
3. The Ld. CIT(A) has erred on facts and in law in upholding the action of AO in treating the purchases of Rs. 11,22,000/- made from M/s Karishma Diamonds Pvt. Ltd. as bogus by not considering the various evidences filed by the assessee. He has further erred in confirming the addition of Rs. 2,80,500/- by disallowing 25% of alleged unverifiable purchases of Rs. 11,22,000/- u/s 69C of IT. Act, 1961.
4. The Ld. CIT(A) has erred on facts and in law inconfirming the addition of Rs. 22,440/- being 2% of Rs. 11,22,000/- on account of alleged commission paid for obtaining the accommodation entry.
5. The Ld. CIT(A) has erred on facts and in law in not accepting the contention of assessee to recomputed the deduction u/s 10AA after considering the trading addition of Rs. 2,80,500/- ignoring the CBDT Circular No. 37/2016 dated 02.11.2016.”
3. Briefly stated, the facts of the case are that the assessee firm is engaged in the business of manufacturing and export of gold, silver and base material jewellery plain & studded with precious & semi precious stones. It has set up its manufacturing and export unit/factory in Special Economic Zone at Sitapura Industrial Area, Jaipur and has started commercial production from 21.04.2008 and has claimed deduction u/s 10AA of the Act. The assessee originally filed its return of income on 23.09.2009 at Nil income after claiming deduction u/s 10AA at Rs. 2,42,21,021/-. The assessment was completed u/s 143(3) on 07.12.2011 wherein the returned income was accepted by the Assessing Officer. Subsequently, basis the information obtained from Investigation wing, Mumbai that the assessee has obtained bogus entries in the form of bogus purchases amounting to Rs. 11,22,000/- from M/s Karishma Diamonds Pvt. Ltd., notice u/s 148 was issued on 30.03.2016. In response to such notice, the assessee filed its return of income on 15.04.2016 declaring the income at Nil after claiming deduction u/s 10AA at Rs. 2,42,21,021/-. The reassessment order u/s 143(3) read with 147 was passed by the Assessing Officer on 08.11.2016 wherein the assessee was found eligible for deduction u/s 10AA to the extent of Rs. 2,42,21,021/- as originally assessed u/s 143(3) of the Act. However, books of accounts were rejected u/s 145(3) and a sum of Rs. 2,80,500/- was added back to the total income of the assessee, being unexplained expenditure u/s 69C of the Act for the reason that the assessee was found indulging in obtaining accommodation entry of purchase of goods from bogus concern which was operated by Shri Gautam Jain without any physical deliveries and such purchases amounting to Rs 11,22,000 were treated as non genuine and 25% of such purchases were brought to tax as unexplained expenditure u/s 69C of the Act. Further, an amount of Rs. 22,440/- on account of commission paid for obtaining the accommodation entry was also brought to tax in the hands of the assessee. On appeal, the said findings have been sustained by the ld. CIT(A) and against the said finding, the assessee is now in appeal before us.
4. In Ground No. 5, the assessee has contested the findings of the ld. CIT(A) wherein he has not accepted the contention of the assessee to recompute the deduction u/s 10AA after considering the trading addition of Rs. 2,80,500/- ignoring the CBDT Circular No. 37/2016 dated 02.11.2016. The relevant findings of the ld. CIT(A) which are under challenge before us read as under:-
“3.4.2 Determination
(i) The AO disallowed the amount on account of bogus purchase u/s 69C of the Act, the appellant contended that the section 69C is not applicable as it has provided all the information explanations details and supported documents to the ld. AO. As discussed in the preceding paragraphs, the appellant was found to obtain accommodation entries to inflate the purchase. The action of the AO was based on information collected and follow up actions taken. The details/ submissions regarding accounting of purchase etc. did not find support in view of investigation mace in this respect. The appellant relied upon number of cases but they are not directly linked to the case and are distinguishable on facts of the case. Considering this, it is held that the AO was justified in making addition u/s 69C of the Act.
(ii) The appellant contended that the disallowance made by the AO should be considered as profit of SEZ unit and be exempted u/s 10AA of the Act. As discussed in the Preceding paragraph, the addition made by the AO have been upheld u/s 69C of the Act. The section 69C is a deeming provision where income is taxed as deemed income without specifying any head of income. The proviso to section 69C read as under:
“Provided that, notwithstanding’ anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.”
(iii) Thus, any disallowance u/s 69C of the Act cannot be considered for benefit under any other section. Further, section 10AA of the Act considers the benefit for SEZ units to the extent of profits and gains derived from export. As deemed income u/s 69C is not the income derived from export activities and also in view of the provision to section 69C of the Act, the addition made by the AO cannot be considered for granting benefit u/s 10AA of the Act. Therefore, no interference is called for in the order of the AO.”
5. In this regard, it was submitted by the ld. AR that during appellate proceedings, the assessee contended that any disallowance made will increase the deduction u/s 10AA and will have no impact on the total income. The Ld. CIT(A) however held that section 69C is deeming provision where income is taxed as deemed income without specifying any head of income. Thus, any disallowance made u/s 69C of the Act cannot be considered for benefit under any other section. Further section 10AA of the Act considers the benefit for SEZ units only to the extent of profit & gains derived from export. As deemed income u/s 69C is not the income derived from export activities, addition made by the AO cannot be considered for granting benefit u/s 10AA of the Act.
6. It was submitted by the ld AR that even if the purchases made from M/s Karishma Diamonds Pvt. Ltd. is held to be bogus and disallowed in computing the income from business, the same would increase the profit of the assessee to that extent and such increased profit is eligible for deduction u/s 10AA. The CBDT in Circular No.37 of 2016 dt. 2nd Nov., 2016 has clarified that where specific disallowances, related to the business activity against which Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, then deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowances. The ratio of this circular is equally applicable where deduction is claimed u/s 10AA. Hence, any disallowance made will increase the deduction u/s 10AA and will have no impact on the total income.
7. It was further submitted that the lower authorities have wrongly held that the addition is made u/s 69C on account of unexplained expenditure. This is because the entire payment of Rs.11,22,000/- made by the assessee is recorded in the books of accounts. Hence, the question of unexplained expenditure does not arise. In fact the AO has disallowed 25% of the purchases. This would only increase the business income and is not an addition falling u/s 69C. Wherever the legislature intended not to allow deduction u/s 10A or 10AA or Chapter VI-A with reference to the addition made to the total income, it has been specifically so provided for and reference can be made to section 92C(4) where it is specifically provided that the arms length adjustment made by the AO which enhances the total income shall not be entitled to deduction under these sections. Therefore, in the absence of any bar in section 10AA, the income increased due to the addition made by the AO is eligible for deduction u/s 10AA. In view of above, even if purchases made from M/s Karishma Diamonds Pvt. Ltd. is held to be bogus, the AO be directed to recompute the deduction u/s 10AA after considering the trading addition of Rs.2,80,500/-.
8. The ld. DR is heard who has relied on the findings of the ld. CIT(A). It was further submitted that the circular referred by the ld. AR is in the context of deduction on enhanced profit under Chapter VI-A of the Act whereas in the present case, the assessee has claimed deduction u/s 10AA which falls under Chapter II of the Act.
9. We have heard the rival contentions and perused the materials available on record. The limited issue under consideration is whether the Assessing Officer is required to recompute the deduction u/s 10AA after considering the addition of Rs. 2,80,500/- so made by him and in that sense, the addition so made is revenue neutral. In this regard, we refer to the CBDT No. 37/2016 dated 2.11.2016 which reads as under:-
“Chapter VI-A of the Income-tax Act, 1961 (“the Act”), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowances, such a disallowances pertaining to Sections 32, 40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure claimed may also be made. The effect of such disallowances is an increase in the profits. Doubts have been raised as to whether such higher profits would also result in claim for a higher profitlinked deduction under Chapter- VI-A.
2. The issue of the claim of higher deduction on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows:
(i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non deduction of TDS under law, such disallowance would ultimately increase assessee’s profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance under section 40(a)(ia) of the Act would qualify for deduction under section 80- IB of the Act. This view was taken by the Courts in the following cases:
