Goenka Diamonds & Jewellers Ltd.,, ... vs Department Of Income Tax

Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM

vk;dj vihy la-@ITA No. 645/JP/2012 fu/kZkj.k o"kZ@Assessment Year : 2009-10

The A.C.I.T. cuke M/s Goenka Diamonds & Jewellers Circle-2, Jaipur. Vs. Ltd., 401, Panchratna, M.S.B. Ka Rasta, Jaipur.

LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACG 7934 Q vihykFkhZ@Appellant izR;FkhZ@Respondent

izR;k{ksi.k@C.O. No. 54/JP/2012 (Arising out of vk;dj vihy la-@ITA No. 645/JP/2012) fu/kZkj.k o"kZ@Assessment Year : 2009-10

M/s Goenka Diamonds & Jewellers cuke The A.C.I.T. Ltd., 401, Panchratna, M.S.B. Ka Vs. Circle-2, Jaipur. Rasta, Jaipur.

LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACG 7934 Q izR;k{ksid@Objector izR;FkhZ@Respondent

jktLo dh vksj ls@ Revenue by : Mrs. Rolee Agarwal (CIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri G.G. Mundra (C.A.)

lquokbZ dh rkjh[k@ Date of Hearing : 08/04/2015 ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 23/04/2015 2 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

vkns'k@ ORDER

PER: T.R. MEENA, A.M.

The appeal by revenue and cross objection by assessee arise

from the order dated 25/04/2012 passed by the learned CIT(A)-I, Jaipur

for A.Y. 2009-10. The ground of revenue's appeal and ground of the

C.O. are as under:-

Ground in Revenue Appeal.

"Whether on the facts and in the circumstances of the case and in law the learned CIT(A) is justified in allowing deduction of Rs. 25,37,14,968/- U/s 10AA of the I.T. Act, 1961 as condition laid down in the section 10AA of the I.T. Act, 1961 for claiming the deduction are not fulfilled."

Ground in Assessee's C.O. "That on the facts and in the circumstances of the case, the learned CIT(A) is wrong, unjust and has erred in law in upholding disallowance of directors remuneration to the extent of Rs. 1406790/- from profits of domestic unit of the appellant on the alleged ground and directors are doing work of both SEZ and domestic unit of the company."

2. The ld. Assessing Officer observed that the assessee is engaged

in business of trading and manufacturing of Precious and Semi Precious

stones, diamond and studded gold jewellery. The return of A.Y. 2009-10

was filed by the assessee on 30/09/2009 and subsequently revised it on

29/03/2011 declaring total income of Rs. 3,44,19,940/-. The case was 3 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

scrutinized U/s 143(3) of the Income Tax Act, 1961 (hereinafter

referred as the Act). During the year under consideration, the assessee

claimed deduction U/s 10AA of the Act with respect to Surat Unit. The

assessee is actually running three units (i) Surat (ii) Mumbai and (iii)

head office at Jaipur where no manufacturing set up is made. The

Assessing Officer gave reasonable opportunity of being heard on Surat

Unit that claim of deduction U/s 10AA of the Act is as per law or not.

The assessee filed explanation vide letter dated 17/10/2011, which has

been reproduced by the Assessing Officer on page Nos. 2 to 7 of the

assessment order. The assessee filed another letter on 01/11/2011,

which has also been reproduced by the Assessing Officer on page Nos.

7 and 8 of the assessment order. The ld Assessing Officer held that in

the Income Tax Act, the Legislature had chosen to exclude the

definition of service from the Special Economic Zone (in short SEZ) from

its scope, therefore, definition of services can be imported from SEZ

Act. The ld Assessing Officer examined in detail the definition of

services. She further held that explanation of Section 10AA includes

services of on site development of computer software (including

services for development of software) outside India. This explains the 4 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

intention of the legislature regarding what nature of services will be

included in services. The assessee is not in manufacturing activity as it

is not having machinery set up to do so. Moreover, it is merely engaged

in trading which is import and export without any value addition which

cannot be termed under services. Hence the assessee's claim for 10AA

regarding Surat Unit is not justified. The assessee's argument before

her that letter of approval by the Development Commissioner as per

SEZ Act and deduction allowed in preceding years was not found

convincing her to allow deduction U/s 10AA of the Act on importing the

goods and reexporting the same. In the assessee's case, the ld CIT(A)

had allowed 10AA deduction in A.Y. 2008-09 but which has been

pending before the ITAT or higher forum of appeal, therefore, she

disallowed the claim of the assessee. The assessee has debited various

expenses in the P&L account and had not segregated as per SEZ Unit

and Mumbai Unit but it had been claimed wholly in the Mumbai Unit to

inflate the profit in SEZ unit particularly remuneration to the Directors,

therefore, she gave the another opportunity to apportion the

expenditure between the units. The assessee submitted that Surat Unit

was controlled by the employees and managers from Surat. However, 5 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

policy decisions were taken by the Directors at the office of Mumbai but

these submissions were also not found convincing to her. After

considering the assessee's reply, she apportioned the Directors salary

on the basis of turnover. Finally she made addition of Rs.

25,37,14,968/- in the income of the assessee.

3. Being aggrieved by the order of the Assessing Officer, the

assessee carried the matter before the learned CIT(A), who had allowed

the appeal by observing as under:-

"4.3 I have carefully perused the order of the A.O. and submissions of the AR. alongwith the assessment order in the case of the assessee for A.Y. 2008-09. For A.Y. 2008- 09, the matter was decided on same facts by ITAT, Jaipur Bench in the case of the appellant. After a detailed discussion it was observed that as per section 51 of the SEZ Act it is mentioned that notwithstanding anything inconsistent therewith contained in any other law for time being in force or in any instrument having effect by virtue of any law other than this Act, the provisions of SEZ Act will prevail. The Hon'ble ITAT, jaipur Bench further observed that the implication of section 51 of the SEZ Act was that anything inconsistent to the provisions of the SEZ Act will not be considered. Thus, the word 'services' as mentioned 6 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

in section 10AA could not be construed inconsistently with the definition of then'services', given in the SEZ Act. Since, under the SEZ Act, trading is included in the term 'services' trading that is export of imported goods was held to be services and the assessee was allowed the deduction u/s 10AA of the I.T. Act.

The A.O. in her order in A.Y. 2009-10 has given the same facts and arguments as discussed in the order for A.Y. 2008-09. No new facts or arguments have been brought on record to controvert the finding of the Hon'ble ITAT, Jaipur Bench in the case of the assessee. As this ground of appeal and issues raised during this A.Y. are covered by the finding of the Hon'ble ITAT, Jaipur Bench vide its order supra, the assessee is allowed the claim U/s 10AA and the addition of Rs. 25,37,14,968/- is deleted."

4. Now the Revenue is in appeal before us. The learned Sr.D.R.

supported the order of the Assessing Officer. At the outset, the ld AR

for the assessee has submitted that Section 10AA of the Act was

inserted in Income Tax Act, 1961 vide Second Schedule of Special

Economic Zones Act, 2005 w.e.f. 10/02/2006. The assessee company is

an entrepreneur within the meaning of Section 10AA of the Act, who

has set up a unit as per SEZ Act read with Section 10AA of the Act. As 7 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

per Section 10AA, 100% deduction on profit and gain derived from

export of things and articles manufactured or produced or providing

services for a period of five consecutive assessment years. The

definition of manufacturing in Section 10AA has been assigned to it in

clause (2) of SEZ Act, 2005, which includes polishing as manufacturing

activity. The service word has been defined in SEZ Act, which also

covered under the general agreement on trade in service. The

Commerce Ministry vide Instruction No. 4/2006 has decided that while

units in the Special Economic Zone, who hold approval to do trading

activities will be allowed to carry out all forms of trading activity, the

benefits U/s 10AA will exclude trading other than trading in the nature

of reexport of imported goods. Section 51 of the SEZ Act reproduced as

under:-

"Sec 51: The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act."

The ld AR further relied on the decision of Hon'ble Supreme Court in the

case of Tax Recovery Officer VGs. Custodian Appointed under the

Special Court (2007) 293 ITR 369 and the Hon'ble Supreme Court had 8 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

interpreted this language that the law of the said Act will prevail over

the Income Tax Act. He further argued that the Hon'ble ITAT, Jaipur

Bench, has decided this issue in assessee's own case in favour of the

assessee. Therefore, he prayed to confirm the order of the ld CIT(A).

5. We have heard the rival contentions of both the parties and

perused the material available on record. The Coordinate Bench in ITA

No. 509/JP/2011 for A.Y. 2008-09 in assessee's own case had allowed

the appeal by observing as under:-

"2.18 The Hon'ble Apex Court in the case of State of Haryana Vs. M/s. Mahabir Vegetable Oils (P) Ltd. 2011-TIOL-24- SC-CT had an occasion to consider the applicability of promissory estoppel on public authorities. In the case before Hon'ble Apex Court, the state of Haryana in Industrial Policy for the period 01-04-1988 to 31-03- 1997 promised to give incentive by way of sales tax exemption for the industries set up in backward areas of the State. Schedule III appended to the Rules provides for a negative list of the industries and at the initial stage the solvent extract plant was admittedly not included in the negative list. On 16th Dec. 1996, amendment to the draft rules were notified and according to which sales tax benefit was to be given to the investment made upto 3rd Jan. 1996 and solvent 9 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

extraction plant was also placed in negative list. The Hon'ble Apex Court after considering the doctrine of promissory estoppel held that the assessee will be entitled to sales tax exemption in respect of the investment made upto 16th Dec. 1996, though the draft rules were circulated on 03-01-1996. It will be useful to reproduce the head note of this case.

"It is indeed difficult to see on what principle can a Government, committed to the rule of law, claim immunity from the doctrine of promissory estoppels: It is elementary that in a republic governed by the rule of law, no one, howsoever high or low, is above the law. Everyone is subject to the law as fully and completely as any other and the Government is no exception. It is indeed the pride of constitutional democracy and rule of law that the Government stands on the same footing as a private individual so far as the obligation of the law is concerned: the former is equally bound as the latter. It is indeed difficult to see on what principle can a Government, committed to the rule of law, claim immunity from the doctrine of promissory estoppels. Can the Government say that it is under no obligation to act in a manner that is fair and just or that it is not bound by considerations of "honesty and good faith"? Why should the Government not be held to a high "standard of rectangular rectitude while dealing with its citizens"? There was a time when the doctrine of executive necessity was regarded as sufficient justification for the Government to repudiate even its contractual obligations; but, let it be said to the eternal glory of this Court, this doctrine was emphatically negative and the supremacy of the rule of law was established. It was laid down by this Court that the Government cannot claim to be immune 10 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

from the applicability of the rule of promissory estoppels and repudiate a promise made by it on the ground that such promise may fetter its future executive action.

2.19 Though vide Instruction no. 1/2006 dated 24-03-2006, it was clarified that trading units can be set up in the SEZ. However, the modification was made on 24-05-2006 in which it was made clear that the deduction u/s 10AA will be available in respect of the trading in the nature of re- export of imported good. Thus the assessees were promised that they will be eligible for deduction u/s 10AA of the Act in respect of the profit earning on trading of re- export of imported goods. The revenue has not been able to show us that such instruction was not withdrawn or the Board has issued instruction that instruction dated 24-05- 206 from the Ministry of Commerce will not be applicable for the purpose of allowing exemption u/s 10AA of the Act. Hence, in view of the doctrine of promissory estoppel, we hold that the assessee is entitled to deduction.

2.20 We have also reproduced Section 51 of the SEZ Act. As per this Section, it is mentioned that notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act, the provision of SEZ Act will prevail. The Hon'ble Apex Court in the case of Tax Recovery Officer, Vs. Custodian Appointed under the Special Court, 293 ITR 369 had an occasion to 11 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

consider the meaning of language employed in Section 13 of the Special Court Act. In Section 13 of the Special Court Act, it was stated that provision of the Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. The Hon'ble Apex Court held that there can be no manner of doubt that the provision of Special Court Act wherever they are applicable shall prevail over the provision of the Income tax Act. The Hon'ble Delhi High Court in the case of CIT Vs. Vasisth Chay Vaapar Ltd., 330 ITR 440 held that when there is a provision in another enactment which contains a non obstente clause than that would override the provisions of the Income Tax Act. Thus one will have to consider the implication of Section 51 of the SEZ Act. It means that anything in-consistent to the provision of the SEZ Act will not be considered. Thus the word services as mentioned in Section 10AA cannot be construed in- consistently with the definition of services given in the SEZ Act. Under the SEZ act, the trading is included in the services provided the trading is export of imported goods. We therefore, feel that the assessee is entitled to deduction u/s 10AA of the Act and therefore, the ld. CIT(A) was justified in allowing the exemption.

3. In the result, the appeal of the revenue is dismissed."

12 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

The facts and circumstances of this case are identical, therefore, by

respectfully following the order of the Coordinate Bench in assessee's

own case for A.T. 2008-09, we also uphold the order of the ld CIT(A).

6. Now we are coming on the C.O. of the assessee, which was

against confirming the addition of remuneration of Director to the

extent of Rs. 14,06,790/-. The assessee challenged this addition before

the ld CIT(A), who had confirmed the addition by observing as under:-

"4.3 I have carefully perused the order of the A.O. and submissions of the AR. And I do not concur with the submissions of the AR. It is perceived that the directors are also the promoters of the company and therefore the ultimate responsibility for the financial success of operations of all the units of the company rests with them and it is to this end that hefty salaries are being paid to them. Given the scale of the business operations of the company it is true that they may not have been employed with the day to day operations of a particular unit but they cannot abdicate responsibility for the overall planning supervision and execution of the business including the unit at Surat for which they were getting the remuneration."

7. Now the assessee is in C.O. before us. The ld AR for the assessee

submitted that the Directors are sitting and residing in Mumbai and they 13 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

were devoting time on DTA unit of company in Mumbai and also day to

day work of administration, taxation and accounts works. SEZ unit at

Surat, which is being looked after by employees and Managers. The ld

Assessing Officer had not brought out any evidence that Directors were

rendering any service to the SEZ Unit at Surat. Therefore, he prayed to

delete the addition.

8. At the outset, the ld Sr. DR has supported the order of the lower

authorities.

9. We have heard the rival contentions of both the parties and

perused the material available on the record. The company is running

various units, which includes head office in jaipur, Mumbai and SEz Unit

at Surat. The overall work either trading or manufacturing is

responsibility of the Directors when company deals in precious items

cannot depend upon only employees and managers. They take the

decision what type of rough diamond should be imported, how it should

be processed and reexported. They not only take the business decision

but also involve in the manufacturing proceeding which they performed

at Surat. Therefore, we find that apportionment of salary among the

taxable and non-taxable unit is rightly done by the ld Assessing Officer 14 ITA 645/JP/2012 & CO 54/JP/2012_ ACIT Vs. M/s Goenka Diamonds & Jewellers Ltd.

and confirmed by the ld CIT(A). Accordingly, we uphold the order of the

ld CIT(A).

10. In the result, the revenue's appeal and C.O. of the assessee are

dismissed.

Order pronounced in the open court on 23/04/2014.

Sd/- Sd/- ¼vkj-ih-rksykuh½ ¼Vh-vkj-ehuk½ (R.P.Tolani) (T.R. Meena) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated:- 23rd April, 2015

*Ranjan

vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:

1. vihykFkhZ@The Appellant- The A.C.I.T., Circle-2, Jaipur.

2. izR;FkhZ@ The Respondent- M/s Goenka Diamonds & Jewellers Ltd., Jaipur.

3. vk;dj vk;qDr@ CIT

4. vk;dj vk;qDr¼vihy½@The CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur

6. xkMZ QkbZy@ Guard File (ITA No. 645/JP/2012 & C.O. 54/JP/2012)

vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar