Green Fire Exports , Jaipur vs Department Of Income Tax

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR

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. 431/JP/2012 fu/kZkj.k o"kZ@Assessment Year : 2009-10. The Income Tax Officer, cuke M/s. Green Fire Exports, Ward 1(2), Vs. Dangayach Mansion, Jaipur. SMS Highway, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. AAEFG 9837 H vihykFkhZ@Appellant izR;FkhZ@Respondent

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

lquokbZ dh rkjh[k@ Date of Hearing : 05.05.2015. ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 17/7/2015

vkns'k@ ORDER

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

This is an appeal filed by the Revenue emanating from the order of ld. CIT

(A)-I, Jaipur dated 16.02.2012 for the A.Y. 2009-10. The effective grounds raised in

the appeal are as under :-

" Whether on the facts and in the circumstances of the case and in law the ld. CIT (A)-I, Jaipur is justified in :-

1. Deleting the addition of Rs. 20,82,95,557/- on account of disallowance of deduction u/s 10 AA of I.T. Act.

2 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

2. Deleting the addition of Rs. 7,27,84,744/- treated as income from other sources by A.O. after estimating the G.P. rate at 25% as against declared G.P. rate of 36.55%."

2. Both the grounds of appeal are inter linked on allowing the deduction under

section 10AA at Rs. 20,82,95,557/- and estimating the GP rate at 25%, and deletion of

addition of Rs. 7,27,84,744/-. The AO observed that assessee filed its return of income

for assessment year 2009-10 on 19.09.2009 declaring income of Rs. 1,17,470/-. The

case was scrutinized under section 143(3) of the IT Act. The ld. AO had mentioned

brief history of the case i.e. M/s. Green Fire Exports is holding status of a firm which

started its business from A.Y. 2007-08 and is carrying on business of manufacture and

export of jewellery. The assessee firm was having two partners viz. Smt. Kamlesh

Dangayach and Shri Atul Dangayach having partnership ratio of 80% and 20%

respectively. During the year under consideration, Shri Hari Mohan Dangayach had

joined as partner and Shri Atul Dangayach had retired and the new profit sharing ratio

between Smt. Kamlesh Dangayach and Shri Hari Mohan Dangayach is of 60% and 40%

respectively. The assessee firm is claiming 100% deduction under section 10AA of the

IT Act being a SEZ Unit. The AO further held as under :-

(1) Smt. Kamlesh Dangayach was proprietor of M/s. Green Fire till 2006-07

having same business i.e. manufacturing and export of gems, stones & jewellery.

(2) The assessee firm received total capital of Rs. 37,00,000/-, out of which

Rs. 27,00,000/- has been received from M/s. Green Fire, proprietorship concern

of Smt. Kamlesh Dangayach. Therefore, there was a direct intake of capital from 3 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

M/s. Green Fire to M/s. Green Fire Exports. Thus M/s. Green Fire Exports has

not been formed out of new funds.

(3) The AO had made comparison of month-wise expenses and sales of M/s.

Green Fire Exports for A.Y. 2007-08, 08-09 and 09-10 which represents shifting

of the contract from M/s. Green Fire to M/s. Green Fire Exports.

(4) The purchases and sales parties of both the concerns were mostly found

common.

(5) The employees of M/s. Green Fire were shifted to M/s. Green Fire Exports.

(6) The unsecured loans were taken by both the concerns mostly from a

common person.

(7) The assessee firm has been formed by splitting up or reconstruction of

business already in existence as per section 10AA of the IT Act.

(8) The manufacturing activity of eligible unit was same as old business in the

name of M/s. Green Fire. Even the brand name of both the concerns is strikingly

similar. The AO gave reasonable opportunity of being heard to the assessee on

this issue that why assessee's business should not be treated as business formed

by splitting up or reconstruction of business already in existence.

(9) The AO also compared GP and NP rate of M/s. Green Fire for A.Y. 2006-07

and GP and NP rate of M/s. Green Fire Exports for A.Ys. 2007-08, 08-09 & 09-10.

(10) The AO concluded that in M/s. Green Fire the GP & NP was less than GP &

NP of M/s. Green Fire Exports from A.Y. 2007-08 to 09-10, which are more than

the ordinary profit which might be expected to arise in such eligible business. 4 ITA No.431/JP/2012 A.Y. 2009-10.

M/s. Green Fire Exports, Jaipur.

Therefore, ld. AO asked the assessee to show cause as to why application of

sub-section (10) of section 80IA, as given in sub section (9) of section 10AA

should not be applied and profits of eligible unit be recomputed on the basis of

some acceptable method of working out the profits. He further observed that

Smt. Kamlesh Dangayach had negative capital balance of Rs. 20,59,54,668/- and

interest payment by the assessee firm was more than Rs. 79,00,000/- which

would not have been made, had there not been the drawing by the partner more

than her own capital. The AO also gave show cause notice on interest payment

and disallowance of interest @ 12% on total drawing by the partner. The

assessee filed the reply before the AO through various letters which have been

reproduced by the AO on pages 11, 12, 13, 14, 15, 16, 17 & 18 of his order.

The AO after considering assessee's reply concluded that the year under

consideration is not the first year of the assessee firm. The firm had been filing

its return since A.Y. 2004-05 but manufacturing stated in the unit in A.Y. 2007-

08 and claimed deduction under section 10AA from A.Y. 2007-08. The previous

records of the firm were verified by the AO. There were hardly any expenses in

Profit & Loss account. Therefore, he concluded that manufacturing activity had

been started from A.Y. 2007-08. The proprietary concern of Smt. Kamlesh

Dangayach is no more and existed only in paper in A.Y. 2007-08. The

transaction between assessee and M/s. Green Fire was normal business

transaction as claimed by the assessee but transacting parties of both the parties

are the same. Therefore, there was a shifting of contract from M/s. Green Fire to 5 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

M/s. Green Fire Exports. The employees of M/s. Green Fire numbering 63 had

been shifted to the assessee which is tantamount to reconstruction of old

business. The AO held that unit set up in SEZ is not actually 'all the same a new

and identifiable unit.' A business activity normally comprises assets, employees

and contracts. When there was a movement from old unit to new unit it

tantamount to reconstruction. The major sales party of M/s. Green Fire and

assessee was M/s. Emsaru USA Corporation. Reconstruction of business involves

the idea of substantially the same persons carrying on substantially the same

business. The reconstruction of business already in existence essentially rests on

changes must be constructive and not destructive. The construction of existing

business also finds reflection in the fact that most of the purchase parties of both

units are same. He further found that capitals, human resources, contracts,

customers and brand name had been shifted from M/s. Green Fire to M/s. Green

Fire Exports, assessee firm which tantamount to reconstruction of business

already in existence. The AO held that assessee's business is reconstruction of

old business as per section 10AA(4)(ii) and, therefore, deduction of Rs.

20,82,95,557/- was disallowed and claim under section 10AA by the AO.

(11) He further observed that assessee has shown unreasonable profit in

export business in comparison to other parties in the same business. Therefore,

a show cause notice was given by the AO which was replied by the assessee. It

is submitted that assessee firm has been manufacturing fancy items having very 6 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

good demand in international market as the margin of profit was higher on the

said items. The dollar rate has also been increased. Therefore, assessee had

earned good rate of GP & NP. Further the goods price has been verified by the

Customs Authority at the time of clearance. But assessee's reply was not found

convincing to the AO on following grounds :-

(i) First of all, the assessee has stated that it was engaged in business of stones and diamonds jewellery and M/s. Green Fire was engaged in business of diamond jewellery. The difference in nature of business of both the concerns doesn't turn out clearly and appears to be same only.

(ii) Further, it was stated that the dollar rate had increased during the concerned year and that explained the increased profits. However, no documentary evidence has been brought on record to prove the same. And it is not readily believable that foreign rate exchange difference could explain this huge difference in profits of both the units. Another important aspect which deserves consideration is the fact that even M/s. Green Fire was exporting and that too to the same party. So the explanation of the assessee is clearly an evasive answer and offers no satisfactory justification for the abnormally high profits.

(iii) Another explanation forwarded by the assessee was that the export price of goods is appraised/assessed by the Customs Authorities before they are exported as per SEZ rules and that the export can be made after the assessed value/appraised value by the said authority. This submission is not acceptable as the Customs Authorities do not actually determine the value at which SEZ units sell or buy the items, rather they only keep a check/monitoring on the goods taken out and brought in by these units and have no say in determining the value of the same, as claimed by the assessee.

7 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

(iv) Moreover, the chart depicting % to turnover of expenses in both the units clearly tells that the figures of both the units are very much comparable and hence the difference in the GP rate of both the concerns is not explained satisfactorily by the assessee and thus can be held as more than the ordinary profits which might be expected to arise in such eligible business and thus represents unusually high GP rate, as mentioned in 80IA(10).

Therefore, AO rejected the books under section 145(3) of the Act. He applied 25% GP

on turnover of Rs. 63,01,18,955/- which comes to Rs. 15,75,29,739/- as reasonable as

against declared by the assessee @ 36.55%. Therefore, net profit comes to Rs.

13,51,21,983/- and difference of Rs. 7,27,84,744/- was added to the total income of

the assessee under the head Income from Other Sources and shall be taxable at normal

rates without being eligible for deduction under section 10AA.

3. Being aggrieved by the order of AO, assessee carried the matter before ld. CIT

(A). The ld. CIT (A) after considering the assessee's reply allowed the appeal by

observing as under :-

" 4.3. I have carefully perused the order of the AO, submissions of the AR and the orders of the Hon'ble ITAT. The Hon'ble ITAT Jaipur Bench in the appellant's own case for A.Y. 2007-08 and 2008-09 in ITA No. 426/JP/10 order dated 18.3.2011 and ITA No. 477/JP/11 dt. 20.01.2012 respectively decided the case in favour of the appellant dismissing the appeal of the department and confirmed the order of ld. CIT (A) on the same facts. The ld. CIT (A) in his order dt. 22/03/11, ITA No. 428/10-11 discussed the issue at length and on page 5 gave the following finding :-

" Contention of the AR is considered. In the immediately preceding year i.e. AY 07-08 when manufacturing in the appellant's concern 8 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

started first time and deduction u/s 10AA was claimed, the issue was decided in favour of the appellant. It was held that substantial new capital was introduced in the new unit. The plant was not set up by shifting of machinery of old units but new machinery worth more than Rs. 43 lacs were purchased. The employees of old concern M/s. Green Fire Exports did not shift en-mass to the new unit but they left the job and joined the new unit keeping in mind their better prospects. It was held that employees though important part of business undertakings cannot be considered as an asset in its commercial sense. It is not a case of reconstruction of business as the assets appearing in the b/s of old concern were not shifted to the new unit. The purchasing or selling parties may be common but it cannot amount to reconstruction of old business. As plant and machinery of the old business are lying as it is the appellant's case under the facts and circumstances was not considered case of reconstruction of existing business. As all other requirements of the section have been fulfilled, the claim of deduction u/s 10AA was found justified. The present year under consideration is only second year of continuity of business and no new facts were noticed by the AO. The deduction allowed u/s 10AA in its first year of commencement should be continued to be allowed in the second year as long as the conditions of Sec. 10AA are fulfilled."

There is no change in the facts of the case in the year under consideration. Since the AO has not brought any facts/evidence or arguments to controvert the findings of the Hon'ble ITAT in the case of the appellant on same facts in the A.Y. 2007-08 and 2008-09 the matter is covered. Respectfully following the decision of Hon'ble ITAT, the AO is directed to allow exemption claimed by the appellant u/s 10AA of IT Act 9 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

amounting to Rs. 20,82,85,557/-. The first ground of appeal is thus decided in favour of the appellant.

For rejection of books of accounts under section 145(3) : "5.3. I have carefully perused the order of the AO, submissions of the AR. The four factors required to be verified for determining the income of the appellant are purchase & sales bills, valuation of opening stock and closing stock. The AO has not brought on record any evidence regarding defects noted in any of these factors. The only premise for invoking provision of Sec. 145(3) is that the GP of the appellant was higher than that of its sister concern M/s. Green Fire. This could be a good basis to investigate further the reasons thereof but not good enough to reject the books of accounts and invoke provisions of Sec. 145(3) particularly when the appellant was a 100% export unit and all its sales were appraised by the Customs Authorities. Moreover, the same issue was adjudicated upon by the ld. CIT (A)-I vide his order dt. 19/02/10 in ITA No. 484/09-10 in the case of the appellant for A.Y. 2007-08. On same facts the ld. CIT (A)-I has given a finding in favour of the appellant. The AO has not brought on record any evcidence or argument to controvert this finding of ld. CIT (A)- I. Therefore, the decision of the AO to reject the books of accounts of the appellant by invoking provisions u/s 145(3) is not upheld. Consequent the estimation of G.P. rate at 25% of turnover and treating the difference of Rs. 7,27,84,744/- as income from other sources is not upheld. The impugned addition of Rs. 7,27,84,744/- is deleted."

For application of GP rate @ 25% :

"6.3. I have carefully perused the order of the AO, submissions of the AR and order of the ld. CIT (A)-I in ITA No. 484/09-10 dt. 19.02.10 in the case of the appellant for A.Y. 2007-08 wherein he has observed as follows :-

10 ITA No.431/JP/2012 A.Y. 2009-10.

M/s. Green Fire Exports, Jaipur.

" Contention of the AR is considered. While invoking provisions of section 145(3) the AO has considered the profits declared by the appellant is more than the ordinary profits and casually made remark that due to un usually high g.p. the provisions of section 80IA(10) are applicable. No separate disallowance has been made on this account as the AO has rejected the claim of deduction made by appellant u/s 10AA. However, from facts of the case, it is clear that there is no business between the assessee and persons having close connection and, therefore, provisions of section 80IA(10) cannot be invoked. The AO has also not brought out a single such instance where the appellant was found having close connection with the parties and has failed to establish that the course of business between them was so arranged that the business produced to the appellant more than profit which might be expected to arise in such eligible business. The application of provisions of section 80IA(10) in the present case cannot be upheld."

Since the matter has already been adjudicated upon by the ld. CIT(A)-I vide his order (supra) in favour of the appellant and this decision has been accepted by the Department in so far that no second appeal was filed the matter is covered by the finding of the ld. CIT (A)-I. The ground of appeal is, therefore, decided in favour of the appellant."

4. Now the revenue is before us. The ld. CIT D/R supported the order of the AO

and argued that ld. AO had depicted the picture of the assessee firm on the basis of

facts and figures that assessee's business was reconstruction of business already in

existence. The assessee firm also had shown abnormal profit in export business in the

year under consideration @ 36.55% which is unusually high GP rate compared to other 11 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

units engaged in the same business. The assessee had not made out the difference of

goods manufactured by both the concerns i.e. proprietary concern as well as

partnership concern. Accordingly, she requested to confirm the order of AO.

5. On the other hand, the ld. A/R of the assessee submitted that this issue has

been considered by Hon'ble ITAT Jaipur Bench in A.Ys. 2007-08 and 08-09 which had

been relied upon by ld. CIT (A) and after relying on the decision of Hon'ble Bench has

allowed the assessee's appeal in ground no. 1 i.e. deduction under section 10AA at Rs.

20,82,95,557/-.

6. In respect of ground no. 2, he argued that the department has accepted the ld.

CIT (AS)'s order in A.Ys. 2007-08 and 08-09 and no appeal has been filed before

Hon'ble ITAT. Therefore, he requested to allow the appeal being covered by the earlier

years' order.

7. We have heard rival contentions and perused the material on record. The co-

ordinate Bench in ITA No. 426/JP/2010 for A.Y. 2007-08 and in ITA No. 477/JP/2011

for A.Y. 2008-09 had considered the issue of reconstruction and deduction claimed

under section 10AA. The ld. CIT (A) has followed the ITAT order and allowed the

assessee's appeal holding that the issue is identical to assessment years 2007-08 and

08-09. Regarding rejection of books of accounts under section 145(3) of the IT Act and

applying GP rate of 25% and estimating the profit under section 80IA(10) read with

section 10AA(9), the AO had compared the GP and NP rate of M/s. Green Fire and

assessee for A.Y. 2007-08. The ld. AO has not brought on record that M/s. Green Fire

has exported the same items to the same parties. Further, it is informed by 12 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

the assessee that business of M/s. Green Fire Exports is exclusively manufacturing of

ornaments studded with precious and semi precious stones and diamonds. Whereas

M/s. Green Fire was engaged in trading of diamond and manufacturing of studded

diamond items and claimed that both the businesses are separate and cannot be

compared. The assessee's assertion was that in diamond business, the margin of profit

remains very low as compared to precious/semi precious stones and that the assessee

firm manufactured fancy items having very good demand in international market and

the margin of profit was also higher on it. The GP and NP was also dependent on dollar

rate with rupee. It is also fact that SEZ Unit is controlled by the Customs Authorities

and there is a check on the under invoicing or over invoicing. The ld. AO had not also

brought on record that items exported by the two concerns are same and there are no

details of parties to whom the goods were exported. The department had not filed any

appeal on similar issue before us in A.Y. 2007-08 and 2008-09. Therefore, we confirm

the order of ld. CIT (A).

8. In the result, appeal of the Revenue is dismissed.

Order pronounced in the open court on 17.07.2015.

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:- 17/7/ 2015 Das/ 13 ITA No.431/JP/2012 A.Y. 2009-10. M/s. Green Fire Exports, Jaipur.

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

1. vihykFkhZ@The Appellant- The ITO Ward 1(2), Jaipur.

2. izR;FkhZ@ The Respondent- M/s. Green Fire Exports, 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. 431/JP/2012)

vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar