M/S Jeans Knit Pvt. Ltd.,, Bangalore vs Department Of Income Tax

M/s.Jeans Knit Pvt. Ltd. No.21, E1, 2nd Phase, Industrial Area, Peenya, Bangalore-560058. ... Appellant PAN: AABCJ 4513 B

Vs.

Asst. Commissioner of Income-tax, Circle 11(5), Bangalore. ... Respondent

AND

ITA No.1516/Bang/2012 (Assessment year: 2007-08)

Deputy Commissioner of Income-tax, Circle 11(5), Bangalore. ... Appellant

Vs.

M/s.Jeans Knit Pvt. Ltd., Bangalore. ... Respondent

Assessee by: Shri Nageshwar Rao, Advocate. Revenue by: Shri T.S.N.Murthy, CIT(DR).

Date of hearing : 13/04/2015 Date of pronouncement: 17/04/2015

Per Smt. P.MADHAVI DEVI, JM:

These cross-appeals by the assessee as well as the

revenue are directed against the order of the CIT(A)-I,

Bangalore, dated 24/8/2012 for the assessment year 2007-08.

ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 2 of 11

2. Brief facts of the case are that the assessee-company

which is engaged in the business of manufacturing and export of

ready-made garments and also doing job works, filed its return

of income for the relevant assessment year declaring 'nil' income

after claiming the deduction of Rs.51,04,29,715/- u/s 10B of the

Income-tax Act, 1961 [hereinafter referred to as 'the Act' for

short] as 100% Export Oriented Unit (EOU). While examining

the claim of deduction u/s 10B of the Act u/s 143(3), the AO

observed that there was a survey action conducted at the

business premises of the assessee on 5/11/2009 and also in the

business premises of M/s.Fibres and Fabrics International Pvt.

Ltd. ('FFIPL' for short) and observed that both the concerns were

operating from the same premises at Bangalore. It was further

observed that the business premises of both are related and also

that both the concerns were not demarcated separately and

were not distinguishable and that there was nothing to indicate

that the two concerns were separate entities. It was further

observed that FFIPL had started its business in 2002 and the

assessee had started its business in September 2004 and while

FFIPL was claiming deduction u/s 80-HHC, the assessee was

claiming deduction u/s 10B of the Act. While considering the

assessee's claim of deduction u/s 10B of the Act, the AO further

observed that the assessee has got 5 units at Bangalore and that

the corporate office of both the companies was the same while

Unit Nos.4 & 5 of the assessee were earlier the business ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 3 of 11 premises of FFIPL and were rented to the assessee-company.

The statements of the Senior Manager (Maintenance of Plant and

Machinery) as well as the General Manager of the assessee-

company were recorded on the date of survey based on which

the AO was of the opinion that the assessee company was

formed by re-construction of the earlier FFIPL. Therefore, he

issued a show cause notice to the assessee as to why the

deduction u/s 10B should not be disallowed. The assessee filed

a detailed submission. After considering the submissions of the

assessee, the AO came to the following conclusions:

i. The approval of the EOU does not automatically make the assessee eligible for deduction u/s 10B of the Act and the deduction is available only after verification.

ii. Assessee has not claimed deduction u/s 10B of the Act from the very same first year as it was only doing the job work for FFIPL during the initial financial year 2004-05 and therefore there was no question of claiming deduction u/s 10B of the Act and that the contention of the assessee that the eligibility of deduction u/s 10B has to be verified only initially, is only partially correct. The assessee has not claimed any deduction u/s 10B for the assessment years 2005-06 and for assessment year 2006-07 it was allowed without verification and the assessment year 2007-08 is the first time that the whole deduction claim is being verified.

iii. The contention of the assessee that the old machinery from FFIPL was transferred to the assessee only in April, 2007 is not acceptable since the assessee had taken over ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 4 of 11 the premises of FFIPL along with old plant and machinery available in it and they have installed the new machinery over a period of time and that the assessee had started its first unit at 26/A, II Phase, Peenya in November 2004 and the second unit at No.485/2, 4th Stage, Peena in March 2005 and then it took over the vacant units of FFIPL at 34/A, 20/A, II Phase, Peenya in May, June and September 2005 and the remaining units in April 2007 and the statements of the owners of the premises at No.26/A and 485/2 prove that the 2nd unit was handed over to the assessee in July 2005 only as construction was completed in the last week of June 2005 and by this information it is clear that the assessee-company started the business of stitching i.e. job work in financial year 2004-05 and then took over the warehouse and the cutting units of FFIPL and thereafter took a new premises as a finishing unit and that it has taken over the processing unit and stitching unit of FFIPL within a short span of time.

iv. The business procedure of the assessee is such that all the units are doing different jobs and only after going through all the units, the end product which is exportable is obtained. Therefore, all the units have to be considered to have started at the same time.

v. Since purchase of the raw materials had started in June 2005 and first sales had occurred only after 20th July 2005, it is clear that the assessee rented new premises in the beginning mainly to show itself to be eligible for 10B deduction but that it had reconstructed the business of FFIPL by taking over of the units of FFIPL and only then did the manufacturing activity start. Since the assessee did not have inbuilt infrastructure and resources for export of garments it was completely dependent on FFIPL.

ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 5 of 11 2.1 Thus, the AO came to the conclusion that the although the

assessee had claimed to have started with the new unit, it had

to wait for obtaining the full and already established

infrastructure consisting of building and plant and machinery of

FFIPL and the man-power resources of FFIPL and then it started

the actual manufacturing activity. He further observed that

there was a transfer of the business of FFIPL to the assessee by

shifting of the employees as well as the customers of FFIPL.

Therefore, he came to the conclusion that it is the re-

construction of the business of FFIPL and hence the assessee

was not eligible for deduction u/s 10B of the Act.

2.2 Thereafter, he proceeded to consider the expenditure

claimed by the assessee in its profit and loss account. On

verification of the P&L Account of the assessee-company, he

noticed that the assessee has claimed to have incurred huge

expenditure of Rs.14,75,07,255/- towards 'Info and tracking of

delivery charges' and Rs.5,62,54,364/- as sales commission

during the relevant financial year. As regards 'Info and tracking

of delivery charges' the AO was of the opinion that the assessee

has made payments to a non-resident company M/s.Sharp Eagle

International Ltd., [SEIL] incorporated in Hongkong without

deduction of tax at source and that the duties of the said non-

resident have not been clearly spelt out in the agreement. The

correspondence produced by the assessee are not between the

assessee and the non-resident but are in the names of FFIPL and ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 6 of 11 one Mr.Manfred who is also not a representative of a non-

resident company SEIL. He observed that the assessee has not

furnished any e-mail correspondence with regard to the goods

purchased from Hongkong where M/s Sharp Eagle International

Ltd. is based. That the e-mail correspondence furnished by the

assessee in the course of assessment proceeding is nothing but

a deliberate attempt on the part of the assessee to mislead or

misdirect the authorities since such correspondence does not

concern the dealings between the assessee and SEIL. Thus

holding that the assessee has failed to prove the genuineness of

the expenditure claimed and that the same is not allowable, he

accordingly, disallowed it u/s 69C of the Act as unexplained

expenditure.

2.3 Without prejudice to the above, it was also disallowed

u/s 37(1) holding it to be not expended wholly and exclusively

for the business of the assessee.

2.4 Without prejudice to the above two findings, the AO

further held that the services rendered by SEIL for which

payments have been made are in the nature of fees for technical

services which require TDS before payment. He accordingly

disallowed it u/s 40a(ia) read with sec195 read with 9(1)(vii) of

the Act.

2.5 As regards the payment of sales commission, the AO

observed that out of the total amount of Rs.5,62,54,364/-, a ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 7 of 11 sum of Rs.4,83,88,732/- has been paid to Shri Anupam Kothari,

the MD of the assessee company and an amount of

Rs.78,65,632/- has been paid to Hongkong Inc, USA. After

considering the statements given by Shri Anupam Kothari during

the course of search and after going through the details filed by

the assessee for payment of commission, the AO was of the

opinion that the payment of huge sum of Rs.4.83 crores to MD

Shri Anupam Kothari was unduly excessive and unreasonable as

per section 40(a)(ia) of the Act and also that the MD has not

shown this income in his return filed for the assessment year

2007-08 and since the payee had not paid tax thereon, the

assessee is not eligible for deduction of the sum. He further

observed that since it was an overseas commission, TDS was to

be made before payment and as no TDS was made, it is not

allowable as a deduction. In view of the same, he disallowed the

commission paid to the MD Shri Anupam Kothari both under

sections 40(a)(ia) as well as section 37 of the Act. As regards

commission paid to Honkong Inc.USA, the AO observed that the

assessee had failed to produce any details pertaining to the said

payment. Therefore in the absence of evidence, the amount was

disallowed u/s 69C of the Act.

3. Aggrieved by the disallowance of deduction u/s 10B as

well as the expenditure claimed by the assessee, the assessee

preferred an appeal before the CIT(A) by filing the relevant

details before him. The CIT(A) called for a remand report from ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 8 of 11 the AO and after considering the issue in detail, he allowed

deduction u/s 10B of the Act by setting aside the finding of the

AO that the assessee's business is re-construction of the

business of FFIPL but as regards the disallowance of the

expenditure, the CIT(A) held that set aside of the disallowance

would only increase the profit and thereby enhance the eligible

business income and accordingly deduction u/s 10B and

therefore the decision on this issue would become academic.

He, accordingly refrained from giving a decision on the

allowability of the expenditure claimed by the assessee.

4. Against the relief given by the CIT(A), the Revenue is in

appeal before us, while against the non-giving of the decision on

the disallowance of the expenditure made by the AO, the

assessee is in appeal before us.

5. In the assessee's appeal, the learned counsel for the

assessee submitted that the expenditure incurred by the

assessee was for the business of the assessee and that the

assessee has produced all the relevant details before the AO in

support of its contention. He submitted that the genuineness of

the expenditure has not been doubted by the authorities below

but the AO has made the disallowance solely on the ground that

the connection between the assessee and the non-resident

company has not been proved. According to him, the material

filed by the assessee before the AO clearly prove that the ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 9 of 11 assessee had availed all the services of the non-resident

company and has benefited from such services and therefore the

assessee has made payment for its business purposes and has

to be allowed. Similarly, arguments were advanced in respect of

payment of commission to the MD as well as Hongkong Inc.USA.

The learned Departmental Representative, on the other

hand, supported the orders of the AO as well as the CIT(A) and

submitted that the burden is on the assessee to prove the

genuineness as well as the business connection of the payment.

Coming to the revenue's appeal, the learned Departmental

Representative supported the orders of the AO while the learned

counsel for the assessee supported the order of the CIT(A).

6. Having heard the rival contentions and having considered

the material on record, we find that the CIT(A) has considered

the issue at length and has come to the conclusion that there

was no transfer of old plant and machinery during the financial

year 2004-05, 2005-06 and 2006-07 and further that the plant

and machinery purchased by the assessee from FFIPL in the

financial year 2007-08 also did not exceed 20% of the total plant

and machinery of the assessee during the said financial year. He

further observed that since there was no purchase of old plant

and machinery from FFIPL in the earlier assessment year even

as per contemporaneous records of the EOU/Customs

authorities. The relevant date of the plant and machinery ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 10 of 11 purchased by the assessee over the years is reproduced at para

1.2.3, page 30 of the order of the CIT(A). Thus, CIT(A) held

that the manufacturing activity carried on by the assessee in the

assessment years earlier to assessment year 2008-09 was by

use of new plant and machinery. As regards the transfer of

business premises, employees and the customers of FFIPL to the

assessee, the CIT(A) observed that there was no prohibition in

the use of the business premises of FFIPL by the assessee and

also of the employees and customers of FFIPL and further that

the transfer of employees and customers of the assessee was

only a small percentage of the total employees and customers of

the assessee respectively. Thus holding, the CIT(A) set aside

the finding of the AO and allowed the deduction u/s 10B of the

Act. We find that the CIT(A) has given elaborate reasons for

coming to the conclusion and that the learned Departmental

Representative has not been able to rebut any of the findings of

the CIT(A) with any evidence to the contrary. Since the findings

of the CIT(A) are based upon the evidence produced by the

assessee which has not been rebutted by the revenue, we do not

see any reason to interfere with the order of the CIT(A). Thus,

the revenue's appeal is dismissed.

7. Consequent to the dismissing of the revenue's appeal,

merits of the disallowance of the expenditure claimed by the

assessee would only become academic as rightly held by the

CIT(A). Disallowance of the expenditure would only increase the ITA No.1382 &1516/Bang/2012 M/s.Jeans Knit Pvt. Ltd

Page 11 of 11 claim of deduction /s 10B of the Act and therefore decision on

the merits of the disallowance is only academic at this stage. In

view of the same, we do not see any reason to adjudicate these

issues at this stage. The assessee's appeal is also dismissed.

8. In the result, both the cross-appeals are dismissed.

Pronounced in the open court on 17th April, 2015.

sd/- sd/- (Pramod Kumar) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER

eksrinivasulu

Copy to:

1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore