M/s. Devrekh Exports(Sez), Surat V. The ACIT.,Circle-3, Surat

ITA 3965/AHD/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9374 (ITAT-AHMEDABAD)
• Duration Of Justice: 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 13-08-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 05-12-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Keywords: Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI T.K.SHARMA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER DATE OF HEARING : 13.08.09 DRAFTED ON: 17.08.0 9 ITA NO.3965/AHD/2008 ASSESSMENT YEAR : 2005-06 M/S.DEVREKHA EXPORTS (SEZ) 10, GARDEN AVENUE NEAR KAPADIA HEALTH CLUB NEW CIVIL ROAD SURAT VS. THE ASST.CIT CIRCLE-3 SURAT PAN/GIR NO. : AAEFD 3374 N (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI RAJESH SHAH, AR RESPONDENT BY: SHRI C.K. MISHRA, DR O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS APPEAL IS BY THE ASSESSEE THE ORDER OF TH E LD.CIT(APPEALS)-II, SURAT DATED 11/09/2008 PASSED FOR ASSESSMENT YEAR 2 005-06. THE FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESSEE IN ITS APPEAL:- 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WE LL AS LAW ON THE SUBJECT, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF CLAIM U/S.10A. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WE LL AS LAW ON THE SUBJECT, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 2 - HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.2,15,298/- ON ACCOUNT OF FORWARDING EXPENSES. 3. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WE LL AS LAW ON THE SUBJECT, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.81,466/- ON ACCOUNT OF FO RWARDING EXPENSES. 4. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WE LL AS LAW ON THE SUBJECT, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.2,92,150/- ON ACCOUNT OF FORWARDING EXPENSES. 5. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WE LL AS LAW ON THE SUBJECT, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.6,48,000/- ON ACCOUNT OF FORWARDING EXPENSES. 6. DEDUCTION U/S.10A MAY ALSO BE ALLOWED ON THE ULTIMA TE PROFIT THAT MAY BE ASSESSED ON CONFIRMATION/DELETION OF AN Y DISALLOWANCE/ADDITIONS MENTIONED IN THE GROUNDS OF APPEAL AT SERIAL NO.2 TO 5. 7. IT IS THEREFORE PRAYED THAT ABOVE DISALLOWANCES/ADD ITION BY ASSESSING OFFICER AND CONFIRMED BY COMMISSIONER OF INCOME- TAX(APPEALS) MAY PLEASE BE DELETED. 8. APPELLANT CRAVES LEAVE TO ADD, ALTER OR DELETE ANY GROUND(S) EITHER BEFORE OR IN THE COURSE OF HEARING OF THE AP PEAL. ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 3 - 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE HAS MADE THE CLAIM U/S.10A OF THE I.T. ACT, 1961 IN RESPECT OF ITS UN IT LOCATED AT PLOT NO.164, SACHIN, SEZ, SURAT. THE TOTAL PROFIT SHOWN BY THIS UNIT WAS RS.55,22,196/- AND THE ASSESSEES CLAIM U/S.10A OF THE I.T. ACT, 1 961 WAS RS.54,72,822/-. THE ASSESSING OFFICER REJECTED THE ASSESSEE'S SUBMISSIONS ON THE GROUND THAT FIRSTLY, DURING THE YEAR, THE ASSESSEE HAD SHOWN INSTALLATION OF MACHINERY OF ONLY RS.88,180/- WHICH INCLUDED A WELDING UNIT WITH WATER-COOLING SYSTEM. OTHER MACHI NES SHOWN IN THE BLOCK OF ASSETS WERE DRILL MACHINES AND ANCILLARIES . THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE ON ELECTRICITY, EVEN THOUG H SUCH MACHINES HAD TO BE RUN BY ELECTRICITY. THE ASSESSEE ALSO OWNED A CO MPUTER WHICH REQUIRED ELECTRICITY. NO EXPENDITURE HAD BEEN INCURRED ON TE LEPHONES ETC EVEN THOUGH THE ASSESSEE HAD CLAIMED TO HAVE MADE OVERSE AS SALES. FURTHER, THE MACHINERY SHOWN IN THE BLOCK OF ASSETS REQUIRED WEL DING RODS AND ARGON GAS TO BE FUNCTIONAL. THE ASSESSEE HOWEVER HAD NOT INCURRED ANY EXPENDITURE ON SUCH ITEMS. MOST IMPORTANTLY, THE AS SESSING OFFICER HAD DEPUTED THE INSPECTOR OF INCOME TAX TO MAKE FIELD I NQUIRIES WHICH SHOWED THAT THE PREMISES AT THE GIVEN ADDRESS HAD BEEN CLO SED AND NO MANUFACTURING ACTIVITY WAS BEING CARRIED ON. THE AS SESSING OFFICER, THEREFORE, CAME TO THE CONCLUSION THAT THE ASSESSEE HAD NOT CARRIED OUT ANY ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 4 - MANUFACTURING ACTIVITY IN THE SEZ, AND CONSEQUENTLY DISALLOWED THE AMOUNT CLAIMED U/S 10A OF THE I.T. ACT, 1961 AND M ADE THE ADDITION OF RS.54,72,822/- TO THE ASSESSEE'S TOTAL INCOME. 3. ON APPEAL BEFORE THE LD.CIT(APPEALS), THE LD. AU THORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT ASSE SSEE WAS ENGAGED IN MANUFACTURING TEXTILE MACHINERY, WHICH WAS EXPORTED . THE MACHINERY MANUFACTURED WAS 'JET-DYEING MACHINE WHICH HAD BEE N INVENTED AND PATENTED (NO. 171568) BY SHRI D. S. NAIK THE MAIN P ARTNER OF THE ASSESSEE FIRM. ACCORDING TO THE AR, THE MAJOR PARTS OF SUCH MACHINES WERE MANUFACTURED UNDER THE SUPERVISION OF SHRI NAIK AND THE MANUFACTURED PARTS WERE SENT TO THE PREMISES IN THE SEZ WHERE TH EY WERE ASSEMBLED AND TESTED. AFTER BEING APPROVED, THE MACHINERY WAS DIS ASSEMBLED AS PER THE PACKAGING REQUIREMENTS AND THE PRODUCT WAS DISPATCH ED BY SHIPPING CONTAINERS AFTER BEING VERIFIED BY THE CUSTOM DEPAR TMENT. COPIES OF THE TEST REPORT OF ALL THE MACHINES EXPORTED DURING THE YEAR, HAD BEEN FURNISHED. THE AR HAS SUBMITTED A BOOKLET WHICH IS SENT WITH EACH EXPORT CONSIGNMENT GIVING THE DETAILS OF EACH MACHINE. THE TURNOVER DURING THE YEAR WAS RS.1,89,42,608/- AND THE NET PROFIT WAS R S.55,22,196/-. THE ASSESSEE HAD DEBITED PURCHASES TO TRADING ACCOUNT, BUT HAD FAILED TO DEBIT ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 5 - ELECTRICITY EXPENSES AND WAGES. THE EXPENSES INC URRED ON ELECTRICITY WAS RS.39,268/- AND THE WAGES WAS OF RS.20,381/-. THES E WERE NOT RECORDED SINCE THEY WERE INCURRED IN CASH OUT OF THE WITHDRA WALS MADE BY SHRI NAIK FROM M/S DEVREKHA HIS PROPRIETORSHIP CONCERN. THE E LECTRICITY BILLS AND WAGES WERE SUPPORTED BY BILLS AND THE WAGE REGISTER . THE AR HAS PRODUCED THE ELECTRICITY BILLS IN ORIGINAL. IT H AS BEEN FURTHER SUBMITTED THAT THE TOTAL INVESTMENT IN FIXED ASSETS WAS. OF R S.11,71,442/-. SINCE, THERE WAS HARDLY ANY MANUFACTURING ACTIVITY, NO FUR THER INVESTMENT WAS MADE IN SUCH ASSETS. IF NO MANUFACTURING HAD BEEN C ARRIED OUT BY THE ASSESSEE, THEN THE CUSTOM DEPARTMENT WOULD NOT HAVE GIVEN THE PERMISSION TO EXPORT. THE PARTS OF THE DYEING MACHI NE WHICH WERE PROCURED LOCALLY WERE ACCOMPANIED BY PROCUREMENT CE RTIFICATES ISSUED BY THE CUSTOM AUTHORITY. ALL THE EXPORT DOCUMENTS WERE FURNISHED, WHICH CLEARLY SHOWED THAT THE ASSESSEE HAD EXPORTED 'JET- DYING MACHINE' FROM ITS UNIT AT SACHIN, SEZ. DURING THE YEAR, A TOTAL OF 16 'JET-DYEING MACHINES' HAD BEEN EXPORTED. THIS MACHINE IS MANUFACTURED ONL Y BY THE ASSESSEE AND PATENTED IN THE NAME OF SHRI NAIK, THE MAIN PAR TNER. THE ASSESSING OFFICER, THEREFORE, WAS NOT JUSTIFIED IN TAKING TH E VIEW THAT THERE WAS NO MANUFACTURING ACTIVITY IN THE SEZ DURING THE YEAR. THE FACTORY HAD BEEN CLOSED DOWN AFTER THE LAST EXPORT IN THE MONTH OF M AY-2007. IT IS FOR THIS ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 6 - REASON THAT THE INSPECTOR HAD FOUND THE PREMISES TO BE CLOSED. HOWEVER, THE MACHINERY AND THE OTHER MATERIALS WERE LYING IN THE FACTORY PREMISES AND THE SAME WERE REMOVED AFTER PAYING CUSTOM DUTY AT THE TIME OF DE- BONDING. THE AR HAS CONTENDED THAT IF THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATIONS FURNISHED BY ASSESS EE, HE COULD HAVE MADE DIRECT ENQUIRIES FROM THE CUSTOM AUTHORITIES TO ASCERTAIN WHETHER OR NOT ANY MANUFACTURING ACTIVITY HAD BEEN CARRIED OUT IN THE SEZ UNIT. ALONG WITH THE WRITTEN SUBMISSIONS OF THE AR, SHRI D.S. NAIK HAS SUBMITTED A DETAILED AFFIDAVIT EXPLAINING HIS ACHIE VEMENTS IN THE FIELD OF DEVELOPING THE SAID TEXTILE MACHINERY, AND THE REWA RDS AND AWARDS THAT HE HAS WON OVER THE YEARS. HE HAS ALSO ATTEMPTED TO EX PLAIN THAT THE TECHNICALITIES OF THE MACHINERY ITSELF. HE HAS ALSO STATED THAT THE ASSESSEE'S FACTORY IN GIDC, SACHIN HAD BEEN SHIFTED TO THE SEZ TO GAIN ADVANTAGE IN EXPORTS IN THE INTERNATIONAL COMPETITIVE MARKET. HO WEVER, THE BUSINESS HAD SUFFERED LOSSES BECAUSE A SUM OF RS.30 LAKHS HAD BE EN SPENT FOR SETTING UP THE INFRASTRUCTURE AND BUILDING IN THE SEZ. SHRI NAIK HAS BEEN ENGAGED IN MANUFACTURING SUCH TEXTILE MACHINERY OVER THE YEARS , AND HIS FIRM HAD BEEN APPROVED AND RECOGNISED BY THE DEPARTMENT OF S CIENTIFIC AND INDUSTRIAL RESEARCH, GOVERNMENT OF INDIA. EXEMPTION U/S 35 OF THE IT ACT HAD ALSO BEEN GRANTED. ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 7 - 4. THE LD.CIT(APPEALS), AFTER CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE HELD AS UNDER:- 6. I HAVE CAREFULLY CONSIDERED THE FINDINGS AND CO NCLUSION OF THE AO ON ONE HAND, AND THE WRITTEN SUBMISSIONS OF THE AR ON THE OTHER AND THE AFFIDAVIT OF SHRI D. S. NAIK, ALL EGEDLY THE MAIN PARTNER OF THE ASSESSEE FIRM. THE SUBMISSIONS OF TH E AR AS ALSO THE CONTENTIONS OF THE PARTNER MAINLY SEEK TO SHOW THAT SHRI NAIK HAS BEEN A MUCH AWARDED AND REWARDED PERSON FO R HIS RESEARCH AND DEVELOPMENT OF TEXTILE MACHINERY. IT I S FOR THIS REASON THAT A DETAILED BIOGRAPHY ALONG WITH PHOTOCO PIES OF NEWSPAPER CUTTINGS HAVE BEEN SUBMITTED. EVEN WHILE ACKNOWLEDGING THE CONTRIBUTION OF SHRI NAIK TO THE DEVELOPMENT OF TEXTILE MACHINERY, IT MUST BE SAID THAT ALL SUCH DETAILS AND DOCUMENTS ARE NOT REALLY OF ANY RELEVANCE TO THE IS SUE AT STAKE, WHICH IS WHETHER OR NOT THE ASSESSEE HAD CARRIED OU T ANY MANUFACTURING ACTIVITY IN THE SEZ TO BE ELIGIBLE FO R EXEMPTION U/S 10A OF THE IT ACT. 6.1 SECONDLY, THE THRUST OF THE AR AND SHRI NAIK HAS BEEN ON THE FACT THAT THE ASSESSEE HAS BEEN EXPORTING SUCH MACHINERY REGULARLY OVER THE YEARS, AND THAT DURING THE YEAR, THE ASSESSEE HAD EXPORTED 16 SUCH MACHINES. EXPORT INVOICES HAVE BEEN FURNISHED ALONG WITH TEST REPORTS OF THE MACHINERY, DETAILS OF LOCAL PURCHASES MADE, A COPY OF PATENT REGISTRATION CERTIFICATE, AND AN AUDIT REPORT IN FORM 56F. THE POINT TO NOTE HERE IS THAT, THE FACTUM OF EXPORT HAS NOT BEEN DISPUTED BY THE AO, NOR IS IT IN DOUBT EVEN IN APPELLATE PROCEEDINGS. THERE FORE, ALL SUCH DOCUMENTS REGARDING THE PURCHASES AND EXPORTS AND P ATENT ARE NOT REALLY RELEVANT TO THE ISSUE. YES, FROM THE FAC T THAT THE ASSESSEE HAD EXPORTED THE MACHINES IT BECOMES CLEAR THAT THE SAME HAD EITHER BEEN PURCHASED OR ASSEMBLED OR MANU FACTURED BY THE ASSESSEE. THE MOOT POINT IS, DID THE ASSESSE E ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 8 - MANUFACTURE OR ASSEMBLE SUCH MACHINERY IN THE SEZ A T SACHIN? THE FINDINGS OF THE AO POINT TO THE FACT THAT THE A SSESSEE DID NOT DO SO. THE FIRST ISSUE RAISED BY THE AO WAS THE INSTALLATION OF FIXED ASSETS WORTH ONLY RS 88,180, DURING THE YE AR. THE AR HAS CONTENDED THAT THE ASSESSEE HAD MADE INVESTMENT IN FIXED ASSETS FOR THE PURPOSE OF CARRYING OUT MANUFACTURIN G AT SEZ UNIT, AND IN THE BALANCE SHEET FOR THE YEAR UNDER C ONSIDERATION, THE VALUE OF SUCH FIXED ASSETS WAS SHOWN AT RS.11,71,M442/-. ON THE OTHER HAND IN THE AFFIDAV IT ON THE LAST PAGE, SHRI NAIK HAS STATED THAT THEY HAD SHIFTED TH EIR UNIT FROM GIDC, SACHIN TO SEZ IN ORDER TO BE MORE COMPETITIVE IN THE INTERNATIONAL MARKET. THIS IS IN CONTRADICTION TO W HAT HAS BEEN STATED BY THE AR (REFER PARA-5 ABOVE). WHAT THE PAR TNER SAYS IS THAT, THE EXISTING UNIT WAS SHIFTED FROM THE GIDC T O THE SEZ, WHICH MEANS THAT THE AO'S OBSERVATIONS WAS ABSOLUTE LY CORRECT, THAT THERE WAS NO INVESTMENT IN THE PLANT AND MACHI NERY EXCEPT FOR THE SUM OF RS 88,180. ON THE OTHER HAND, THE CL AIM OF THE PARTNER REGARDING THE SHIFTING OF UNIT IS NOT SUBST ANTIATED BY ANY EVIDENCE. HE DOES NOT SAY WHEN THEY SHIFTED TO THE SEZ, AND WHAT WERE THE ITEMS THAT WERE SHIFTED, WHAT WAS THE EXPENDITURE INCURRED IN DOING SO, EVEN THOUGH THE C LAIM IS THAT THE ASSESSEE HAD INCURRED A LOSS OF RS 30 LAKHS IN THE PROCESS. 6.2 THE AO FURTHER OBSERVED THAT THE MACHINERY SHOW N IN THE BLOCK OF ASSETS REQUIRED WELDING RODS AND ARGON GAS TO BE OPERATIVE. THE AR'S CONTENTION IS THAT, THE USE OF ARGON GAS IS OUTDATED AND THAT, SUCH MACHINERY NOW RUN ON ELECTR ICITY. THEN, THE QUESTION WHICH ARISES IS THAT WHY DID THE ASSESSEE INVEST IN A WELDING UNIT WHICH REQUIRED ARGON GAS? SURELY, THE SAME UNIT COULD NOT BE RUN BY BOTH GAS AND ELECTRIC ITY! AND WHAT ABOUT THE WELDING RODS? NO EXPENDITURE WAS INC URRED ON THESE ITEMS, WHICH MEANS THAT THE MACHINERIES WERE NOT OPERATED. ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 9 - 6.3 THE NEXT GROUND TAKEN BY THE AO IS THAT, THE ASSESSEE HAD NOT CLAIMED ANY EXPENDITURE ON ELECTRICITY, WHICH M EANS THAT THE MACHINERIES WERE NOT USED, ESPECIALLY THOSE WHI CH WERE TO RUN WITH THE HELP OF ELECTRICITY. THE EXPLANATION OF THE AR OF THE ASSESSEE IS THAT, THE ASSESSEE HAD INCURRED A T OTAL SUM OF RS.39,268/- ON ELECTRICITY AND RS.20,381/- ON WAGES TO WORKERS, AND THAT, THESE SUMS WERE INCURRED IN CASH FROM OUT OF WITHDRAWALS MADE BY SHRI NAIK FROM HIS PROPRIETORSH IP CONCERN, M/S.DEVREKHA EXPORTS. THE AR HAS SUBMIT TED COPIES OF ELECTRICITY BILLS IN SUPPORT OF HIS CLAIMS. 6.4 EVEN IF THE ELECTRIC BILLS AND THE PAYMENTS THE RE OF ARE TO BE ACCEPTED AS GENUINE, YET I AM OF THE VIEW THAT THE TOTAL ELECTRICITY EXPENSES WHICH THE ASSESSEE CLAIMED TO HAVE INCURRED AND WHICH WAS ACCOUNTED FOR, WAS GROSSLY I NSUFFICIENT TO MANUFACTURE OR EVEN ASSEMBLE THE TYPE OF MACHINE THE ASSESSEE CLAIMED TO HAVE EXPORTED. A PHOTOCOPY OF T HE PAMPHLET SHOWING THE DIFFERENT TYPES OF MACHINES AL LEGEDLY MANUFACTURED BY THE ASSESSEE, IS ANNEXED TO THIS OR DER. THESE ARE SUBSTANTIALLY LARGE MACHINES, SOME OF THEM REQU IRING A FLIGHT OF STEPS TO REACH THE UPPER PART. SUCH MACHI NES COULD NEVER HAVE BEEN MANUFACTURED WITH ELECTRICITY WHICH WAS WORTH ONLY RS 39,268 AND WAGES OF RS 20,381. IT IS NOT SU RPRISING THEREFORE, THAT THE ASSESSEE DID NOT ACCOUNT FOR SU CH EXPENSES IN HIS BOOKS. 6.5 THE NEXT GROUND TAKEN BY THE AO IS THE FIELD EN QUIRIES CONDUCTED BY THE INSPECTOR OF INCOME TAX. THE AR'S CLAIM IS THAT SUCH ENQUIRIES HAD BEEN CONDUCTED AFTER THE UN IT HAD BEEN CLOSED IN MAY,2007. EVEN IF THAT BE SO, IF AT ALL A NY MANUFACTURING HAD BEEN CARRIED OUT PRIOR TO MAY,200 7 THERE WOULD HAVE BEEN CLEAR EVIDENCE FOR A NORMAL HUMAN B EING WITH AVERAGE INTELLIGENCE AND PERCEPTION TO ASCERTAIN AS TO WHETHER OR NOT ANY MANUFACTURING HAVE BEEN CARRIED OUT AT T HE SAID PREMISES. EVEN THOUGH THE LAST EXPORT MAY HAVE BEEN MADE IN MAY,2007 YET, IF IT WAS AN ONGOING BUSINESS/MANUFAC TURING ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 10 - ACTIVITY, IT WOULD NOT LOOK ABSOLUTELY DESERTED WIT HIN A PERIOD OF ONLY 7 MONTHS. THEREFORE, NONE OF THE EXPLANATIONS PROVIDED BY THE AR AND THE PARTNER TO THE FINDINGS AND CONCLUSI ON OF THE AO, ARE EITHER REASONABLE OR LOGICAL, AND HENCE, AR E NOT ACCEPTABLE. 6.6 THE AR HAS FURNISHED A LIST OF PURCHASES MADE F ROM VARIOUS PARTIES, THE LIST HOWEVER CONTAINS ONLY THE NAMES O F THE PARTY(S) FROM WHOM THE PURCHASES WERE MADE, THEIR ADDRESSES AND THE AMOUNT OF PURCHASES. IT DOES NOT MENTION THE ITEMS PURCHASED. IN ANY CASE, WHAT IS TO BE UNDERSTOOD AND APPRECIAT ED IS THAT, FOR CUSTOM PURPOSES THE SEZ IS A FOREIGN COUNTRY, A ND THEREFORE ANY GOODS BEING SENT INTO THE SEZ IS LIAB LE FOR THE PAYMENT OF CUSTOM DUTIES. BECAUSE OF THE SPECIAL ST ATUS OF SEZ, THE CUSTOM AUTHORITIES WHO GUARD AND MAN THE GATES TO THE SEZ HAVE TO EITHER CHARGE DUTY OR DECLARE THE GOODS TAKEN IN AS DUTY-FREE. FOR THIS PURPOSE THEY HAVE TO PASS AN AS SESSMENT ORDER. SIMILARLY, FOR THE GOODS WHICH ARE TAKEN IN IT. COULD BE EITHER THAT EXCISE DUTY IS PAID, OR IS FREE OF EXCI SE DUTY. IF ANY EXCISE DUTY IS PAID ON ANY MATERIAL WHICH IS TAKEN INTO THE SEZ, BECAUSE OF THE SPECIAL STATUS OF SUCH ENTITIES , EXCISE DUTY BECOMES REFUNDABLE TO THE ASSESSEE. ONCE AGAIN, THE RE HAS TO BE AN ASSESSMENT OR DOCUMENTATION WHICH DETERMINES THE EXCISE DUTY COMPONENT OR THE- REFUND. WHEN THE ASSE SSEE TAKES OUT ANY PLANT OR MACHINERY OUT OF THE SEZ BEFORE TH E END OF THE STIPULATED OR AGREED PERIOD OF MANUFACTURING, WHICH IS A CONDITION EMBEDDED INTO THE APPROVAL GIVEN BY THE S EZ AUTHORITIES TO THE PLOT HOLDER THEN THE DUTY WHICH WAS INITIALLY WAIVED ON SUCH PLANT AND MACHINERY AT THE TIME OF I NSTALLATION, WOULD HAVE TO BE PAID TO THE CUSTOM AUTHORITIES ALO NG WITH PENALTY AND FINE. THIS PROCESS IS CALLED DE-BONDING . THEREFORE THERE HAS TO BE SOME DOCUMENTATION REGARDING SUCH D E- BONDING, WHICH ACCORDING TO THE ASSESSEE, HAD TAKEN PLACE WHEREBY ALL THE MACHINERY AND MATERIALS HAD BEEN MO VED OUT OF THE SAID PREMISES. INTERESTINGLY, NONE OF THESE CUSTOM DOCUMENTS HAVE BEEN PRODUCED BY THE ASSESSEE OR THE AR, ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 11 - WHICH MEANS THAT THE FINDINGS OF THE INSPECTOR OF T HE INCOME TAX WAS CORRECT, THAT THERE WAS NO MANUFACTURING AC TIVITY CARRIED OUT AT THE SAID PREMISES, SINCE THERE WAS N O PLANT MACHINERY OR ANY RAW MATERIAL AVAILABLE THEREIN. 6.7 THUS, EVEN THOUGH THERE WAS NO DISPUTE REGARDIN G THE FACT THAT THE ASSESSEE HAD INDEED EXPORTED THE MACHINERI ES MANUFACTURED BY IT DURING THE YEAR YET, WHAT HAS BE EN CLEARLY ESTABLISHED IS THE FACT THAT SUCH MACHINERIES WERE NOT MANUFACTURED IN THE SACHIN SEZ, SURAT. THEREFORE, T HE CLAIM OF EXEMPTION U/S IDA WAS JUSTIFIABLY DENIED TO THE ASS ESSEE. THE AO'S ACTION IS THUS UPHELD AND THE ADDITION OF THE SUM OF RS.54,72,822 IS CONFIRMED. 5. THE LD. AUTHORISED REPRESENTATIVE OF THE ASSESS EE HAS RELIED THE ORDER OF THE ITAT BENCH A FOR ASSESSMENT YEAR 2004-05 IN THE CASE OF M/S.D.JAYANTILAL EXPORTS VS. JT.CIT IN ITA NO.1647/ AHD/2008, DATED 19/12/2008 AND SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE. THE RELEVANT PART OF THE ORDER OF THE TRIBUNAL, WHICH READS AS UNDER:- 2. THE ONLY ISSUE RAISED IN THE APPEAL PERTAINS T O DENIAL OF EXEMPTION U/S 10 A OF THE ACT TO THE EXTENT OF RS.2,34,15,635 /-. 3. DURING THE RELEVANT YEAR THE ASSESSEE WAS ENGAGE D IN THE BUSINESS OF IMPORT OF OLD GOLD JEWELLERY AS ALSO PURE GOLD. OUT OF THE SAME THE ASSESSEE MANUFACTURED PENDANTS WEIGHING 10 GRAMS EA CH AND EXPORTED THE SAME. THE ASSESSEE HAS CLAIMED TO HAVE MANUFACT URED SUCH JEWELLERY AT UNIT NO.85 BLOCK NO.302 SPECIAL ECONOMIC ZONE (S E Z) AT SACHIN, SURAT. THE PROFIT WAS CLAIMED AS EXEMPT U/S 10A OF THE ACT. ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 12 - 4. THE ASSESSING OFFICER DENIED THE CLAIM FOR THE F OLLOWING REASONS:- (I) THE MANUFACTURING EXPENSES WERE INSIGNIFICANT. (II) THE MACHINERIES REQUIRED FOR MANUFACTURE ARE N OT POSSESSED BY THE ASSESSEE AND ONLY PART OF THE MACHINERIES WA S ACQUIRED AT A LATER PART OF THE FINANCIAL YEAR. (III) THE ASSESSEE DID NOT HAVE ELECTRICITY CONNECTION AN D ELECTRICITY CONNECTION WAS AVAILABLE ONLY FOR TWO M ONTHS OF THE FINANCIAL YEAR. (IV) WHILE RECORDING THE STATEMENT OF PARTNERS, THOUGHT THEY WERE ABLE TO DETAIL THE MACHINERIES USED FOR MANUFACTURI NG UNIT NONE OF THEM HAD ANY KNOWLEDGE ABOUT THE ENTIRE MANUFACTURING ACTIVITIES AND (V) OUT OF 7 WORKERS EMPLOYED, THE ASSESSEE COULD PRODU CE ONLY TWO WORKERS. THEIR STATEMENTS WERE RECORDED BUT THE Y HAD HARDLY ANY KNOWLEDGE OF MANUFACTURE ACTIVITY. THE P URCHASE OF GOLD FROM MAHESH & CO., SINGAPORE AND M/S. DIPU JEWWELLERS, DUBAI, PENDANTS STATED TO BE MANUFACTUR ED ARE EXPORTED TO THE SAME PARTIES. ONE OF THE PARTNERS H AD CLOSE CONNECTION WITH THE SAID CONCERNS. 4.1 THE ASSESSING OFFICER HELD THAT THE ASSESSEE, T HEREFORE, ARRANGED THE AFFAIRS SO AS TO DECLARE MAXIMUM PROFITS. THE A SSESSING OFFICER ALSO HELD THAT THE ASSESSEE HAS USED 101663 GRAMS OF OLD GOLD JEWELLERY INCLUDING GOLD BARS OUT OF WHICH PENDANTS WERE MANU FACTURED WEIGHING 99371.55 GRAMS. THE PENDANTS MANUFACTURED ARE OF 10 GRAMS EACH. THE LABOUR CHARGES IN INDIAN RETAIL MARKET IS RS.150/- TO RS.200/- PER PENDANT OF 10 GRAMS. THE PRICE OF GOLD IN INTERNATIONAL MAR KET IS FIXED AND THERE IS NO MUCH VARIATION IN THE PRICE PREVAILING IN INDIAN MARKET AS COMPARED TO OVERSEAS MARKET. IF THE LABOUR CHARGES ARE CONSIDER ED AT RS.200/- PER PENDANT, THE ASSESSEE COULD HAVE EARNED PROFIT ONLY OF RS.20,00,000/- WHEREAS THE ASSESSEE IS CLAIMING NET PROFIT OF RA.2 ,34,00,000/-. THIS IS MERELY A CASE OF OVER VALUATION AND INFLATION OF PR OFITS IN ORDER TO CLAIM DEDUCTION U/S 10A OF THE ACT. THE CLAIM OF THE ASSE SSEE WAS, THEREFORE, DENIED. 5. BEFORE THE LEARNED CIT(A) DETAILED SUBMISSIONS W ERE MADE. IT WAS SUBMITTED THAT MANUFACTURING ACTIVITY WAS CARRIED O UT ON S E Z UNIT WHICH IS UNDER THE CONTROL OF S E Z AUTHORITIES. THE IMPO RT AND EXPORT OF GOLD/JEWELLERY WAS MONITORED BY THE CUSTOMS AUTHORI TIES ALSO. NO DOUBT ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 13 - HAS BEEN RAISED IN RESPECT OF PURCHASE OF GOLD, BRI NGING THE SAME TO SEZ UNIT AND EXPORTING THE SAME OUT OF SEZ UNIT. THERE WERE ONLY 10 TRANSACTIONS AND THE TIME TAKEN BETWEEN IMPORT OF G OLD JEWELLERY AND EXPORT OUT OF IT TOOK ONLY 10/12 DAYS. THEREFORE, T HE LABOUR CHARGES AND ELECTRICITY EXPENSES WERE NOT INCURRED THROUGH OUT THE YEAR BUT ONLY DURING THE PERIOD THE MANUFACTURING ACTIVITY WAS CA RRIED OUT. THE MACHINERY REQUIRED IS VERY SIMPLE. THE SAME INCLUD ES ONLY A FURNACE (BHATTI) FOR REFINING, PRESS MACHINE AND HAND CUTTI NG MACHINE. THUS, HARDLY ANY SPECIALISED MACHINERIES WERE REQUIRED. T HE DYE CASTING MACHINE MANUFACTURES ANYTHING BETWEEN 500 TO 5000 P ENDANTS PER DAY DEPENDING UPON DESIGN. WHEN THERE WAS NO ELECTRICIT Y, GENERATOR WAS USED FOR WHICH KEROSENE WAS PURCHASED AND CONSUMED. DURI NG LATER PART OF THE FINANCIAL YEAR ELECTRICITY CONNECTION WAS ALSO AVAI LABLE. THE ASSESSING OFFICER HAS NOT BROUGHT OUT WHAT KIND OF INFRASTRUC TURE OR MACHINERIES WERE REQUIRED FOR MANUFACTURE OF PENDANTS. THE ASSE SSEE HAS ALSO CONSUMED ACID AND CHEMICALS FOR POLISHING PURPOSES. OUT OF 7 LABOURERS EMPLOYED 2 LABOURERS PERSONALLY APPEARED AND THEY C ONFIRMED HAVING MANUFACTURED, THOUGH THEY MAY BE IGNORE ABOUT OTHER ACTIVITIES. NONE OF THE CONCERN TO WHOM THE GOODS WERE SOLD IS CONNECTE D TO THE ASSESSEE. THERE IS NO MATERIAL ON RECORD TO SUGGEST SO. NO EN QUIRY WAS EVER MADE WITH SUCH CONCERN. THE ASSESSEE WAS MORE OR LESS DO ING THE JOB WORK SINCE LABOUR IN OVERSEAS MARKET IS MUCH COSTLIER AND CHEA P LABOUR IS AVAILABLE IN INDIA. THE CALCULATION OF THE ASSESSING OFFICER IN ESTIMATING THE LABOUR CHARGES AT RS.150/- TO RS.200/- IS INCORRECT. THE L ABOUR CHARGES PREVAILING IN DOMESTIC MARKET IS RS.100/- TO RS.200/- PER GRAM AND NOT PER 10 GRAMS OF PENDANTS. IN SUPPORT OF THE SAME BILLS FROM LOCA L JEWELLERS WERE ALSO PRODUCED. THEREFORE, APPLYING THE SAME CRITERIA THE PROFIT COULD HAVE EXCEEDED RS.2,00,00,000/-. THE PROFIT ALSO INCLUDES DIFFERENCE DUE TO RATE IN GOLD PURCHASED AND SOLD. SEZ UNIT AND CUSTOMS AU THORITIES ARE GOVERNMENT AUTHORITIES WHO HAVE CERTIFIED THE IMPOR T AND EXPORT. THERE IS NO EVIDENCE THAT THE MANUFACTURE WAS CARRIED OUT AT OTHER PLACE AND PRODUCTS WERE BROUGHT TO SEZ UNIT FOR EXPORT OUT OF INDIA. THE COMPARABLE CASES RELIED BY THE ASSESSING OFFICER WE RE NEVER CONFRONTED TO THE ASSESSEE. EVEN, IN RESPECT OF THESE PARTIES, TH EY SUPPRESSED IN THE PROFIT AND ONLY AFTER SURVEY BEING CONDUCTED, THE ADDITION AL INCOME WAS DECLARED BY THEM. 6. THE LEARNED CIT(A) MADE ENQUIRIES WITH SEZ AUTHO RITIES. THE SEZ AUTHORITIES BY LETTER DATED 17-7-2007 FIRSTLY CONFI RMED THAT THE ASSESSEE ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 14 - HAD SET UP UNIT AT SEZ, SACHIN, SURAT IN TERMS OF A PPROVAL GRANTED BY LETTER DATED 10/12/-9-2002. THEY HAVE EMPLOYED 7 PE RSONS AND THEIR NET FOREIGN EXCHANGE (NFE) WAS POSITIVE. THE LEARNED CI T(A) REQUIRED THE SEZ AUTHORITIES TO CONFIRM HOW THE CERTIFICATE WAS ISSUED. IN REPLY THEREOF THE DEPUTY DEVELOPMENT COMMISSIONER, SEZ KANDLA (IN CHARGE OF SEZ AT SURAT) REPLIED THAT THEY DO NOT MAINTAIN RECORDS OF MANUFACTURING OPERATION AND NO INSPECTION OR SUPERVISION IS CARRI ED OUT FOR THIS PURPOSES. THEY SIMPLY MONITOR WHETHER THE UNIT IS N ET FOREIGN EXCHANGE EARNER OR NOT ON THE BASIS OF ANNUAL PERFORMANCE RE PORT CERTIFIED BY A CHARTERED ACCOUNTANT. THERE IS NO PROCEDURE TO SEE WHETHER MANUFACTURING ACTIVITIES ARE CARRIED OUT BY APPROVA L HOLDER. THE LEARNED CIT(A), THEREFORE, HELD THAT THE CONFIRMATION OF TH E IMPORT AND EXPORT EITHER BY THE CUSTOMERS OR BY THE SEZ AUTHORITIES DO NOT CONCLUSIVELY PROVE EXPORT BY THE SEZ UNIT. HE ALSO HELD THAT THE MACHINERIES ARE NOT COMMENSURATE WITH THE NATURE OF EXPENDITURE OF ACTI VITIES CARRIED OUT AND PRODUCTION EMANATING OUT OF THE SAME. HE ALSO HELD THAT THOUGH THE ASSESSEE IS CLAIMING THE UNIT IS LABOUR INTENSIVE, THE ASSESSEE HAS EMPLOYED ONLY 7 LABOURERS TO WHOM THE TOTAL SALARY PAYABLE IS ONLY RS.53,760/-. THUS, THE SALARY PAID PER HEAD PER MON TH WORKS OUT TO RS.640/- ONLY WHICH IS VERY UNLIKELY FIGURE. THE LE ARNED CIT(A) ALSO HELD THAT THE ASSESSEE DID NOT HAVE ELECTRICITY OR POWER CONNECTION. PURCHASE OF KEROSENE IS NOT SUFFICIENT TO RUN THE GENERATOR FOR 10 MONTHS. THEREFORE, IT WAS NOT POSSIBLE TO MANUFACTURE SUCH A LARGE NUMBER OF PENDANTS WORTH OF CRORES OF RUPEES WITHIN 10 MONTHS ONLY WITH THE HELP OF GENERATOR. ACID AND CHEMICALS EXPENSES ARE INSIGNIFICANT TO HOLD TH AT THE PENDANTS WERE MANUFACTURED. THE LEARNED CIT(A) CONCLUDED THAT ON THE FACTUAL POSITION OF THE MANUFACTURING ACTIVITIES WITH REGARD TO THE MACHINERIES USED, MANPOWER DEPLOYED AND AVAILABILITY OF POWER AS ALSO OTHER EXPENSES INCURRED, THE ASSESSEE COULD NOT HAVE MANUFACTURED 16180 PENDANTS WHICH WERE EXPORTED FOR A SUM OF RS.11.98 CRORES. THE ASS ESSING OFFICER HAD VISITED THE SITE DURING ASSESSMENT PROCEEDINGS AND FOUND THAT HARDLY ANY ACTIVITIES WERE CONDUCTED. IT WAS FOUND THAT THE UN IT WAS CLOSED AND ON THE BASIS OF LOCAL INQUIRIES IT WAS LEARNT THAT HARDLY ANY ACTIVITIES WERE CARRIED OUT AT THE GIVEN ADDRESS. THEREFORE, THE PENDANTS W ERE NEVER MANUFACTURED AT SEZ UNIT. THE ASSESSEE IS, THEREFOR E, NOT ELIGIBLE FOR EXEMPTION U/S 10A OF THE ACT. THE ASSESSEE IS IN FU RTHER APPEAL BEFORE US. 7. THE LEARNED COUNSEL OF THE ASSESSEE REITERATED T HE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A). HE SUBMITTED THAT THE TOTAL TRANSACTIONS ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 15 - FOR PURCHASE AND EXPORT WERE ONLY TEN. THE MANUFACT URING ACTIVITIES WERE NOT CARRIED OUT THROUGHOUT THE YEAR AS CAN BE VERIF IED FROM THE CHART OF IMPORT OF JEWELLERY AND EXPORT OF JEWELLERY WHICH I T AT PAGE 17 OF THE APPELLATE ORDER. THE MANUFACTURING PROCESS IS VERY SIMPLE WHICH WAS EXPLAINED TO THE ASSESSING OFFICER. THE SAME IS AT PAGES 32 AND 33 OF THE PAPER BOOK. AS PER THE PROCESS THE OLD JEWELLERY OR THE PURE GOLD PURCHASED WERE MELTED IN THE BHATTI FOR REFINING. T HEREAFTER, CHEMICALS ARE ADDED TO MIX WITH STRAPS. AFTER ACIDIC REACTION OTHER METALS GET DILUTED AND PURE GOLD EMERGES. FROM THE FURNACE BARS OF GOL D ARE TAKEN OUT WHICH ARE PUT INTO HAND PRESSING MACHINE TO OBTAIN THE REQUIRED GAUGE. THESE BARS ARE THEN PUT INTO CUTTING MACHINE WHERE HOLES ARE MADE FOR LOCKET. FROM TAR PATA MACHINE WIRES ARE DRAWN WHICH ARE JOINED AND HOOKS ARE MADE. THE HOOKS ARE ATTACHED TO LOCKET/PE NDANTS. THE MACHINERIES REQUIRE ARE ONLY ELECTRIC AND DESI BHAT TI, PRESS MACHINE AND HAND CUTTING MACHINE. THE REQUISITE MACHINERIES ARE AVAILABLE TO THE ASSESSEE. THE DETAILS OF MACHINERIES ALONG WITH INV OICES ARE AT PAGES 66 TO 72 OF THE PAPER BOOK. THE LEARNED CIT(A) HAS IGNORE D SUCH EVIDENCES ON THE GROUND THAT PERSONS SELLING THE MACHINERY DO NO T HAVE REQUIRED EXPERTISE. THIS COULD NOT HAVE BEEN SO WITHOUT EXAM INING THE MACHINERY MANUFACTURERS. AS REGARDS AVAILABILITY OF POWER, TH OUGH THE ELECTRICITY CONNECTION WAS ESTABLISHED IN JANUARY, 2004, THE AS SESSEE USED GENERATOR. THE GENERATOR WAS RUN ON KEROSENE. KEROSENE BEING E SSENTIAL COMMODITY CANNOT BE PURCHASED ON APPROVED VOUCHERS BUT THE EX PENSES ARE DULY RECORDED IN THE BOOKS OF ACCOUNT FOR WHICH VOUCHERS ARE AVAILABLE AT PAGES 74 TO 77 OF THE PAPER BOOK. THE ASSESSING OFF ICER HIMSELF ADMITS THAT THE LABOUR CHARGES PER PENDANTS WOULD BE RANGI NG FROM RS.150/- TO RS.200/- PER PENDANTS AND HENCE THE PROFIT COULD HA VE BEEN AROUND RS.20,00,000/-. HOWEVER, THE SIMPLE MISTAKE THE ASS ESSING OFFICER MADE WAS HOLDING THE LABOUR CHARGES @RS.150/- TO RS.200/ - PER PENDANT WHICH IN FACT IS ONLY PER GRAM. IF THE LABOUR CHARGES ARE CONSIDERED @ RS.150/- PER GRAMS THE INCOME WOULD HAVE BEEN MORE THAN RS.2 ,40,00,000/-. DUE TO DIFFERENCE IN RATE OF GOLD FURTHER PROFIT ALSO A CCRUED. THE ENTIRE PURCHASES AND SALES ARE UNDER THE EYES OF SEZ AUTHO RITIES. IN RESPECT OF EACH AND EVERY PURCHASE AND SALE INVOICE, THE SAME HAS BEEN ASSESSED ON THE BASIS OF DECLARATION. THE PURCHASE INVOICES, TH E BILL OF ENTRY FOR CONSUMPTION AND THE SALE INVOICES ALL BEARS STAMP O F SEZ AUTHORITIES. AS PER SEZ REGULATION EITHER FOR BRINGING IN OR FOR TA KING OUT ANY GOODS FROM SUCH APPROVED UNIT THE SAME REQUIRES APPROVAL OF SE Z AUTHORITIES. FOR BRINGING IN OLD GOLD JEWELLERY AND GOLD BARS, APPRO VAL WAS TAKEN. ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 16 - SIMILARLY, FOR EXPORTING THE PENDANTS OUT OF THE UN IT APPROVAL WAS TAKEN. THIS CONCLUSIVELY PROVES THAT ONCE OLD GOLD JEWELLE RY AND GOLD BARS ENTERED THE ELIGIBLE UNIT, WHAT WENT OUT OF THE UNI T WAS ONLY MANUFACTURED GOODS. THIS ACTIVITY IS NOT AT ALL DOUBTED. THOUGH, SEZ AUTHORITIES DO NOT CERTIFY THE SUPERVISION OF MANUFACTURING ACTIVITY Y ET IT CANNOT BE SAID THAT THE IMPORT AND EXPORT WERE WITHOUT THEIR APPRAISAL AND APPROVAL. 7.1 EXPLAINING THE EXPENSES INCURRED, LEARNED COUNS EL FOR THE ASSESSEE SUBMITTED THAT THE LABOURERS WERE NOT REQUIRED THRO UGHOUT THE YEAR. ONLY DURING THE PERIOD THE MANUFACTURING ACTIVITIES WERE CARRIED OUT LABOURERS WERE EMPLOYED. THE HAND PRESS MACHINE CAN PREPARE M ORE THAN 2500 PENDANTS PER DAY. THEREFORE, THE WAGES PAYABLE ARE COMMENSURATE WITH THE WORK PERFORMED FOR THE PERIOD OF THE ASSESSEE T HE ELECTRICITY CONNECTION WAS AVAILABLE. FOR OTHER PERIOD, GENERAT OR WAS USED AND IN RESPECT OF WHICH KEROSENE WAS USED AS FUEL. THEREFO RE, NO ADVERSE INFERENCE SHOULD BE DRAWN. THE LEARNED CIT(A) WAS G UIDED MORE THAN BY VALUE RATHER THAN LABOURERS INVOLVED, PROCESS CARRI ED OUT AND DEPLOYMENT OF MACHINERIES. FOR A UNIT MANUFACTURING GOLD JEWEL LERY THE VALUE OF MACHINERIES IS INSIGNIFICANT COMPARED TO THE VALUE OF FINAL PRODUCTS AS THE SAME IS VERY PRECIOUS METAL. THE WHOLE CLAIM IS DEN IED MERELY ON PRESUMPTIONS AND ASSUMPTION OR SURMISES AND CONJECT URES AND NOT BASED ON ANY COGENT EVIDENCE. THE CLAIM IS, THEREFORE, AL LOWABLE. 8. THE LEARNED DR ON THE OTHER HAND STRONGLY SUPPOR TED THE APPELLATE ORDER. HE INVITED OUR ATTENTION TO PAGE 96 OF THE P APER BOOK WHICH IS PROFIT & LOSS ACCOUNT FOR THE RELEVANT FINANCIAL YE AR. HE SUBMITTED THAT IF THE CLAIM OF THE ASSESSEE IS THAT THE UNIT IS LABOU R INTENSIVE, THE TOTAL SALARY BY THE ASSESSEE IS RS.53,760/- FROM WHICH IT EARNS RS.2,34,00,000/-. THIS IS HUMANLY IMPOSSIBLE. SIMILARLY, THE ASSESSEE HARDLY HAS ANY MACHINERY TO MANUFACTURE THE PENDANTS. THE TOTAL VA LUE OF THE MACHINERIES IS ONLY RS.52,000/- WHICH CANNOT MANUFACTURE JEWELL ERY WORTH OVER RS.11.00 CRORES. THE ASSESSEE DOES NOT HAVE EVEN EL ECTRICITY CONNECTION FOR MOST PART OF THE YEAR. THE ASSESSEE COULD NOT P RODUCE EVIDENCE FOR PURCHASE OF KEROSENE OR FOR USE OF ELECTRICITY FROM SOME OTHER UNIT. THEREFORE, NO MANUFACTURING PROCESS WAS CARRIED OUT AT THE SEZ UNIT. THE PRESUMPTION IS, THEREFORE, THE MANUFACTURING WAS CA RRIED OUT AT OTHER PLACE BUT WAS STATED TO BE EXPORTED FROM ELIGIBLE U NIT. IN ABSENCE OF SUFFICIENT EVIDENCE TO JUSTIFY THAT MANUFACTURING W AS CARRIED OUT AT THE SEZ UNIT ITSELF THE CLAIM OF DEDUCTION IS NOT PERMISSIB LE. ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 17 - 9. WE HAVE CAREFULLY CONSIDERED THE RELEVANT FACTS AND ARGUMENTS ADVANCED. WE HAVE ALSO PERUSED THE PAPER BOOK TO WH ICH OUR ATTENTION IS DRAWN. THERE IS NO DENIAL OF FACT THAT THE ASSESSEE WAS ALLOTED AN ELIGIBLE UNIT AT SEZ ESTABLISHED AT SACHIN, SURAT. THE RELEV ANT AGREEMENT IS AT PAGES 78 TO 82 OF THE PAPER BOOK. THE SAME WAS FOR MANUFACTURE OF GOLD AND STUDDED JEWELLERY. THIS IS THE FIRST YEAR OF OP ERATION. THE TRANSACTIONS FOR IMPORT OF OLD GOLD JEWELLERY AND GOLD BAR AS AL SO EXPORT OF GOLD JEWELLERY CAN BE TABULATED AS UNDER: IMPORT INVOICE NO. & DATE IMPORT OF OLD GOLD JEWELLERY GIVEN FOR MANUFACTURE JEWELLERY MANUFACT URE GOLD JEWELLERY EXPORT INVOICE NO. & DATE EXPORT GOLD JEWELLERY 39111/28/05/03 12786.3 12786.3 11659.41 DJE/001/10/06/03 11659.41 39561/23/06/06 9728.03 9728.03 8886.05 DJE/002/03/07/03 8886.05 39670/21/07/03 9651.29 9651.29 8815.8 DJE/003/29/07/03 8815.8 39793/21/08/03 21012.27 21012.27 19170.21 SJE/004/02/09/03 19170.21 39932/10/10/03 15234.89 15234.89 13904.48 DJE 005/21.10/03 13904.48 TOTAL 68413.28 68413.28 62435.95 62435.95 40208/17/12/03 15227.33 15227.33 13948.2 DJE/001/26/12/03 13948.2 40420/20/02/04 GOLD BAR 40000 40000 40000 DJE/002/03/03/04 21443.47 30142/16/03/04 11436.6 11436.6 10423.35 DJE/003/08/03/04 18556.53 40548/17/03/04 GOLD BAR 35000 35000 35000 DJE/004/25/03/04 25241.35 TOTAL 101663.93 101663.93 99371.55 99371.55 FROM THE ABOVE CHART IT IS SEEN THAT AFTER THE ASSE SSEE IMPORTED 12786.3 GRAMS OF OLD GOLD JEWELLERY ON 28-5-2003, JEWELLERY WORTH 11659 GRAMS WERE MANUFACTURED AND THE SAME WERE EXPORTED ON 10 -6-2003. THIS IS REFLECTED AS SOLD BY INVOICE NO.1. THUS, THE TOTAL TIME TAKEN IS ONLY 12/13 DAYS. SIMILARLY, CONSIDERING ALL THESE TRANSACTIONS THE ACTUAL FUNCTIONING OF THE MANUFACTURING PROCESS AT THE UNIT WAS ONLY R ANGING FROM 75/80 DAYS (EXCLUDING THE DAYS OF ACTUAL IMPORT AND EXPOR T). SAMPLES OF THE PURCHASES AND SALES BILLS ARE FILED IN PAPER BOOK W HICH ARE AT PAGES 38 TO 56 OF THE PAPER BOOK. WE FIND THAT FOR EACH AND EVE RY PURCHASE BILL AND ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 18 - SALES BILL INCLUDING BILLS OF ENTRY FOR HOME CONSUM PTION, THE SAME IS APPRAISED BY APPRAISAL VOUCHER OBTAINED BY SEZ AUTH ORITIES AND BY THE PREVENTIVE OFFICER OF SURAT SEZ. THE SIGNATURES AND SEALS OF THESE AUTHORITIES ARE FOUND ON SUCH INVOICES/BILL OF ENTR IES. AS PER THE SCHEME OF SEZ UNITS, FOR EACH AND EVERY ENTRY/REMOVAL OF GOOD S THE SAME HAS TO BE SUBJECT TO APPRAISAL BY APPOINTED AUTHORITY. THOUG H THE DEPUTY DEVELOPMENT COMMISSIONER, KANDLA SEZ HAS STATED THA T THEY DO NOT MAINTAIN RECORDS OF THE MANUFACTURING OPERATIONS AN D NO INSPECTION OR SUPERVISION IS CARRIED OUT FOR THIS PURPOSES, THERE IS NO EVIDENCE CONTRARY TO THE FACT THAT ALL THE INWARD AND OUTWARD OF GOOD S WERE UNDER THEIR LENS. IF THE LABOURERS HAVE TO WORK ONLY FOR 75 DAYS, THE LABOUR CHARGES OF RS.53,760/- PAID IS COMMENSURATE WITH THE QUALITY O F WORK PUT IN BY THEM. THE LEARNED CIT(A) WAS WRONGLY GUIDED BY THE VALUE OF GOODS EXPORTED RATHER THAN THE VALUE OF LABOUR PUT IN BY SUCH LABO RERS. SIMILARLY, IF THE GENERATOR IS TO BE USED ONLY FOR SUCH SMALL PERIOD, THE CONSUMPTION OF KEROSENE WHICH IS 79 LITERS IS SUFFICIENT TO GENERA TE POWER FOR THE TIME THE MACHINERIES WERE USED. THE HAND CUTTING MACHINE DOE S NOT REQUIRE ANY POWER. WITHOUT APPRECIATING THE MANUFACTURING PROCE SS INVOLVED AND THE QUALITY OF LABOURERS REQUIRED FOR THAT PURPOSE THE CIT(A) WAS MERELY GUIDED BY THE VALUE OF GOODS MANUFACTURED. WHEN THE GOODS MANUFACTURED ARE PRECIOUS METAL LIKE GOLD OF 24 KARATE THE VALUE IS UNDOUBTEDLY DISPROPORTIONATE TO THE AMOUNT OF LABOUR PUT BEHIND THE SAME. THE ASSESSEE HAS ALSO PRODUCED BILLS FROM LOCAL JEWELLE RS TO JUSTIFY THAT THE LABOUR CHARGES ARE RANGING FROM RS.150/- TO RS.200/ - PER GRAM. RELEVANT INVOICES ARE AT PAGES 35 TO 37 OF THE PAPER BOOK. T HE ASSESSING OFFICER WRONGLY UNDERSTOOD THE LABOUR CHARGES AT RS. 150/- TO RS.200/- PER PENDANTS OF 10 GRAMS. IF THE STANDARD LABOUR CHARGE S ARE CONSIDERED AT RS.150/- PER GRAM, THE INCOME WILL BE EXCEEDING RS. 2,40,00,000/-. TO THIS, IF PROFIT DUE TO RATE DIFFERENCE IS ADDED THE PROFI T DECLARED IS NEITHER EXCESSIVE NOR UNREASONABLE. THE GROSS PROFIT RATIO WORKED OUT IS 20%. THIS IS ALSO COMMENSURATE WITH THE TYPE OF BUSINESS AND NATURE OF ACTIVITIES UNDERTAKEN BY THE ASSESSEE. THE ASSESSIN G OFFICER HAS NOT BROUGHT OUT ANY MATERIAL REGARDING THE ALLEGED CONN ECTION BETWEEN THE ASSESSEE AND THE CUSTOMERS. WHO ARE THE PERSONS CON TROLLING THE INTEREST OF THE ASSESSEE AND WHO ARE SUCH PERSONS CONTROLLIN G THE INTEREST OF CUSTOMERS HAS NOT BROUGHT OUT ON RECORD, LEAVING AP ART ESTABLISHING ANY CLOSE CONNECTION BETWEEN THESE TWO PERSONS. THEREFO RE, PROVISIONS OF SECTION 10A(7) READ WITH SECTION 80 IA (10) OF THE ACT COULD NOT HAVE BEEN INVOKED. SINCE, THE ASSESSEE HAS FILED OVERWHELMING EVIDENCE IN SUPPORT OF ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 19 - THE CONTENTION THAT GOLD WAS BROUGHT TO SEZ UNIT AN D JEWELLERY WERE EXPORTED OUT OF SUCH UNIT AND ALSO THE EVIDENCE FOR CARRYING OUT MANUFACTURING ACTIVITIES, THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. SINCE, THERE IS NOT DISPUTE ABOUT THE AMOU NT OF PROFIT ACCRUING, THE WHOLE OF SUCH PROFIT IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. 6. THE LD.DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. THE ASSESSEE, IN THE INSTANT CASE, CLAIMED DEDUCTION U/S.10A OF THE I.T. ACT, 1961 IN RESPECT OF INCOME DERIVED FROM EXPORT OF MANUFACTURED MACHI NES CALLED 'JET- DYEING MACHINE WHICH ACCORDING TO THE ASSESSEE WA S MANUFACTURED IN SPECIAL ECONOMIC ZONE (IN SHORT SEZ). THE ASSE SSING OFFICER OBSERVED THAT NO EXPENDITURE IN RESPECT OF ELECTRIC ITY CHARGES AND TELEPHONE CHARGES WERE DEBITED IN ITS PROFIT & LOSS ACCOUNT WHO CLAIMED TO HAVE MANUFACTURED AND EXPORTED MACHINERIES OF RS .1,89,42,608/-. THE ASSESSING OFFICER ALSO OBSERVED FORM THE DETAILS OF THE MACHINERIES OWNED BY THE ASSESSEE THAT THE SAME REQUIRED WELDING RODS AND ARGON GAS FOR ITS OPERATION AND NO EXPENSES IN RESPECT OF THESE ITEMS WERE SHOWN IN THE ACCOUNTS OF THE ASSESSEE. DURING THE COURSE OF AS SESSMENT PROCEEDINGS, ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 20 - THE ASSESSING OFFICER DEPUTED AN INSPECTOR WHO AFTE R VISITING THE PREMISES SITUATED AT SEZ REPORTED THAT HE FOUND THAT UNIT W AS CLOSED AND ACCORDING TO THE INSPECTOR, NO MANUFACTURING ACTIVITY WAS CA RRIED OUT AT THAT PREMISES. IN VIEW OF THE ABOVE, THE ASSESSING O FFICER OPINED THAT NO MANUFACTURING ACTIVITY WAS CARRIED OUT IN THE SEZ A ND, THEREFORE, DISALLOWED THE CLAIM OF DEDUCTION U/S.10A OF THE I. T. ACT, 1961. THE LD.CIT(APPEALS) ALSO CONFIRMED THIS ACTION OF THE A SSESSING OFFICER. THE LD. AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMI TTED THAT ELECTRICITY EXPENSES OF RS.39,268/- ONLY WAS INCURRED BY THE AS SESSEE WHICH WAS DULY SUPPORTED BY THE BILLS WHICH WAS ALSO PRODUCED BEFO RE THE ASSESSING OFFICER AND IT WAS EXPLAINED THAT THE PAYMENT OF TH E SAME WAS MADE BY ONE OF THE PARTNERS, NAMELY, SHRI D.S. NAIK OUT OF WITHDRAWAL SHOWN FROM PROPRIETORSHIP FIRM M/S.DEVREKHA. THE ASSESSEE AL SO EXPLAINED THAT THE UNIT WAS CLOSED IN THE MONTH OF MAY-2007 DUE TO LO SSES SUFFERED AND, THEREFORE, WHEN THE INSPECTOR VISITED THE PREMISES , HE FOUND IT CLOSED. THE ASSESSEE IN SUPPORT OF HIS GENUINENESS OF THE B USINESS PRODUCED BEFORE THE LOWER AUTHORITIES, COPIES OF THE INVOICE S RAISED IN RESPECT OF THE SALE OF MACHINERIES AND ALL RELATED PAPERS FOR EXPO RT WHICH WAS DULY APPROVED BY THE SEZ AUTHORITIES AND CUSTOM OFFICIAL S. THE ASSESSEE ALSO PLACED HIS RELIANCE ON THE DECISION OF THE TRIBUNAL IN THE CASE OF ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 21 - M/S.D.JAYANTILAL EXPORTS VS. JT.CIT IN ITA NO.1647/ AHD/2008, DATED 19/12/2008, DECISION OF WHICH HAS BEEN ELABORATELY QUOTED ABOVE IN THIS ORDER. THE ASSESSEE EXPLAINED HIS ACTIVITY AS MAJ OR PARTS OF MACHINERIES WERE MANUFACTURED UNDER THE SUPERVISION OF SHRI NAI K AND THE MANUFACTURED PARTS WERE SENT TO THE PREMISES IN THE SEZ WHERE THEY WERE ASSEMBLED AND TESTED. AFTER BEING APPROVED, THE M ACHINERY WAS DISASSEMBLED AS PER THE PACKAGING REQUIREMENTS AND THE PRODUCT WAS DESPATCHED BY SHIPPING CONTAINERS AFTER BEING VERIF IED BY THE CUSTOM DEPARTMENT. ON THE ABOVE FACTS, WE FIND THAT THE PURCHASES SHOWN BY THE ASSESSEE WAS NOT DISPUTED BY THE DEPARTMENT AND THE SAME WAS ACCEPTED AS GENUINE. HOWEVER, IN OUR CONSIDERED VIEW ON T HE FACTS OF THE CASE, THE ACTIVITY OF THE ASSESSEE WHICH WAS CARRIED OUT AT T HE SEZ AS CLAIMED BY THE ASSESSEE REQUIRED CONSIDERATION WHICH WAS NOT C ONSIDERED BY THE LOWER AUTHORITIES. FROM THE DETAILS FURNISHED BEFORE US ALSO, THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE IN THE SEZ IS NOT CLEAR. IT NEEDS TO BE EXAMINED WHETHER THE ACTIVITY OF ASSEMBLING CARRIE D OUT BY THE ASSESSEE TANTAMOUNTS TO MANUFACTURE OR PRODUCING ARTICLES OR THINGS OR NOT. FURTHER, THE DECISION OF THE TRIBUNAL WAS RELIED UPON BY THE ASSESSEE WAS ALSO NOT TAKEN INTO CONSIDERATION BY THE LOWER AUTHORITIES. IN THE CIRCUMSTANCES, IN OUR OPINION, IT SHALL BE IN THE INTEREST OF THE JUS TICE TO RESTORE THE ISSUE BACK ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 22 - TO THE FILE OF THE ASSESSING OFFICER FOR PROPER VER IFICATION WITH REGARD TO THE ACTIVITIES CLAIMED BY THE ASSESSEE TO HAVE UND ERTAKEN IN THE SEZ AREA. THE ASSESSING OFFICER SHALL AFTER PROPER VERIFICATI ON OF THE ACTIVITY CLAIMED TO HAVE BEEN UNDERTAKEN IN THE SEZ AREA AND AFTER TAKING INTO CONSIDERATION THE DECISION OF THE TRIBUNAL IN THE C ASE OF M/S.D.JAYANTILAL EXPORTS VS. JT.CIT IN ITA NO.1647/AHD/2008, DATED 1 9/12/2008(SUPRA), DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW. T HE ASSESSING OFFICER SHALL ALLOW SUFFICIENT OPPORTUNITY OF HEARING TO TH E ASSESSEE BEFORE DECIDING THE ISSUE AFRESH. THUS, THIS GROUND OF AP PEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 8. IN RESPECT OF THE OTHER GROUNDS OF APPEAL, THE L D. AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED DURING THE COURSE OF HEARING THAT THEY ARE CONSEQUENTIAL TO GROUND NO.1 AS IF IT IS H ELD THAT DEDUCTION IS ALLOWABLE TO THE ASSESSEE UNDER SECTION 10A OF THE I.T. ACT, 1961, THEN THE DISALLOWANCE WILL BE OF NO CONSEQUENCE. AS WE HAVE SET ASIDE THE GROUND NO.1 OF THE APPEAL TO THE FILE OF THE ASSESSING OFF ICER FOR ADJUDICATION AFRESH, IN OUR OPINION, IT SHALL BE JUST AND FAIR TO SET ASIDE THE ISSUES INVOLVED IN THESE GROUNDS ALSO BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION AFRESH IN LIGHT OF HIS DECISION IN RES PECT OF GROUND NO.1 OF THE ITA NO .3965/AHD/2008 M/S.DEVREKHA EXPORTS (SEZ) VS. ACIT ASST.YEAR 2005-06 - 23 - APPEAL. THUS, THESE GROUNDS OF APPEAL ARE ALSO ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 21/08/2009. SD/- SD/- ( T.K. SHARMA ) ( N.S. SAINI ) JUDICIAL MEMBER ACCO UNTANT MEMBER AHMEDABAD; DATED 21/08/2009 T.C. NAIR COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT-ASSESSEE. 2. THE RESPOND ENT 3. THE CIT CONCERNED. 4. THE LD. CIT (APPEALS)-II, SURAT 5. THE DR, AHMEDABAD BENCH. 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD