By TIOL News Service

NEW DELHI, FEB 16, 2016: THE issue is - Whether the gold recovered by the assessee from the wastage in its regular course of business of manufacturing and export of gold jewellery is its income. YES is the answer.

Facts of the case

The assessee is a partnership firm engaged in manufacturing & Export of Gold Jewellery, located in Noida Special Economic Zone (NSEZ). The unit located in NSEZ is claiming its income exempt u/s 10A. The assessee filed the return of income declaring Nil income after claiming the exemption u/s 10A. The return was processed u/s 143(1) but later on the case was selected for scrutiny. AO during the course of assessment proceedings noticed that the assessee had shown export sales and gross profit showing G.P rate of 7.67%. The claim of the assessee for exemption u/s 10A was verified by the AO and found the same in order. During the year under consideration a survey u/s 133A was carried out and physical stock of gold was taken. On verification from the books of accounts, a difference of 12kg of gold was found. Apart from this, some loose papers were also found which did not tally with the entries of books of accounts. AO while recording the statement of the working partner asked certain questions for clarification relating to jewellery weighting about 12kg. The assessee surrendered a sum on account of various discrepancies. However, later on furnished a letter stating that the stock in question was erroneously omitted from books of accounts and the stock had accumulated on account of normal loss of manufacturing process. It was stated that the stock in question is exported thereafter and income generated is tax free u/s 10A. AO made addition of amount which was earlier surrendered by the assessee during the course of survey on account of suppression of stock manufacturing charges and other discrepancies. In appeal, CIT(A) sustained the addition made by the AO.

Having heard the parties, the Tribunal held that,

+ the gold recovered by the assessee from the wastage was in its regular course of business of manufacturing and export of gold jewellery and there was no local sale. The AO accepted that the assessee was eligible for deduction u/s 10A of the Act being 100% Export Oriented Unit established in Noida Special Economic Zone. The assessee disclosed the gold recovered from the wastage in its books of accounts after the survey and the same was sold which was also entered in the stock register. The department had accepted the books of accounts maintained by the assessee in its regular course of business. The assessee disclosed the sale of the gold weighing 12kg which was recovered from the wastage. When the assessee itself disclosed the sale of the gold obtained on recopying the wastage and disclosed the profit on the said sale in the books of accounts which had been accepted by the department. The value of 12kg gold recovered by the assessee from its customer in regular course of business was its income but the assessee was eligible for deduction u/s 10A on the said income. The deduction u/s 10A of the Act has not been denied by the AO. Therefore, the addition of Rs.1,20,00,000/- made by the AO and sustained by CIT(A) was justified but the assessee is entitled for deduction u/s 10A of the Act on the said addition because the said income was directly related to the export business of the assessee. As regards to the another addition of Rs.11 lakhs is concerned, the said amount was disclosed by the assessee itself to cover up the various discrepancies found during the course of survey but that discloser was also related to the regular business of the assessee and it was not from the sources other than the business. On the said income of Rs.11 lakhs disclosed by the assessee, the exemption u/s 10A of the Act was available. (para 13)

++ the assessee agreed during the course of survey for the addition only when discrepancies in the loose papers were found. The assessee surrendered Rs.11 lakhs to cover up the irregularities of the business and short coming found during the course of survey. The said surrender was related to the regular business of the assessee and it is not brought on record that the assessee earned the said income from any other source. Therefore, the deduction u/s 10A of the Act was allowable to the assessee being 100% Export Oriented Unit established in SEZ on this income also. Therefore, the addition made by the AO upheld. AO is directed to allow the deduction u/s 10A of the Act. (para 14)

(See 2016-TIOL-270-ITAT-DEL)