Activity of assessee for converting gold bricks, biscuits or bars, into jewellery amounted to production or manufacture of a new article and accordingly, qualifies for deduction under section 80-IB.

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Activity of assessee for converting gold bricks, biscuits or bars, into jewellery amounted to production or manufacture of a new article and accordingly, qualifies for deduction under section 80-IB.

 

Short Overview Jewellery has a distinctive name, character and use. It can no longer be regarded as the original commodity, has separate consumers and is a new commercial commodity. Thus, activity of assessee for converting gold bricks, biscuits or bars, into jewellery amounted to production or manufacture of a new article and accordingly, qualifies for deduction under section 80-IB.

Assessee engaged in the business of making and trading of gold ornaments claimed deduction under section 80-IB being of the view that conversion of 24 Carat gold (pure gold) into 22 Carat gold ornaments by the assessee did not amount to ‘manufacturing’ within the meaning of section 80-IB, disallowed the assessee’s claim.

It is held that  As gold, silver or platinum in bar, biscuits or brick form, is converted by manual labour and by the use of implements/tools or by machinery, culminating into an entirely new article/thing called jewellery or ornaments. Jewellery is a wearable item and is used by both men and women. Jewellery/ornaments in common parlance or in commercial terms has a distinct identity, treated as a new article, and not the same as raw or standard gold in the form of bricks, biscuits or bars. As a result of the said processing a commercially different saleable product comes into existence. Jewellery has a distinctive name, character and use. It can no longer be regarded as the original commodity, has separate consumers and is a new commercial commodity. Thus activity of assessee for converting gold bricks, biscuits or bars, into jewellery amounted to production or manufacture of a new article and accordingly, qualifies for deduction under section 80-IB.

Decision: In assessee’s favour.

Relied: Free India Assurance Services Ltd. v. Dy. CIT (2011) 132 ITD 60 (Mum-Trib) : 2011 TaxPub(DT) 2093 (Mum-Trib)

IN THE ITAT, AMRITSAR BENCH

L.P. SAHU, A.M. & RAVISH SOOD, J.M.

Puneet Sehdev v. ITO

ITA No. 305/Asr./2015, ITA No. 05/ASR/2013, ITA No. 579/ASR/2016, ITA No. 547/ASR/2016

30 June, 2020

Assessee by: P.N Arora, A.R.

Revenue by: M.P. Singh, CIT D.R.

ORDER

Ravish Sood, J.M.

The captioned appeals are directed against the respective orders of the Commissioner (Appeals), Jammu, as under :–

ITA No./appellant Assessment Year Details of impugned order Details of assessment/penalty order
ITA 305/Asr/2015 (Assessee) 2008-09 Commissioner (Appeals), Jammu — Order, dated 30-3-2015 Assessment order under section 143(3) read with section 147, dated 26-3-2013.
ITA 05/Asr/2013 (Assessee) 2009-10 Commissioner (Appeals), Jammu — Order, dated 10-10-2012 Assessment order under section 143(3), dated 30-12-2011.
ITA 579/Asr/2016 (Assessee) 2009-10 Commissioner (Appeals), Jammu — Order, dated 30-6-2016 Penalty order under section 271(1)(c), dated 11-3-2014.
ITA 547/Asr/2016 (Revenue) 2009-10 Commissioner (Appeals), Jammu — Order, dated 30-6-2016 Penalty order under section 271(1)(c), dated 11-3-2014.

As the issues involved in the abovementioned appeals are inextricably interlinked or in fact interwoven, therefore, the same are being taken up and disposed off together by way of a common order. We shall first advert to the appeal of the assessee for assessment year 2008-09, wherein the impugned order has been assailed before us on the following grounds of appeal :–

“1. That the assessment order as well as the order of the learned Commissioner (Appeals), Jammu are both against the facts of the case and are untenable in law.

  1. That the worthy Commissioner (Appeals) did not appreciate the facts of the case and did not apply his mind and without appreciating the arguments and written submissions rejected the appeal of the appellant and has confirmed the order of the assessing officer therein making several additions.
  2. That the authorities below did not appreciate that the assessee was an individual and is the proprietor of M/s. Puneet Bangle House and is engage in the business of manufacturing of Jewellery as in the earlier years.
  3. That the assessing officer has grossly erred in making an addition of Rs. 2,08,51,002 on account of so-called bogus purchases. The assessing officer did not appreciate that these were genuine purchases and all the purchases were duly accounted for in the books of accounts and their sales were duly accepted in toto. As such, the assessing officer has blown hot & cold in the same breath/.
  4. That the assessing officer did not appreciate that even otherwise the rate of profit shown during the year under consideration was consistent and reasonable and by following the theory of assessing officer the rate of profit will shoot up to that extent which is impossible in this line of business.

As such the assessing officer has grossly erred in making the addition of Rs. 2,08,51,002 which is not at all called for viewed from all the angles. Similarly, the learned Commissioner (Appeals) has also erred in confirming the same without appreciating the facts of the case and without applying his mind and has blindly confirmed the order of the assessing officer. It is, therefore, very respectfully prayed that the addition confirmed by the Commissioner (Appeals) at Rs. 2,08,51,002 may kindly be deleted. Alternatively, the addition made is very high & excessive.

  1. Again, the assessing officer has grossly erred in making an addition to the tune of Rs. 1,05,56,112 on account of so called unexplained credits under section 68 of the Income Tax Act, 1961. The assessing officer did not appreciate that these were genuine creditors in due course of business and merely on the basis of conjectures, surmise and suppositions the addition has been made. The assessing officer has failed to place any adverse material against the assessee on record to justify the said addition. As such, no addition whatsoever is called for under section 68 and the addition made is unjustified and unwarranted on the facts and circumstances of the case. Similarly, the worthy Commissioner (Appeals) has also erred in confirming the same without appreciating the facts on record and arguments which took place during the course of hearing of appeal before the learned Commissioner (Appeals). In view of these circumstances, the addition confirmed by the learned Commissioner (Appeals) is not called for and the same may be deleted. Alternatively, the addition made is very high & excessive.
  2. Again, the assessing officer has grossly erred in making addition of Rs. 41,62,600 on account of disallowance under section 40A(3) of the Income Tax Act, 1961. The assessing officer has failed to appreciate that there was no violation of provisions of section 40A(3). All the provisions were duly complied with.

As such, no disallowance was called for and similarly the worthy Commissioner (Appeals) was also not justified in confirming the same without appreciating the facts of the case. Alternatively, the disallowance made is very high & excessive.

  1. Further, the assessing officer has grossly erred in not allowing the deduction claimed at Rs. 34,22,312 under section 80-IB of the Income Tax Act, 1961. It is an admitted fact that the assessee is manufacturing Gold Jewellery and is clearly entitled for deduction as claimed under section 80-IB of the Income Tax Act, 1961, at Rs. 34,22,312. Similarly, the learned Commissioner (Appeals) has grossly erred in confirming the same. It is prayed that deduction was correctly claimed under section 80-IB being a manufacturing business and thereby complying all the provisions laid down under the law. Further the assessee is registered with District Industries Centre, Jammu and other various departments. In view of these circumstances, the deduction as claimed under section 80-IB may kindly be allowed.
  2. Further, the assessee is also entitled for the deduction under section 80-IB on the finally assessed income and it is prayed that the same may kindly be allowed.
  3. Any other ground of appeal which may be urged at the time of hearing of the appeal.”
  4. Briefly stated, the assessee who is an individual engaged in the business of making and trading of gold ornaments had e-filed his return of income for assessment year 2008-09 on 24-11-2008, declaring a total income of Rs. Nil after claiming deduction under section 80-IB amounting to Rs. 34,22,312.

Original assessment was framed by the assessing officer under section 143(3), dated 16-12-2010, wherein holding a conviction that conversion of pure gold into ornaments did not amount to manufacturing within the meaning of section 80-IB of the Act, the assessing officer had disallowed the assessee’s claim for deduction under section 80-IB and determined his total income at Rs. 34,22,312. Subsequently, on the basis of facts gathered in the course of the assessment proceedings in the case of the assessee for the immediately succeeding year, i.e., assessment year 2009-10, it was observed by the assessing officer that the assessee during the year under consideration had booked bogus purchases aggregating to Rs. 2,08,51,002 in the name of two concerns viz. (i) M/s. Balaji Impex : Rs. 1,48,08,138; and (ii). M/s. S.K Impex : Rs. 60,42,864. Also, it was noticed by him that fictitious credits aggregating to Rs. 1,05,56,012 were shown by the assessee against the names of the aforesaid concerns in his ‘balance sheet’ for the year under consideration. In the backdrop of the aforesaid facts, the assessing officer holding a belief that the income of the assessee aggregating to Rs. 3,14,07,014 [Bogus purchases : Rs. 2,08,51,002 (+) Rs. 1,05,56,012] chargeable to tax had escaped assessment, therein reopened his case under section 147 of the Act. In compliance to the notice issued under section 148 on 22-12-2011 the assessee vide his letter dated 12-3-2012 requested that his return of income filed under section 139(1) on 29-11-2008 may be treated as the return of income filed in compliance to the said notice. Acting upon the aforesaid request, the assessing officer framed the assessment vide his order passed under section 143(3) read with section 147, dated 26-3-2013 at an income of Rs. 2,08,51,000 after making the following additions/disallowances :–

S. No. Particulars Amount of Addition/ disallowance
1. Disallowance of Bogus purchases claimed by the assessee to have been made from two parties viz. (i) M/s. Balaji Impex : Rs. 1,48,08,138; and (ii). M/s. S.K Impex : Rs. 60,42,864. Rs. 2,08,51,002 Rs. 2,08,51,002 (As the additions/disallowances towards viz. (i). bogus purchases : Rs. 2,08,51,002; (ii). Unexplained credits under section 68 : Rs. 1,05,56,112; and (iii). disallowance under section 40A(3) of purchases : Rs. 41,62,600 were overlapping in nature,
2. Addition of ‘Unexplained Credits’ under section 68 shown as sundry creditors in the balance sheet of the assessee against the names of the aforementioned two parties viz. (i) M/s. Balaji Impex : Rs. 61,54,538; and (ii). M/s. S.K Impex : Rs. 44,01,574. Rs. 1,05,56,112 therefore, the same were telescoped and restricted to the amount of Rs. 2,08,51,002).
3. Disallowance under section 40A(3) of cash purchases of gold from the aforementioned parties. Rs. 41,62,600
4. Disallowance of the assessee’s claim for deduction under section 80-IB of the Act. Rs. 34,22,312 Disallowance of the assesses claim of deduction under section 80-IB of Rs. 34,22,312 that was made by the assessing officer in ‘Original’ assessment under section 143(3), dated 16-12-2010 was on appeal vacated by the Commissioner (Appeals), vide his Order, dated 29-2-2012, against which the revenue had carried the matter in appeal before the ITAT, Amritsar.
  1. Aggrieved, the assessee assailed the assessment order passed by the assessing officer under section 143(3) read with section 147, dated 26-3-2013 before the Commissioner (Appeals). However, the Commissioner (Appeals) not being persuaded to subscribe to the contentions advanced by the assessee upheld the aforesaid additions/disallowances and dismissed the appeal.
  2. The assessee being aggrieved with the order of the Commissioner (Appeals) has carried the matter in appeal before us. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. We shall deal with the respective issues involved in the present appeal in a chronological manner, as under:
  3. BOGUS PURCHASES :

(i). As is discernible from the orders of the lower authorities, the assessing officer while framing the assessment in the case of the assessee for the immediately succeeding year, i.e., assessment year 2009-10, had observed, that the assessee in the said year had booked purchases aggregating to Rs. 2,38,60,205 in the name of two concerns viz. (i). M/s. Balaji Impex, Shop no. 18, 1st Floor, Parsvanth Plaza, Sector 27, Noida, Uttar Pradesh; and (ii). M/s. S.K Impex, 1241, Gali Kacha Bagh, Chandni Chowk, Delhi. On the basis of verifications, it was observed by the assessing officer that M/s. Balaji Impex in its confirmation had stated that it had closed down its operation since 31-3-2006 and had not entered into any transaction with the assessee, while for M/s. S.K Impex had confirmed that it had not carried out any transaction with the assessee. On being confronted with the aforesaid facts the assessee in his statement recorded on oath on 16-12-2011 admitted that the purchase vouchers pertaining to both of the aforesaid parties were bogus and in fact fabricated by him.

(ii). Acting upon the aforesaid information that was gathered by the assessing officer while framing the assessment in the case of the assessee for assessment year 2009-10, it was observed by him that the assessee had during the year under consideration booked purchases aggregating to Rs. 2,08,51,002 (out of total purchases of Rs. 3,91,62,368) in the name of the aforementioned parties viz. (i). M/s. Balaji Impex : Rs. 1,48,08,138; and (ii). M/s. S.K Impex : Rs. 60,42,864. On the basis of verifications carried out by the assessing officer under section 133(6) of the Act, it stood revealed that the assessee had not made any genuine purchases from the aforesaid parties. The assessee had claimed that the impugned purchases were made by him from the open/grey market. Further, it was the claim of the assessee that as no supporting bills were provided by the open/grey market suppliers from where the goods were procured, therefore, in order to justify the genuineness of the purchases he had used the bogus purchase invoices in the names of the aforesaid parties. At the same time, it was the claim of the assessee that though the purchase bills were bogus but he had made the correlating purchases from the open/grey market. In order to drive home his aforesaid claim the assessee placed on record certain supporting documentary evidence viz. (i). the bill wise details of sales and ledger copies of all the parties to whom the corresponding sales were made were furnished; (ii). the assessing officer issued letters under section 133(6) to the parties to whom the sales were made and all of them had confirmed the transactions with the assessee; and (iii). the stock register was produced by the assessee, wherein quantitative details showing opening stock, purchases, quantity issued for production, production and closing stock were furnished with the assessing officer, who verified the same and did not give any adverse remarks as regards the genuineness of the sale transactions. Apart from that, it was submitted by the assessee that its GP rate for the year under consideration was 9.70%, which was in conformity with its past history and also that prevailing in the trade line. In fact, it was the claim of the assessee that if the impugned purchases of Rs. 2,08,51,002 were to be held as bogus, then it would give a distorted picture of its trading results and the GP rate would shoot up to an unimaginable figure of 60.40%. However, the assessing officer did not find favour with the aforesaid claim of the assessee and holding a conviction that the assessee had raised a claim of bogus purchases of Rs. 2,08,51,002 added the same to his returned income. On appeal, the Commissioner (Appeals) finding no infirmity in the view taken by the assessing officer upheld the addition of Rs. 2,08,51,002 made by the assessing officer towards bogus purchases.

(iii). We have deliberated at length on the issue under consideration and are unable to persuade ourselves to subscribe to the view taken by the lower authorities. Admittedly, the assessee had not made any genuine purchases from the aforesaid two parties viz. (i). M/s. Balaji Impex; and (ii). M/s. S.K Impex. In fact, the assessee in his statement recorded on oath on 16-12-2011 in the course of the assessment proceedings for assessment year 2009-10, had admitted, that the purchase vouchers pertaining to both of the aforesaid parties were bogus and had been fabricated by him. Insofar the year under consideration is concerned, we find that the assessee had stated before the assessing officer that he had not made any purchases during the year from the aforementioned parties and had in fact procured the impugned goods from the unorganized sector operating in the open/grey market. As is discernible from the orders of the lower authorities, we find that it has consistently been the claim of the assessee that as the impugned goods were purchased by him from the open/grey market, therefore, to justify the genuineness of such purchases and route the same through his books of accounts that he had used the bogus purchase invoices in the name of the aforesaid parties. At the same time, we find that the fact that the assessee had duly accounted for the sales correlating to the impugned purchases in his books of accounts also stands established to the hilt beyond any scope of doubt. In the backdrop of the aforesaid facts, we are of the considered view that now when the correlating sales of the goods had duly been accounted by the assessee in his ‘books of accounts’, therefore, it can safely or rather inescapably be concluded that the assessee had not purchased the goods from the aforementioned parties but had procured the same from open/grey market. Accordingly, the addition of the entire value of the impugned purchases could not have been made in the hand of the assessee. We are unable to comprehend as to on what basis the Commissioner (Appeals) had concurred with the view taken by the assessing officer that an addition of the entire value of impugned purchases of Rs. 2,08,51,002 was called for in the hands of the assessee. But then, we also cannot remain oblivious of the fact that the assessee would had procured the impugned goods from the open/grey market at a discounted value as against that accounted for on in his books of account on the basis of the bogus bills of the aforementioned parties. Accordingly, the addition in the hands of the assessee in our considered view could have fairly been made to the extent of the profit element involved in making of such purchases at a discounted value by the assessee from the open/grey market. Insofar the quantification of such profit element is concerned, we find that the Hon’ble High Court of Bombay in its recent judgment in the case of Pr. Commissioner of Income Tax-17 v. M/s. Mohhomad Haji Adam & Company [ITA No. 1004 of 2016, dated 11-2-2019] while upholding the order of the Tribunal, had observed, that the addition in the hands of the assessee as regards the bogus/unproved purchases was to be made to the extent of bringing the G.P rate of such purchases at the same rate as that of the other genuine purchases.

The Hon’ble High Court while concluding as hereinabove had observed as under :–

“8. In the present case, as noted above, the assessee was a trader of fabrics. The assessing officer found three entities who were indulging in bogus billing activities. assessing officer found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis.

Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee’s additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the Commissioner (Appeals) and the Tribunal would suggest that the department had not disputed the assessee’s sales. There was no discrepancy between the purchases shown by the assessee and the sale declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trade. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases. The decision of the Gujarat High Court in the case of N.K. Industries Ltd. (supra) cannot be applied without reference to the facts. In fact in paragraph 8 of the same Judgment the Court held and observed as under :–

“So far as the question regarding addition of Rs. 3,70,78,125 as gross profit on sales of Rs. 37.08 Crores made by the assessing officer despite the fact that the said sales had admittedly been recorded in the regular books during Financial Year 1997-98 is concerned, we are of the view that the assessee cannot be punished since sale price is accepted by the revenue. Therefore, even if 6% gross profit is taken into account, the corresponding cost price is required to be deducted and tax cannot be levied on the same price. We have to reduce the selling price accordingly as a result of which profit comes to 5.66%. Therefore, considering 5.66% of Rs. 3,70,78,125 which comes to Rs. 20,98,621.88 we think it fit to direct the revenue to add Rs. 20,98,621.88 as gross profit and make necessary deductions accordingly. Accordingly, the said question is answered partially in favour of the assessee and partially in favour of the revenue.”

  1. In these circumstances, no question of law, therefore, arises. All Income Tax Appeals are dismissed, accordingly. No order at costs.”

As such, the Hon’ble High Court had observed that the addition in respect of purchases which were found to be bogus in the case of the assessee before them was to be worked out by bringing the G.P. rate of such bogus purchases at the same rate of other genuine purchases. We thus respectfully following the aforesaid judgment of the Hon’ble High Court direct the assessing officer to restrict the addition insofar the bogus/unproved purchases aggregating to Rs. 2,08,51,002 in the case before us is concerned, by bringing the G.P. rate on the amount of such bogus purchases at the same rate as that of other genuine purchases. Accordingly, for the limited purpose of giving effect to our aforesaid directions the matter is restored to the file of the assessing officer. Needless to say, the assessee in the course of the ‘set aside’ proceedings shall furnish the requisite details before the assessing officer who shall after making necessary verifications restrict the addition in terms of our aforesaid observations.

The order passed by the Commissioner (Appeals) is ‘set aside’ and the matter is restored to the file of the assessing officer to give effect to our aforesaid directions. Grounds of appeal Nos. 4 & 5 are allowed for statistical purposes in terms of our aforesaid observations.

  1. UNEXPLAINED CREDITS UNDER SECTION 68 :

(i). As observed by us hereinabove, the assessee in lieu of the impugned purchases which were claimed by him to have been made from the aforementioned parties, had reflected in his ‘balance sheet’ for the year under consideration outstanding liabilities aggregating to an amount of Rs. 1,05,56,012 (Cr) under the head ‘Sundry creditors’ against their names viz. (i). M/s. Balaji Impex : Rs. 61,54,438 (Cr); and (ii). M/s. S.K Impex : Rs. 44,01,571 (Cr). In sum and substance, the assessee had claimed that out of the total impugned purchases of Rs. 2,08,51,002 [Rs. 1,48,08,138 (+) Rs. 60,42,864] made from the aforementioned parties an amount aggregating to Rs. 1,05,56,012 [Rs. 61,54,438 (+) Rs. 44,01,571] was outstanding as payable to them as on 31-3-2008. Observing, that the assessee had shown bogus creditors of Rs. 1,05,56,012 in his ‘books of accounts’, the assessing officer added the same as an unexplained credit within the meaning of section 68 of the Act. On appeal, the Commissioner (Appeals) concurred with the view taken by the assessing officer and upheld the addition made by the assessing officer under section 68 of the Act.

(ii). We have given a thoughtful consideration to the aforesaid issue before us and are unable to agree with the view taken by the lower authorities. As observed by us hereinabove, the assessee had not purchased the impugned goods from the aforementioned parties viz. M/s. Balaji Impex and M/s. S.K Impex, but had procured the same from the unregistered dealers operating in the open/grey market. Accordingly, now when the purchase transactions of the assessee with the aforementioned respective parties had been found to be bogus/sham, therefore, the corresponding accounting treatment given by the assessee in his ‘books of account’ to the extent relatable to his claim of having purchased the goods from them have to be reversed. At the same time, as the assessee had admittedly purchased the impugned goods at a discounted value from the open/grey market, therefore, the source of procuring of such goods have to be related to such unidentified suppliers, and thus cannot be held to be bogus. In sum and substance, once the purchase transactions of the assessee with the aforementioned parties are stamped as bogus/sham, thereafter, no adverse inferences as regards any part of such bogus purchase transactions reflected as outstanding liability against their names in the ‘books of account’ of the assessee could have been validly drawn. In the backdrop of our aforesaid observations, we are of a strong conviction that now when the purchase transactions of the assessee with both of the aforesaid parties viz. M/s. Balaji Impex and M/s. S.K Impex have been held to be bogus, thereupon, there remained no occasion for drawing of any adverse inferences as regards the outstanding liability aggregating to Rs. 1,05,56,012 reflected under the head ‘Sundry creditors’ against the names of the said parties in the ‘balance sheet’ of the assessee for the year under consideration. In fact, now when we have observed that the assessee had purchased the goods under consideration from unregistered dealers operating in the open/grey market, therefore, the outstanding liability in respect of such purchase transactions can safely be related to such suppliers. Accordingly, we are unable to persuade ourselves to subscribe to the view taken by the lower authorities who have characterised the outstanding liability generated from making of the impugned purchases by the assessee as bogus, and thus vacate the addition of Rs. 1,05,56,012 made by the assessing officer under section 68.

Ground of appeal No. 6 is allowed.

  1. DISALLOWANCE UNDER SECTION 40A(3) :

(i). In the course of the assessment proceedings it was observed by the assessing officer that a perusal of the ledger account of M/s. Balaji Impex (in the books of the assessee) revealed that the assessee had made cash purchases of Rs. 41,62,600, against which payments in excess of Rs. 20,000 on any single day were made. On the contrary, it was the claim of the assessee that he would make cash withdrawals from the bank and utilise the amount for making of purchases from the open/grey market. It was the claim of the assessee that on no occasion any single payment in excess of Rs. 20,000 was made for purchasing the goods. However, the assessing officer was not inclined to accept the aforesaid claim of the assessee and disallowed the aforesaid amount of Rs. 41,62,600 under section 40A(3) of the Act. On appeal, the Commissioner (Appeals) did not dislodge the observations drawn by the assessing officer as regards the disallowance made by him under section 40A(3) of the Act.

(ii). We have given a thoughtful consideration to the aforesaid issue before us. In our considered view section 40A(3) is an overriding provision, which operates in spite of anything to the contrary contained in any other provision of the ‘Act’ relating to the computation of income under the head “Profits and gains of business or profession”. We are of the considered view that the aforesaid statutory provision being mandatory in nature calls for a strict compliance, with the only exception as regards its applicability having been carved out by the legislature in Rule 6DD. But then, we also cannot remain oblivious of the fact that as per the mandate of section 40A(3) as was applicable during the year under consideration, the assessing officer was obligated to demonstrate that the assessee had incurred any expenditure in respect of which a payment was made of a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft. Although, it has throughout been the claim of the assessee that he had on no occasion made any single payment in excess of Rs. 20,000 for purchasing the goods from the suppliers operating in the open/grey market, however, the assessing officer without rebutting the same by placing on record any material proving to the contrary and dislodging the veracity of the said claim of the assessee, had most arbitrarily concluded that the assessee had contravened the provisions of section 40A(3) of the Act. As regards the impugned purchases from M/s. Balaji Impex as referred to by the assessing officer are concerned, the same already having been held to be in the nature of bogus/sham purchase transactions would thus not assist the case of the revenue. In sum and substance, the revenue had triggered the operation of section 40A(3) on a mere presumptive basis de hors any concrete material proving to the contrary, which we are afraid would by no means be justified. As observed by us hereinabove, it has consistently been the claim of the assessee that though he would withdraw amount from the bank and utilise the same for making purchases from the open/grey market, but on no single occasion any payment in excess of an amount of Rs. 20,000 was ever made by him to any supplier party during the year under consideration. As the aforesaid claim of the assessee had not been disproved or dislodged by the revenue, therefore, the disallowance of an amount of Rs. 41,62,600 made under section 40A(3) by the assessing officer cannot be sustained and is liable to be vacated. Our aforesaid view is fortified by the order of a coordinate bench of the Tribunal in the case of Free India Assurance Services Ltd. v. DCIT (2011) 132 ITD 60 (Mum) : 2011 TaxPub(DT) 2093 (Mum-Trib).

In the said case, it was observed by the Tribunal that disallowance cannot be made merely on the basis of a presumption that the assessee had made the purchases by way of cash from the grey market in violation of the provisions of section 40A(3) of the Act. Further, we find that the ITAT, Pune in the case of Rajmal Lakhichand v. Asstt. CIT (2001) 79 ITD 84 (Pune) : 2001 TaxPub(DT) 0374 (Pune-Trib), had observed, that the provisions of section 40A(3) are to be invoked when the Department has evidence with itself that the assessee had made payments in cash exceeding the prescribed limits. It was observed by the Tribunal that disallowance cannot be made merely on the basis of a presumption that the assessee must have made payments in cash and that too exceeding the prescribed limits. Adopting a similar view, the ITAT, Mumbai in the case of Western India Bakers (P) Ltd. v. Dy. CIT (2003) 87 ITD 607 (Mumbai) : 2003 TaxPub(DT) 0598 (Mum-Trib), had concluded, that when a provision of law is to be applied, it is to be seen that all the circumstances alliunde to the application of such provision did exist. It was observed by the Tribunal, that if it was not possible to find out how the violation of the provision was done, then addition could not be made on the basis of inferences and surmises. Observing, that in the case before them, as it was not known at what point of time and how the assessee had violated the provisions of section 40A(3), therefore no addition on that count was warranted. Accordingly, in the backdrop of our aforesaid observations, we are of the considered view that as the revenue had failed to dislodge the claim of the assessee, and therein prove to the contrary that he had made payments towards purchase of goods from the open/grey market exceeding the prescribed limits contemplated in section 40A(3), therefore, the disallowance of an amount of Rs. 41,62,600 made by the assessing officer cannot be sustained and is liable to be vacated. Ground of appeal No. 7 is allowed in terms of our aforesaid observations.

  1. DEDUCTION UNDER SECTION 80-IB :

(i). As is discernible from the orders of the lower authorities, the assessee had in his return of income claimed deduction under section 80-IB of Rs. 34,22,312. However, the assessing officer being of the view that conversion of 24 carat gold (pure gold) into 22 carat gold ornaments by the assessee did not amount to “manufacturing” within the meaning of section 80-IB of the Act, disallowed the assessee’s claim for deduction while framing the ‘Original’ assessment, vide his order passed under section 143(3), dated 16-12-2010. On appeal, the Commissioner (Appeals), vide his Order, dated 29-2-2012 holding a conviction that the assessee’s claim for deduction under section 80-IB was in order vacated the disallowance made by the assessing officer Aggrieved, the revenue had assailed the order of the Commissioner (Appeals) before the Tribunal, which however was dismissed by the Tribunal vide its order passed in ITA No. 153/Asr/2012, dated 15-11-2018 for low tax effect in terms of the CBDT Circular No. 3 of 2018, dated 11-7-2018. The assessing officer while framing the reassessment vide his order passed under sections 143(3) read with section 147, dated 26-3-2013 had in the mean time again disallowed the assessee’s claim for deduction under section 80-IB of the Act. On further appeal, the Commissioner (Appeals) observed that he had while disposing off the appeal of the assessee for assessment year 2009-10 had upheld the disallowance of the assessee’s claim for deduction that involving identical facts was raised under section 80-IB. Observing, that the issue had already been decided by him and was pending before the Tribunal in the assessee’s own case, therefore, he dismissed the ground of appeal raised by the assessee to the said effect.

(ii). We have perused the orders of the lower authorities and find that the assessee who is engaged in the business of conversion of pure gold/bullion (24 carat) into gold ornaments (22 carat), claiming that he was engaged in the business of “manufacturing” of gold ornaments had claimed deduction under section 80-IB of Rs. 34,22,312. As observed by us hereinabove, the assessing officer while framing the ‘Original’ assessment vide his order passed under section 143(3), dated 16-12-2010 had declined the assesses claim of deduction under section 80-IB, for the reason, that as per him conversion of pure gold (24 carat) into gold ornaments (22 carat) did not amount to manufacturing within the meaning of section 80-IB of the Act. However, on appeal the Commissioner (Appeals) being of the view that the assessee’s claim of deduction under section 80-IB was in order had allowed the same. On a perusal of the records, we find, that the revenue had assailed the order of the Commissioner (Appeals) before the Tribunal, which however, as observed by us hereinabove was dismissed by the Tribunal vide its order passed in ITA No. 153/Asr/2012, dated 15-11-2018 for low tax effect in terms of the CBDT Circular No. 3 of 2018, dated 11-7-2018.

We find that in the course of the reassessment proceedings the assessing officer holding a conviction that the conversion of pure gold/bullion (24 carat) into gold ornaments (22 carat) could not be construed as an activity of “manufacturing” of gold ornaments, had thus, called upon the assessee to justify his claim for deduction under section 80-IB of the Act. Also, it was observed by the assessing officer in the body of the assessment order that the assessee had not satisfied certain other conditions contemplated in section 80-IB. In reply, the assessee tried to impress upon the assessing officer that the requisite conditions for claim of deduction under section 80-IB were duly satisfied by him. It was the claim of the assessee before him, that he would purchase 24 carat pure gold which would be converted into 22 carat gold ornaments by diluting the same with 7% copper and 3% silver. As such, it was the claim of the assessee that as he was carrying on the business of manufacturing of gold ornaments, therefore, his claim for deduction under section 80-IB was well in order. In support of his aforesaid claim for deduction under section 80-IB the assessee had relied on a host of judicial pronouncements. However, the assessing officer after considering the submissions of the assessee did not find favour with the same. The assessing officer finally concluded that as the conversion of 24 carat pure gold into 22 carat gold ornaments did not amount to manufacturing, therefore, the assessee was not entitled for claim of deduction under section 80-IB of the Act. On the basis of his aforesaid conviction the assessing officer rejected the assessee’s claim for deduction of Rs. 34,22,312 under section 80-IB. On appeal, the Commissioner (Appeals) following the view that was taken by him while disposing off the appeal of the assessee for assessment year 2009-10 upheld the disallowance of the assessee’s claim for deduction under section 80-IB of the Act.

(iii). We have deliberated at length on the issue under consideration and find that the issue herein involved is squarely covered by the order of this Bench of the Tribunal in the case of ACIT, Circle, Srinagar v. Shri Lokesh Handa, Jammu [ITA No. 332(Asr)/2015, dated 10-12-2015]. In the aforesaid order it was observed by the Tribunal as under :–

“5. We have heard the rival contentions and have perused the material available on record. We find that the issue involved in the present appeal is squarely covered by the order of this Bench of the Tribunal in ITA No. 407(Asr)/2012, dated 19-2-2013, in the case of ITO, Wards 2(3), Jammu v. Shri Sanjay Jain, Jammu (supra). The learned Commissioner (Appeals) has also followed the aforesaid order of the Tribunal. The relevant findings of the Tribunal are as follows :–

“4. We have heard the rival contentions and perused relevant record available with us. We are of the view that the learned first appellate authority has decided the issue in dispute in favour of the assessee by respectfully following the various decisions rendered by the various Benches of the Tribunal and the Hon’ble High Courts. For the sake of convenience, the findings of the learned Commissioner (Appeals) given at pages 3 & 4 of the order are reproduced as under :–

“4. I have carefully considered the submissions made and find that assessee is to succeed. Even before the definition of manufacturing was not on the statute the direct decision of Hon’ble Delhi High Court and Hon’ble ITAT, Mumbai as referred above held that conversion of gold into ornaments amounted to ‘manufacture’. In the case of M/s. Lovelesh Jain and others 204 Taxman 134 : 2012 TaxPub(DT) 0785 (Del-HC) the issue was elaborately discussed by the Hon’ble Delhi High Court as under :–

“The activity for converting gold bricks, biscuits or bars, into jewellery amounts to “production or manufacture of a new article. The gold, silver or platinum in bar, biscuits or brick form, is converted by manual labour and by the use of implements/tools or by machinery, culminating into an entirely new article/thing called jewellery or ornaments. Jewellery is a wearable item and is used by both men and women. This process has been referred to above in paragraph 6.4, while adverting to the factual matrix in the case of Shashi Kant Mittal. Jewellery/ornaments in common parlance or in commercial terms has a distinct identity, treated as a new article and not the same as raw or standard gold in the form of bricks, biscuits or bars. As a result of the said processing a commercially different saleable product comes into existence. Jewellery has a distinctive name, character and use. It can no longer be regarded as the original commodity, has separate consumers and is a new commercial commodity. The activity of the respondent assessee amounts to ‘manufacture or production and, therefore, qualifies for deduction under section 10A/10B.”

4.1. Also, in the case of M/s. Tribhuwan Dass Bhimjee Jhaveri 110 TTJ 942 : 2007 TaxPub(DT) 1301 (Mum-Trib), the Hon’ble ITAT, Mumbai has held as under :–

“Deduction under section 80-IB–Allowability–Industrial undertaking or branch office–Assessee’s unit at Hyderabad is getting the jewellery made from Karigars at Mumbai under the supervision and control of its employees with the help of Mumbai Office (head office) of the assessee-operations carried on by the Hyderabad unit cannot be ignored merely because the Mumbai office is facilitating its activities–Therefore, assessee is entitled to deduction under section 80-IB in respect of Hyderabad unit.”

4.2. In the case of Puneet Sachdeva in Appeal No. 253/10-11, dated 29-2-2012, I have also held that the conversion of gold into gold ornaments was manufacturing, relying on the order of Hon’ble High Court and Hon’ble ITAT, Mumbai as referred above.

4.3. Further, the definition of ‘manufacture’ is inserted with effect from 1-4-2009 in section 2(24BA) of Income Tax Act as under :–

“Manufacture” with its grammatical variations means a change in non-living physical object or article or thing :–

(a) Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use, or

(b) Bringing into existence of a new and distinct object or article or thing with different chemical composition or integral structure.

4.4. The conditions are alternate to each other and on satisfying any one of the two the activity would be treated as ‘manufacture’. In the present case 2(29BA)(a) of Income Tax Act is clearly satisfied as there is transformation of 24k gold into new and distinct object as ornament which has different name, character in and usage.

4.5. The assessing officer has not commented in his order as to how the activity of assessee is not covered by the definition of ‘manufacture’. His reliance is on case laws which are not direct on the issue whereas the decision of Hon’ble Delhi High Court and Hon’ble ITAT, Mumbai are direct on the issue which are relied by me in case of Puneet Sachdev in Appeal No. 253/10-11, dated 29-2-2012. Following the above, I hold that assessee was engaged in ‘manufacture’ and was entitled to deduction under section 80-IB of Income Tax Act. I am not going into the issue of consistency as raised by the learned Representative of assessee as the matter stands decided on merits. Ground No. 1 to 6 stands disclosed.”

  1. Keeping in view the aforesaid findings, we are of the view that no interference is called for in the well reasoned order passed by the learned first appellate authority, who has decided the issue in dispute in favour of the assessee, by respectfully following the decisions of the Hon’ble High Court as well as ITAT, Mumbai Bench. Therefore, we uphold the impugned order by dismissing the appeal filed by the Revenue.”
  2. The said Tribunal order has not been shown to have been either upset, or even stayed on appeal. The facts therein have also not been stated to be any different from those before us.
  3. Thus, respectfully following the aforesaid order of the Tribunal in the case of “ITO, Ward-2(3), Jammu v. Sanjay Jain, Jammu” (supra) which has also been followed by the learned Commissioner (Appeals), and is squarely applicable to the facts and circumstances of the present case, we dismiss the appeal of the Revenue.
  4. In the result, the appeal of the Revenue is dismissed.”

We have perused the aforesaid order of the Tribunal and finding ourselves to be in agreement with the view therein taken respectfully follow the same. Apart from that, as observed by us hereinabove, the assessing officer while framing the ‘Original’ assessment for assessment year 2008-09, vide his order passed under section 143(3), dated 16-12-2010 had disallowed the assessee’s claim for deduction under section 80-IB.

However, on appeal, the Commissioner (Appeals), vide his Order, dated 29-2-2012 had principally found favour with the assessee’s entitlement for claim for deduction under section 80-IB and allowed the same to the extent of 95%. Aggrieved, both the revenue and the assessee had assailed the order of the Commissioner (Appeals) before the Tribunal by way of an appeal and a cross-objection, respectively. Insofar the appeal of the revenue is concerned, we find that the same was dismissed by the Tribunal vide its order passed in ITA No. 153/Asr/2012, dated 15-11-2018 for low tax effect in terms of the CBDT Circular No. 3 of 2018, dated 11-7-2018. On the other hand, the cross-objection of the assessee was disposed off by the Tribunal vide its order passed in C.O No. 15(Asr)/2012 [arising out of ITA No. 153/Asr/2012], wherein the restriction of the assessee’s claim for deduction under section 80-IB to 95% by the Commissioner (Appeals) was held to be improper. On the basis of the aforesaid facts, it can safely be concluded that the Tribunal vide its aforesaid order passed in C.O. No. 15(Asr)/2012, had concluded, that the assessee’s claim for deduction under section 80-IB was in order. In the backdrop of the aforesaid facts, we are of the considered view that the claim of the assessee for deduction of Rs. 34,22,312 under section 80-IB is in order and the disallowance of the same by the assessing officer cannot be sustained. Accordingly, the order of the Commissioner (Appeals) is ‘set aside’ and the disallowance of the assessee’s claim for deduction of Rs. 34,22,312 under section 80-IB is vacated. Ground of appeal No. 8 is allowed in terms of our aforesaid observations.

  1. Before parting, we may herein observe that there is substantial force in the claim of the assessee that deduction under section 80-IB has to be allowed on the amount of profits and gains derived by him the eligible business within the meaning of the said statutory provision, as finally determined.

Our aforesaid view is fortified by the orders of this tribunal in the case of Shri Ashok Kumar, Prop. M/Bhagwati Stone Crusher v. ITO, Ward-2(4), Udhampur [ITA No. 273/Asr/2015 & 112/Asr/2016, dated 16-5-2016] and Smt. Harbhajan Kaur, Prop. M/s. Sainico Engineers v. ITO, Ward 1(4), Kathua [ITA No. 331/Asr/2013, dated 6-12-2013]. In the aforesaid orders, it was observed by the Tribunal that disallowance of expenses claimed by the assessee as regards his eligible business would increase its income which again will be exempt under section 80-IB of the Act.

Accordingly, finding ourselves to be in agreement with the aforesaid view of the tribunal, we respectfully follow the same. Ground of appeal No. 9 is allowed in terms of our aforesaid observations.

  1. The Grounds of appeal Nos. 1, 2, 3 & 10 being general in nature are dismissed as not pressed.
  2. The appeal of the assessee is allowed in terms of our aforesaid observations.

ITA 05/Asr/2013, Assessment Year 2009-10 (Assessee’s appeal)

  1. We shall now advert to the appeal filed by the assessee against the order passed by the Commissioner (Appeals), Jammu, dated 10-10-2012 for assessment year 2009-10, which in turn arises from the order passed by the assessing officer under section 143(3) of the Act, dated 30-12-2011. The assessee has assailed the impugned order on the following grounds of appeal before us :–

“1. That having regard to the facts and circumstances of the case the learned Commissioner (Appeals), Jammu has erred both in law and on facts by making enhancement in the income assessed by the learned assessing officer without giving any opportunity of being heard to the appellant against the principle of natural justice.

  1. That having regard to the facts and circumstances of the case the learned Commissioner (Appeals), Jammu has erred both in law and on facts of the case by not accepting the process of conversion of 24 Karat Gold into gold ornaments of 22 Karat as manufacturing activity and accordingly denying the deduction under section 80-IB claimed by the assessee.
  2. That having regard to the facts and circumstances of the case the learned Commissioner (Appeals), Jammu has erred in upholding the additions on account of bogus purchases.
  3. That having regard to the facts and the circumstances of the case the learned Commissioner (Appeals), Jammu has erred in upholding the additions made under section 40A(3) of the Act.
  4. That having regard to the facts and circumstances of the case the learned Commissioner (Appeals), Jammu has erred in making additions on account of unverified creditors.
  5. That the appellant craves to leave to add, amend, modify, delete any of the ground of appeal before or at the time of hearing and all the above grounds are without prejudice to each other.”
  6. Briefly stated, the assessee had e-filed his return of income for assessment year 2009-10 on 30-9-2009, declaring a total income of Rs. Nil after claiming deduction under section 80-IB of Rs. 64,10,983. The case of the assessee was selected for scrutiny assessment under section 143(2) of the Act. In the course of the assessment proceedings the assessing officer made the following additions/disallowances :–
S. No. Particulars Amount of Addition/disallowance
1. Disallowance of Bogus purchases claimed by the assessee to have been made from two parties viz. (i) M/s. Balaji Impex : Rs. 1,31,85,493; and (ii). M/s. S.K Impex : Rs. 1,06,74,712. Rs. 2,38,60,205 Rs. 2,86,96,452 (As the additions/ disallowances towards viz. (i). bogus purchases : Rs. 2,38,60,205; (ii). Unexplained credits under section 68 : Rs. 51,34,260; and (iii). disallowance under section 40A(3) of purchases : Rs. 2,86,96,452 were overlapping in nature, therefore, the same were telescoped and restricted to the amount of Rs. 2,86,96,452).
2. Addition of ‘Unexplained Credits’ under section 68 shown as sundry creditors in the balance sheet of the assessee against the names of the aforementioned two parties viz. (i) M/s. Balaji Impex : Rs. 28,27,327.79; and (ii). M/s. S.K Impex : Rs. 23,06,933.05. Rs. 51,34,260
3. Disallowance under section 40A(3) of cash purchases of gold from the aforementioned parties. Rs. 2,86,96,452
4. Disallowance of the assessee’s claim for deduction under section 80-IB of the Act. Rs. 64,10,983
  1. Aggrieved, the assessee assailed the assessment order passed by the assessing officer under section 143(3), dated 30-12-2011 in appeal before the Commissioner (Appeals). However, the Commissioner (Appeals) not being persuaded to subscribe to the contentions advanced by the assessee upheld the aforesaid additions/disallowances and dismissed the appeal.
  2. The assessee being aggrieved with the order of the Commissioner (Appeals) has carried the matter in appeal before us. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. We shall deal with the respective issues involved in the present appeal, as under:
  3. BOGUS PURCHASES :

As the facts and the issue pertaining to the disallowance made by the assessing officer towards bogus purchases of Rs. 2,38,60,205 which were claimed by the assessee to have been made from the aforementioned parties viz. (i). M/s. Balaji Impex, Shop no. 18, 1st Floor, Parsvanth Plaza, Sector 27, Noida, Uttar Pradesh (Rs. 1,31,85,493); and (ii). M/s. S.K Impex, 1241, Gali Kacha Bagh, Chandni Chowk, Delhi (Rs. 1,06,74,712), remains the same as were there before us in his appeal for the immediately preceding year, i.e., assessment year 2008-09, therefore, our order therein passed while disposing off Grounds of appeal No. 4 & 5 in ITA No. 305/Asr/2015 of his appeal for assessment year 2008-09 shall apply mutatis mutandis for the purpose of disposing off Ground of appeal No. 3 of the present appeal, i.e., ITA No. 05/Asr/2013 for assessment year 2008-09. We thus on the same terms respectfully following the aforesaid judgment of the Hon’ble High Court of Bombay in the case of Pr. Commissioner of Income Tax-17 v. M/s. Mohhomad Haji Adam & Company (ITA No. 1004 of 2016, dated 11-2-2019) direct the assessing officer to restrict the addition insofar the bogus/unproved purchases aggregating to Rs. 2,38,60,205 in the case before us is concerned, by bringing the G.P. rate on the amount of such bogus purchases at the same rate as that of other genuine purchases. Needless to say, the assessee in the course of the ‘set aside’ proceedings shall furnish the requisite details before the assessing officer who shall after making necessary verifications restrict the addition in terms of our aforesaid observations. The order passed by the Commissioner (Appeals) is ‘set aside’ and the matter is restored to the file of the assessing officer to give effect to our aforesaid directions. Ground of appeal No. 3 is allowed for statistical purposes in terms of our aforesaid observations.

  1. UNEXPLAINED CREDITS UNDER SECTION 68 :

(i). As is discernible from the orders of the lower authorities, the assessee in lieu of the impugned purchases which were claimed by him to have been made from the aforementioned parties had reflected in his ‘balance sheet’ for the year under consideration an outstanding liability aggregating to an amount of Rs. 51,34,260 (Cr) under the head ‘Sundry creditors’ against their names viz. (i). M/s. Balaji Impex: Rs. 28,27,327.79 (Cr); and (ii). M/s. S.K Impex : Rs. 23,06,933.05. (Cr). In sum and substance, the assessee had claimed that an amount aggregating to Rs. 51,34,260 [Rs. 28,27,327.79 (+) Rs. 23,06,933.05] was outstanding as payable to the aforesaid parties as on 31-3-2009. Observing, that the assessee had shown bogus creditors of Rs. 51,34,260 in his ‘books of accounts’, the assessing officer had added the same as an unexplained credit within the meaning of section 68 of the Act. On appeal, the Commissioner (Appeals) concurred with the view taken by the assessing officer and upheld the addition made by the assessing officer under section 68 of the Act.

(ii). We have given a thoughtful consideration to the aforesaid issue before us and find that the facts and the issue pertaining to the addition of Rs. 51,34,260 made by the assessing officer by treating the outstanding liabilities aggregating to an amount of Rs. 51,34,260 (Cr) shown by the assesseee in his ‘balance sheet’ under the head ‘Sundry creditors’ against the names of the aforesaid parties viz. (i). M/s. Balaji Impex : Rs. 28,27,327.79 (Cr); and (ii). M/s. S.K Impex : Rs. 23,06,933.05. (Cr) as an unexplained credit within the meaning of section 68 of the Act, remains the same as were there before us in his appeal for the immediately preceding year, i.e., assessment year 2008-09. Accordingly, our order passed while disposing off Ground of appeal No. 6 in ITA No. 305/Asr/2015 of his appeal for assessment year 2008-09 shall apply mutatis mutandis for the purpose of disposing off Ground of appeal No. 5 of the present appeal, i.e., ITA No. 05/Asr/2013 for assessment year 2008-09. We thus on the same terms vacate the addition of Rs. 51,34,260 made by the assessing officer under section 68 of the Act. Ground of appeal No. 5 is allowed in terms of our aforesaid observations.

  1. DISALLOWANCE UNDER SECTION 40A(3) :

(i) In the course of the assessment proceedings it was observed by the assessing officer that as the assessee had made cash purchases aggregating to Rs. 2,86,96,452 viz. (i) cash purchases amounting to Rs. 1,27,69,355 from M/s. S.K Impex; and (ii). cash purchases amounting to Rs. 1,59,27,097 from M/s. Balaji Impex, therefore, he called upon the assessee to put forth his explanation as regards the same. In reply, it was submitted by the assessee that he had not made any purchases from the aforesaid parties but had procured the goods from the unregistered dealers operating in the open/grey market. It was stated by the assessee that he would make cash withdrawals from the bank and utilise the amount for making of purchases from the open/grey market. However, it was the claim of the assessee that on no occasion any single payment in excess of Rs. 20,000 was made for purchasing the goods. The assessing officer was however not inclined to accept the aforesaid claim of the assessee and disallowed an amount of Rs. 2,86,96,452 under section 40A(3) of the Act. On appeal, the Commissioner (Appeals) did not dislodge the observations drawn by the assessing officer as regards the disallowance made by him under section 40A(3) of the Act.

(ii). We have given a thoughtful consideration to the aforesaid issue before us. On a perusal of the records, we find that though it has throughout been the claim of the assessee that he had on no occasion made any single payment in excess of Rs. 20,000 for purchasing the goods from the suppliers operating in the open/grey market, however, the assessing officer without rebutting and dislodging the veracity of the said claim of the assessee and placing on record any material proving to the contrary, had most arbitrarily concluded that the assessee had contravened the provisions of section 40A(3) of the Act. As the facts and the issue pertaining to the disallowance made by the assessing officer under section 40A(3) of an amount of Rs. 2,86,96,452 towards impugned cash purchases principally remains the same as were there before us in his appeal for the immediately preceding year, i.e., assessment year 2008-09, therefore, our order passed while disposing off the Ground of appeal No. 7 in ITA No. 305/Asr/2015 of his appeal for assessment year 2008-09 shall apply mutatis mutandis for the purpose of disposing off Ground of appeal No. 4 of the present appeal, i.e., ITA No. 05/Asr/2013 for assessment year 2008-09. We thus on the same terms vacate the addition/disallowance of Rs. 2,86,96,452 made by the assessing officer under section 40A(3) of the Act. Ground of appeal No. 4 is allowed in terms of our aforesaid observations.

  1. DEDUCTION UNDER SECTION 80-IB :

(i). On a perusal of the records, we find that the assessee had in his return of income claimed deduction under section 80-IB of Rs. 64,10,983. However, the assessing officer being of the view that conversion of 24 carat pure gold into 22 carat gold ornaments by the assessee did not amount to “manufacturing” within the meaning of section 80-IB of the Act, disallowed the assessee’s claim for deduction while framing the ‘Original’ assessment, vide his order passed under section 143(3), dated 30-12-2011. On appeal, the Commissioner (Appeals) not finding any infirmity in the view taken by the assessing officer, upheld the disallowance of the assessee’s claim for deduction under section 80-IB. Aggrieved, the assessee had assailed the order of the Commissioner (Appeals) before the Tribunal.

(ii). We have perused the orders of the lower authorities and find that the assessee who is engaged in the business of conversion of raw gold (24 carat) into gold ornaments (22 carat), claiming to be engaged in the business of manufacturing of gold ornaments had thus raised a claim for deduction of Rs. 64,10,983 under section 80-IB of the Act. As observed by us hereinabove, the lower authorities had declined the assessees claim for deduction under section 80-IB, for the reason, that as per them conversion of pure gold (24 carat) into gold ornaments (22 carat) did not amount to manufacturing within the meaning of section 80-IB of the Act. We find that as the facts and the issue pertaining to the disallowance of the assessee’s claim for deduction of Rs. 64,10,983 under section 80-IB remains the same as were there before us in his appeal for the immediately preceding year, i.e., assessment year 2008-09, therefore, our order passed while disposing off the Ground of appeal No. 8 in ITA No. 305/Asr/2015 of his appeal for assessment year 2008-09 shall apply mutatis mutandis for the purpose of disposing off Ground of appeal No. 2 of the present appeal, i.e., ITA No. 05/Asr/2013 for assessment year 2008-09. We thus on the same terms vacate the disallowance of the assessee’s claim for deduction under section 80-IB of Rs. 64,10,983 made by the assessing officer. Ground of appeal No. 2 is allowed in terms of our aforesaid observations.

  1. That as the Grounds of appeal Nos. 1 and 6 are general, therefore, the same are dismissed as not pressed.
  2. The appeal of the assessee is allowed in terms of our aforesaid observations.

ITA No. 579/Asr/2016, Assessment Year 2009-10 (Assessee’s appeal)

  1. We shall now take up the appeal of the assessee which arises from the order passed by the Commissioner (Appeals), Jammu, dated 30-6-2016, which in turn arises from the order passed by the assessing officer under section 271(1)(c) of the Act, dated 11-3-2014 for assessment year 2009-10. The assessee has assailed the impugned order on the following grounds of appeal before us :–
  2. That the order passed by the assessing officer under section 271(1)(c) of the Income Tax Act, 1961, thereby imposing the penalty to the tune of Rs. 1,18,25,384 is against the facts of the case and is untenable under the law.
  3. That the order passed by the assessing officer therein levying penalty under section 271(1)(c) and the order of Commissioner (Appeals) therein confirming the penalty after allowing deduction of Rs. 64,10,983 under section 80-IB of the Income Tax Act, 1961 is bad in law and the same is liable to be cancelled.
  4. That the imposition of penalty is unjustified, uncalled for and the same may be deleted.
  5. That the initiation of penalty is unjustified, invalid and void ab initio in the eyes of law, inasmuch as the penalty was initiated for furnishing inaccurate particulars of income and also for concealing the particulars of income. As such the penalty order is bad in law and is liable to be cancelled.
  6. That the notice issued under section 274 read with section 271(1)(c) along-with the assessment order is also invalid and void ab initio and penalty order is liable to be cancelled.
  7. That the penalty order passed by the assessing officer is also illegal, invalid inasmuch as there is no application of mind while levying the penalty. As such the order is bad in law and the same is liable to be cancelled.
  8. That the Commissioner (Appeals) has grossly erred in sustaining some penalty. The whole penalty should have been cancelled by the worthy Commissioner (Appeals).
  9. That the penalty sustained by the Commissioner (Appeals) is very high & excessive.
  10. Any other ground of appeal which may be urged at the time of hearing of the appeal.”
  11. Briefly stated, the assessing officer wile culminating the assessment had also initiated penalty proceedings under section 271(1)(c) of the Act for concealing of the particulars of income by the assessee, as regards the following additions/disallowances :–
S. No. Particulars Amount of Addition/disallowance
1. Disallowance of Bogus purchases claimed by the assessee to have been made from two parties viz. (i) M/s. Balaji Impex : Rs. 1,31,85,493; and (ii). M/s. S.K Impex : Rs. 1,06,74,712. Rs. 2,38,60,205 Rs. 2,86,96,452 (As the additions/disallowances towards viz. (i). bogus purchases : Rs. 2,38,60,205; (ii). Unexplained credits under section 68 : Rs. 51,34,260; and (iii). disallowance under section 40A(3) of purchases : Rs. 2,86,96,452 were overlapping in nature, therefore, the same were telescoped and restricted to the amount of Rs. 2,86,96,452).
2. Addition of ‘Unexplained Credits’ under section 68 shown as sundry creditors in the balance sheet of the assessee against the names of the aforementioned two parties viz. (i) M/s. Balaji Impex : Rs. 28,27,327.79; and (ii). M/s. S.K Impex : Rs. 23,06,933.05. Rs. 51,34,260
3. Disallowance under section 40A(3) of cash purchases of gold from the aforementioned parties. Rs. 2,86,96,452
4. Disallowance of the assessee’s claim for deduction under section 80-IB of the Act. Rs. 64,10,983

On the basis of a ‘Show Cause Notice’ (‘SCN’), dated 22-10-2013, the assessee was called upon to explain as to why penalty under section 271(1)(c) as regards the aforesaid additions/disallowances so made may not be imposed on him. As the assessee despite sufficient opportunity failed to furnish any reply, therefore, the assessing officer vide his Order, dated 11-3-2014 imposed a penalty under section 271(1)(c) of Rs. 1,18,25,384 on the assessee.

  1. Aggrieved, the assessee assailed the order passed by the assessing officer under section 271(1)(c) before the Commissioner (Appeals). Observing, that no infirmity did emerge from the order of the assessing officer to the extent he had imposed penalty under section 271(1)(c) in respect of three issues viz. (i) addition/disallowance of bogus purchases: Rs. 2,38,60,205 (ii). addition towards unexplained credits under section 68 of the Act: Rs. 51,34,260; and (iii). addition/disallowance of cash purchases under section 40A(3) of the Act: Rs. 2,86,96,452, the Commissioner (Appeals) upheld the same. As regards the penalty imposed by the assessing officer as regards the disallowance of assessee’s claim for deduction of Rs. 64,10,983 under section 80-IB of the Act, the Commissioner (Appeals) being of the view that the assessee was eligible for deduction under section 80-IB, deleted the penalty to the said extent.
  2. The assessee being aggrieved with the order passed by the Commissioner (Appeals) to the extent he had sustained the penalty imposed by the assessing officer under section 271(1)(c), has carried the matter in appeal before us.

We may herein observe that as the impugned additions/disallowances made by the assessing officer viz. (i) addition towards unexplained credits under section 68 of the Act: Rs. 51,34,260; and (ii). addition/disallowance of cash purchases under section 40A(3) of the Act: Rs. 2,86,96,452, had been vacated by us while disposing off the appeal of the assessee in ITA 05/Asr/2013 for assessment year 2009-10, therefore, the penalty imposed by the assessing officer as regards the same cannot survive and is liable to be vacated. Accordingly, we quash the penalty imposed by the assessing officer under section 271(1)(c) in respect of the aforesaid additions/disallowances viz.(i) addition towards unexplained credits under section 68 of the Act : Rs. 51,34,260; and (ii). addition/disallowance of cash purchases under section 40A(3) of the Act: Rs. 2,86,96,452. As regards the addition towards bogus purchases of Rs. 2,38,60,205, the same had been restricted by us to the extent of the amount the assessee would had benefited by procuring the goods at a discounted value from the open/grey market. In our considered view, as the addition/disallowance of the bogus purchases had been sustained by us on an estimate basis, therefore, penalty under section 271(1)(c) as regards such addition/disallowance which in itself is backed by a process of estimation cannot be sustained and is therefore deleted. Accordingly, on the basis of our aforesaid observations we delete the penalty that was sustained by the Commissioner (Appeals) as regards the aforesaid additions/disallowances.

  1. The appeal filed by the assessee is allowed in terms of our aforesaid observations.

ITA No. 547/Asr/2016, Assessment Year 2009-10 (Revenue appeal)

  1. We shall now take up the appeal of the revenue which arises from the order passed by the Commissioner (Appeals), Jammu, dated 30-6-2016, which in turn arises from the order passed by the assessing officer under section 271(1)(c) of the Act, dated 11-3-2014 for assessment year 2009-10. The assessee has assailed the impugned order on the following grounds of appeal before us :–

“1. Whether the learned Commissioner (Appeals) was right in law in deleting the penalty under section 271(1)(c) of the Income Tax Act, 1961.

  1. Whether the learned Commissioner (Appeals) was right in law in relying his decision on the case laws which are not directly related with the issue and ignoring the decisions of Hon’ble Delhi High Court and Hon’ble ITAT Mumbai which are directly related with the issue involved.”
  2. We find that the revenue has assailed before us the order of the Commissioner (Appeals) to the extent he had vacated the penalty imposed by the assessing officer as regards disallowance of assessee’s claim for deduction under section 80-IB of the Act. As the disallowance by the assessing officer of the assessee’s claim for deduction under section 80-IB has been vacated by us by an order of even date while disposing off the assessee’s quantum appeal for assessment year 2009-10 inITA 05/Asr/2013, therefore, the penalty imposed by the assessing officer in context of the said issue cannot be sustained and is herein vacated.
  3. The appeal filed by the revenue is dismissed.
  4. Before parting, we may herein deal with a procedural issue that though the hearing of the captioned appeal was concluded on 6-2-2020, however, this order is being pronounced after the expiry of 90 days from the date of conclusion of hearing. We find that Rule 34(5) of the Income Tax Appellate Tribunal Rules, 1962, which envisages the procedure for pronouncement of orders, provides as follows :–

(5) The pronouncement may be in any of the following manners :–

(a) The Bench may pronounce the order immediately upon the conclusion of the hearing.

(b) In case where the order is not pronounced immediately on the conclusion of the hearing, the Bench shall give a date for pronouncement. In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board. As such, “ordinarily” the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression “ordinarily” has been used in the said rule itself. This rule was inserted as a result of directions of Hon’ble High Court in the case of Shivsagar Veg Restaurant v. ACIT (2009) 317 ITR 433 (Bom) : 2009 TaxPub(DT) 1040 (Bom-HC) wherein it was inter alia, observed as under :–

“We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income Tax Act are directed to decide matters heard by them within a period of three months from the date case is closed for judgment.”

In the rule so framed, as a result of these directions, the expression “ordinarily” has been inserted in the requirement to pronounce the order within a period of 90 days. The question then arises whether or not the passing of this order, beyond a period of ninety days in the case before us was necessitated by any “extraordinary” circumstances.

  1. We find that the aforesaid issue after exhaustive deliberations had been answered by a coordinate bench of the Tribunal viz. ITAT, Mumbai ‘F’ Bench inDCIT, Central Circle-3(2), Mumbai v. JSW Limited & Ors. [ITA No. 6264/Mum/18, dated 14-5-2020] : 2020 TaxPub(DT) 2142 (Mum-Trib), wherein it was observed as under :–

“Let us in this light revert to the prevailing situation in the country. On 24-3-2020, Hon’ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemic, and this lockdown was extended from time to time. The epidemic situation being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial wok all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon’ble Supreme Court of India, in an unprecedented order in the history of India and vide Order, dated 6-5-2020 read with Order, dated 23-3-2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that “In case the limitation expired after 15-3-2020 then the period from 15-3-2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown”.

Hon’ble Bombay High Court, in an Order, dated 15-4-2020, has, besides extending the validity of all interim orders, has also observed that, “It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the Order, dated 26-3-2020 continues to operate shall be added and time shall stand extended accordingly”, and also observed that “arrangement continued by an Order, dated 26-3-2020 till 30-4-2020 shall continue further till 15-6-2020”. It has been an unprecedented situation not only in India but all over the world. Government of India has, vide Notification, dated 19-2-2020, taken the stand that, the coronavirus “should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure……”. The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled’ When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an “ordinary” period.

  1. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act, 2005, is causing unprecedented disruption in the functioning of our justice delivery system.

Undoubtedly, in the case of Otters Club v. DIT (2017) 392 ITR 244 (Bom) : 2017 TaxPub(DT) 0689 (Bom-HC), Hon’ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon’ble Bombay High Court itself has, vide Judgment, dated 15-4-2020, held that directed “while calculating the time for disposal of matters made time bound by this Court, the period for which the Order, dated 26-3-2020 continues to operate shall be added and time shall stand extended accordingly”. The extraordinary steps taken suo motu by the Hon’ble High Court and Hon’ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words “ordinarily”, in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case.”

We have given a thoughtful consideration to the aforesaid observations of the tribunal and finding ourselves to be in agreement with the same, therein respectfully follow the same. As such, we are of the considered view that the period during which the lockout was in force shall stand excluded for the purpose of working out the time limit for pronouncement orders, as envisaged in Rule 34(5) of the Appellate Tribunal Rules, 1963.

  1. Resultantly, the appeals of the assessee for assessment year 2008-09 inITA No. 305/Asr/2015 and for assessment year 2009-10 in ITA No. 05/Asr/2013 are partly allowed. The appeal of the assessee for assessment year 2009-10 in ITA No. 579/Asr/2016 is allowed, while for the appeal of the revenue for assessment year 2009-10 in ITA No. 547/Asr/2016 is dismissed.

Order pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board.

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