Appeal partly allowed, remanding deduction issue, dismissal of making charges addition.

The appeal was partly allowed for statistical purposes, remanding the deduction under section 10AA and related depreciation issue back to the AO for fresh consideration. The addition on account of making charges was dismissed, upholding the CIT (A)'s decision.

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Issues Involved:
1. Deletion of disallowance of Rs. 79,69,851/- claimed under section 10AA of the Income Tax Act, 1961.
2. Deletion of addition of Rs. 22,54,476/- on account of making charges of 22 carat gold ornaments.
3. Deletion of disallowance of Rs. 7,52,639/- on account of depreciation on machinery installed in SEZ unit.

Detailed Analysis:

1. Deletion of Disallowance of Rs. 79,69,851/- Claimed Under Section 10AA:

The revenue challenged the CIT (A)'s action in deleting the disallowance made by the AO on the assessee’s claim for deduction under section 10AA. The AO disallowed the claim on two grounds: the karigars were located outside the SEZ Unit without Customs Authority permission, and the purchase invoices of 24 carat gold were addressed outside the SEZ Unit and not stamped by Customs. Consequently, the AO concluded that no manufacturing activity occurred in the SEZ Unit.

The assessee argued that separate books of accounts were maintained for SEZ and DTA divisions, and various expenses indicated manufacturing activities in the SEZ Unit. The assessee also contended that karigars, though residing outside, worked within the SEZ premises, and the purchase of gold bars from the Bank of Nova Scotia did not require Customs stamping due to its status as an authorized canalizing agent.

The CIT (A) found the AO's conclusions based on conjectures and surmises, noting the absence of independent verification. The CIT (A) observed that the AO did not reject the books of account or find specific defects. The CIT (A) directed the AO to allow the deduction under section 10AA, as the assessee fulfilled the necessary conditions.

Upon appeal, the Tribunal noted the arguments from both sides and decided to remand the matter back to the AO for fresh consideration, giving the assessee another opportunity to substantiate its claim for deduction under section 10AA.

2. Deletion of Addition of Rs. 22,54,476/- on Account of Making Charges of 22 Carat Gold Ornaments:

The AO noticed that the assessee did not include making charges in the valuation of 22 carat semi-finished gold articles, leading to an addition of Rs. 22,54,476/-. The assessee explained that the market rate for such items does not include making charges, a practice prevalent in the jewellery industry.

The CIT (A) agreed with the assessee, citing established commercial practices and legal precedents that support the valuation of closing stock at cost or market value, whichever is lower. The CIT (A) noted that the AO did not reject the books of account and that the assessee consistently followed the same valuation method. The CIT (A) deleted the addition, finding the AO's method unjustified.

The Tribunal upheld the CIT (A)'s decision, agreeing that there was no under-valuation of stock by the assessee and dismissing the revenue’s appeal on this ground.

3. Deletion of Disallowance of Rs. 7,52,639/- on Account of Depreciation on Machinery Installed in SEZ Unit:

Both parties agreed that the issue of depreciation on machinery in the SEZ unit is consequential to the primary issue of manufacturing activity in the SEZ unit. Since the Tribunal remanded the primary issue back to the AO for fresh consideration, it also sent back the issue of depreciation for a fresh decision based on the outcome of the primary issue.

Conclusion:

The appeal was partly allowed for statistical purposes, with the primary issue of deduction under section 10AA and the related depreciation issue remanded back to the AO for fresh consideration. The addition on account of making charges was dismissed, upholding the CIT (A)'s decision.

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