ITAT Sets Aside PCIT's Revision, Upholds Deduction u/s 10AA Due to Proper AO Review [Read Order]

The Jaipur Bench of Income Tax Appellate Tribunal(ITAT) set aside the revision order passed by the Principal Commissioner of Income Tax (PCIT) and upheld the deduction under section 10AA of Income Tax Act,1961 claimed by the assessee ruling that the Assessing Officer (AO) had properly examined the claim, including reviewing the inter-unit transfer pricing, after a detailed survey and reassessment proceedings.

Pinkcity Jewelhouse Pvt. Ltd.,appellant-assessee, filed its return of income on 31.10.2018, declaring a total income of Rs. 7,42,23,910/- after claiming a deduction under section 10AA of the Act. The case was selected for scrutiny, and a notice under section 143(2) was issued on 22.09.2019. A further notice under section 142(1) was issued on 08.02.2021, along with a detailed query letter, to which the assessee responded by providing books of accounts for examination.

The assessee, involved in manufacturing and exporting gold and silver jewellery, reported differing profit margins between its SEZ unit at Sitapura and domestic unit at Mahapura. The domestic unit had a profit rate of 2.41%, while the SEZ unit showed a significantly higher profit rate of 17.74%. The assessee was asked to explain the inter-unit transfers, but could not substantiate the profits claimed from these transfers.

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As a result, the AO applied a profit rate of 17.74% to the inter-unit transfer value, leading to an additional income of Rs. 51,88,811/- and a revised deduction under section 10AA of the Act. The income was assessed at Rs. 7,68,18,310/-.

Subsequently, the PCIT reviewed the assessment order and found it to be erroneous and prejudicial to the interest of revenue. Therefore, proceedings under section 263 were initiated, and a notice was issued to the assessee on 08.03.2024, with a deadline to respond by 19.03.2024 regarding the deduction under section 10AA of the Act.

The PCIT noted that the assessee had taken plant and machinery on rent from its sister concern and absorbed its employees into the SEZ unit. The buyers and suppliers were also the same, which violated section 10AA(4)(iii) and section 80IA(3) of the Act. The assessee argued that the domestic unit, not the SEZ unit, took the plant and machinery and provided supporting documents.

The PCIT found issues with the stamp paper and bank payments, which did not prove the actual use of the machinery. As a result, the PCIT concluded that the AO had failed to properly disallow the deduction under section 10AA of the Act.

Dissatisfied by the decision of the PCIT the assessee appealed before the tribunal.

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Read More: Disallowance of Income Tax Deduction u/s 10AA on Audit objection grounds lack Independent View: ITAT quashes Revision Order

The two member bench comprising Narinder Kumar(Judicial Member) and Rathod Kamlesh Jayantbhai(Accountant Member) reviewed the PCIT's decision to disallow the deduction under Section 10AA of the Act, which was claimed in the assessee's income return. The AO had already verified the claim after a survey and made adjustments due to price differences between the SEZ and DTA units.

Following the survey on 17-18.08.2017, reassessment proceedings under Section 148 were initiated for Assessment Years 2012-2013 to 2015-2016, and scrutiny assessments under Section 143(3) were carried out for A.Y. 2016-2017 to A.Y. 2018-2019. The assessee’s claim had been examined in these proceedings for the years from A.Y. 2010-11 to A.Y. 2018-2019, including the year in question.

The appellate tribunal noted that the PCIT invoked Explanation (2) to Clause (a) of Section 263 of the Act but clarified that the amendment did not give the PCIT unlimited power. It was stated that the explanation should not be applied simply based on subjective opinion.

The bench pointed out that the AO had already examined the Section 10AA claim. Referencing the case of Parashuram Pottery Works Co. Ltd., it was stated that legal proceedings must have finality, and stale issues should not be reopened beyond a certain point.

In short,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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