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Facts
The assessee, M/s Orient International, engaged in manufacturing and trading of labels and papers, claimed deduction under Section 10AA for its SEZ unit. The Assessing Officer (AO) disallowed the entire deduction. The CIT(A) allowed partial deduction, which was then challenged by both the assessee and the Revenue.
Held
The Tribunal held that once the AO had accepted the unit as independent and new in the first year, the deduction under Section 10AA could not be denied in subsequent years. The Tribunal also found no provision to bifurcate the exemption claimed under Section 10AA and thus set aside the CIT(A)'s order.
Key Issues
Whether the assessee is eligible for deduction under Section 10AA for subsequent years when the unit was deemed new and independent in the first year, and whether the CIT(A) had the power to bifurcate the exemption.
Sections Cited
10AA, 801A(10)
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Income Tax Appellate Tribunal, DELHI BENCH ‘F’: NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI KRINWANT SAHAY
and Ors. Orient International vs. ACIT O R D E R
PER KRINWANT SAHAY, AM:
The above captioned appeals are filed by the Assessee whereas the appeal in is filed by the Revenue against the orders dated 30.08.2016 passed by the Ld. Commissioner of Income Tax (Appeals)-19, New Delhi [‘the Ld. CIT(A) for short] for Assessment Years 2012-13 to 2015-16 respectively.
Since, the issues raised in all four appeals filed by the assessee are common, therefore, they are being taken together for consideration. We first take up the appeal No.5719/DEL/2016 which is related to Assessment Year 2012-13 and the grounds of appeal
are as under: “1. That the Ld. CIT(A) New Delhi erred in fact in allowing deduction under section 10AA of the Act to the extent of Rs. 1,84,57,581/- instead of deduction claimed by the appellant under section 10AA of the Act of Rs.2,54,87,936/-.
2. That having regard to the facts and circumstances of the case the Ld. CIT(A) after holding that the appellant is eligible for claiming exemption under section 10AA of the Act has erred in law and on facts in computing the partial deduction of Rs.1,84,57,581/- under section 10AA of the Act.
3. That having regard to the facts and circumstances of the case, the Ld. CIT(A) has erred in not discussing the disallowance made by the Assessing Officer of Rs.2,77,98,817/- against the actual deduction claimed by the appellant under section 10AA of the Act of Rs.2,54,87,936/-.
4. That having regard to the facts and circumstances of the case, the Ld. CIT(A) erred in confirming addition made on account of disallowance of the generator expenses of Rs. 43,754/-.
5. That having regard to the facts and circumstances of the case, the Ld. CIT(A) erred in reducing Rs. 4,80,000/- on account of partners salary for purpose of eligibility under section 10AA of the Act. and Ors. Orient International vs. ACIT 6. That the appellant company craves leave to add, delete, modify, and amend any grounds of appeal before or at the time of hearing of appeal
7. That above grounds of appeal is without prejudice to each other.”
3. Brief facts of the case as per the order of the Ld. CIT(A) are as under: “4. M/s Orient International ("the appellant") is engaged in the business of manufacturing and export of Self-Adhesive Labels, Self-Adhesive Papers and trading of Hand Labelers, Ribbons, Barcode Printers, Scanners and their parts. It is also a SEZ registered unit and commenced its operations in NSEZ area after getting approval of the Assn. Development Commissioner of NSEZ on 07-07-2010. During the year, the appellant had e-filed its return of income on 30-09-2012 declaring an income of Rs. 23,37,130/- after claiming deduction under section 10AA of the Income Tax Act, 1961 ("the Act") The case was selected for scrutiny assessment through CASS and the income of the appellant has been assessed at Rs. 4,04,30,030/- after disallowing exemption claimed by the appellant under section 10AA of the Act based on various observations made by the Id. Assessing Officer ("the AO").
4. Aggrieved with the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A).
5. In this appeal, ground nos.1 and 2 are related to deduction in exemption claimed u/s 10AA of the Act of Rs.2,54,87,936/- to Rs.1,84,57,581/-. Appeal of ground No.2 is related to the ground No.1 here also the assessee has challenged. The granting of partial deduction u/s 10AA to the tune of Rs.1,84,57,581/- instead of the whole deduction claimed u/s 10AA of Rs.2,54,87,936/-.
During the proceedings before us, the Ld. Counsel for the assessee has brought on record following facts on this issue as under: “4.3 Also, as per the assessment order for AY 2011-12 (first year of claiming deduction under section 10AA of the Act) as enclosed on page no. 118-119 of the paper book I, the AO noted his clear cut findings that "the said unit was not formed by splitting up or the reconstruction of business already in and Ors. Orient International vs. ACIT existence. New machinery and plant was purchased by assessee for setting of manufacturing unit. No machinery or plant was used previously for any purpose." Admittedly, the AO for AY 2011-12 has clearly held that the appellant has not been formed by either splitting up or reconstruction and hence, the appellant becomes fully eligible to claim the deduction in AY 2012-13 and subsequent years as well as the conditions as stipulated under section 10AA are to be considered only for the first year of claim for deduction under section 10AA. Once the assessee is able to show that it has used new plants and machinery which has not been previously used for any purpose and the new undertaking is not formed by splitting up or reconstruction of business already in existence, it is entitled to the deduction under section 10AA for subsequent years. Since the assessee had been granted claim of deduction right from the assessment year 2011-12 under section 10AA, consequently it cannot be denied deduction for the subsequent years inasmuch as restraint of section 10AA cannot be considered for every year of claim of deduction, but can be considered only in the year of formation of the business. Refer Commissioner of Income-tax v. Tata Communications Internet Services Ltd. [2012] 251 CTR 290 (Delhi)”
Ld. Counsel for the assessee also argued on the line of the discussion made above.
On the other hand, the Ld. CIT(A) has given his finding on the basis of various statements recorded by the AO, in fact, M/s Orient International, the Director /partners of M/s Orient International are also Directors/partners of M/s Orient Agencies which is also engaged in the manufacturing of the same things and business is also on the same pattern as of the appellant company. The AO has tried to make out a case that all the manufacturing is not being done by the appellant company rather it is the Orient Agencies which is doing the main manufacturing job and in order to supress it profits, its claiming to be manufactured by the appellant company. The Ld. CIT(A) has also given his finding on this issue by relying on the orders or purchase orders given by some of the clients of Orient Agencies to and Ors. Orient International vs. ACIT M/s Orient International. The CIT(A) findings on this issue are as under: “. One fails to understand why a party regularly dealing with M/s Oriental Agencies, would like to place his next order with M/s. Orient International when both are making the same product. This shows a clear manipulation whereby M/s. Orient Agencies had transferred its orders to M/s. Orient International to inflate the profits of M/s. Orient International. Similarly, M/s. Oriental Agencies has borne the expenses of M/s. Orient International to bring down its net profit while increasing the net profits of M/s. Orient International. This can also be seen from the marked variation in the profit ratio of 2 firms although they are engaged in same product. The provisions of section 801A(10) are, therefore, clearly applicable and therefore, deduction available to the appellant under section 10AA, deserves to be adjusted. For this purpose, one has to consider the turnovers of the erstwhile clients of M/s. Oriental Agencies and also the variation in allocation of expenses between the 2 units. The variation arising on account of above will be eligible for only 50% of deduction under section 10AA as would have been available to M/s. Oriental Agencies, if the same had been booked in that concern. (This will negate the effect of this arrangement).”
On this finding, the Ld. CIT(A) has bifurcated the claim made by the appellant company u/s 10AA and allowed partial deduction of Rs.1,84,57,581/- in place of claimed deduction u/s 10AA by the assessee company of Rs.2,54,87,936/-. The Ld. DR mostly relied upon the orders of the Assessing Officer and claimed that keeping in view the statement recorded by the AO of different clients and suppliers and the electricity bills or electricity consumed by M/s Orient Agencies as well as M/s Orient International. The ld. CIT(A) should have not allowed any claim of the assessee made u/s 10AA.
We have considered the finding given by the AO in the Assessment Order and the Ld. CIT(A) in the appellate order. We have also considered the written submissions filed by the Ld. Counsel for the assessee during the proceedings before us and we have gone and Ors. Orient International vs. ACIT through the details brought on record by the Ld. DR. We are of this considered view that once the Assessing Officer has given categorical finding in the first year of the business of the assessee company that it is all together an independent unit, it has come into existence on totally new set off of plant and machinery and it has got nothing to do with bifurcation of any other existing company, therefore, keeping in view the order of the Jurisdictional Delhi High Court in the case of Commissioner of Income Tax vs. Tata Communications Internet Services [2012] 251 CTR 290 (Delhi), there is not much scope left for the AO or the Ld. CIT(A) in subsequent years to deny the claim of the deduction made u/s 10AA by the assessee on the ground that the appellant company is being used/misused by some other company or firm in order to deviate its income/profit. We are also unable to understand under which provision the Ld. CIT(A) has bifurcated the exemption claimed by the assessee u/s 10AA because as per our understanding there is no such provision available u/s 10AA of the Income Tax Act, 1961. Keeping in view the facts discussed above, we are of this considered view that the findings given by the Ld. CIT(A) on this issue cannot be sustained. Accordingly, the assessee’s appeal of ground Nos.1 and 2 are allowed.
Appeal of ground No.3, 4 & 5 have not been pressed by the assessee. They are dismissed as not pressed.
Appeal of ground Nos.6 & 7 are general in nature, there is no need for adjudication.
In the result, the assessee’s appeal is partly allowed.
As stated earlier the grounds raised
by the Assessee for Assessment Year 2012-13 are exactly identical except different figures with those grounds raised in Assessment Years 2013-14, 2014-15, 2015-16. Hence, the decision rendered herein above for AY 2012-13 shall apply mutatis mutandis to all three Asst. Years i.e., 2013-14, 2014-15, 2015-16.
15. In the final result, all the appeals filed by the assessee are partly allowed. for Assessment Year 2012-13 16. The appeal filed by the Revenue against the order dated 30.08.2016 passed by the Ld. Commissioner of Income Tax (Appeals)- 19, New Delhi [‘the Ld. CIT(A) for short] for Asst. Year 2012-13. Grounds of appeal are as under: “1. On the facts and in the circumstances of the case, the order of the Ld. CTT(A) is bad in law.
2. The Ld. CIT(A) has erred in partly allowing the deduction u/s 10AA as the unit does not satisfy the condition enumerated in the clause (ii) subsection (4) of section 10AA of the Income Tax Act, 1961.
3. The Ld. CIT(A) has erred in applying section 801A(10) of the Income Tax Act. 1961 as the unit does not satisfy the condition enumerated in that section. and Ors. Orient International vs. ACIT 4. The appellant craves leave to add, allow or amend any or all the ground of appeal before or during the course of hearing of the appeal.”
17. Ground Nos. 1 & 4 are general in nature.
18. Ground Nos. 2 & 3 are related to particularly allowing the deduction u/s 10AA as the unit does not satisfy the condition enumerated in clause 2 of sub-section 4 in section 10AA of the IT Act, 1961 that the Ld. CIT(A) has erred in applying section 801A(10) of the Act as the unit does not satisfy the condition enumerated in that section. As we have already discussed above that the Ld. CIT(A) on the basis of findings given by the Ld. Assessing Officer in the assessment order by recording the statements of purchasers and suppliers/creditors to the appellant company along with the electricity consumption of the appellant company, the Ld. CIT(A) has bifurcated the exemption claimed by the assessee u/s 10AA of the IT Act, 1961 and partially allowed the exemption while partially disallowing it. The case of the Revenue is that the Ld. CIT(A) should not have been partially allowed the exemption claimed by the assessee u/s 10AA as well the exemption claimed by the assessee u/s 801A(10) of the Act. The assessee company has not fulfilled the conditions related with this section.
19. As discussed above, we have already given our finding that once the AO has accepted categorically in the first year of the assessment that the appellant company is all together a new assessee and or plant and machinery and other things used in it are new and it has and Ors. Orient International vs. ACIT not come to existence after bifurcating any other plant so as per the order of the jurisdictional High Court in the case of Commissioner of Income Tax vs. Tata Communications Internet Services (supra). It is not open to Revenue to question the authenticity of the claim of the assessee made u/s 10AA in subsequent years. We have also given our finding there is no arrangement in section 10Aa of the Income Tax Act, 1961 to bifurcate the exemption claimed by the assessee, therefore, the action of the Ld. CIT(a) has been negated as in our orders in and Ors.. Accordingly, the Revenue’s appeal that the entire exemption claimed by the assessee u/s 10AA should be disallowed along with exemption claimed u/s 801A(10) of the IT Act should be disallowed is not acceptable because once the AO has already given clear and categorical finding in the first year of the inception of the company that it is all together new company all plant and machinery are new in subsequent years without rebutting this fact and without bringing any material thing on record disproving the manufacturing made by the assessee, the Revenue cannot disallow the claim made u/s 10AA or u/s 801A(10) of the Act. Accordingly, Revenue appeal on this issues are dismissed.