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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV, VICE- & SHRI AMARJIT SINH
आदेश/O R D E R
PER RAJPAL YADAV, VICE-PRESIDENT:
Revenue and assessee are in cross appeal against order of the ld.CIT(A)-6, Ahmedabad dated 21.7.2014 passed for the Asstt.Year 2011-12. Copy of the grounds of appeal in the assessee’s appeal was sent to the Revenue on 29.9.2014, but it filed cross-objection bearing
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no.42/Ahd/2020, which is time barred. All these appeals and CO are disposed of by this common order for the sake of convenience.
Grievance of the Revenue is that the ld.CIT(A) has erred in accepting the claim of the assessee for grant of deduction under section 80IAB of the Income Tax Act, 1961.
Brief facts of the case are that the assessee company was incorporated on 28.7.2006. It is a closely held public limited company having 100% equity share held by Dishman Pharmaceuticals and Chemicals Ltd. (DPCL), which is a flagship company. This company was incorporated with a sole idea to develop Special Economic Zone. It has filed a return of income electronically on 30.9.2011 declaring NIL income. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the Act was issued on 28.9.2012 which was duly served upon the assessee. On perusal of the return, it was revealed to the AO that the assessee-company has been approved for development of Special Economic Zone (SEZ) at Bavla, Nr. Ahmedabad, Gujarat. It has shown gross profit of Rs.41.77 crores and after set off of carry forward business loss, it has claimed deduction under section 80IAB at Rs.41,62,61,487/-. The ld.AO has made analysis on the issue in the impugned assessment order, which is running into 54 pages. However, the discussion over this issue is available from page no.1 to 29 of the assessment order. The ld.AO has examined this aspect under four different heads, and he summarized as to why this deduction is not admissible in para-3.1 of
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the assessment order. These four heads under which he has made detailed examination read as under:
“3.1 During the course of survey proceedings as well as subsequent post-survey inquiries and assessment proceedings has established beyond doubt that the claim of the deduction u/s 80IAB of the Act of Rs. 41,62,61,487 is bogus and prima-facie wrong. The facts leading to this conclusion are summarised as under: I. No development or insignificant development of Special Economic Zone by the company till F.Y. corresponding to A.Y. 2011- 12 and in subsequent years (elaborately discussed in paragraphs 4 to 8 below) II. Infringement of SEZ Act & Rule, 2005 while claiming lease rental from sister concern, M/s Dishman Pharmaceuticals and Chemicals Limited (elaborately discussed in paragraphs 9 to 10 below) III. Admission of wrong claim of deduction u/s 80IAB of the Act by the main person of the company, Shri Janmejay R. Vyas, Managing Director & surrender of the entire receipt shown in the P & L A/c of Rs. Rs.41,77,29,824/- for the purpose of taxation during the course of survey proceedings (elaborately discussed in paragraphs 10 to 16 below) IV. Huge claim of capital work in progress (CWIP) in SEZ which has been established to be bogus & fake (elaborately discussed in paragraphs 17 to 33 below) These are elaborately discussed in the following paragraphs. However, before proceedings further, in facts related to the approved SEZ are discussed as under.”
We will be dealing with the reasons given by the AO in seriatim in later part of this order.
Dissatisfied with the disallowance of deduction, the assessee carried the matter in appeal before the ld.CIT(A). Thereafter, the ld.CIT(A) has also noticed arguments raised by the ld.counsel for the 3
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assessee and allowed deduction. The relevant part of the impugned order reads as under:
“3.2 In the assessment order, A.O. observed that the appellant had claimed the gross total income of Rs. 41.62 crores as deduction u/s 80IAB; appellant was approved for development of Special Economic Zone[SEZ] at Bavla, near Ahmedabad; the deduction u/s 801AB was not claimed in any preceding or succeeding year; the appellant company was incorporated on 28-7-2006;it is promoted by M/s Dishman Pharmaceutical & Chemicals Ltd.[DPCL], flagship company of the group; survey u/s l33A carried out on 10th&11th October,20 l 3; during the course of survey proceedings the claim of deduction was found to be bogus and prima-facie wrong; appellant had not carried out any significant development of SEZ; it infringed SEZ Act and Rules 2005; Shri Janmejay R.Vyas, M.D. admitted the wrong claim of deduction; the claim of capital work in progress [CWIP] in SEZ was found to be bogus and fake; appellant company had applied for approval for developing & setting up of SEZ on 15- 05-2006; 'in principal' approval was issued by the Ministry of Commerce & Industry On 30-05-2007; formal approval was granted by the Ministry on 17-04-2008; gazette notification was published on i3-l l-2009;appellant failed to fulfill the conditions as stipulated in the approval letter issued under SEZ Act; the Development Commissioner, Kandla SEZ had issued showcause letter to the appellant on 15-02-2013; as seen from the statement recorded from Shri Doshi, supervisor at the site office and Shri Nayan Parikh, Managing Director of M/s Multi Media Consultancy Pvt. Ltd.. appellant had not carried out any development work in the notified SEZ and thereby violated the provisions of SEZ Act; it violated the Rules of SEZ Act by allocating space/builtup area to M/s DPCL, which was not an approved unít as on 31-03-2011;therefore the receipts from DPCL will not qualify for deduction u/s 801AB;Sec. 80IA(10) is applicable due to the close connection between the appellant and the DPCL; Shri Bharat Podia, ED of the appellant company confirmed the disclosure made by the M.D during the course of survey; however, on 16-12-2013 the M.D. filed affidavit dtd. 13-11-2013refracting the admission made during the course of survey; no evidence was furnished to show that the statement recorded during the survey was incorrect either on facts or in law; the retraction was just a self serving statement and therefore the
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appellant company was being held as not eligible for deduction u/s 801AB. Accordingly, A.O disallowed the claim.
3.3 The contentions of the Ld.A.R. are that by virtue of section 51(l) of the SEZ Act, the Act has over riding effect over other legislation; under the scheme of SEZ Act, the Board of approval [BOA] is empowered to implement the Act; the said BOA includes member, who is Jt. Secretary to the Government of India representing the Central Board of Direct Taxes; the powers and functions of the BOA are provided under sectîon-9 of the SEZ Act; the provisions of Sec. 801ABwere introduced by the SEZ Act 2005[ and not by the Income- tax Act]; as observed by the A.O himself in the assessment order the appellant was granted formal letter of approval by the Commerce Ministry vide the letter dtd. 17-04-2008;gazette notification was also issued on 13-11-2009;the A.O has no locus-standi or jurisdiction to look into whether the appellant satisfied/fulfilled the terms and conditions laid down in the letter of approval; SEZ Act is a code in itself; till date the appellant holds valid letter of approval granted by the BOA; it is for the BOA to ensure the fulfillment of conditions laid down in SEZ Act and the A.O.'s sitting in judgement over the approval granted by BOA amounts to judicial indiscipline. In support of this contention he relied on Ahmedabad Tribunal's decision dtd. 07-07-204,the Supreme Court decision cited at l 17 ITR 1, the Gujarat High Court's decisions cited at 276 ITR 411 & 355 ITR 384 &Ahmedabad Tribunal's decision cited 124 TTJ 176 & 45 SOT 529.
3.4 As regards the A.O.'s finding that the appellant infringed SEZ Rules by claiming lease rentals from sister-concern DPCL, it was contended that the DPCL had made application to the Development Commissioner for approval to set up unit in the SEZ on 29-03- 2011;approval was granted on 26-06-201; the office of the Development Commissioner had accepted that they had received the application from DPCL on 29-03-201l, though the application was allotted inward no.16 dated 05-04-201l and letter of approval granted would relate back to the date of application. ln support thereof he relied on the Gujarat High Court decision cited [236 ITR 251]. Alternatively it was contended that if it is presumed that the approval given to DPCL was relatable to the succeeding year, then the lease rentals received from DPCL would be only an advance towards land premium and therefore the said amount received from DPCL could not be treated as income at all in the hands of the 5
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appellant in the year under consideration. It was contended further that invocation of the provisions of Sec. 801A(10) by the A.O was improper, as there is nothing on record to suggest that the transaction with DPCL was so arranged as to give the appellant tax advantage.
3.5 As regards A.O.'s reliance on the statement of M.D of the appellant company recorded during the course of survey , it was contended that the affidavit dtd. 13-11-2013 was filed on 16-12-2013 clarifying the statement given by him; the delay of two months in filing the affidavit was on account of the fact that copy of the statement was never provided to the appellant and as noted by the A.O. himself at page-24 of the assessment order, appellant was given opportunity to examine the impounded material and the statement recorded only between 08-11-2013 and l0-l l-2013; the affidavit dtd. 13-11-2013was filed on 16-12-2013 and therefore, impugned disallowance relying on the statement was not in accordance with law.
3.6 I have given my careful consideration to the facts of the matter. The undisputed facts are that the Ministry of Commerce & Industry had granted 'in principal' approval to the appellant on 30-05-2007. Formal letter of approval was issued on 17-04-2008. Gazette notification was issued on 13-1 1-2009.notîfying the appellant as a developer under the SEZ Act. Such recognition was valid during the year under consideration. The approval given has not been suspended. It is not the case of the A.O that the appellant had not satisfied the conditions laid down u/s 801AB. I am in agreement with the ld.A.R.'s contention that the Income-tax authorities cannot sit in judgement over the approval given by the competent authority under SEZ Act. So long as the approval given is valid, it is not for other agency/department to sit in judgement over the issue as to whether the appellant satisfied the provisions of the SEZ Act or not. The case- laws relied on by the Ld. A.R. support this finding.
Ahmedabad Tribunal in the case of M/s Zaveri & Co. Pvt. Ltd. vs. CIT in ITA Nos. 1395 & 1396/ Ahd/2013, vide the dated 07/05/2014, held as under:
"'31. We find that no material has been brought on record by theRevenue to controvert the above submission of the assessee. Further, we find that the Hon'ble Supreme Court in 6
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the case of Gestatner Duplicators Private Ltd. Vs. CIT117 /TR1 (SC) held as under: ································ ······························· 32. To the same effect is the decision of the Hon'ble Gujarat High Court in the case of Nitin P. Shah alias Modi Vs. DCIT {2005) 276 ITR411 {Guj.} and decision of the Ahmedabad Bench of the Tribunal in the case of Gujarat Information Technology Fund 64 DTR 169(Ahd.) .In our considered view, it was not open to the Commissioner of Income Tax to take the view contrary to the approval already granted by the approval committee appointed under SEZ Act 2005 and SEZ Rules, 2006.
Thus, we do not find any material to arrive at the finding that the assessee has violated any provision of SEZ Act, 2005 or SEZ Rules,2006 or that the assessee was not an entrepreneur referred to in clause (j) of section 2 of SEZ Act, 2005 ....xxx"
The observations of the Hon'ble Supreme Court in the case of Gestetner Duplications P. Ltd. vs. CIT ( 117 ITR 1 ) relied on by the Tribunal are as under:
"12. The facts in the present case that need be stressed in this behalf are that it was as far back as 1937 that the Commissioner of Income- tax had granted recognition to the provident fund maintained by the assessee under the relevant rules under 1922 Act, that such recognition had been granted after the true nature of the commission payable by the assessee to its salesmen under their contracts of employment had been brought to the notice of the Commissioner and that said recognition had continued to remain in operation during the relevant assessment years in question; the last fact in particular clearly implied that the provident fund of the assessee did satisfy all the conditions laid down in rule 4 of Part A of the Fourth Schedule to the Act even during the relevant assessment years. In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the assessee's provident fund did not satisfy any particular condition mentioned in rule 4. It would be conducive to judicial 7
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discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for the particular assessment year implies that the provident fund satisfies all the conditions under rule 4of Part A of the Fourth Schedule to the Act and not sit in judgment over it. There is ample power conferred upon the Commissioner under rule 3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted if, in his opinion, the provident fund contravenes any of the conditions required to be satisfied for its recognition and if during assessment proceedings for any particular assessment year the taxing authority finds that the provident fund maintained by an assessee has contravened any of the conditions of recognition, he may refer the question of withdrawal of recognition to the Commissioner but until the Commissioner acting under the powers reserved to him withdraws such recognition the taxing authority must proceed on the basis that the provident fund has satisfied all the requisite conditions for its recognition for that year; any other course is bound to result in chaos and uncertainty which has to be avoided.”
In the case of Nìtin P. Shah alias Modi vs. DCIT 276 ITR 411 (Gu].], it was held as under:
"27. The CIT, having issued certificate under section 68(2) of the Scheme, judicial discipline requires that the authorities entrusted with administering law proceed on the basis that the certificate granted by the CIT would indicate satisfaction of all the requisite conditions as required by the provisions of the scheme and it is not open to subordinate authority to sit in judgment over the certificate granted by the CIT. The Assessing Officer in the present case has, while making addition of Rs. 137 lakhs in the fresh assessment made pursuant to order of set aside, taken upon himself to give go- bye to the certificate issued by the CIT as if the said certificate had been issued by the CIT without verification or application of mind. The Court is not prepared to proceed on such an assumption, though it was so contended by the learned counsel for the Revenue. The fact that the CIT is superior authority insofar as the Assessing Officer is concerned, is not in dispute and could not be disputed by the learned counsel for the Revenue. Once that is the posttion, the following observations 8
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made by the Apex Court in case of Gestetner Duplicators(P.) Ltd. v. CIT [1979] 117 ITR 11, would apply. In a case where a private company employed salesmen with a fixed monthly salary and also commission at fixed percentage of the turnover achieved by the salesmen, the assessee-company paid employer's contribution to a provident fund maintained by the company after computing the same by considering both as salary. The fund was recognised by the CIT. According to the Assessing Officer, the commission so paid did not partake the character of salary and, hence, the contribution made in relation to such commission was proportionately disallowed in the assessment proceedings. After deciding on the merits of the dispute between the parties and taking into consideration the terms of the contract, it was observed by the Court that :
"... It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under rule 4 of Part A of the Fourth Schedule to the Act and not sit in judgment over it. There is ample power conferred upon the CIT under rule 3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted if, in his opinion, the provident fund contravenes any of the conditions required to be satisfied for its recognition and if during the assessment proceedings for any particular assessment year the taxing authority finds that the provident fund maintained by an assessee has contravened any of the conditions of recognition, he may refer the question of withdrawal of recognition to the CIT; but until the CIT acting under the powers reserved to him, withdraws such recognition the taxing authority must proceed on the basis that the provident fund has satisfied all the requisite conditions for its recognition for that year; any other course is bound to result in chaos and uncertainty which has to be avoided." (p. 15) Therefore, it is not open to the Assessing Officer to go behind the certificate issued by the CIT and by ignoring same, assess an income which has already borne tax under VDIC.”
In the case of Agriculture Produce Market Committee vs. ITO [355 ITR 384(Guj.)], it was held as under: 9
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“10. This High Court in the case of Ahmedabad Urban Development Authority (supra}, has held thus:
"9. Section 12AA of the Act lays down the procedure for registration in relation to the conditions for applicability of sections 11 & 12 as provided in section 12A of the Act. Therefore, once the procedure is complete as provided in sub-section (1) of section 12AA of the Act and a Certificate is issued granting registration to the Trust or Institution it is apparent that the same is a document evidencing satisfaction about: (1) genuineness of the activities of the Trust or institution, (2) about the objects of the Trust or Institution. Section 12A of the Act stipulates that provisions of sections 11 & 12 shall not apply in relation to income of a Trust or an Institution unless conditions stipulated therein are fulfilled. Thus granting of registration under section12AA of the Act denotes, as per legislative scheme, that conditions laid down in section 12A of the Act stand fulfilled.”
Applying the principles laid down by the Apex Court in the case of Gestetner Duplicators (P.) ltd. v. CIT[1979] 117 ITR 1 (SC)/1 Taxman 1 (SC) the Court held that while framing assessment order, it was not open to the Assessing Officer to ignore the certificate of registration granted under section 12AA of the Act by the Director of Income Tax [Exemption].
A perusal of the reasons recorded shows that the assessment is sought to be reopened on the ground that even if the petitioner has obtained registration under section 12AA of the Act as an institution carrying on charitable activities, the petitioner is not entitled to the status of trust carrying out charitable activities since the petitioner is conducting the business as an "Association of Persons" and not as a "Trust". Thus, though the petitioner has been granted registration under section 12AA of the Act by the Commissioner of Income- tax, the assessment is sought to be reopened on the basis of revenue audit objection that the petitioner is not eligible for exemption for the aforesaid reasons. The grounds for 10
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reopening the assessment are clearly contrary to the settled legal position as laid down by this Court in the case of Hirala/Bhagwati (supra) as well as in the case of Ahmedabad Urban Development Authority (Exemption), wherein the Court has held that section 12AA of the Act lays down the procedure for registration in relation to the conditions for applicability of sections 11 and 12 as provided in section 12A of the Act. Therefore, once the procedure is complete as provided under sub-section (1) of section 12AA of the Act and a certificate is issued granting registration to the Trust or Institution, it is apparent that the same is a document evidencing satisfaction about: (1) genuineness of the activities of the trust or Institution, and (2) about the objects of the Trust or Institution. While framing the assessment order, it is not open to the Assessing Officer to ignore the certificate of registration granted under section 12AA of the Act by the Director of Income Tax(Exemption).
In the facts of the present case, the Assessing Officer while framing the original assessment under section 143(3) of the Act has, taken into consideration the certificate granted by the Commissioner of Income Tax under section 12AA of the Act., and has found that the petitioner carries on charitable activities. In the return of income filed by it, the petitioner had specifically claimed deduction of Rs.32,401212/- and Rs. 45,00,000/- totalling · to Rs. 77,40,212/- as a Charitable Trust registered under section 12AA of the Act by the Commissioner of Income Tax. During the course of assessment proceedings the Assessing Officer had issued notice pursuant to which the petitioner had given its reply explaining as to why it was entitled to the said deductions. The Assessing Officer after considering the explanation given by the petitioner had passed a scrutiny assessment order under section 143(3) of the Act specifically allowing the above deductions. From the reasons recorded, it is evident that the Assessing Officer has not recorded any independent opinion regarding income having escaped assessment for the reasons stated therein. The sole ground for reopening the assessment appears to be the observations of the Revenue Audit Party that the assessee is not eligible for exemption to the tune of Rs. 77,40,212/- for the yearunder reference since, the Assessing Officer has not disallowed the exemption while finalizing the assessment 11
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under section 143(3) of the Act. Thus, it appears that the belief that income chargeable to tax escaped assessment is that of the Revenue Audit Party and not of the Assessing Officer. In the circumstances. the condition precedent for exercise of powers under section 147 of the Act, namely, that the Assessíng Officer should have reason to believe that income chargeable to tax has escaped assessment, does not appear to be fulfilled in the present case.
Besides, in the light of the above referred decisions of this Court, it is not permissible for the Assessing Officer to go behind the registration obtained by the assessee under section 12AA of the Act.
In the case of ITO vs. E-Infochips Ltd. 124 TTJ 176 (Ahd.), it was held as under:
"7. Now adverting to other aspects relating to no new undertaking having been established and violation of STPI norms., the AO found that the taxpayer was engaged in the business of software development since 1995 and was registered as 100 per cent EDU with STPI on 31st Aug., 1995. According to the AO, the undertaking was old and by conversion it cannot become a newly established undertaking, as is required under s. 108. Since at the time of registration with STPI the undertaking was already in existence, AO held that it could not be held to be a new established undertaking. He also referred to the facts regarding no new purchase of machineries and commencement of software development in asst. yr. 1995-96and exports in asst. yr. 1996-97. This proves that the EOU was and existing unit which had started production and was in operation before registration. Besides the AO also found that though the taxpayer was having status of 100 per cent EOU, he had made local sales of Rs. 4,73,290 without taking prior approval from STPI. He also pointed out the violation of the provisions of the Customs Act in December, 2000, detected during the search by the central excise and customs authorities on 11.th Dec, 2001, when capital goods were found to have been moved from bonded warehouse, without obtaining permission from the competent authority. Inter alia, on the basis of these violations, the AO 12
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disallowed the claim of the taxpayer for deduction under s. 108 of the Act. The AO further observed that the company was incorporated in 1988 and at that point of time deduction under s. 108 was available for five years from asst. yr. 1990-91. As in asst. yr. 1996-97 no new undertaking was established and it was merely a conversion while no separate accounts of the business of the EOU were kept, the taxpayer was not entitled to any deduction.
7.1 Before the learned CIT(A), the taxpayer submitted that there is no violation in respect of submission of forms in respect of export sales except that no prior intimation was given in respect of domestic tariff area sales-sales in India. The AO failed to appreciate that the Act does not provide for withdrawal of the exemption under s..10B on any violation of STPI permission etc. The STPI authorities were aware of the violations in respect of domestic sales and even then did not withdraw the registration. Under s. 10B the undertaking is permitted to make sales in domestic market, as per 2nd proviso to s.10B(I) of the Act. Besides, the undertaking had shifted its capital goods from bonded warehouse temporarily due the shortage of space. The Notification No. 140 of 1991, dt. 22nd Oct., 1991., under Customs Act, grants exemption from whole of duty and additional duty to the capital goods imported by 100 per cent EOU, subject to condition that importer agrees not to move the goods from the units without approval of Asstt. Commr.of Customs. The Customs Department levied a penalty of Rs. 2,00,000 for the procedural lapse as mentioned above. In this respect the order of the Asstt. Commr.of Customs., levying penalty reads as under :
“I find from the records that the said unit has already exported goods valued at Rs. 12,96, 73,255 till December, 2000, as against total export obligation of Rs. 1,00,17.,106 fixed as per terms and conditions of STPI., Gandhinagar, against the of duty free capital goods. Thus the unit has fulfilled the main condition regarding fulfilment of export obligations. Only breach on the part of the said unit is shifting of capital goods (warehoused goods) from bonded warehouse to a premises other than bonded warehouse without obtaining any permission from competent authority., which can be
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considered as a procedural lapse. There is no duty involvement in respect of imported capital goods."
7.1.1. It was further submitted before learned CIT(A} that since the undertaking has been registered with STPI, which fact has been accepted by the AO, he was not competent to question the recognition by the STPI on the basis of alleged violation of any of the conditions prescribed by STPI while granting the approval. If the AO sits in judgment over the approval granted by STPI, then it will amount to judicial indiscipline which is not permitted. In this respect taxpayer relied on the judgment in the case of Gestetner Duplicators(P.) ltd. v. CIT[1979] 8 CTR {SC) 371: [1979] 117 ITR 1 (SC), wherein it is held: ………………….. …………………………. Any businessmen are required to carry out its business in accordance with the rules and regulations laid down under various Acts. But violation of a rules and regulations provided under other Act does not automatically disqualify the businessmen from the incentive sections, if the conditions as mentioned in the relevant provision of the IT Act are fulfilled. It is also noted from the provision of s. 10B, that the section does not require that the books of accounts of the EOU should be kept separately. In view of the decision relied upon by the appellant, rejection of the benefit on this ground is also not justified.” …..
7.5 We have heard the rival contention and gone through the facts of the case On the aspects of violation of STPI norms and establishment of new undertaking, we do not find any infirmity in the findings of learned CIT(AJ".
In the case of ITO vs. Gujarat Information Technology Fund 45 SOT 529 (Ahd.), it was held as under:
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"(5)Whether AO can look into whether venture capital fund fulfils conditions laid down in SEBI {Venture Capital Funds}Regulations, 1996.
In our considered view the AO is duty bound to enquire whether the assessee trust is registered under the Registration Act, 1908 and has been granted certificate of registration by SEBI under SEBI(Venture Capital Funds) Regulations, 1996. But his role is confined to satisfy himself with such certificates granted and not beyond. Sub-clause (i) and sub-clause (ii) of clause (b) under Explanation l only requires to ensure that assessee trust has certificates as mentioned therein. Even if certificates are granted under misrepresentation of facts then it is for the concerned authorities to look into the matter and take action under the provisions of the concerned statute under which certificates are granted. In this regard the observations of the Hon. Supreme Court in the case of Gestetner Duplicators (P.) Ltd. (supra) are very relevant. In that case the Commissioner had granted recognition to the P.F. as far back as 1937. The assessee a private limited company paid to salesmen a fixed monthly salary and commission at fixed percentage of turnover and also paid employer's contribution to the P. F. on the basis of monthly salary as well as commission and credited them into individual account of these sales-men in P.F. maintained and recognized by the Commissioner. A part of such commission and consequently provident fund on such commission was sought to be disallowed. The matter went up to the Hon. Supreme Court. It observed as under:- ……….. ………………… 25. So far as condition laid down in sub-clause (iii) of clause (b)under Explanation 1 is concerned what we consider appropriate for the AO is to find out whether any action for default has been taken by SEBI under regulation -30 as referred to above for default committed by the assessee trust. So far as any violation of investment pattern as laid down in regulation 12(d) is concerned it is also covered under clause (a) of regulation-30 which shows that assessee trust can be penalized for contravention of any provision of this Act or these regulations. Thus, if assessee trust contravenes regulation-12(d) then SEBI is competent to penalize assessee trust within the powers given under regulation 30. So long as 15
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SEBJ does not find any default of any contravention of the provisions of the SEBI Act or SEBI (VCF)Regulation 1996 then it can be inferred that assessee trust fulfils the conditions laid down under these regulations. The AO,, however, can look into the issue whether assessee trust fulfils such conditions as laid down in regulation 12(d) (and not under regulatíon-8) and report the matter to SEB/ taking a protective view under l. T. Act:. 1961. If finally SEBI does not find any default on the part of the assessee trust then view of the AO that there is violation cannot survive. In other words fulfilment of condition under sub-clause (iii} is subject to the final finding by 5£81 authorities. Their final view on the alleged contravention by the assessee trust will prevail over the view of AO. Thus in our view role of the AO in examining the issue about fulfilment of conditions laid down in clause (b) is limited to the extent as described above.”
Therefore the A.O's finding that the appellant is not eligible for deduction u/s801AB since it violated the provisions of SEZ Act is not legally tenable.
3.7 Similarly, the A.O's observation that M/s DPCL was not an approved unit as on 31-03-2010 is against the facts on record. As admitted by the Development Commissioner's office, DPCL had filed application for approval on29-03-2011 and therefore the approval given on 26-06-2011 will date back to the date of application. In the case relied on by the A.R. and cited at 326 ITR251 (Guj), it was held as under:
"5. We have considered the submissions made by the learned Standing Counsel appearing for the revenue and we have also perused the orders passed by the authorities below.
The Tribunal has discussed this issue at length in its order. It was contended by the assessee before the Tribunal that nowhere the provisions provide that expenditure from the date of approval only has to be allowed. In the absence of those words, such conditions cannot be imputed in the statute by the lower authorities. Doing so amounts to reading more in the law which is not expressly provided. The words used are any expenditure incurred by the assessee on scientific research on 16
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the in-house "R & D" facility approved by the prescribed authorities has to be allowed by deduction of expenditure so incurred. Meaning of these words is plain and clear that the facility is to be established first and on approval of the facility all the expenditure so incurred by the assessee for development of in-house facility is to be held as eligible for weighted deduction. Form No. 3CM, which is order of approval as provided by the rules in this behalf also does not have any mention of date of approval rather it speaks of only approval. The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the "R & D" facility, expenditure so incurred is eligible for weighted deduction.
The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is "DSIR"; and {iv) allowance of weighted deduction on the expenditure so incurred by the assessee. The provisions nowhere suggest or imply that "R & D" facility is to be approved from a particular date and in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered rule 6{5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of "R & D" facility has to be allowed for weighted deduction as provided by section 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost 17
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up R & D facílity in India, the Legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility., intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction. 8. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under section 35(2AB) of the Act by the assessee. 9. We are, therefore, of the view that no substantial question of law arises out of the order of the Tribunal. This appeal is, therefore, dismissed.
Even if it is presumed that the approval was applicable to the succeeding year only, the money received from OPCL by the appellant is to be held to be an advance and cannot be taxed as income in the year under consideration. A.O.'s passing observation at para-10.2.4 [page 20] of the assessment order[that Sec. BOIA( 1 O) is attracted to the transaction] is without any basis. 3.8 As regards the statement given by the M.D of the appellant company, it is seen that the statement was clarified/retracted by the affidavit filed after 2months. The time lag was explained by the appellant to be on account of the ill-health of the M.D., the non- furnishing of copy of the statement by the A.O. to the appellant and the appellant being allowed only to inspect the statement on 8th, 9th and 10th of November,2013. Further, eligibility or otherwise of deduction is to be decided on the basis of provisions of Sec. 801AB and the documentary evidence. Judicial opinion is settled that the statement recorded during the course of survey does not have the evidentiary value of the statement recorded u/s 132(4). Reliance is placed in this regard on the case-laws cited at210 Taxman 248 [SC] and 300 ITR 157 [Mad].
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3.9 1n the light of the above discussion, I am of the considered view that disallowance of deduction u/s 801AB by the A.O. was based on extraneous observations, which ore not relevant to the issue under consideration. A.O did not bring any material on record to show that the appellant did not satisfy the conditions laid down u/s 801AB. Disallowance of deduction is not in accordance with law. It is deleted. This ground of appeal is allowed.”
The ld.DR relied upon the assessment order, and submitted that the ld.CIT(A) has erred in accepting the claim of the assessee. On the other hand, the ld.counsel for the assessee, Shri S.N.Soparkar has relied upon the order of the ld.CIT(A). He submitted that the issue in dispute is covered in favour of the assessee by the decision of Hon’ble Gujarat High Court rendered in the case of B.A. Research India Ltd., 70 taxmann.com 268 (Guj). He also relied upon the decision of the ITAT in the case of Zaveri & Co. P. Ltd., in ITANo.1395- 96/Ahd/2013, copy of which is also placed on paper book page no.507-533. He submitted that these decisions have been elaborately discussed by the ld.CIT(A). In brief, his line of argument is that once the approval for development of SEZ is being granted by the prescribed authority, and such approval is valid, then it would no longer be open to the AO to verify the satisfaction of the conditions prescribed in the different rules in order to deduce deduction admissible under section 80IAB of the Act.
We have duly considered rival submissions and gone through the record carefully. Before we embark upon an inquiry on the reasons assigned by the AO, in order to assess sustainability of the order of the first appellate authority, we deem it appropriate to appraise ourselves with regard to the basic conditions required to be 19
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fulfilled by any assessee for claiming deduction under section 80IAB of the Act. Thus, in order to inquire essential conditions, we have to take a brief look into the scheme of SEZ and how it provides a tax holiday to an assessee. For better development of infrastructure in the country, Government of India among various other measures and legislations, enacted SEZ Act offering various benefits to developers of various SEZs in India. This Act was enacted in 2005, and hereinafter referred to “SEZ Act”. The section 51(1) of the SEZ Act, provides overriding effect over all other legislations or instrument. Under the scheme of SEZ Act, the Board of Approval (BOA) is constituted, to whom vide powers have been entrusted i.e. from the implementation of the Act, Rules and other aspects. It is also observed that in the decision of the said BOA, a Joint secretary to the Government of India representing the Central Board of Direct Taxes is also being made a Member. Section 9 of the SEZ Act provides duties, power and functions of the BOA. Section 80IAB was not introduced by the Income Tax Act, but by the SEZ Act, 2005. It also amended various other laws. Relevant Income Tax related amendments are provided in section 27 of the SEZ Act. Similarly, second schedule in clause 13 also amends various other laws which have bearing on the development of SEZ’s in India. Section 80IAB incorporated in the Income Tax Act by SEZ Act without amending the Finance Act, which reads as under: "THE SECOND SCHEDULE" (13) nothing contained in this section shall apply to any Special Economic Zones notified on or after the 1st day of April, 2005 in accordance with the scheme referred to in sub clause (Hi) of clause (c) of sub-section (4) ".
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(f) after section 80-IA, the following section shall be inserted, namely:- Deductions in "80-1AB. (1) Where the gross total income of an assessee, being a Developer, includes any profits and gains derived by an undertaking or an enterprise from any business of developing a Special Economic Zone, notified on or after the 1st day of April, 2005 under the Special Economic Zone Act, 2005, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent, of the profits and gains derived from such business for ten consecutive assessment years." (2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which a Special Economic Zone has been notified by the Central Government: Provided that where in computing the total income of any undertaking, being a Developer for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (13) of section 80-1 A, the undertaking being the Developer shall be entitled to deduction referred to in this section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in sub-section (1) or subsection (2) as the case may be: Provided further that in a case where an undertaking, being a Developer who develops a Special Economic Zone on or after the 1st day of April, 2005 and transfers the operation and maintenance of such Special Economic Zone to another Developer (hereafter in this section referred to as the transferee Developer), the 'deduction under sub-section (1) shall be allowed to such transferee Developer for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee Developer."
A perusal of the above would indicate that on fulfillment of the conditions contemplated in this section, deduction at 100% of the profit and gains derived from such business shall be available to the assessee. The conditions which are required to be satisfied by an assessee are;
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(A) gross total income of an assessee developer should include any profits and gains derived by an undertaking or an enterprise from any business of developing a SEZ, (B) such SEZ should be notified on or after the 1st day of April, 2005 under the SEZ Act, 2005. Sub-section (2) of section 80IAB further provides that at the option of the assessee, claim of deduction can be made for any ten consecutive assessment years out of fifteen years beginning from the year in which a SEZ has been notified by the Central Government.
Case of the assessee is that it has been granted formal approval by the Government of India, Ministry of Commerce and Industry, Department of Commerce (SEZ Section) vide letter dated 17.4.2008 bearing formal approval no.f.2/455/2006-SEZ. The Government has also issued notification on 13.11.2009 and notified the assessee as SEZ Developer vide notification no.S.O.2891(E), dated 13.11.2009. Thus, according to the assessee it has fulfilled conditions enumerated under clause (b) referred above. With regard to the fulfillment of conditions required under condition no.(a) are concerned, the profit and gains should be derived by an undertaking from any business of development an SEZ. According to the assessee, it is not the requirement of the section 80IAB of the Act that for claiming deduction under the scheme, first the SEZ should have been developed at full-fledged and functional at its fullest capacity. On the other hand, the language used in the very provision contemplates that even while development of SEZ is in progress, if any income has any 22
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business connection, which is earned in the process of development a SEZ, the same can be claimed as deduction under section 80IAB of the Act. It was demonstrated before the ld.CIT(A) that intention was to grant deduction to an undertaking which develops the SEZ and therefore the process of development and any income arising therefrom has to be granted the deduction. It is also pertinent to note that unlike the very restrict and narrow meaning of the term “income derived from development of SEZ”, the legislature has, in its own wisdom used the phrase “any profits and gains” derived by an undertaking or an enterprise from any business of development a Special Economic Zone. Thus, according to the assessee the phraseology used in section 80HH/80I and others identical sections in Chapter VI are different than the expression used in section 80IAB of the Act. In other words, expression ‘derived from’ industrial undertaking had been used by statute to restrict the deductions of only those income which has directly been derived from the industrial undertaking, and not other income, which is incidental to the carrying on industrial undertaking. In section 80IAB expression used is “profits and gains” derived by an undertaking from any business of development of SEZ. It clearly shows that the intention of the legislature while inserting the additional words in section 80IAB i.e. ‘any business of’ was to give benefit of deduction not only to the profits and gains derived from developing SEZ but also to give benefit of deduction in respect to the income having a close and direct nexus with the profit and gains of the business of the development of SEZ. Therefore, all sorts of income which is inextricably related to the
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carrying on the business of development of SEZ is to be considered for computing deductions under section 80IAB of the Act.
After going through the above concepts/scheme of the Act, let us take reasons assigned by the AO while rejecting claim of the assessee. The first objection raised by the AO is, no development or insignificant development of SEZ by the company till financial year 2011-12, and in subsequent years (elaborately discussed in paragraphs 4 to 8 in the assessment orders). During the course of hearing on this proposition, the ld.counsel for the assessee has submitted that the area of inquiry undertaken by the AO was beyond the scope because he could looked into documentation, whether SEZ scheme was approved by the BOA. It has been notified or not; because legislature has constituted a special body for that purpose. The AO cannot sit over their judgment as an appellate authority. It was not his area, and for this proposition on this point, the ld.counsel for the assessee made reference to the judgment of Hon’ble Gujarat High Court in the case of B.A. Research India Ltd. (supra) and ITAT decision in the case of Zaveri & Co. (supra). On the other hand, the ld.CIT-DR pointed that whether the assessee has developed SEZ in the terms of scheme approved by the BOA was required to be gone into by the AO. If the assessee has played a fraud with the Revenue, and without development any SEZ intends to avail deduction, then such claim has to be whittled down by the AO. Therefore, the AO has carried out proper investigation, and disbelieved the claim of the assessee. In other words the AO found it bogus.
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We have considered rival submissions on this issue. The AO, in order to demonstrate that no development or insignificant development of SEZ was carried out by the assessee-company, and therefore it is not entitled for deduction under section 80IAB of the Act, has made reference to the statements of Ravin Bipinbhai Doshi and Shri Nayan R. Parikh, recorded during the course of survey, and some of the pictures of the site taken during the course of survey. These are also part of the assessment order. However, we find that SEZ Act is a code in itself. Section 51 of the Act provides that provision of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. Thus, SEZ Act provides powers to the BOA. Once an approval has been granted by the BOA and never suspended or cancelled subsequently, then no other authority, has any right to reappreciate or doubt that approval. If the AO has any grievance qua that he should have challenged that approval; This aspect has been considered by the Tribunal in the case of Zaveri & Co. Ltd. (supra) which we have reproduced while taking cognizance of the finding of the ld.CIT(A) in upper part of this order. The AO could examine, whether the letter of approval granted for the SEZ development is genuine or not. If he was of the view that the assessee does not qualify the requisite conditions, then he should have applied to the competent authority for suspension of approval or withdrawal of the approval; only then he could consider non-granting of benefit under section 80IAB of the Act. Therefore, this aspect is fully covered in favour of the assessee by the earlier decisions of the Tribunal as well 25
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as of the Hon’ble High Court. The ld.CIT(A) has rightly put reliance upon those decisions. In the case of B.A. Research India Ltd. (supra), the assessee company was engaged in scientific research and development. It used to store clinical sample in specific storage conditions on request of its customers. The assessee charged an amount for this purpose and claimed it to be income from research activity. The AO was of the view that sample storage income was not derived from research and development activity; consequently he disallowed deduction in respect of such income under section 80IB(8A) of the Act. The ld.CIT(A) concurred with the AO. However, the Tribunal did not approve this view of the Revenue authority and allowed deduction. The Revenue went in appeal before the Hon’ble Gujarat High Court, and the Hon’ble Court has observed that once the approval to such activity is granted by the prescribed authority, and such approval is valid, it will no longer be open for the AO to verify the satisfaction of the conditions prescribed under Rule 18DA in order to refuse deduction under section 80IB(8A) of the Act. Hon’ble Court has made reference to the decision of Hon’ble Supreme Court also in the case of Gestetner Duplicators P.Ltd. Vs. 117 ITR 1. This very decision has been referred by the ITAT in the case of Zaveri & co. (supra). Thus, first head under which the ld.AO has examined the case of the assessee is not justifiable head for rejecting the claim.
In the next line of reasoning, the ld.AO has observed that the assessee has infringed SEZ Act and Rules while claiming lease rental from sister concern, as eligible for grant of deduction under section 80IAB. A perusal of the impugned order would reveal that the 26
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assessee has received lease-premium from sister concern viz. Dishman Pharmaceuticals & Chemicals Ld. (“DPCL” ). With regard to this reasoning, it is observed that the case of the AO was that as on 31.3.2011 DPCL i.e. sister concern was not an approved unit, and therefore, the assessee could not give land on lease to DPCL. Thus, according to the AO, allotment of land to DCPL on lease is violation of provision of SEZ Act, and therefore, the lease premium received from DPCL did not qualify for deduction under section 80IAB of the Act. We find this aspect has been gone into by the CIT(A) in detail. The DPCL had made application to the Development Commissioner for approval for setting up SEZ on 29.3.2011 which was granted by the Development Commissioner on 22.6.2011. The said application was duly received by KASEZ on 29.3.2011. The assessee had submitted complete details about the procedural documentation on this aspect and as per Rule 6(2)(a) of the SEZ Rules, one of the units in SEZ could start commercial production within three years from the date of letter of approval granted by the BOA. Unless the land is being purchased, how production could be started. This aspect has been considered by the ld.CIT(A) while taking note of these facts in paragraph 3.4 at page no.38 of the impugned order. We have taken cognizance of this paragraph in the earlier part of this order, therefore we are of the view that the ld.CIT(A) has appreciated the facts in right perspective on this reasoning also, and rightly did not agreed with the AO.
Under the third fold of reasoning, the ld.AO has observed that MD of DPCL, Shri J.R. Vyas has accepted that a wrong claim of 27
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deduction under section 80IBA was made. We have gone through the details recorded on this fold of reasoning. It was demonstrated that this statement was given under misconception of the facts demonstrated before the MD by the survey team. It is pertinent to note that statement made during the course of survey under section 131(1A)(3) of the Act was without administrating oath, because the authorized officer conducting survey is not empower to administer oath, and such statement does not carry much evidentiary value. It is a just an information for corroboration purpose. A recent decision of Hon’ble Supreme Court in the case of S. Kader Khan & Sons, 352 ITR 480 (SC) as well as the decision of Hon’ble Kerala High Court reported in the case of Paul Mathews & Sons Vs. CIT, 263 ITR 101 are worth to refer for the proposition that if the officer is not authorized to record the statement on oath, the statement taken during the course of survey, has no evidentiary value as contemplated under law. Therefore, on the strength of this statement, the ld.AO cannot deny the deduction to the assessee. This aspect has also been gone through by the ld.CIT(A). After going through the well reasoned finding of the ld.CIT(A) we do not wish to interfere in it on this issue.
In the next fold of reasoning, the ld.AO has observed that huge claim of capital work-in-progress has been made by the assessee, which found to be bogus and fake. No doubt the assessee has claimed expenditure of more than Rs.17 crores towards work-in-progress. But it was not claimed as deduction in the profit & loss account. With regard to the above aspect, we are of the view that BOA has granted approval to the assessee. This approval has not been cancelled or 28
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suspended. It was valid. The assessee has offered a piece of land measuring 299151 sq.meters to DPCL at Rs.1400/- per sq.meter as lease rent for a period of 99 years, and Rs.2100/- per sq.meter towards development charges. Now this amount computed at the rate of Rs.1400/- per sq.meter has been shown by the assessee as income from SEZ. Sister concern has already applied to the BOA Before the 31st March for approval. It could not be doubted by referring an aspect that capital expenditure shown and capitalized under the head work-in-progress was bogus. On the basis of such an observation, deduction otherwise admissible to the assessee cannot be denied. The assessee has fulfilled all necessary conditions under section 80IAB of the Act. It was having valid approval from BOA, and therefore, it has rightly claimed deduction. The ld.CIT(A) in the well reasoned order has examined all these reasoning given by the AO and thereafter observed that this aspect has been considered by the ITAT in various decisions, and the case of the assessee duly fall within the ambit of section 80IAB of the Act for grant of deduction. After going through order of the ld.CIT(A), we do not find any reason to interfere in this first fold of grievance raised by the Revenue. Ground No.1 and 2 are rejected.
In ground no.3, Revenue has pleaded that the ld.CIT(A) has erred in holding that expenditure for financial charges was not for any violation of infringement of any law, and therefore, these are allowable.
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During the assessment proceedings, the ld.AO noticed that the assessee has debited a sum of Rs.4,13,494- in the profit & loss account, which was treated as “penal interest”. To the query, assessee explained that the same was incurred due to late submission of documents to the IDBI bank, which is wholly and exclusively for the business purposes, and the same required to be allowed. However, the ld.AO did not accept this contention of the assessee, and held that the expenses incurred by the assessee is penal in nature for the violation of provisions and rules, and therefore, hit by the Explanation-1 to section 37(1). He accordingly made addition to the total income of the assessee. However, in appeal, the ld.first appellate authority reversed the action of the AO and held that the expenses incurred by the assessee was not for any purpose, which was an offence prohibited by the law within the meaning of section 37(1). Aggrieved Revenue is before the Tribunal. 17. Before us both the parties supported orders of the respective authorities.
After going through the orders of the Revenue authorities, we find that the ld.CIT(A) has justified in accepting the contention of the assessee that the expenses incurred for late submissions of the documents to IDBI Bank wholly and exclusively for purpose of assessee’s business, and not incurred for any offence prohibited by the law or for violation of any provisions. Explanation 1 to section 37(1) of the Act provides that the payment of any amount which was prohibited by law was not a business expenditure and it could not be allowed as an expenditure. It is needless to mention here that this type 30
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of expenditure do happen during normal incident of business. Late submission of the documents and payment for such lapse were not common in the normal course of business activities, and therefore, it cannot be termed as an expenditure for infraction of law so as to attract the Explanation-1 of section 37(1) of the Act, which is a residuary section for allowance business expenditure, besides allowance of the expenditure as per sections 30 to 36. Therefore, we are of the view the case of assessee does not fall under the Explanation 1 to section 37(1), and therefore, we confirm the action of the ld.CIT(A) in allowing the expenditure of Rs.4,13,494/- incurred towards late submissions of the documents.
Now we take appeal of the assessee. The first four grounds are inter-connected with each other. Therefore, we take them together. The grounds taken by the assessee reads as under:
“1. The learned CIT(A) has erred both in law and on the facts of the case in not holding that the expenditure of Rs. 17,50,00,000/- was genuine and actually incurred. Under the facts and circumstances of the case, Id. CIT(A) ought to have decided the issue rather than delaying the decision in the year of actual of claim of the said expenditure. 2. The learned CIT(A) has erred both in law and on the facts of the case in not deciding the disallowance of Rs.29,78,050/- u/s 40A(3) of the Act for the year under consideration on the ground that since the expenditure in question is not claimed in P & L Account, the question of deciding its allowability does not arise. Under the facts and circumstances of the case, Id. CIT(A) ought to have decided the issue rather than delaying the decision to the year of actual of claim of the said expenditure. 3. The learned CIT(A) has erred both in law and on the facts of the case in not deciding the disallowance of Rs.37,67,094/- made on 31
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account of the same being not for the purposes of the business on the ground that since the expenditure in question is not claimed in P & L Account, the question of deciding its allowability does not arise. Under the facts and circumstances of the case, Id. CIT(A) ought to have decided the issue rather than delaying the decision to the year of actual of claim of the said expenditure. 4. The learned CIT(A) has erred both in law and on the facts of the case in not deciding the disallowance of interest of Rs.4,74,71,691/- for the year under consideration on the ground that since the expenditure in question is not claimed in P & L Account, the question of deciding its allowability does not arise. Under the facts and circumstances of the case, Id. CIT(A) ought to have decided the issue rather than delaying the decision to the year of actual of claim of the said expenditure.”
The ld.counsel for the assessee at the very outset submitted that these expenditures have not been claimed by the assessee in the income-tax returns as well as profit & loss account. These were not routed through profit & loss account and straight away taken to capital work-in-progress. The AO has held that these expenditures were not genuine, and therefore were not allowable. The ld.CIT(A) has observed that since the assessee has not debited these amounts in the profit & loss account, and has not claimed as deduction, therefore, the issue in the present year is an academic one. Grievance of the assessee is that, on one hand, the ld.CIT(A) has not adjudicated the issue with regard to genuineness of the expenditure, and on the other hand, has upheld the finding of the AO. The ld.counsel for the assessee further submitted that since these were debited to capital work-in-progress, and work-in-progress has been increased in the year in which they be claimed in future, then their genuineness or otherwise should have been decided on merit in that year. Otherwise,
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this finding of the ld.CIT(A) upholding the view of the AO would come in the way of the assessee.
On the other hand, the ld.CIT-DR submitted that the AO has rightly treated them as non-genuine, and the ld.CIT(A) has rightly upheld this view point of the AO.
We have considered rival submissions and gone through the record carefully. The observation of the ld.CIT(A) that major item of expenditure disallowed by the AO is worth to note, which reads as under: 5.3 However, the Id. AO has not appreciated the submission furnished by the Appellant and made huge amount of addition, without appreciating further fact that the Appellant has not claimed such expenditure in the Profit & loss account. Infact, the Id. AO himself has noted that the same is debited to Capital Work-in-progress account which is not debited to Profit & Loss account It is settled principle of low that if the amount of expenditure is not claimed in the Profit & loss account, the same cannot be disallowed while computing total income of the Assessee. In fact, the Id. AO in the subsequent paras has reduced the expenditure from the Capital Work-in-progress account after holding that the respective expenditure was not claimed in Profit & Loss -account, and therefore there would not be any effect while if computing total income of the Appellant. It is submitted that when the expenditure is not claimed in the Profit & loss account and in turn while I computing total income of the Appellant, how the said amount can be added in the hands of the Appellant* while computing assessable income in framing the assessment. This shows the sheer intention of the Id. AO in making huge additions without any basis. On this short ground only, the addition made by the Id. AO deserves to be deleted. 5.4 However, it is pertinent to note that, that wheneverin .the succeeding assessment year the said expenditure is claimed as revenue or capital expenditure at relevant point of time, the Appellant reserves the right to agitate the contentions raised by the assessing officer, in that assessment year. 4.2 At para nos. 17 to 27 of the assessment order, A.O. observed that during the course of survey most of the expenses claimed under 33
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the head capital work-in-progress were found to be bogus; on verification of the ledger account of land leveling expenses, it was found that on 01-07-2010 payment of Rs. 17.5 crores was made to M/s Subhash Project & Marketing Ltd.[SPML], Kolkata; Rs.7.15 crores was paid in July,2010 after deducting tax of Rs. 35 lakhs statement were recorded from the M.D of Multimedia Consultancy Pvt. Ltd. [MCPL] and Shri G.M. Parikh, main person of the firm M/s.Balaji Associates; as seen from the statements, no land development was carried out by the appellant company for the reasons recorded at para-26, it was established beyond doubt that the payments to M/s SPML were not made for the purpose mentioned; but it was just paper transaction to inflate the expenditure, appellant's claim [that since the expenditure was capital in nature no disallowance was called for] is not relevant and therefore Rs. 17.5 crores was being added. 4.3 The contentions of the learned A.R. are that A.O. himself have noted that impugned expenditure was debited to capital work-in- progress account and not debited -to P&L account; since the expenditure was not claimed, the question of disallowance did not arise and as and when the expenditure is claimed in the succeeding years the appellant reserves the right to hesitate the contentions raised by the A.O. 4.4 The undisputed fact is that impugned expenditure was debited to the capital work-in-progress account. It was neither debited to P&L account nor was claimed as allowable expenditure in the year under consideration. Therefore, A.O.'s action in disallowing the said sum is not in accordance with law. Impugned addition is deleted. The finding of the A.O. that the said expenditure was bogus is academic as far as the year under consideration is concerned. A.O.'s finding is upheld. This ground of appeal is treated as partly allowed for statistical purposes.”
It is also pertinent to note that the findings on other issues is almost identical because all these items the assessee has not claimed in profit & loss account, and therefore, the question of deciding their allowable cannot be taken up in this accounting year. Taking into consideration the academic nature of the issue under these four heads of the appeal, we record a finding that ends of justice would meet if we vacate the finding of the AO that these expenditures are non- genuine, because in this year, there should not have been any occasion 34
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to record this finding when the expenditure have not been claimed in the accounts as well as in the return. It will be open for the Revenue to decide the genuineness of the expenditure as and when they are being claimed in future years by the assessee. With the above observation, the above four grounds of the appeal are partly allowed.
Ground no.5 reads as under:
“The ld.CIT(A) has erred in law and on the facts of the case in confirming the addition of rs.42,00,098/- out of total addition of Rs.60,00,646/- made in respect of interest income after holding that the same is required to be treated as “Income from other sources”.
With regard to this ground of appeal, brief submissions raised by the ld.counsel for the assessee is that interest income treated by the Revenue authorities as income from other sources amounting to Rs.42,00,098/-, which otherwise qualifies for deduction under section 80IAB of the Act. Appellant submitted before the Revenue authorities, the interest income earned by it forms part of the business income, because surplus and spare fund of the business was parked with the banks for temporary period. According to him, this aspect has been considered by the Hon’ble High Court in the assessee’s own case in tax appeal no.192 of 2019 whereby the Hon’ble Court has held that interest income earned by the assessee has direct nexus with the income of the business of the undertaking, therefore, the same is to be treated as business income. On the other hand, the ld.CIT-DR justified orders of both the Revenue authorities on this issue.
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We have considered rival submissions and gone through the record carefully. We find that Hon’ble jurisdiction High Court in the assessee’s own case for the earlier period has held that interest income earned by the assessee is derived from business of the undertaking and therefore allowable as business expenditure. We are of the view that the incidental activity of parking of surplus funds with the banks is a part of business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be detached from its profits and gains derived by the undertaking; and therefore, in this year also claim of the assessee is to be allowed. Accordingly, we allow the claim of the assessee and treat the interest income as business income derived from the undertaking of the assessee.
As far as cross objection of the Revenue in the assessee’s appeal is concerned, the ground reads as under:
“1) In case the Hon'ble Tribunal is inclined to agree with the CIT(A) that the expenditure were non- genuine then, at the same time, it should also be held that the AO should have liberty to recast the Balance sheet of the assessee as the CWIP is a part of Balance sheet and not routed through Profit & Loss account and therefore the AO should take consequential action.”
By way of present ground of CO, the Revenue intends to rake up altogether a new situation. The ld.AO did not take any action for recasting of the balance sheet by observing that expenditure debited in the work-in-progress has not been claimed in the profit & loss account. By filing CO, the department cannot take up a new issue. The scope of CO is discernible from plain reading of sub-section (4)
ITA No.2663 & 2593 /Ahd/2014 with CO
of section 253 of the Income Tax Act, 1961. It contemplates that the respondent could file a CO against impugned order on any part of the order. In other words, if the Revenue has any grievance with the impugned order of the CIT(A), and on that issue it has not filed appeal, then on receipt of notice in the assessee’s appeal, it can file CO. But here the Revenue wants to rake up altogether a new issue which was not subject matter of appeal before the ld.CIT(A); even it was not a subject matter before the AO in the assessment proceedings. Therefore, such CO is not maintainable, hence dismissed.
In the result, appeal of the Revenue and its cross objections are dismissed, whereas the appeal of the assessee is partly allowed.
Order pronounced in the Court on 5th February, 2021 at Ahmedabad.
Sd/- Sd/- (AMARJIT SINGH) (RAJPAL YADAV) ACCOUNTANT MEMBER VICE-PRESIDENT