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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘B’
Before: SHRI RAJPAL YADAV, VICE- & SHRI WASEEM AHMED
आदेश/O R D E R
PER RAJPAL YADAV, VICE-PRESIDENT Revenue and the assessee are in cross-appeals against orders of the ld.CIT(A)-8, Ahmedabad dated 6.3.2018 and 15.3.2018 passed for the assessment years 2012-13 and 2013-14 respectively. Since issues are inter-
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 2 connected with each other, therefore, we heard these appeals together and deem it appropriate to dispose of them by this common order.
First we take appeals of the Revenue.
Ground No.1 and 2 in each assessment year are inter-connected with each other. In these grounds, the Revenue has pleaded that the ld.CIT(A) has erred in deleting the disallowance amounting to Rs.42,29,32,066/- and Rs.10,58,10,775/- in the Asstt.Years 2012-13 and 2013-14.
The ld.counsel for the assessee at the very outset submitted that issue in dispute is squarely covered by order of the Tribunal dated 4.3.2019 passed in ITA Nos.630 and 864/Ahd/2017 for the Asstt.Year 2011-12 in assessee’s own case. The ld.DR was unable to controvert this contention of the ld.counsel for the assessee.
With the assistance of the ld.representatives, we have gone through the record carefully. It emerges out from the record that the assessee-company was incorporated in the year 2003 and engaged in the business of retail jewellery, trading in bullions, transactions in commodity exchanges, power generation through wind mills. It set up a unit in SEZ in the year 2007 which commenced its business on 26.10.2007. As per the provisions of section 10AA of the Income Tax Act, 1961 “entrepreneur” referred in clause (j) of section 2 of the Special Economic Zones Act, 2005 (SEZ Act) means who begins to manufacture or produce articles or things or provides any services during the previous year commencing from the assessment year 2006-07 is eligible for hundred percent deduction of profit and gains derived from export of such articles etc. for a period of five consecutive assessment years and fifty percent deduction for the next five consecutive assessment years. According to the assessee, its unit was located in the SEZ, Sachin, Surat and is engaged
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 3 in business of trading of diamonds and gold jwellery as well as manufacturing gold jewellery for the purpose of export. According to the assessee as per Rule 76 of SEZ Rules, 2006 “services” include import for the purpose of re- export. Thus, the assessee claimed deduction under section 10AA from the assessment year 2009-10. In the assessment years 2009-10 and 2010-11, originally deduction was allowed to the assessee by the AO including deduction on the interest components on the FDRs. The ld.Commissioner took cognizance under section 263 of the Income Tax Act, and vide order dated 19.4.2013 for the assessment year 2009-10, and order of even dated for the Asstt.Year 2010-11 set aside the assessment orders. Dissatisfied with the order passed by the ld.Commissioner, the assessee came in appeal before the Tribunal in ITA No.1395/Ahd/2013 and ITA No.1396/Ahd/2013, and these appeals of the assessee were allowed, and 263-orders were quashed by the Tribunal. Thus, deduction claimed under section 10AA was allowed to the assessee.
In the assessment year 2011-12, the AO has passed the assessment orders under section 143(3). He disallowed the claim on the ground that 263- action was taken against the assessee. Against this disallowance assessee went in appeal before the ld.CIT(A) who has deleted the disallowance vide order dated 10.1.2017. The ld.counsel for the assessee further contended that this order of the ld.CIT(A) dated 10.1.2017 has been upheld by the Tribunal in ITA No.864/Ahd/2017. Copy of this order dated 4.3.2019 has been placed on record. It is pertinent to note that the assessee has filed its returns of income on 30.9.2012 and 30.11.2013 declaring total income at Rs.40,97,64,670/- and 27,44,30,102/- in the assessment year 2012-13 and 2013-14 respectively. The case of the assessee was selected for scrutiny assessment in both the years, and notices under section 143(2) were issued on 2.9.2013 and 8.9.2014 in both these assessment years respectively. A perusal
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 4 of the record would indicate that the assessee has claimed deduction under section 10AA at Rs.42,29,32,066/- and Rs.10,58,10,775/- in the Asstt.Year 2012-13 and 2013-14 respectively. The ld.AO sought explanation of the assessee as to why this deduction be not disallowed. After referring various expression “service” and “entrepreneur” employed in SEZ Rules, the ld.AO has disallowed the deduction.
We find that detailed finding recorded by the AO has been reproduced by the ld.CIT(A) in the impugned order. The ld.CIT(A) thereafter took cognizance of finding recorded by her predecessor in the Asstt.Year 2011-12 and deleted the disallowance made by the AO. The finding of the ld.CIT(A) in the Asstt.Year 2011-12 has been upheld by the Tribunal.
Before taking note of the finding of the Tribunal, we deem it appropriate to take cognizance of next ground of appeal also because in the assessment year 2011-12, the Tribunal has recorded a common finding on the issue regarding admissibility of deduction under section 10AA as well as quantification of eligible amounts on which deduction is admissible. In the present two years, apart from ground nos.1 and 2 in ground no.3, Revenue has pleaded that the ld.CIT(A) has erred in holding that interest income amounting to Rs.252,02,01,717/- and 2,92,00,000/- are eligible for grant of deduction under section 10AA in the Asstt.Year 2012-13 and 2013-14 respectively. The AO was of the view that this interest income deserves to be assessed as income from other sources, and not eligible for grant of deduction under section 10AA; whereas following earlier year’s order, the ld.CIT(A) has held that impugned interest income would form part of the business, and will be included in the eligible profit for calculating deduction admissible under section 10AA(7) of the Act.
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 5 9. On the both the issues, the Tribunal has reproduced the ground of appeal taken by the Revenue, and thereafter upheld the finding of the ld.CIT(A) in the immediately preceding year vide order dated 4.3.2019. We deem it appropriate to take note of the Tribunal’s order on both the issues, which reads as under:
“11. In ground nos.1 and 4, which we will take up together, the Assessing Officer has raised the following grievances: “1. Whether the Ld. CIT(A) is right in law and on facts in deleting the disallowance of deduction of Rs.45,73,98,923/- made on account of u/s.10AA of the Act.
Whether the Ld. CIT(A) is right in law and on facts in deleting the disallowance made on account of deduction u/.s.10AA on the interest income.” 12. So far as this grievance is concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction under section 10AA amounting to Rs.45,73,98,923/-. The Assessing Officer also noted that the assessee has earned net interest income of Rs.291.08 crores which is included in eligible business profits of the assessee. The Assessing Officer was of the view that this income is required to be taxed as income from other sources and not business income. Accordingly, it was concluded as follows :- “3.41 From the above facts and circumstances and commercial and legal pronouncements by various courts as discussed above, it is also clear that the interest income earned by assessee for the year under consideration is in the nature of other income liable to be taxed as "income from other sources". 3.42 It is also seen that assessee has computed the book profit u/s.115JB of the Act by reducing profit of the SEZ unit as computed after inclusion of interest income. However, as stated above, assessee did not derive any profit from eligible and core operations of SEZ unit eligible for claim u/s.10AA of the Act and hence, assessee had legally & factually made a wrong. 3.43 In view of the above, it is held that (i) The assessee is not eligible for any claim of deduction u/s. 1OAA of the Act.
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 6 (ii) Since the assessee is not eligible for any claim of deduction u/s.10AA of the Act, it is not eligible for any reduction in book profit on account of profit of SEZ unit. (iii) The interest income on bank FDR of Rs.219,11,58,218/- is in the nature of 'income from other sources' and therefore, the assessee is not eligible for claim of exemption u/s.10AA on interest income earned on bank FDR."
Aggrieved, assessee carried the matter in appeal before the learned CIT(A) who reversed the action of the Assessing Officer and observed as follows :-
“5.2 I have considered the assessment order, facts of the case and the submissions made by the appellant, as well as the case laws relied on by the appellant. In his order, the AO held that the inclusion of interest on FDRs as profits of business of SEZ unit was not correct and held that the same was actually income from other sources. The appellant's claim of deduction u/s. 10AA was accordingly disallowed to that extent. The appellant has relied on the order of the Hon'ble ITAT in ITA No.1395 & 1396 of 2013 for Asst. Years 2009-10 & 2010-11 in its own case. A perusal of the submission made by the appellant shows that similar disallowances on identical facts were considered by the Hon'ble ITAT, Ahmedabad in the appellant’s own case for Asst. Years 2009-10 & 2010-11. The Hon'ble ITAT deliberated upon this issue of deduction u/s.10AA at length in its order from para 37 & 39. The relevant paragraphs of the order of the Hon'ble Tribunal are reproduced as under:
"37. The undisputed facts relating to this issue are that the assessee imports goods on credit and re-exports the same from its SEZ unit. The import is made on a credit of 360/90 days against letter of credit. For obtaining the letter of credit, the assessee is required to offer fixed deposit receipt to the bank as a security. On expiry of the letter of credit period, the bank liquidates the fixed deposit receipt and makes payment to the importer. Further, the exports are made on immediate payment basis. Therefore, as the purchases are made on credit basis, the purchase value is higher than the prevailing rate on the date of purchase from purchases which are made on immediate payment basis. The exports are made on immediate payment basis at the market value which is prevalent on the date of payment. Normally, the assessee's purchase value is therefore more than its sale value. However, as the assessee receives payment for sales immediately and the payment for purchases are made at a later date and interest income earned by the assessee during the intervening period on sale value, the transaction were considered as commercially expedient and results in overall income to the assessee. The interest income in question are interest income which are earned by the assessee on fixed deposit receipts which are kept or pledged by the assessee with its bank for obtaining the Letter of Credit against its purchases is not in dispute.
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 7 "39. We find that in the instant case, it is not in dispute that the interest income which were earned by the assessee were from fixed deposit receipts with bank which were made by the assessee in the course of its trading business of import for the purposes of re- export, for obtaining Letter of Credit for its purchases. We thus find that the relevant fixed deposit receipts on which interest were earned were business assets of the assessee acquired in the course and for the purposes of its business. The fixed deposit receipts being business assets, we find no reason as to why interest income earned from such fixed deposit receipts could not be assessed as business income of the assessee. Our above view finds support from the recent decisions of the Hon'ble Karnataka High Court in the case of CIT & anr. Vs. Motorola India Electronics (P) Limited (2014) 265 CTR 94 (Kar.) wherein it was held that:
"No doubt Sub-section 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Subsection (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1). The substituted Sub-section (4) says that profits derived from export of articles or things or computer software shall be the amount which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles are different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary there is specific provision like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking.
In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way affixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 8 by sale of import entitlement is to be construed as income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of 'Income from Profits and Gains' incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals."
5.2.1 It is further seen that the various other judicial decisions relied upon by the appellant in this respect also squarely cover its case, viz. the decision of the Hon. Gujarat High Court in Hari Orgocheme Pvt. Ltd. In view of the judicial decisions cited supra and the categorical finding of the Hon'ble ITAT, Ahmedabad in the appellant's own case for the earlier two years on an identical issue, it is held that interest income would form part of the profit of the business and would be included for arriving at profits derived from export to be calculated u/s. 10AA(7) of the I.T. Act and the disallowance made by the Assessing Officer is deleted. Grounds of appeal Nos. 3, 4 & 5 are allowed.
The Assessing officer is aggrieved of the relief so granted by the learned CIT(A) and is in appeal before us.
We have heard the rival contentions, perused the material on record and considered facts of the case in the light of the applicable legal position. 16. We find that the above issue is covered, in favour of the assessee, by a co-ordinate bench decision dated 7th May 2014 in assessee’s own case for the assessment year 2009-10 and 2010-11 wherein the co-ordinate bench has, inter alia, observed as follows :-
“36. The next issue relates to the order of Commissioner of Income Tax whereby it was held that interest income earned by the assessee on its fixed deposit receipts with the bank is to be taxed under the head “income from other sources” and consequentially not entitled to exemption u/s 10AA of the Act and consequentially interest income is to be excluded for calculating benefit allowable u/s 10AA of the Act.
The undisputed facts relating to this issue are that the assessee imports goods on credit and re-exports the same from its SEZ unit. The import is made on a credit of 360/90 days against letter of credit. For obtaining the letter of credit, the assessee is required to offer fixed deposit receipt to the bank as a security. On expiry of the letter of credit period, the bank liquidates the fixed deposit receipt and makes payment to the importer. Further, the exports are made
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 9 on immediate payment basis. Therefore, as the purchases are made on credit basis, the purchase value is higher than the prevailing rate on the date of purchase from purchases which are made on immediate payment basis. The exports are made on immediate payment basis at the market value which is prevalent on the date of payment. Normally, the assessee’s purchase value is therefore more than its sale value. However, as the assessee receives payment for sales immediately and the payment for purchases are made at a later date and interest income earned by the assessee during the intervening period on sale value, the transaction were considered as commercially expedient and results in overall income to the assessee. The interest income in question are interest income which are earned by the assessee on fixed deposit receipts which are kept or pledged by the assessee with its bank for obtaining the Letter of Credit against its purchases is not in dispute.
On the above undisputed facts, the interest income earned by the assessee was assessed as business income of the assessee by the Assessing Officer in the assessment order. This view of the Assessing Officer was considered as not a possible view by the Commissioner of Income Tax in the impugned order passed u/s 263 of the Act and the Commissioner of Income Tax had held that the interest are mandatorily assessable under the head “income from other sources”.
We find that in the instant case, it is not in dispute that the interest income which were earned by the assessee were from fixed deposit receipts with bank which were made by the assessee in the course of its trading business of import for the purposes of re- export, for obtaining Letter of Credit for its purchases. We thus find that the relevant fixed deposit receipts on which interest were earned were business assets of the assessee acquired in the course and for the purposes of its business. The fixed deposit receipts being business assets, we find no reason as to why interest income earned from such fixed deposit receipts could not be assessed as business income of the assessee. Our above view finds support from the recent decisions of the Hon’ble Karnataka High Court in the case of CIT & anr. Vs. Motorola India Electronics (P) Limited (2014) 265 CTR 94 (Kar.) wherein it was held that:
“No doubt Sub-section 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Subsection (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1). The substituted Sub-section (4) says that profits derived from export of articles or things or computer software shall be the amount which bares to the profits of the business of the undertaking
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 10 and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles are different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary there is specific provision like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking.
In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of ‘Income from Profits and Gains’ incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals.”
In view of the above, we find that the view adopted by the Assessing Officer showing interest income under consideration is business income cannot be held as not a possible view and therefore, the Commissioner of Income Tax was not justified in interfering with the said view in the impugned order.
The other connected issue is that as per the view of the Commissioner of Income Tax, the interest income in question being derived by the assessee from Indian Bank, the same is to be excluded while computing profits derived from the export of articles or things or services for the purpose of section 10AA of the Act. Sub-section (7) of section 10AA provides the manner in which the profits derived
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 11 from “export of articles or things or services” is to be computed for the purposes of section 10AA of the Act. Therefore, in view of the above specific provision in the section itself, “profits derived from the export of articles or things or services” cannot be computed in any other manner. Sub-section (7) of Section 10AA reads as under:
“For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on [by the undertaking]:
[Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.]”
Thus, a perusal of the aforesaid sub-section takes us to the “profits of the business of the undertakings”. Now, the profits of the business of the undertakings are to be computed as per the provisions of chapter-IVD of the Act and the only adjustment which is permitted by the legislature to be made to such profits of the business is to apportion the same in the proportion of exports turnover of the eligible services to the total turnover of the business carried on by the assessee. It is significant to note here that the specific provision like explanation (baa) of section 80HHC which provides for exclusion of 90% of interest income from the profits of business to arrive at the profits of the business has not been provided by the legislature in section 10AA of the Act. In absence of such a provision enacted by the Parliament in section 10AA of the Act, it is not possible for any other person to read such provision in section 10AA of the Act. Hon’ble Supreme Court in the case of Sm. Tarulata Shyam Vs. CIT (1971) 108 ITR 345 (SC) held that there is no scope for importing in the statute words which are not there. Further, Hon’ble Supreme Court in the case of CIT Vs. Shann Finance Private Limited (1998) 231 ITR 308 (SC) went on to hold that in interpreting fiscal statute, court cannot proceed to make good the deficiencies if there be any. The court must interpret the statute as it stands, and in case of doubt, in a manner favourable to taxpayer. Thus, we find no provision in the statute on the basis of which it can be held that the interest income which forms part of the profits of the business is to be excluded for arriving at profits derived from “export of articles or things or services” as prescribed under sub-section (7) of section 10AA of the Act. Our above view also finds support from the decision of the Bangalore Bench of the
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 12 Tribunal in the case of Rajesh Exports Limited Vs. ACIT, (2008) TIOL-457-ITAT-Bangalore wherein it was held that:
“In the light of the aforesaid discussion, it seems to us that the expression “profits of the business of the undertaking” appearing in section 10B(4) has to be construed in a wider sense than the expression “profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things” appearing in section 10B(1) of the Act. We have already noticed that sub-section (1) has been expressly made subject to the provisions of the Section. Therefore, the meaning to be ascribed to the words used in that sub-section should be controlled or tempered by the language used in subsection (4). So constructed it appears to us that the profits of the business of the undertaking includes not merely the profits derived by or from the undertaking, but also include any profits or income which are incidental to the carrying on of the business of the undertaking.”
To the same effect is the decision of the Hon’ble Karnataka High Court in the case of Motorola India Electronics (P) Limited (supra).
In view of the above, we find that the view adopted by the Assessing Officer in this regard in the assessment order of not excluding interest income which was assessed as business income of the assessee for computing “profits derived from export of articles or things or services” was a possible view and therefore, the same could not be interfered in exercise of powers available u/s 263 of the Act.
We also observe that the Commissioner of Income Tax in the impugned order has observed that the assessee was indulging in financial arbitrage only in its SEZ unit. In other words, the true business of the assessee in its SEZ unit was that of financial arbitrage and not of trading by way of re-export of imported goods. The Commissioner of Income Tax formed the above view as he observed that on exclusion of interest income, the result of the activities of the assessee are negative or loss only.
We find that the assessee was duly granted approval by SEZ authorities to set up SEZ unit for engaging in trading by way of re- export of the imported goods. The activities carried out by the assessee in the SEZ unit are monitored by the competent SEZ authorities. The annual performance report of the assessee are monitored and verified by approval committee formed under the SEZ Act. The assessee is recognized as an entrepreneur under the SEZ Act. After taking into consideration the activities of the assessee in the SEZ unit, the assessee was also granted renewal of approval
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 13 for trading by competent authority under the SEZ Act. Keeping in view the above fact, in our considered view, it would be not proper to characterize the activity of the assessee which consists of re- export of the imported goods and inter alia to acquire fixed deposits for obtaining letter of credit for receiving goods on credit in the case of import as merely financial arbitrage and not as trading by way of re-export of imported goods and consequentially service under the SEZ Act. In the above facts and circumstances, we set aside the order of the Commissioner of Income Tax to the extent the Commissioner of Income Tax held that interest income earned by the assessee on bank fixed deposit receipts is required to be taxed as “income from other sources” and such interest income is to be excluded from arriving at profits derived from export of services for the purposes of section 10AA of the Act.
The next issue relates to the set-off of brought forward loss. The above issue is consequential to the finding of the Commissioner of Income Tax in respect of head under which the interest income earned by the assessee on fixed deposit receipts is to be assessed. As we find that the view adopted by the Assessing Officer in the assessment order that interest income earned by the assessee on fixed deposit receipts are assessable under the head “business income” on the facts of the instant case was found to be a possible view and therefore, we have to also hold that set-off of brought forward business loss against such business income as done by the Assessing Officer in the assessment order was a possible view. Therefore, we set aside the order of the Commissioner of Income Tax to the extent it directed that as interest income earned on fixed deposit receipts taxed as income from other sources, the assessee would not be entitled for set-off of brought forward business loss against such interest income.”
While the above observations were in the context of revision proceedings under section 263, these observations were equally applicable on merits. The coordinate bench has dealt with the matter on the merits as well. Respectfully following the co-ordinate bench decision (supra), we uphold the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. Learned CIT(A) has merely followed the decision of the co-ordinate bench, and we see no infirmity in that approach. In any case, learned Departmental Representative has not pointed out any specific reasons as to why the said decision should not be followed.
It is also important to note that the undisputed facts of the case are that the assessee imports the goods on credits and re exports the same from its SEZ unit. The imports are made on credit on the basis of the letter of credit but to get the letter of credit, the assessee has to place the fixed deposits as a guarantee for payments. On expiry of the letter of credit period, as we are given to understand, the banker liquidates the fixed deposit and makes payment to the importer. The exports made by the assessee, on the other
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 14 hand, are on immediate payment basis. The imports are on the higher value, but in the light of the payment terms, it is considered commercially expedient to buy at higher price on credit and sell on the lower price on immediate payment basis. In view of the fact that the interest is earned on the fixed deposits which are placed as margin money for letters of credits, and are thus integral part of the business, the interest on such deposits can only be treated as business income. 19. The other connected issue is that the interest income, as income earned from the bank, is to be excluded while computing profits derived from the export of article or things or services for the purpose of section 10AA of the Act. On this aspect of the matter, we find that sub section 7 of section 10AA provides the manner in which the profits derived from export of article or things or services are to be computed, and this specific statutory provision does not, therefore, permit computation of such profit in any other manner. Section 10AA(7) provides that “for the purpose of sub section 1, the profits derived from the export of articles or things or services shall be the amount which bears to the profits of the business of the undertaking, being the unit, the same proportion as the export turnover of the business carried on by the undertaking”. The only adjustment thus can be made is for apportionment of turnover. Unlike the provision of Explanation (baa) to section 80 HHC, no part of interest income is to be excluded from the profits to arrive at the profits eligible for Section 10AA benefit. What is not provided by the statute cannot be inferred by us either. As a corollary to this legal position, once interest income is required to be treated as business income, as it is required to be on the facts of this case in the light of factual position that interest was earned on placing the fixed deposits which were wholly made for availing the letter of credit facilities, the same becomes part of business profits and is eligible for benefit of Section 10AA. This approach is fully supported by a coordinate bench decision in assessee’s own case, in the context of revision proceedings, in the case of Ausom Enterprise Lytd (Order dated 15th October 2018 in ITA No. 857/Ahd/17) and by Hon’ble Karnataka High Court’s full bench judgment in the case of CIT Vs Hewlwtt Packard Global Soft Ltd [(2017) 87 taxmann.com 182 (Kar FB)]. 20. Whichever way we look at it, thus, the conclusions arrived at by the learned CIT(A) are indeed correct and call for no interference. In view of these discussions, and bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A). No interference is called for. 21. Ground nos.1 & 4 are thus dismissed.”
On an analysis of the above facts and circumstances, we are of the view that there is no disparity on facts. The assessee has claimed deduction under section 10AA for the first time in the year 2009-10 which was allowed by the AO himself, but this order was set aside by the ld.CIT under section 263 of
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 15 the Act. The order of the ld.CIT under section 263 passed in supervisory jurisdiction, did not meet approval of the Tribunal, and orders for the Asstt.Year 2009-10 and 2010-11 were set aside by the Tribunal in ITA No.1395 and 1396/Ahd/2013. The next assessment year was A.Y.2011-12 wherein the ld.CIT(A) has allowed deduction and order of the ld.CIT(A) has been upheld by the Tribunal. Therefore, consistently, it is observed that the assessee has been allowed deduction under section 10AA on the profit derived by it in its SEZ unit including on the interest income which has been assessed as business income derived from SEZ. Therefore, respectfully following orders of the Co-ordinate Bench, we do not find any reason to interfere in order of the ld.CIT(A) in both these years. Ground No.1 to 3 of the Revenue’s appeal in both the years are rejected.
Ground no.5 and 6 in the assessment year 2012-13 and ground no.4 and 5 in the assessment year 2013-14 of the Revenue’s appeals are inter- connected with sole ground of the assessee in the Asstt.Year 2012-13 and ground no.1 to 3 in the assessment years 2013-14.
In all these grounds of appeals, the issue involved is, what amount required to be computed for the purpose of disallowance under section 14A of the Act, and whether such disallowed amount be added back in the book profit for the purpose of section 115JB of the Income Tax Act ?
Brief facts of the case are that in the assessment year 2012-13, the assessee has claimed dividend income of Rs.20,34,613/- and Rs.41,67,818/- as exempt from tax under section 10(34)/10(35) of the Income Tax Act, 1961. Similarly, in the asstt.Years 2013-14, it has claimed such income as exempt of Rs.1,66,04,551/- and Rs.40,38,935/-. A perusal of the assessment order would indicate that the ld.AO straight away applied Rule 8D and made
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 16 reference to the decision of ITAT in the case of Cheminvest Ltd. Vs. ITO, 124 TTJ 577 (Del)(SB). He also made reference to the decision of Special Bench in the case of Daga Capital Management P.Ltd., 117 ITD 169 (Mum)(SB). Apart from these decisions, he made reference to the Hon’ble Rajasthan High Court in the case of Rajasthan state Warehousing Corpn Ltd. Vs. CIT, 242 ITR 450(Raj), and also four more ITAT’s orders. He worked out the disallowance of Rs.36,59,563/- in the Asstt.Year 2012-13 and Rs.67,30,601/- in the Asstt.Year 2013-14. Dissatisfied with the disallowance, assessee went in appeal before the ld.CIT(A) who deleted the disallowance partly. The ld.CIT(A) was of the view that the assessee has sufficient interest free funds, and therefore, no interest expenditure required to be disallowed for earning tax free income. In this way, the ld.CIT(A) has restricted the disallowance to Rs.17,93,818/- and Rs.23,06,949/- as against Rs.36,59,563/- and Rs.67,30,601/- in the Asstt.Years 2012-13 and 2013-14 respectively. Against this partial deletion of the disallowance, Revenue is in appeal before us. Qua confirmation of part disallowance, the assessee is in appeal before the Tribunal.
With the assistance of the ld.representatives, we have gone through the record carefully. As far the issue agitated by the Revenue is concerned, we find that the assessee has sufficient interest free funds, and no interest amount deserves to be disallowed. The ld.CIT(A) has recorded a finding that the assessee has Rs.305 crores in its share capital and reserves against which it has made investment of Rs.32.73 crores in the Asstt.Year 2012-13. Thus, interest free fund available with the assessee was far more than the investment, and no interest expenditure could be disallowed. The ld.CIT(A) has made reference to the decision of Hon’ble Gujarat High Court in the case of CIT Vs. Gujarat State Fertilizers Ltd, 358 ITR 323 (Guj) and CIT Vs. Torrent Power Ltd., 363 ITR 474 (Guj). Further, the facts of the case in the
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 17 Asstt.Year 2013-14 are also identical, and therefore, we do not find any merit in the grounds raised by the Revenue in both the years. Accordingly, ground no.5 and 6 in the Asstt.Year 2012-13 and ground no.5 2014-15 of the Revenue’s appeal are dismissed.
As far as issue raised by the assessee is concerned, it is pertinent to note that as per sub-section-2 of section 14A, the AO has to record a categorical finding that he has not satisfied with regard to correctness of the accounts of the assessee, by which it has shown expenditure relatable to earning of tax free income. It is also pertinent to observe that there is no dispute with regard to the proposition that expenditure incurred by an assessee relating to earning of tax free income are to be disallowed. The question is, quantification of this expenditure. Firstly, the AO has to examine the accounts of the assessee, then he has to point out the defects in these accounts, and thereafter he has to record a finding of his inability to work out the exact amount from these accounts. Thereafter, the AO can proceed to compute the disallowance with help of Rule 8D. In the present case, the ld.AO has not carried out any such exercise. He simply proceed to compute the disallowance with help of Rule 8D. He made reference to the decision of Special Bench in the case of Cheminvest Ltd.(supra) which has been reversed by the Delhi High Court reported in 378 ITR 33 (Del). In other words, the conclusion of Special Bench did not meet approval of Hon’ble Delhi High Court. Now, the question is that for earning of roughly Rs.62 lakhs of tax free income in the Asstt.Year 2012-13 and Rs.2.07 crores in the Asstt.Year 2013- 14, how much administrative expenditure should be construed as sufficient. An ideal situation would be to find out the expenditure from the books of accounts. If the same is not available, then take help of Rule 8D. In that situation, sometime investment could be of 100 crores, but exempt income is only few lakhs. Can the expenditure exceed the exempt income. This
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 18 situation has been answered by the Hon’ble Gujarat High Court in the case of Corretech Energy P.Ltd., 372 ITR 97 by propounding that if there is no tax free income, then there could not be any expenditure. This view was expressed by the Hon’ble Delhi High Court in the case of Cheminvest (supra) while reversing the conclusion of the Special Bench of the Tribunal. Therefore, looking into the facts of the case from all these angles, we are of the view that ends of justice would be meet if we restrict the disallowance to rupees seven lakhs in the Asstt.Year 2012-13, and rupees twelve lakhs in the Asstt.Year 2013-14, which will be sufficient for taking care of administrative expenditure for making investment and earning exempt income. Accordingly, grounds raised by the assessee are partly allowed.
Now coming to the issue of inclusion of disallowance made under section 14A in the book profit determined under section 115JB of the Income Tax Act, 1961, the ld.counsel for the assessee at the very outset submitted that this issue is covered in favour of the assessee by the decision of Special Bench in the case of ACIT Vs. Vireet Investments P.Ltd., 165 ITD 27 (SB) wherein it is held that no increase or decrease can be effected in the book profit calculated under section 115JB on account of certain disallowance made under section 14A.
Considering the above facts, we are of the view that Special Bench of the ITAT in the case of Vireet Investment P.Ltd. (supra) has formulated following question for adjudication on this issue:
“Whether the expenditure incurred to earn exempt income computed u/s.14A could not be added while computing book profit u/s.115JB of the Act.” 18. Special Bench answered this question in favour of the assessee and held that computation for the purpose of clause (f) of Explanation 1 to Section
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 19 115JB(2) is to be made without resorting to the computation as contemplated under section 14A r.w. rule 8D. Respectfully following the above decision of the Special Bench, we reject this ground of appeal in both the years and direct the AO not to make adjustments in book profit for the purpose of MAT liability on the basis of calculations made with Rule 8D of the Income Tax Rules.
Now only ground left for adjudication is ground no.4 in the Asstt.Year 2012-13, vide which Revenue challenge deletion of disallowance of Rs.2,90,55,441/- made on account of deduction under section 80IA of the Act.
Brief facts emerging from the relevant record is that the assessee has wind mill units located various places in Gujarat and Maharashtra, and the income generated from such wind mills units are eligible for 100% deduction. It has claimed deduction under section 80IA of Rs.2,90,55,441/-. According to the AO, the same should be claimed after setting off of earlier years’ brought losses, if any, as provided in the said provision. It was explained by the assessee that there was no loss or unabsorbed depreciation available or pending for set off since the same was adjusted against the income of other undertakings of the assessee, and therefore, nothing remained to be set off against the profit of current year, and the claim of the assessee is within the provisions of section 80IA(5) of the Act. The ld.AO did not accept the explanation of the assessee and he held that for the purpose of determination of quantum of deduction under section 80IA has to be computed after deduction of notional brought forward loss and depreciation of eligible business, though the same would have been allowed to be set off against other income in earlier years. After relying on some case laws, as mentioned in his impugned order, the ld.AO rejected claim of the assessee, and the deduction was added back to the total income of the assessee. Aggrieved by the action
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 20 of the AO, the assessee went in appeal before the ld.CIT(A). The ld.CIT(A) after going through order of the AO and considering order of his predecessor in the assessee’s own case for the assessment year 2011-12, allowed the claim of the assessee. Revenue is aggrieved by this order of the ld.CIT(A), and hence, before the Tribunal.
Before us, the ld.DR relied on the order of the AO, while the ld.counsel for assessee relied upon order of the ld.CIT(A). The ld.counsel for the assessee further relied upon order of the ITAT in the assessee’s own case in ITA No.630 and 864/Ahd/2017 for the Asstt.Year 2011-12 wherein similar claim of the assessee was allowed by the Tribunal. He placed on record copy of order of the Tribunal dated 4.3.2019.
We have heard both the sides and gone through the record carefully. We find that similar claim of the assessee was allowed in the Asstt.Year 2011-12. For adjudication of this issue, it would suffice if we consider well reasoned finding recorded by the ld.CIT(A) on this issue. It reads as under:
“6.2 I have carefully considered the facts of the case and the submissions made by the appellant. AO has disallowed the deduction applying the provision of sub section (5) of section 80IA and computed the quantum of deduction u/s.80IA after giving set off of notional brought forward losses. Appellant has contended that there was no brought forward losses in his case since the same have already been set off in the earlier years against the income of other undertaking of the appellant. AO relied upon the decision in the case of Hon'ble Ahmedabad !TAT in the case of Goldmine Shares and Finance PO. Ltd (supra) wherein it was held that deduction u/s.SOIA (5) is to be computed after reducing notional brought forward losses and depreciation on the eligible business. I find that the similar issue was involved in appellant's own case in A.Y.2011-12 wherein my predecessor vide order in CIT (A)-7/45/2014-15 allowed the appellant's appeal relying upon a later judgment of Hon'ble Ahmedabad ITAT in case of Sadbhav Engineers Ltd. vs. DCITlTA
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 21 No.610/Ahd/2008, 1834 & 2054 / Ahd/2009. Relevant part of the order is reproduced as below:
" I have considered the assessment order, facts of the case and the submission made by the appellant, as well as the judicial decision relied on by the appellant. The AO made the impugned disallowance by applying sub-section 5 of section 80IA and computing the quantum of deduction u/s.80IA after deduction of notional brought forward losses. The appellant has contended that there were no such brought forward losses in its case since the same had already been set off in earlier years against the income of other undertakings of the appellant. The AO has made the impugned addition by relying on the decision of the Hon'ble ITAT Ahmedabad in the case of ACIT vs. Goldmine Shares and Finance Pvt Ltd. wherein it was held that as per section 801A(5) of the I. T. Act deduction was to be computed after reducing notional brought forward losses and depreciation of eligible business even though they had already been set off against other income in earlier years. However it is seen that, this was done since at that time, the year of commencement of business was considered as the initial Asst. year. The Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills vs. ACIT 340 ITR 463, decided a similar issue in favour of the appellant on an identical issue. The decision in the case ofSadbhav Engineering Ltd. vs DC/7 in ITA No. 610/Ahd/2008, 1834 & 2054/Ahd/2009 1835 & 2Q55/Ahd/2009 and 2053/Ahd/2009, wherein the Hon. Tribunal has held as under-
" We find that section 801A of the Act which has been substituted with effect from 01.04.2000 provides that where the gross total income of an assessee includes any profits and gains derived by an undertaking from eligible business referred to in sub section 4, there shall, in accordance with an subject to the provision of section, be allowed in computing the total income, the deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive years. Substituted sub section (2) of section 80IA, provides that an option is given to the assessee for claiming any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking or the enterprise develops and begin the operate. The 15 years is the outer limit within which the assessed can choose of deduction for
ITA No1080 & 1081 and 1193 & 1194 /Ahd/2018 22 an eligible for an business. The relevant provisions of sub section (5) of section 801A reads as under:
"(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year56a and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. 6.2 from a plain reading of the above, it can be gathered that it is a non obstante clause which overrides the other provisions of the Act and it is for the assessment year immediately succeeding the initial assessment year and any subsequent assessment year to be computed as if the eligible business is the only source of income. Thus, the fiction created is that the eligible business is the only source of income and the deduction would be allowed from the initial assessment year or any subsequent years. It nowhere definers as to what is the initial assessment year. Prior to 1st April, 2000, the initial assessment year was defined for various types of eligible assesses under section 80IA(12). However, after the amendment brought in statue by the Finance Act, 1999, the definition of "initial assessment year" has been specifically taken away. Now when the assessee exercise the option of choosing the initial assessment year as culled out in sub section (2) of section 801A from which it choose its 10 years of deduction out of 15 years, then only the losses of the years starting from the initial assessment year alone are to be brought forwards as stipulated in section 80IA(5). The loss prior to the initial assessment year which was already been set off cannot be brought forward and adjusted into the period of 10 years from the initial assessment year as contemplated or chosen by the assessee. It is only when the loss have been incurred from the initial assessment year, then the assessee has adjust loss in subsequent assessment years and it has to be computed as if eligible business is the only source of income and then only deduction under section 80IA can be determined. This is the true import of section 80IA(5).”
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The CBDT has also issued a Circular No.1/2016 dated 15.12.2016 wherein it has been clarified that the initial Asst. year for the purpose of Section 801 A(5) is not the year of commencement of production, but it is the first year of claim of deduction at the assessee's choice out of block period of 10 years. In the appellant's case, the losses incurred by it were already set off and adjusted against the profits of the earlier years. During the current Assessment year 2011- 12, the appellant exercised the option under s.80-IA(2). During the relevant period, there was no unabsorbed depreciation or loss of t he eligible undertaking and the same were already absorbed in the earlier years. Thus there was positive profit during the year and the deduction claimed was correct as per the provisions of section 80IA(5). 6.3 The facts of the case continue to be same and hence following the clarification as per circular No.1 /2016 issued by CBDT, ratio of Hon'ble ITAT Ahmedabad's judgment in the case of Sadbhav Engineering Ltd. (supra) as well as relying upon the decision of CIT(A) in earlier year in the appellant's own case it is held that appellant is entitled to deduction U/S.80IA on the profits derived from wind mill unit amounting to Rs.2,90,55,441/-. Accordingly, this ground of appeal is allowed.”
We find that similar claim of the assessee for the Asstt.Year 2011-12 allowed by the ld.CIT(A) has been met approval of the Tribunal vide ITA No.630 and 864/Ahd/2017 cited (supra). Therefore, we do not find any infirmity in the order of the ld.CIT(A) for allowing claim of the assessee in the assessment year 2012-13 also. His order on this issue is upheld.
In the result, both the appeals of the Revenue are dismissed.
Now we take appeals of the assessee for the assessment years 2012-13 and 2013-14.
Grounds no.1 to 3 in both the appeals raise common issue, that is, the ld.CIT(A) has erred in restricting and partly confirming the disallowances under section 14A r.w. Rule 8D of the Income Tax Act. We have already disposed of these grounds with grounds of Revenue’s appeals.
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Now only ground left for our adjudication is ground no.4 in the Asstt.Year 2013-14 against confirmation of disallowance of Rs.1,15,091/- in respect of employee’s contribution to PF/ESIC.
The ld.counsel for the assessee fairly conceded that this issue is covered against the assessee by decision of Hon’ble jurisdictional High Court in the case of Gujarat State Road transport Corporation, 360 ITR 170(Guj). In view of this stand of the assessee, we reject this ground of appeal.
In the result, both appeals of the Revenue are dismissed and the appeals of the assessee are partly allowed.
Order pronounced in the Court on 19th March, 2020 at Ahmedabad.
Sd/- Sd/- (WASEEM AHMED) (RAJPAL YADAV) ACCOUNTANT MEMBER VICE-PRESIDENT