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Income Tax Appellate Tribunal, AHMEDABAD ‘D’ BENCH, AHMEDABAD
Per Pramod Kumar, Vice President:
These cross appeals are directed against the order dated 10th January, 2017 passed by 1. the learned CIT(A) in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2011-12.
We will first take up the appeal filed by the assessee.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 2 of 25
In ground nos.1 to 3, which we will take up together, grievances raised by the assessee are as follows :-
“1. That on facts, and in law, the learned CIT(A) has grievously erred in partly confirming the addition of Rs.36,83,567/- out of addition of Rs.6,23,83,485/- made u/s.14A of the Act.
That on facts, and in law, it ought to have been held that the provisions of section 14A of the Act are not applicable as the appellant is carrying on the business of dealing/trading in shares and securities.
That on facts, evidence on record, and in law, the entire addition u/s.14A of the Act ought to have been deleted as prayed for.”
We have noted that the learned CIT(A) has restricted the disallowance to Rs.36,83,567/-, i.e. the total tax exempt income, and that is all that the assessee had prayed for. As regards application of rule 8D, there is no dispute that it is applicable in the present year. When it was put to the learned counsel, he did not have much to say. We, therefore, confirm the action of the learned CIT(A) and decline to interfere in the matter.
Ground nos.1 to 3 are thus dismissed.
In ground no.4, the assessee has raised the following grievance:
“4. That on facts, and in law, the learned CIT(A) has grievously erred in confirming the disallowance of Rs.13,629/- in respect of employee’s contribution to PF/ESIC.”
Learned Representatives fairly agree that this issue is covered against the assessee by Hon’ble jurisdictional High Court’s judgement in the case of CIT vs. Gujarat State Road Transport Corporation, 366 ITR 170 (Guj.). We, therefore, confirm the action of the learned CIT(A) on this point as well, and decline to interfere in the matter.
Ground no.4 is dismissed.
In the result, appeal of the assessee is dismissed.
We now take up the appeal filed by the Assessing Officer.
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.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 3 of 25 4. 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.”
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.
(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
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 4 of 25 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.
"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
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 5 of 25 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 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. 14. 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
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 6 of 25 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. 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. 38. 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”. 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
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 7 of 25 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. 8. 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.” 40. 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. 41. 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 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]:
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 8 of 25 [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.]” 42. 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 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 sub- section (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). 43. 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
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 9 of 25 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. 44. 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. 45. 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 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. 46. 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.” 17. 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.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 10 of 25
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 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.
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)].
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.
In ground nos. 2 & 3 the Assessing Officer has raised the following grievances: “2. Whether the Ld. CIT(A) is right in law and on facts in holding that the appellant is falling within the purview of ‘services’ as defined in the SEZ Act read with IT Act.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 11 of 25
Whether the Ld. CIT(A) is right in law and on facts in holding the appellant is fulfilling the condition of achieving NFE as required under Rule 53 of SEZ Rules?”
Learned Representatives fairly agree that this issue is also covered, in favour of the assessee, by a co-ordinate bench decision dated 7th May 2014 (supra) in assessee’s own case for the assessment year 2009-10 and 2010-11, even as the learned Departmental Representative rather dutifully relied upon the stand of the Assessing Officer. 24. We find that the co-ordinate bench has in its order (supra), inter alia, observed as follows :- “18. The first issue is in respect of eligibility of deduction u/s 10AA of the Act. The Commissioner of Income Tax considered that the assessee was not entitled for deduction u/s 10AA on the ground that the assessee has not fulfilled the conditions for eligibility of deduction u/s 10AA for carrying out the services as per section 2(z) of the SEZ Act, 2005 i.e. import for the purposes of re-export and has not earned any foreign exchange for the country which is the main intention behind the provisions of section 10AA of the Act. In view of this, the Commissioner of Income Tax ordered that the assessee is not entitled to exemption u/s 10AA of the Act, both while computing income as per normal provisions of the Act and book profit u/s 115JB of the Act. For the above issue, it is necessary to give a look at the provisions of the sub-section (1) of section 10AA of the Act which reads as under: “10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of— (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2).” 19. In the instant case, we find that it is an undisputed fact that the assessee in its SEZ unit is engaged in carrying on business of trading in gold, platinum and diamond. The SEZ unit inter alia imports goods from supplier of Dubai and re- exports it.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 12 of 25 20. It is not in dispute that the income from above activity qualifies for deduction u/s 10AA of the Act. The above view is supported by the instruction no. 4 dated 24.05.2006 issued by Government of India, Ministry of Commerce & Industry wherein it is stated as under: “This Department has been receiving representations on difficulties faced by the existing SEZ units holding approval to do trading, that their exports are adversely affected and also that several of their orders are held up due to the restriction on trading on account of the above instruction. Taking cognizance of these representations, partial modification of the above referred Instruction dated 24th March, 2006, it has been decided that while units in the Special Economic Zone who hold approval to do trading activities will be allowed to carry out all forms of trading activity, the benefits under Section 10AA will exclude trading other than trading in the nature of export of imported goods. Appropriate amendments in this regard are being issued. 2. In the meantime, sourcing from domestic area may be permitted by units in the SEZs which are allowed to do trading, subject to this circular being cited and on production of an undertaking by the concerned unit that no income tax benefits will be available by the unit for trading, except in the nature of re-export of imported goods.” 21. Thus, it is clear that SEZ units are not entitled for deduction u/s 10AA in respect of trading goods exported from SEZ when such goods were procured from Domestic Tariff Area and the assessee is entitled for income tax benefit u/s 10AA in respect of trading which is in the nature of re-export of imported goods. To the same effect is the decision of the Jaipur Bench of the Tribunal in the case of DCIT Vs. M/s Goenka Diamond & Jewellers Limited ITA No. 509/JP/2011 Assessment Year 2008- 09. 22. Further, it is also not in dispute that the above activity of the assessee was started during the Assessment Year 2008-09. Thus, the only other condition is that the assessee must be an entrepreneur as referred to in clause (j) of section 2 of SEZ Act, 2005. The Section 2(j) of SEZ Act, 2005 reads as under: "Entrepreneur" means a person who has been granted a letter of approval by the Development Commissioner under sub- section (9) of section 15.” 23. Sub-section (9) of section 15 of SEZ Act, 2005 reads as under: “The Development Commissioner may, after approval of the proposal referred to in sub- section (3), grant a letter of approval to the person concerned to set up a Unit and undertake such operations which the Development Commissioner may authorize and every such operation so authorized shall be mentioned in the letter of approval.” 24. In the instant case, it is not in dispute that the assessee has been granted an approval by the Development Commissioner under sub-section (9) of section 15 of the SEZ Act, 2005. A copy of the said approval vide letter no. SSEZ/II/18/2007-08/603 dated 30.10.2007 is placed at page no. 908 of the Paper Book.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 13 of 25 25. Further, originally Development Commissioner, Surat Special Economic Zone granted approval to the assessee’s SEZ unit in respect of manufacturing of Gold, Silver, Platinum, Palladium, Coins (other than legal tenders), Plain Jewellery, Studded Jewellery & Articles thereof or combination thereof with or without Diamonds and/or semiprecious stones, Cut & Polished Diamonds, Semi Precious Stones {under chapter-71 of ITC (HS)} vide letter no. SSEZ/II/18/2007-08/663 dated 30.08.2007, copy of which is placed at page nos. 908 to 910 of Paper Book-III. However, the said certificate was amended vide letter no. SSEZ/II/018/2007- 08/824 dated 18.10.2007 wherein the assessee was granted approval for trading also which reads as under: “Government of India Ministry of Commerce & Industry, Office of the Development Commissioner Surat Special Economic Zone Near Sachin Railway Station, Diamond Park, Sachin, SURAT-394230. Phone No. (0261)2399247; 2397667; Fax No. (0261) 2399247. No. SSEZ/II/018/2007-08/824 Dated: 18th October, 2007
M/s Zaveri & Co. Pvt. Ltd. “Swagat”, C.G. Road, AHMEDABAD-380009.
Sub: Your proposal for Trading Activity in the Surat Special Economic Zone.
Reference:- LOA No. SSEZ/II/18/2007-08/663 dated 30-08- 2007
Dear Sirs,
I am directed to refer to your letter dated 18-09-2007, on the above subject and to convey the approval of the Competent Authority/Development Commissioner for broadbanding of Letter of Approval No. SSEZ/II/18/2007-08/663 dated 30-08- 2007 as amended, and to include Trading and Export of the following items with all the facilities and entitlements admissible to a unit in the Surat Special Economic Zone subject to the provisions of the Special Economic Zones Act, 2005 and the rules and orders made thereunder, from Unit No. 364, on Plot No. 239, Surat Special Economic Zone, Sachin, Surat in the State of Gujarat.
Authorized Operations:-
Sr. No. Activity 01 TRADING:- Trading of Gold, Silver, Platinum, Palladium, Bars, Coins (other than legal tenders) and Medallions. {under chapter-71 of ITC (HS)}
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 14 of 25
(1) CONDITIONS:- (i) You shall export the goods procured/imported, as per provisions of the Special Economic Zones Act, 2005 and Rules made there-under for a period of five years from the date of commencement of trading activities. For this purpose, you shall execute a fresh Bond-Cum-Legal Undertaking as prescribed under the Special Economic Zone Rules, 2006, for both manufacturing and trading operation consolidated.
(ii) You shall achieve positive Net Foreign Exchange (NFE) as prescribed in the Special Economic Zone Rules, 2006 for the period you operate as a Unit in the Special economic from the commencement of production, failing which you shall be liable for penal action under the Foreign Trade (Development and Regulation) Act, 1992.
(iii) You may import or procure from the Domestic Tariff Area all the items required for your authorized operations under this approval, except those promoted under the ITC (HS) Classifications of Export and Import Items.
(iv) The benefits under Section-10AA of the Income Tax Act, shall exclude trading other than trading in the nature of re-export of imported goods only. If you envisage DTA procurement, you shall maintain separate account, etc. as provided under SEZ Act and Rules there-under.
(v) Date of commencement of trading activities shall be intimated to the Development Commissioner.
(vi) You shall undertake trading activities in a segregated premises and separate account shall be maintained with proper identification.
(vii) You shall follow the RBI Regulations.
(2) If you fail to comply with the conditions stipulated above, this Letter of Approval shall be cancelled as per the provisions of the Special Economic Zones Act, 2005 and the rules and orders made there-under.
(3) This letter may be kept attached with the original Letter of Approval, as amended. All future correspondence may be addressed to the Development Commissioner, Surat SEZ.
Yours faithfully (R.P. Vaidya) Officer on Special Duty, For Development Commissioner Surat Special Economic Zone”
Copy of the said letter is placed at page nos. 911 to 913 of Paper Book-III. Further, validity of approval was renewed till 25.10.2017 vide letter no. SSEZ/II/18/2007-
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 15 of 25 08/1229 dated 17.01.2013, copy of which is placed at page no. 1282 of the Paper Book-IV.
Thus, we find that the assessee is entrepreneur as referred to in clause (j) of section 2 of the SEZ Act, 2005 who began to provide services during the previous year relevant to the Assessment Year 2008-09. Therefore, in our opinion, the Assessing Officer’s view that the assessee is entitled for deduction u/s 10AA cannot be held as an impossible view on the basis of the language employed u/s 10AA of the Act. The Commissioner of Income Tax considered that the assessee is not entitled for deduction u/s 10AA of the Act on the ground that net foreign exchange earning for the said unit is negative. In calculating net foreign exchange earning as negative, the Commissioner of Income Tax relied upon Export Promotion Council for EOUS and SEZS Circular no. 42 dated 26.03.2007 and viewed that the purchases made by the assessee from domestic tariff area should be treated as import and therefore, the purchase value should be reduced from the foreign exchange earnings of the assessee for calculating net foreign exchange earnings.
The Ld. Authorized Representative of the assessee pointed out that the said Export Promotion Council for EOUS and SEZS Circular no. 42 dated 26.03.2007 contains only a proposed change in Rule 53 of SEZ Rules, 2006 but that change has not yet been incorporated. In support of the above, the Authorized Representative of the assessee filed before us clarification dated 27.02.2014 issued by Export Promotion Council for EOUS and SEZS no. EDC/SEZ/AM04/A.14 dated 26.02.2014 which reads as under:
“From EPCES HO epces@epces.in Sent: Thu, 27 Feb. 2014 13:02:02:05 To “Mr. Mrugesh Shah” mrugesh@zaveriandco.in
Subject: Clarification-reg.
Export Promotion Council for EOUS and SEZS Ministry of Commerce & Industry, Government of India 8G, Hansalaya Building, 15, Barakhamba Road, New Delhi-110001. Tel:23329767, 23329768, 23329769 Fax No. 011-23329770
O.P.Kapoor No. EPC/SEZ/AM04/A.14 Dy. Director General February 26 2014 Mobile: 9810850501
Dear Sir,
This is with reference to your email regarding applicability of circulars on SEZs, in this regard, we are to inform you as under:
As regards circular issued by EPCES N.16/2007-08 dated 11/7/07, kindly note that this circular is meant for EOUs only.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 16 of 25 2. As regards EPCES Circular No. 42 dated 26/3/07, this suggestion was not included in SEZ Rule 53. To read the updated SEZ Rule 53, please visit website www.sezindia.nic.in.
As regards Circular No. 12/2008-Customs dated 24/7/08, this circular is also meant for EOUs only.
Kindly note that EPCES has shifted its premises from Bhikaji Cama Bhawan to its own premises as the address mentioned above, kindly note the new address and contact details.
With warm regards, Yours Sincerely
(O.P. Kapoor) Dy. Director General”
The Authorized Representative of the assessee also submitted before us a clarification issued by the Government of India, Ministry of Economic and Industry, office of the Development Commissioner, Surat Special Economic Zone dated 03.03.2014 which reads as under:
“Government of India Ministry of Commerce & Industry, Office of the Development Commissioner Surat Special Economic Zone Near Sachin Railway Station, Diamond Park, Sachin, Surat.
No.SSEZ/II/18/2007-08/1408 dated 3rd March 2014
To,
M/s Zaveri & Co. Pvt. Ltd. Unit No. 364 on Plot No. 239 Surat Special Economic Zone, Surat.
Gentlemen,
Sub: Request for clarification –reg.
Please refer to your letter 27.02.2014 on the above mentioned subject and in this connection it is to clarify that:
a. EPCES Circular No. 16/2007 is not applicable to SEZs. It pertains to EOUs only.
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 17 of 25 b. Regarding EPCES Circular No. 42, it is only a suggestion by EPCES however, the suggestions have not been incorporated in SEZ Act/Rules so far.
c. Circular No.12/2008-Cus is not applicable to SEZs. It pertains to EOUs only.
It is also to clarify that though SEZs and EOUs, both are export promotion schemes, they are governed by different provisions. SEZs are governed by SEZ Act, 2005 and Rules framed thereunder. 100% EOUs are governed by Foreign Trade Policy.
Yours sincerely
(Vijay N Shewale) Development Commissioner Surat Special Economic Zone”
Further, the Ld. Authorized Representative of the assessee pointed out that the assessee has received a renewal from Development Commissioner, Surat Special Economic Zone on 17.01.2013 upto a period of 5 years i.e. upto 25.10.2017 which conclusively proves that the annual performance report submitted by the assessee before the SEZ authorities showing positive net foreign exchange earnings were in accordance with the SEZ Act and SEZ Rules and the assessee complied with SEZ Act and SEZ Rules.
The Ld. Authorized Representative also pointed out that the approval committee of SEZ, who examined and approved the annual performance report filed by the assessee consists of various persons including Commissioner of Income Tax and they have not found any defect while monitoring assessee’s working achieving positive net foreign exchange earnings as submitted in the annual performance report.
We find that no material has been brought on record by the Revenue to controvert the above submission of the assessee. Further, we find that the Hon’ble Supreme Court in the case of Gestatner Duplicators Private Ltd. Vs. CIT 117 ITR 1 (SC) held as under:
“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 r.4. 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 implied that the provident fund satisfies all the conditions under r. 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 r. 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
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 18 of 25 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.”
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 ITR 411 (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. Therefore, in our considered view, it cannot be held that the view adopted by the Assessing Officer in holding that the assessee is entitled for deduction u/s 10AA of the Act was not a possible view. Therefore, the interference by the Commissioner of Income Tax with that view of the Assessing Officer in purported exercise of power available to him u/s 263 cannot be sustained. We, therefore, cancel the order of the Commissioner of Income Tax on this issue.
As a consequence of our finding, we delete the order of the Commissioner of Income Tax to the extent it was held the assessee is not entitled to exemption u/s 10AA of the Act both while computing the income as per normal provisions of the Act and book profit u/s 115JB of the Act.
Before parting with this issue, we would like to observe that in view of the instruction no. 4 of 24.05.2006 quoted above, deduction u/s 10AA is not available to the assessee in respect of profit relating to trading activities wherein goods for export were procured from domestic tariff area. However, we find that in the instant case, it is not the case of the Revenue that benefit of section 10AA was allowed to the assessee by the Assessing Officer in the assessment order in respect of income arising from goods exported by procuring the same from domestic tariff area. Therefore, no interference by us in this respect is called for.”
We see no reasons to take any other view of the matter than the view so taken by the co-ordinate bench, which is what the learned CIT(A) has, in the impugned order, concluded as well. Respectfully following the co-ordinate bench decision, we uphold the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. 26. Ground nos.2 & 3 are thus dismissed. 27. In ground no.5, the Assessing Officer has raised the following grievance :-
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 19 of 25
“5. Whether the Ld. CIT(A) is right in law and on facts in allowing the disallowance of brought forward losses and unabsorbed depreciation pertaining to A.Y. 2008-09 against the current year’s income.”
Learned Representatives fairly agree that the relief granted by the learned CIT(A) was only consequential upon the co-ordinate bench decision allowing the claim, and that this grievance does not require any independent adjudication on merits. 29. Ground no.5 is thus dismissed as infructuous. 30. In ground no.6, the Assessing Officer has raised the following grievance:-
“6. Whether the Ld. CIT(A) is right in law and on facts in deleting the disallowance of Rs.2,23,90,593/- made on account of deduction u/s.80IA of the I.T. Act.”
The issue in appeal lies in a very narrow compass of material facts. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of Rs.2,23,90,593/- under section 80IA in respect of income from windmills but these windmills had commenced production in the assessment year 2004-05. The Assessing Officer, on perusal of year wise working of losses submitted by the assessee, further observed that if brought forward losses of windmills are set off against their current year’s profits, there will be no profit for the year under consideration. The Assessing Officer further observed that, as evident from the provisions of section 80IA(5), the profit from eligible business, for the purpose of determination of quantum of deduction under section 80IA, has to be computed after deduction of notional brought forward losses and depreciation of eligible business, though they have been set off against other income of earlier years. In support of this proposition he relied upon a special bench decision in the case of ACIT vs. Goldmine Shares and Finance Limited (113 ITD SB 209). It was in this backdrop, and relying upon CBDT Circular No.281 dated 22.09.1980, the Assessing Officer declined the deduction under section 80IA to the tune of Rs.2,23,90,593/-. Aggrieved, assessee carried the matter in appeal before the learned CIT(A) who reversed the stand of the Assessing Officer and observed as follows :- “8.2 I have considered the assessment order, facts of the case and the submissions made by the appellant, as well as the judicial decisions 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 ITAT Ahmedabad in the case of ACIT Vs. Goldmine Shares and Finance Pvt. Ltd. wherein it was held that as per section 80IA(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 Madras High Court in the case of Velayudhaswamy Spinning Mills vs ACIT 340 ITR 463, decided a similar issue in favour of the
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 20 of 25 appellant on an identical issue. The decision of the Hon Madras High Court has been followed by the Hon ITAT, Ahmedabad in its decision in the case of Sadbhav Engineering ltd Vs DCIT in ITA Nos. 610/Ahd/2008, 1834 & 2054/Ahd/2009, 1835 & 2055/Ahd/2009 and 2053/Ahd/2009, wherein the Hon tribunal has held as under :-
"6.1 We find that section 80IA 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 provisions of this 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 15years is the outer limit within which the assessee can choose the period of claiming the deduction. Sub-section (5) is a non-obstante clause which deals with the quantum of deduction for an eligible business. The relevant provisions of sub-section (5) of section 80IA, 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 purpose 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 year and to every subsequent assessment year upto 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 purpose of determining the quantum of deduction under section 80IA, 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 year. It nowhere defines as to what is the initial assessment year. Prior to 1st April, 2000, the initial assessment year was defined for various types of eligible assessees under section 80IA(12). However, after the amendment brought in statute 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 80IAfrom 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 forward as stipulated in section 80IA(5). The loss prior to the initial assessment year which has already been set off cannot be brought forward and adjusted into the period of
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 21 of 25 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 the 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)."
8.2.1 The CBDT has also recently 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 80IA(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 a 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 i.e. ITAY 2011-12, the appellant exercised the option under s. 80-IA(2). During the relevant period, there was no unabsorbed depreciation or loss of the eligible undertakings 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).
8.2.2 Considering that the matter has now been clearly decided by the Board's Circular as well as by the various decisions cited supra, the disallowance of deduction u/s. 80IA(5) made by the Assessing Officer is deleted. Grounds of appeal Nos. 9 & 10 are allowed.”
The Assessing Officer is aggrieved of the relief so granted by the learned CIT(A) and is in appeal before us. 33. 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. 34. We find that the special bench decision in the case of Goldmine Shares (supra) did not find favour with Hon’ble Courts above. Hon’ble Madras High Court, in the case of Velayudhaswamy Spinning Mills Pvt. Ltd. vs. ACIT (340 ITR 477) rejected that school of thought and observed as follows :- 17. From a reading of sub-section (1), it is clear that it provides that where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4), i.e., referred to as the eligible business, there shall, in accordance with and subject to the provisions of the section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100 per cent. of the profits and gains derived from such business for ten consecutive assessment years. Deduction is given to eligible business and the same is defined in sub-section (4). Sub-section (2) provides option to the assessee to choose 10 consecutive assessment years out of 15 years. Option has to be exercised, if it is not exercised, the assessee will not be getting the benefit. Fifteen years is outer limit and the same is beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure activity, etc. Sub- section (5) deals with quantum of deduction for an eligible business. The words "initial assessment year" are used in sub-section (5) and the same is not defined under the provisions. It is to be noted that "initial assessment year" employed in sub-
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 22 of 25 section (5) is different from the words "beginning from the year" referred to in sub- section (2). The important factors are to be noted in sub-section (5) and they are as under : "(1) It starts with a non obstante clause which means it overrides all the provisions of the Act and other provisions are to be ignored ; (2) It is for the purpose of determining the quantum of deduction ; (3) For the assessment year immediately succeeding the initial assessment year; (4) It is a deeming provision ; (5) Fiction created that the eligible business is the only source of income ; and (6) During the previous year relevant to the initial assessment year and every subsequent assessment year."
From a reading of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to the initial assessment year and every subsequent assessment years. When the assessee exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years which were already set off against the income of the assessee. Looking forward to a period of ten years from the initial assessment is contemplated. It does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplates to bring set off amount notionally. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created. 19. In the present cases, there is no dispute that losses incurred by the assessee were already set off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee exercised the option under section 80-IA(2). In Tax Case Nos. 909 of 2009 as well as 940 of 2009, the assessment year was 2005-06 and in Tax Case No. 918 of 2008 the assessment year was 2004-05. During the relevant period, there were no unabsorbed depreciation or loss of the eligible undertakings and the same were already absorbed in the earlier years. There is a positive profit during the year. The unreported judgment of this court cited supra considered the scope of sub-section (6) of section 80-I, which is the corresponding provision of sub-section (5) of section 80-IA. Both are similarly worded and, therefore, we agree entirely with the Division Bench judgment of this court cited supra. In the case of CIT v. Mewar Oil and General Mills Ltd. (No. 1) [2004] 271 ITR 311 (Raj) ; [2004] 186 CTR (Raj) 141, the Rajasthan High Court also considered the scope of section 80-I and held as follows (page 314 of 271 ITR) : "Having considered the rival contentions which follow on the line noticed above, we are of the opinion that on finding the fact that there was no carry forward losses of 1983-84, which could be set off against the income of the current
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 23 of 25 assessment year 1984-85, the recomputation of income from the new industrial undertaking by setting off the carry forward of unabsorbed depreciation or depreciation allowance from previous year did not simply arise and on the finding of fact noticed by the Commissioner of Income-tax (Appeals), which has not been disturbed by the Tribunal and challenged before us, there was no error much less any error apparent on the face of the record which could be rectified. That question would have been germane only if there would have been carry forward of unabsorbed depreciation and unabsorbed development rebate or any other unabsorbed losses of the previous year arising out of the priority industry and whether it was required to be set off against the income of the current year. It is not at all required that losses or other deductions which have already been set off against the income of the previous year should be reopened again for computation of current income under section 80-I for the purpose of computing admissible deductions thereunder. In view thereof, we are of the opinion that the Tribunal has not erred in holding that there was no rectification possible under section 80-I in the present case, albeit, for reasons somewhat different from those which prevailed with the Tribunal. There being no carry forward of allowable deductions under the head depreciation or development rebate which needed to be absorbed against the income of the current year and, therefore, recomputation of income for the purpose of computing permissible deduction under section 80-I for the new industrial undertaking was not required in the present case. Accordingly, this appeal fails and is hereby dismissed with no order as to costs." 20. From a reading of the above, the Rajasthan High Court held that it is not at all required that losses or other deductions which have already been set off against the income of the previous year should be reopened again for computation of current income under section 80-I for the purpose of computing admissible deductions thereunder. We also agree with the same. We see no reason to take a different view. 21. The standing counsel appearing for the Revenue is unable to bring to our notice any relevant material or any compelling reason or any contra judgment of other courts to take a different view. He only relied heavily on the Memorandum explaining the provisions in the Finance (No. 2) Bill, 1980, [1980] 123 ITR (St.) 154 to support this case and the same reads as follows : "Clause 30(iii). In computing the quantum of 'tax holiday' profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such units were an independent unit owned by a taxpayer who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of deduction admissible under the new section 80-I even though they may have been set off against the profits of the taxpayer from other sources." 22. We are not agreeing with the counsel for the Revenue. We are, therefore, of the view that loss in the year earlier to the initial assessment year already absorbed against the profit of other business cannot be notionally brought forward and set off
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 24 of 25 against the profits of the eligible business as no such mandate is provided in section 80-IA(5). 23. Under these circumstances, we set aside the order of the Tribunal and answer all the questions in favour of the appellant/assessee and against the Revenue in Tax Case Nos. 909 and 940 of 2009 respectively. Accordingly, tax cases are allowed.”
We have also noted that the Central Board of Direct Taxes, vide Circular No.1/2016 dated 15.12.2016, clarified that the initial year, for the purpose of section 80IA(5), is not the year in which production has commenced but it is first year of claim of deduction at the assessee’s choice out of block of 10 years. Hon’ble Madras High Court, in the case of CIT Vs. GRT Jewellers (India) Pvt Ltd has followed the same approach and held so. In the present year, the assessee has exercised that option and the losses incurred earlier were already set off and adjusted against the profits of the earlier years. There was thus no unabsorbed depreciation or loss of the earlier years. The claim of the assessee was thus correct, and the learned CIT(A) was justified in granting the impugned relief. We approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
Ground no.6 is thus dismissed.
In ground no.7, the Assessing Officer has raised the following grievance : “Whether the Ld. CIT(A) is right in law and on facts in restricted the disallowance to Rs.36,83,567/- out of total disallowance of Rs.6,23,83,485/- made on account of 14A of the Act.”
Learned Representatives fairly agree that this issue is also covered in favour of the assessee, by Hon’ble jurisdictional High Court’s judgement in the case of Corrtech Energy Pvt. Ltd. (372 ITR 97) inasmuch as disallowance under section 14A cannot exceed the tax exempt earning itself, and that is the approach adopted by the learned CIT(A) in granting the impugned relief. We, therefore, approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
Ground no.7 is thus dismissed.
In the result, the appeal of the revenue is dismissed.
To sum up, both the appeals are dismissed. Pronounced in the open Court today on the 4th day of March, 2019.
Sd/- Sd/- Justice P P Bhatt Pramod Kumar (President) (Vice President) Ahmedabad, dated the 4th day of March, 2019
ITA Nos.630 & 864 /Ahd/2017 Assessment Year: 2011-12 Page 25 of 25
Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File
By order