M/S GRANITE MART LIMITED vs THE INCOME-TAX OFFICER

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 19TH DAY OF MARCH 2020

PRESENT

THE HON’BLE MR. JUSTICE ALOK ARADHE

AND

THE HON’BLE MR. JUSTICE M. NAGAPRASANNA

I.T.A. NO.28/2011 C/W I.T.A. NO.29/2011, I.T.A. NO.108/2013 I.T.A. NO.540/2013 & I.T.A. NO.193/2014

I.T.A. NO.28/2011

BETWEEN:

M/S. GRANITE MART LIMITED REP. BY ITS MANAGING DIRECTOR SRI. KAMAL KUMAR AGARWAL 41-D, KIADB INDUSTRIAL AREA HOSKOTE, BANGALORE. ... APPELLANT (BY MR. A. SHANKAR, SENIOR COUNSEL A/W MS. M. LAVA, ADV.,)

AND:

THE INCOME-TAX OFFICER WARD-11(2), R.P. BHAVAN NRUPATHUNGA ROAD OPP. TO RBI, BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.)

THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 17-9-2010 PASSED IN ITA

NO.22/BANG/2010 FOR THE ASSESSMENT YEAR 2005-06, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE TRIBUNAL IN ITA NO.22/BANG/2010 DATED 17/9/2010, IN THE INTEREST OF JUSTICE AND EQUITY.

I.T.A. NO.29/2011

BETWEEN:

AND:

THE INCOME-TAX OFFICER WARD-11(2), R.P. BHAVAN NRUPATHUNGA ROAD OPP. TO RBI, BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - -

THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 17-9-2010 PASSED IN ITA NO.763/BANG/2010 FOR THE ASSESSMENT YEAR 2006-07, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE TRIBUNAL IN ITA NO.763/BANG/2010 DATED 17/9/2010, IN THE INTEREST OF JUSTICE AND EQUITY.

I.T.A. NO.108/2013

BETWEEN:

AND:

THE INCOME-TAX OFFICER WARD-11(2), R.P. BHAVAN NRUPATHUNGA ROAD OPP. TO RBI, BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 9-11-2012 PASSED IN ITA NO.354/BANG/2012 FOR THE ASSESSMENT YEAR 2008-09, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE ITAT, BANGALORE, ‘B’ BENCH BEARING ITA NO.354/BANG/2012 DATED 9/11/2012, IN THE INTEREST OF JUSTICE AND EQUITY.

I.T.A. NO.540/2013

BETWEEN:

AND:

THE INCOME-TAX OFFICER WARD-11(2), 5TH FLOOR R.P. BHAVAN, NRUPATHUNGA ROAD OPP. TO RBI, BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 8-8-2013 PASSED IN ITA NO.1193/BANG/2012 FOR THE ASSESSMENT YEAR 2009-10, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE ITAT IN ITA NO.1193/BANG/2012 DATED 8/8/2013, ANNEXURE-A.

I.T.A. NO.193/2014

BETWEEN:

AND:

THE INCOME-TAX OFFICER WARD-11(2), R.P. BHAVAN NRUPATHUNGA ROAD OPP. TO RBI, BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 10-2-2014 PASSED IN ITA NO.975/BANG/2013 FOR THE ASSESSMENT YEAR 2007-08, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE

APPELLANT. TO ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE TRIBUNAL IN ITA NO.975/BANG/2013 DATED 10/2/2014.

THESE ITAs COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:

JUDGMENT

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short) has been filed by the assessee which is a company registered under the Companies Act, 1956 and is a 100% export oriented unit engaged in the business of manufacture and export of granites, slabs and monuments. The seminal issue, which arises for consideration in this appeal is whether the appellant is entitled for a deduction under Section 10B of the Act in respect of exports made to third parties and inter unit transfers. I.T.A.No.28/2011 pertains to assessment year 2005-06, whereas I.T.A.No.29/2011 relates to assessment year 2006-07. Similarly, I.T.A.No.193/2014 pertains to assessment year 2007-08 and I.T.A.No.108/2013 pertains to assessment year 2008-09, whereas I.T.A.No.504/2013 relates to assessment year 2009-10. I.T.A.No.29/2011 was

admitted by a bench of this court vide order dated 11.07.2011 on the following substantial questions of law:

(i) Whether the Tribunal was justified in law in holding that the exports made through third parties and inter unit transfers are not entitled for deduction under Section 10B of the Act on the facts and circumstances of the case and consequently gave a perverse finding?

(ii) Whether the authorities below are justified in law in not appreciating the sales made to their parties as well other export oriented units are deemed exports under EXIM policy and should also be treated as export under Section 10B of the Act on the facts and circumstances of the case?

(iii) Whether the authorities below are justified in law in charging interest under Section 234B and 234C of the Act on the facts and circumstance of the case?

Since, in all the appeals common questions of law arise for consideration, they were heard analogously and are being decided by this common judgment.

I.T.A.NO.28/2011 3. The appellant filed its return of income for the assessment year 2005-06 and declared total income of Rs.1,88,920/- after claiming deduction of Rs.1,88,14,242/- under Section 10B of the Act. The return of income of the appellant was selected for scrutiny and notices under Section143(2) and 142(1) of the Act were issued to the appellant. The Assessing Officer allowed the deduction under Section 10B of the Act only to the extent of direct export made by the appellant and disallowed the claim for deduction under Section 10B of the Act in respect of the sales made through third parties i.e., export houses and inter unit transfers. The Assessing Officer determined the income of the appellant as Rs.1,09,72,680/- as against the income declared by the appellant of Rs.1,88,920/- and passed an order under Section 143(3) of the Act. The Assessing Officer restricted the claim under Section 10B of the Act to Rs.80,30,476/- as against Rs.1,88,14,242/- claimed by the appellant. Being aggrieved, the appellant preferred an appeal before Commissioner of Income Tax (Appeals) who by an order dated 28.08.2009 dismissed the claim of the appellant.

The appellant thereafter approached the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). The Tribunal by placing reliance in case of ‘TATA ELEXI LTD. VS. ACIT, 15 TTJ 423 partly allowed the appeal of the appellant in respect of sales made to other export oriented units and third parties and passed common order for assessment years 2005-06 and 2006-07 and held that the appellant company is not entitled for deduction under Section 10B of the Act.

ITA NO.29/2011: 4. The appellant filed the return of income for the assessment year 2006-07 on 3.11.2006 declaring the total income of RS.4,59,860/- after claiming deduction under Section 10B of the Act of Rs.2,71,50,014/-. The assessing officer vide order dated 31.12.2008 determined the total income of the appellant at Rs.88,50,320/- as against the income declared by the appellant to the tune of Rs.4,59,850/- and passed an order under Section 143(3) of the act and restricted the claim of the appellant under Section 10B to Rs.1,87,51,558/- as

against

Rs.2,71,50,014/- as claimed by the appellant. Being aggrieved, the appellant filed an appeal before Commissioner of Income Tax (Appeals) who by an order dated 17.05.2010 dismissed the appeal. Being aggrieved , the appellant filed an appeal before the Tribunal, the Tribunal by an order dated 17.09.2010 partly allowed the appeal preferred by the appellant. ITA NO.193/2014: 5. The appellant filed the return of income for the assessment year 2007-08 and declared the total income as Rs.1,76,040/- after claiming deduction under Section 10B of the Act to the tune of RS.2,73,34,530/-. The case of the appellant was selected for scrutiny. The assessing officer passed an order under Section 143(3) of the Act on 24.12.2009 and determined the total income of the appellant at Rs.58,44,300/- as against the income declared by the appellant which was Rs.1,76,040./-. The assessing officer restricted the claim of deduction under Section 10B to Rs.2,16,66,271/- as against Rs.2,73,34,540/- as claimed by the appellant. Being aggrieved, the appellant filed an appeal before the Commissioner of Income Tax (Appeals) who by an

order dated 08.02.2013 partly allowed the appeal. Being aggrieved, the appellant approached the Tribunal. The Tribunal by order dated 10.02.2014 dismissed the appeal preferred by the appellant.

ITA No.108/2013: 6. The appellant field the return of income for the assessment year 2008-09 on 30.09.2008 and declared total income of Rs.3,35,997/- after claiming deduction under Section 10B of the Act in respect of sum of Rs.2,01,44,161/-. The assessing officer passed an order under Section 143(3) of the Act on 28.12.2010 and determined the total income of the appellant Rs.96,48,260/- as against the income declared by the appellant of Rs.3,35,997/-. The assessing officer restricted the claim of deduction under Section 10B to Rs.1,08,31,895/- as against claim of Rs.2,01,44,161/- claimed by the appellant. Being aggrieved by the order of the assessing officer, the appellant filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 10.01.2012 partly allowed the appeal. Thereafter, the appellant approached the Tribunal by filing an appeal. The

Tribunal by an order dated 09.11.2012 dismissed the appeal filed by the appellant.

ITA No.540/2013: 7. The appellant field the return of income for the assessment year 20009-10 on 30.09.2008 and declared total income of Rs.5,87,630/- after claiming deduction under Section 10B of the Act in respect of sum of Rs.1,39,39,292/-. The assessing officer passed an order under Section 143(3) of the Act on 28.12.2010 and determined the total income of the appellant Rs.60,33,690/- as against the income declared byt eh appellant of Rs.5,87,630/-. The assessing officer restricted the claim of deduction under Section 10B of the Act to Rs.84,93,233/- as against claim of Rs.1,39,39,292/- claimed by the appellant. Being aggrieved by the order of the assessing officer, the appellant filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 31.07.2012 partly allowed the appeal. Thereafter, the appellant approached the Tribunal by filing an appeal. The Tribunal by an order dated 08.08.2013 dismissed the appeal filed by the appellant.

In all the aforesaid assessment years, the appellant has been denied deduction in respect of deemed exports through third party and inter unit transfers.

Learned Senior counsel for the appellant submitted that the Tribunal denied the deduction by following the decision of coordinate bench in Tata Elxi Ltd., which was reversed by this court vide order dated 20.10.2014 passed in ‘M/S TATA ELXI LTD. VS. CIT’, ITA NO.411/2008. It is further submitted that the Tribunal grossly erred in holding that 398 parties were involved in fact 398 are the number of transactions which has been noticed by the assessing officer in para 2.1 and 2.2 of its order for the assessment year 2005-06. It is also urged that the Assessing Officer examined two of the major parties with whom the assessee had transacted viz., S.K.International, New Delhi and M/s Glittek Granites Limited and they had given their response and had stated they had not claimed exemption. It is further submitted that the question of duplication does not arise as each person can claim on the value addition by him and the presumption that there can be duplications itself is contrary

to principle of accountancy and computation of income under the Act. In support of aforesaid submissions, reliance has been placed on the decision in ‘TATA ELXSI LTD. VS. ACIT, ITA NO.411/2008 DATED 20.10.2014, ‘DCIT VS. METAL CLOSURES (P) LTD.’, 102 TAXMANN.COM 72 (SC), ‘ METAL CLOSURES (P) LTD., DCIT’, 102 TAXMANN.COM 71 (KAR) AND ‘PCIT VS. INTERNATIONAL STONES INDIA (P) LTD’, 95 TAXMANN.COM 287 (KAR).

10.

On the other hand, learned counsel for the revenue did not dispute the proposition of law laid down in the aforesaid decisions. However, it is submitted that each transaction has to fulfill the condition of eligibility under Section 10A of the Act. It is further submitted that in the cases, on which the reliance has been placed there was no factual dispute. It is further submitted that a trader may obtain the material from the appellant and may not export it at all and the aforesaid aspects of the matter therefore requires factual adjudication. It is urged that the matter be remitted for adjudication of the factual aspects.

11.

We have considered the submissions made on both the sides and have perused the record. Section 10A of the Act is relevant for the purpose of controversy involved in this batch of appeals is reproduced below for the facility of reference: 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into

a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or produce such articles or things or computer software in such free trade zone or export processing zone : Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years. (1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be,— (i) hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles

or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter; (ii) for the next three 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 Allowance Reserve Account") to be created and utilised for the purposes of the business of the assessee in the manner laid down in sub-section (1B) : Provided that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139. (1B) The deduction under clause (ii) of sub-section (1A) shall be allowed only if the following conditions are fulfilled, namely:— (a) the amount credited to the Special Economic Zone Re-investment Allowance Reserve Account is to be utilised— (i) for the purposes of acquiring new machinery or plant which is first put to use before the expiry of a period of three years next following the previous year in which the reserve was created; and

(ii) until the acquisition of new machinery or plant as aforesaid, for

the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India;

(b) the particulars, as may be prescribed in this behalf, have been furnished by the assessee in respect of new machinery or plant along with the return of income for the assessment year relevant to the previous year in which such plant or machinery was first put to use. (1C) Where any amount credited to the Special Economic Zone Re-investment Allowance Reserve Account under clause (ii) of sub-section (1A),— (a) has been utilised for any purpose other than those referred to in sub-section (1B), the amount so utilised; or (b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-section (1B), the amount not so utilised, shall be deemed to be the profits,— (i) in a case referred to in clause (a), in the year in which the amount was so utilised; or (ii) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of sub-section (1B),………… and shall be charged to tax accordingly. (2) This section applies to any undertaking which fulfils all the following conditions, namely :— (i) it has begun or begins to manufacture or produce articles or things or computer

software during the previous year relevant to the assessment year— (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.

12.

Thus, from perusal of Section 10A of the Act, it is evident that the intention of the legislature is to encourage establishment of export oriented industries with the object of

receiving convertible foreign exchange. In order to claim deduction under Section 10A of the Act, the conditions laid down under Section 10A(2) have to be complied with. It is pertinent to mention here that in INTERNATIONAL STONES INDIA P. LTD., supra, a division bench of this court has held that a narrow and pedantic approach cannot be applied in construing the words “by an undertaking” and restricting the benefit under Section 10B of the Act only in respect of direct export of such goods manufactured by such units. The deemed export by the assessee undertaking even through third party who has exported such goods to foreign country and has fetched foreign currency for India still remains a deemed export in the hands of the assessee undertaking also. The aforesaid decision was proved by another division bench of this court in the case of METAL CLOSURES STEEL LTD., supra, which has been affirmed by the Supreme Court. In view of aforesaid enunciation of law, it is evident that the appellant is entitled to benefit of deduction under Section 10B of the Act in respect of export made to third parties and inter unit transfers. So far as submission made by learned counsel for the revenue that the

matter requires factual adjudication and therefore, should be remitted is concerned, suffice it to say that there were in all approximately 40 parties with whom the appellant had entered into 398 transactions. Out of the aforesaid 2 parties, the Assessing Officer had examined 2 of the major parties viz., S.K.Inernational, New Delhi and M/s Glittek Granites Ltd., who had stated before the Assessing Officer that they had not claimed any exemption. Under Rule 16E of the Income Tax Rules, 1962 The report of an accountant which is required to be furnished by the assessee along with the return of income, under sub-section (5) of section 10B shall be in Form No. 56G. The aforesaid report has been furnished by the appellants and it is not the case of the revenue the appellants have not furnished the aforesaid report. Besides this, it is pertinent to mention here that the question of duplications in the fact situation of the case does not arise as each person can claim only on the value addition by him and the presumption that there can be duplication is contrary to the principle of computation of the income under the Act.

In view of the preceding analysis, the substantial questions of law are answered in favour of the assessee and against the revenue. In the result the order passed by the Income Tax Appellate Tribunal as well as the Commissioner of Income Tax (Appeals) insofar as it disallows the claim of the appellant with regard to transactions through third parties and inter-unit transfers is hereby quashed and the assessee is held entitled to the benefit of deduction under Section 10B of the Act in respect of third parties and inter unit transfers as well. In the result, the appeals are allowed.

Sd/- JUDGE

M/S GRANITE MART LIMITED vs. THE INCOME-TAX OFFICER