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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM
Assessee by: None. Revenue by: Shri H. P. Meena, CIT(DR) Date of Hearing : 28/03/2022 Date of Pronouncement : 15/06/2022 आदेश / O R D E R
PER Dr. A. L. SAINI, ACCOUNTANT MEMBER:
This captioned appeal filed by the Revenue and Cross-Objection filed by Assessee, pertaining to the Assessment Year (AY) 2010-11, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)-II, Surat [in short “the ld. CIT(A)”] in Appeal No. CAS/II/192/2013-14 dated 13.03.2016, which in turn arises out of an assessment order passed by the Assessing Officer u/s.143(3) of the Income Tax Act, 1961 [hereinafter referred to as the “Act”].
Grounds of appeal raised by the Revenue are as follows: “[1] On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of exemption u/s.l0AA despite the fact that the assessee did not have adequate and sufficient fixed assets, manpower and power/ ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports fuel to carry out any manufacturing or processing activity to the extent shown by the assessee. [2] On the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in holding that provisions of the SEZ Act have overriding effect over provision of section 10AA of the Income-tax Act. [3] On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer as the assessee has done trading activity to the extent of assessed as such. [4] It is, therefore, prayed that the order of the CIT (A) may be set aside and that of Assessing Officer may be restored.”
The Grounds of appeal
raised by Assessee in CO No.91/AHD/2016 are as follows: “1. In law and in the facts and circumstances of the case, the Ld CIT(A) has erred in not allowing deduction u/s 10AA on interest income of Rs.8,94,992/- when such income has been earned on FD made out of business compulsion and forms part of business income eligible for deduction u/s 10AA. The Assessing Officer shall be directed to allow deduction u/s 10AA on such interest income.
2. The respondent craves leave to add, amend and/or alter the ground or grounds of Cross-objections either before or at the time of hearing.”
First we shall take Revenue’s appeal in 2010-11.
Succinct facts are that grounds raised by the Revenue pertain to deduction u/s 10AA of the Act. During the assessment proceedings, the Assessing Officer observed that assessee had claimed deduction u/s 10AA of the Act amounting to Rs.3,62,92,500/-. The Assessing Officer noted that assessee was not in manufacturing activity and only doing trading activity which was strengthened by the fact that there was no shortage of the quantity which normally happens in manufacturing process, no closing stock, very less electricity consumption, very few machines and workers were not produced for examination. Therefore, the Assessing Officer held that the production of Rs.28,60,43,090/- is not justified with consumption of 3751 electric units and 10 workers of which are 3 are administrative staff. The Assessing Officer disallowed the claim of deduction of Rs.3,71,87,492/- ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports (Rs.3,62,92,500 +Rs.8,94,992) u/s 10AA of the Act and added to the income of the assessee.
On appeal, ld CIT(A) deleted the addition partly, observing as follows: “6.2.2. During the appellate proceedings, it was found that the bifurcation of the total turnover on the basis of the activity is as following:- Sr.No Activity Turnover (In Rs.) 1 Manufacturing and export of Diamond Studded 7,80,72,096 Gold Jewellery. 2 Trading in the nature of Re-Export of Imported 9,84,21,554 6 Cut and Polished Diamond . 3 Merchandise Trading in the nature of Re-Export 10,95,49,440 2 of Imported Textile Embroidery Design . Total 28,60,43,090 3 The assessee during the course of the appellate proceedings admitted that merchandise trading in the nature of re-export of Imported Textile Embroidery Design of Rs.10,95,49,440/- which is part of the total turnover of Rs.28,60,43,090/- claimed for deduction u/s 10AA of the Act is not eligible for deduction u/s 10AA of the Act as the assessee had no permission or license to carry out the above activity. The assessee as per order sheet order dated 02.1.2015 was asked to submit the profit of working of merchandise selling of embroidery design and the expenses related to this activity. The assessee vide his letter dated 08.1.2015 submitted the working of the profit from the merchandise selling of embroidery design as following: Income Amount Export sales of Textile Embroidery Design 109549440 Total 109549440 Direct Expenses Import purchase of Textile Embroidery Design 99564288 Export Exchange Loss (on Textile Embroidery Design) 5683867 Import exchange Gain (On Textile Embroidery Design) 4346865 Bank Charges 82364 Total 100983654 Profit without considering indirect expenses 8565786 Less: Indirect Expenses in proportionate to Turnover (As 391905 per Annexure:1) 8173881 Net Profit relating to Merchant Trading of Embroidery Design 6.2.4. The Assessing Officer was issued a letter dated 22.04.2015 asking him to submit a report on the following issue:-
ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports "In this case the assessee had claimed exemption u/s 10AA of the Act. The Assessing Officer has disallowed the entire deduction u/s 10AA of the Act amounting to Rs.3,62,92,500/-. The assessee had claimed profit from Merchant Exports of Textile Embroidery Design and the total export sales from Textile Embroidery Design was shown of Rs.10,95,49,440/- During the appellate proceedings, the assessee admitted that the trading of the embroidery design was not allowable as no permission or license was issued by the Competent Authority of SEZ. The assessee was asked to provide the breakup of the expenses related to Merchant Exports of Textile Embroidery Design which have been claimed during the year but will not be allowed in view of the above facts, The assessee has provided a calculation of the expenses related to Merchant Exports of Textile Embroidery Design. You are directed to examine the claim of the assessee regarding the expense pertaining to Merchant Exports of Textile Embroidery Design and furnish your report. You are also directed to examine whether the assessee has claimed similar income from the sale of Merchant Exports of Textile Embroidery Design in the previous or subsequent Financial Years, The report may be sent to this office by 30.04.2015." 6.2.5. The Assessing Officer vide his letter dated 22.02.2016 has submitted his report as following:- "In this connection it is submitted that I have verified the details of the expenses relating to the Merchant Export of Textile Embroidery Design business with the books of accounts and other relevant bills & vouchers. On verification it is found that net profit from Merchant Trading of Embroidery Design business claimed by the assesses at Rs.81,73,881/- appears genuine. The assessee has not declared similar income from the sale of Merchant Export of Textile Embroidery Design in the immediately preceding year or in the subsequent financial years in the return of income.” 6.2.6. In view of the above facts, it is seen that in this case the assessee had claimed exemption u/s 10AA of the Act. The Assessing Officer has disallowed the entire deduction u/s 10AA of the Act amounting to Rs.3,62,92,500/-. The assessee had claimed profit from Merchant Exports of Textile Embroidery Design and the total export sales from Textile Embroidery Design was shown of Rs.10,95,49,440/-. During the appellate proceedings, the assessee admitted that the trading of the embroidery design was not allowable as no permission or license was issued by the Competent Authority of SEZ. The assessee was asked to provide the breakup of the expenses related to Merchant Exports of Textile Embroidery Design which have been claimed during the year but will not be allowed in view of the above facts. The assessee has provided a calculation of the expenses related to Merchant Exports of Textile Embroidery Design. The income from merchandise selling of embroidery design business has been shown at Rs. 10,09,83,654/- on which direct expenses of Rs.81,73,811/- and indirect expenses in proportion to the turnover of Rs.39,11,905/- has been claimed. The income from merchandise selling of embroidery design business has been shown at Rs.10,95,49,440/- which is not allowable u/s 10AA of the Act. In addition, the direct expenses / proportionate expenses on the above activity also does not qualify for deductions u/s 10AA of the Act. 6.2.7. Now coming to the other issue of claim u/s 10AA of the Act, it is observed that the Assessing Officer held that the assessee was not involved in manufacturing
ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports taking into consideration the various facts such as low electricity consumption, less number of labours, etc. and was in trading which does not constitute exports as per the clause (ii) of Explanation 1 to section 10AA of the Act. The assessee contention that provisions of SEZ Act will have an overriding effect on any other Act by virtue of section 51(1) of SEZ Act which lays down as following: "51 (1) The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act". Hence, by virtue of Section 51 of the SEZ Act, the provisions of the SEZ Act and the Rules will have overriding effect over the provisions contained in any other Act. 6.2.8. The provisions of section 10AA of the IT Act provide a deduction of 100% profit and gains from the export of such articles or things from the services. The Second Schedule to the SEZ Act includes 'trading' as services. The trading for the purpose of the Second Schedule of the SEZ Act means import for the purpose of re- export as per the SEZ (Amendment) Rules 2006 vide notification no. GSR/470 (E) dated 10.08.2006. The provisions of section 51 of SEZ Act lays down that the SEZ Act and Rules will have an overriding effect over the provisions contained any other Act including Income Tax Act. The Instruction No. 4/2006 dated 24.05.2006 issued by the Ministry of Commerce & Industry regarding grant of deduction u/s 10AA to the units carrying on trading in the nature of re-export of imported goods. The definition of services as per SEZ Rules 2006 at Rule 76 includes 'trading' as services for the purpose of sub-clause Z of section 2 of the SEZ Act. The Circular 17 of 29.05.2006 issued by the. Export Promotion Council for EOUs & SEZ Unit (Ministry of Commerce & Industry, Government of India) para 2 of which reads "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 on prescription of an undertaking by the concerned unit that no income tax benefit will be availed by the Unit for trading except in the nature of re-export of imported goods". The assessee has filed a schedule to SEZ which clears the case with modification to the Income Tax Act, 1961 for inserting Sec. 10AA of the Act. Instruction No. 4/200 also clears the claim of deduction u/s 10AA of the Act to the units carried out for trading in the nature of re-export form the SEZ Act. So it is very clear from the SEZ Act that services includes trading also and assessee has done trading from SEZ Act of the imported goods which have been re-exported after processing. 6.2.9. Under section 51(1) of the SEZ Act, lays down that the provision of this Act has overriding effect in case of contradiction between the SEZ Act and other Act. In the SEZ Act under Section 51, it has been clearly provided that the provision of SEZ Act will override the provision of any other Act, meaning thereby the provisions provided under the SEZ Act has to override on the provision of section 10AA of the Income Tax Act. Hence, by virtue of section 51 of the SEZ Act, the provision of SEZ Act and Rules, the Circular issued by Government of India and the provision of Section 51 of the SEZ Act it is evident that trading done by the assessee is a service and, therefore, deduction under section 10AA is allowable. 6.2.10. In view of the above facts and discussions, it is evident that section 51 of SEZ Act have clearly provided that the provisions of SEZ Act will override the provisions of any other Act meaning thereby that the provisions provided under the ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports SEZ Act overrides the provisions of Sec. 10AA of the Act and the SEZ Rules includes trading to be services. However, keeping in view the facts as discussed above, regarding the profit from merchandise selling of embroidery design is not eligible for the deduction u/s 10AA of the Act, the Assessing Officer is directed to recalculate the disallowance keeping in view the turnover of Rs.10,95,49,440/-, profit of Rs.81,73,881/- and direct/indirect expense of Rs.10,13,75,559/-. Hence, the assessee is entitled to claim the deduction u/s 10AA of the Act for the activity other than merchandise selling of embroidery design and the grounds of appeal are partly allowed."
Aggrieved, the Revenue is in appeal before us.
None appeared on behalf of assessee. The notices were sent to the assessee for hearing by registered post with AD on several time. However, no one was present on behalf of the assessee on the date of hearing. Neither an adjournment petition was filed in respect of the above assessee. It means that assessee is not interested to prosecute the appeal.
We have heard ld DR for the Revenue and gone through the order of ld CIT(A). The ld DR for the Revenue pleads that during the assessment stage Assessing Officer observed that there was no closing stock, plant and machinery was of Rs.1,97,000/-, manufacturing expenses was only Rs.1,67,816/- and there is no shortage reported in the case of assessee. During the assessment proceedings, on being show caused, the assessee submitted that it was engaged in the manufacturing activity. On the contrary, the assessee itself has admitted that there was trading activity, so more man power was not required. It is pertinent to mention that to ascertain manufacturing activity, the assessee was requested to furnish list of workers. The assessee submitted list of 10 persons which include- one manager, one sweeper and one accountant. As per the assessee 7 workers were adequate to carry out such a huge turnover and manufacturing activities, is not believable.
The ld DR further pointed out that part relief given by ld CIT(A) is not justifiable. The ld CIT(A) granted the relief to the assessee stating that SEZ Rules overrides the provisions of Income Tax Act. The relevant findings of the ld CIT(A) is reproduced below for ready reference:
ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports 6.2.10. In view of the above facts and discussions, it is evident that section 51 of SEZ Act have clearly provided that the provisions of SEZ Act will override the provisions of any other Act meaning thereby that the provisions provided under the SEZ Act overrides the provisions of Sec. 10AA of the Act and the SEZ Rules includes trading to be services. However, keeping in view the facts as discussed above, regarding the profit from merchandise selling of embroidery design is not eligible for the deduction u/s 10AA of the Act, the Assessing Officer is directed to recalculate the disallowance keeping in view the turnover of Rs.10,95,49,440/-, profit of Rs.81,73,881/- and direct/indirect expense of Rs.10,13,75,559/-. Hence, the assessee is entitled to claim the deduction u/s 10AA of the Act for the activity other than merchandise selling of embroidery design and the grounds of appeal are partly allowed."
11. From the above findings of ld CIT(A) it is vivid that provisions provided under the SEZ Act overrides the provisions of section 10AA of the Act and the SEZ Rules includes trading to be services. Thus, ld DR pointed out that SEZ Rules can not override the provisions of section 10AA of the Income Tax Act, as these SEZ Rules do not have mandatory force as that of main provisions of the Act. He further pointed out that Rules can not override the main provisions of the Act. Even SEZ Rules cannot override the main provisions of the SEZ Act.Therefore, ld DR prays the Bench that matter may be remitted back to the file of the assessing officer to examine the facts of the assessee`s case in the light of main provisions of SEZ Act and Income Tax Act.
12. The law is well settled that a person who claims exemption or concession has to establish that he is entitled to that exemption or concession. A provision providing for an exemption, concession or exception, as the case may be, has to be construed strictly. Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file of the assessing officer to examine the conditions of section 10AA of the Act and SEZ Act and adjudicate the issue afresh in accordance with law. Therefore, statistical purposes, the appeal of the Revenue is treated to be allowed.
In the result, appeal of the Revenue (ITA 1534/AHD/2016) is allowed for statistical purposes.
ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports 14. Coming to the Cross Objections raised by the assessee in Co.No.91/Ahd/2016, the ld DR submitted before us that ld CIT(A) has passed speaking order on this issue and the same may be confirmed. We note that ld CIT(A) dismissed the ground of the assessee observing as follows: “6.1.1. I have considered the assessment order as well as the submissions of the assessee. The Grounds of appeal
Ground No. 1 pertains to the F.D. interest on account of buyer's credit may be considered as business income. The Assessing Officer found that the assessee had shown other income of Rs.10,41,523/- under the schedule XI. This other income included interest income of Rs.8,94,992/-which was not offered for taxation. The Assessing Officer held that the interest income cannot be said to have been earned from manufacturing and export of an article or thing and disallowed the interest of Rs.8,94,992/- as not allowable u/s 10AA of the Act. The assessee submitted that interest income in the P&L account was due to the FD given to the bank for buyers credit purchase and that as per the bank rule the FD was to be given as collateral security for obtaining the buyers credit and therefore it is business income only and not income from other sources. 6.1.2. On the perusal of the details, it is observed that the amount of Rs.8,94,992/- earned as interest income was disallowed by the Assessing Officer as not being allowable as deduction u/s 10AA of the Act. During the appellate proceedings, the assessee was asked to produce the evidences regarding the claim of the assessee that the bank FDR was provided as per the terms and conditions of the bank for granting the buyers credit. The assessee as per order sheet entry dated 04.03.2016 expressed his inability to produce the details of the bank terms and conditions regarding the pledging of the FDR's as the collateral security for obtaining the buyers credit. In view of the above facts, it is evident that the incomes from the FDR's have not been earned from manufacturing and export of articles as per the terms and conditions u/s 10AA of the Act as the FDR interest was not related. Hence, the addition made by the Assessing Officer of Rs.8,94,992/- is upheld and the ground of appeal is dismissed.
15. As the assessee has not filed paper book before the Bench explaining the facts on the issue under consideration. Neither assessee nor his Authorized Representative appeared before us. Therefore, it is not possible to comment on the findings of the ld CIT(A) on factual aspects. In this scenario, we are of the view that one more opportunity should be given to the assessee to explain the facts before ld Assessing officer. Therefore, we remit this issue back to the file of the assessing officer to adjudicate the issue afresh in accordance with law.
In the result, cross objections filed by the assessee (CO. No.91/AHD/2016) is allowed for statistical purposes.
ITA & CO No.1534 & 91/AHD/2016 Assessment Year. 2010-11 Riddhi Siddhi Exports Registry is directed to place one copy of this order in all appeals folder / case file(s).
Order is pronounced in the open court on 15/06/2022 by placing the result on the Notice Board as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rule 1963.