In view of this judgement of high court , all cases where deduction u/s 10B for 100% EOU has been given , needs to rechecked and whereever possible , necessary remedial action under relavant provisions of IT Act needs to be taken.

Approval by Central Government must to claim deduction u/s.10B for 100% EOU

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In the instant case, there is no notification or official document suggesting that either the Interministerial Committee, or any other officer or agency was nominated to perform the duties of the Board (constituted under section 14 of the IDR Act), for purposes of approvals under section 10-B. Though the considerations which apply for granting approval under sections 10-A and 10-B may to an extent, overlap, yet the deliberate segregation of these two benefits by the statute reflects Parliamentary intention that to qualify for benefit under either, the specific procedure enacted for that purpose has to be followed. There is nothing in any of the circulars or instructions relied on by the Tribunal in all the orders, implying that approval for purposes of an STP also entitled the unit to a benefit under section 10-B. The orders of the Tribunal are consequently, erroneous, and its reasoning, unsupportable.

HIGH COURT OF DELHI

Commissioner of Income tax

Regency Creations Ltd.

IT Appeal Nos. 69 of 2008, 783 of 2009 & 1239 of 2011

SEPTEMBER 17, 2012

JUDGMENT

S. Ravindra Bhat, J. – These appeals have been preferred by the Revenue claiming to be aggrieved by the common orders of the Income Tax Appellate Tribunal (ITAT) in respect of the two assessees, i.e. M/s. Regency Creations Ltd. and Valiant Communications Ltd. The questions of law which arises in all the appeals is common, i.e.

"Whether the Tribunal fell into error in holding that the claim of deduction under Section 10-B of the Income Tax Act in respect of the assessees' income derived from export of computer software was permissible."

2. The facts pertaining to the cases of Regency Creations Ltd. [IT Appeal Nos. 69/2008 and 783/2009] in respect of Assessment Years 2003-04 and 2004-05 are that it is engaged in 100% export of artware handicrafts, home furnishing and software exports. The assessee had three divisions respectively, in connection with the said three activities - i.e. artware handicrafts, home furnishing and software division, which was named M/s. Maxtech iSolution. The assessee claimed exemption under Section 10B in respect of its software export income. The Assessing Officer held that to qualify for such benefit, the assessee should be a 100% Export Oriented Unit (EOU) and approved by the Central Government through its appropriate authority under Section 14 of the Industries (Development and Regulation) Act, 1951 (IDR Act). The Assessing Officer concluded that the Assessee had no valid certificate for software export and had not mentioned in its Articles of Memorandum of Association that it could carry-out business in computer software and that M/s. Maxtech iSolution was not shown to be an undertaking of the assessee, in its Articles of Memorandum of Association. The assessees' appeal was allowed for academic years 2003-07; the Appellate Commissioner held that the claim for exemption under Section 10B was admissible since it was registered with the Central Government, i.e. Software Technology Park of India (STPI) and that the business activity of software export was permissible with the main and the ancillary object spelt-out in the Memorandum of Association. The CIT (Appeals) relied upon a Circular of the Central Board of Direct Taxes (CBDT). The Revenue appealed to the Tribunal, which dismissed the appeal, holding as follows:

"5. We have considered the rival contentions and found from the record that the assessee had established a software division under the name and style of Maxtech iSolutions, which was approved and registered with the STPI, a unit of Ministry of Information and Technology. This is a nodal agency for grant of approval for establishment of 100% export oriented software. As per the permission letter dated 7th November, 2006, as placed on the record, we found that STPI had granted registration to the assessee vide letter dated 5.12.2000 for setting up a 100% EOU under Software Technology Park Scheme which was valid for 5 years. The assessee was granted extension to continue the operations under Software Technology Park Scheme up to 31.03.2009. CBDT in its Circular No. 149/194/2004/TPL dated 06.01.2005 and Circular No. 200/20/2006/Income Tax Act, 1961-I dated 31.3.2006 has directed to treat the grant of registration by STPI as valid agency for purposes of Section 10B.

6. In the instant case, the assessee has got approval from STPI, an organization of government duly authorized by CBDT Circular as stated above. Memorandum of Association of the Company in its main object clause clearly states the export of all kinds of goods all over the world. Goods thus includes computer software. Clause 11 of the Incidental objects as set out in memorandum empowers to set up any unit or division by the company for carrying on any business. Thus the setting up of Maxtech iSolution is one of the divisions of assessee is authorized by Memorandum. The details about branches and production units of assessee have been clearly informed to Assessee Officer during the assessment proceedings which he ought to have treated as sufficient compliance. The information about the places of business of assessee have been clearly mentioned in CA report which accompanies the return.

7. In view of the above, we do not find any infirmity in the order of the CIT (Appeals) for granting exemption under sec. 10-B to the assessee unit. The finding recorded by the CIT (Appeals) at pages 5 & 6 of his appellate order has not been controverted by the department by bringing any positive material on record."

3. For the assessment year 2004-05, the Assessing Officer disallowed the claim for deduction under Section 10B. The Appellate Commissioner accepted the assessees' argument following his previous order for the assessment year 2003-04 and also after observing that the appellant had exported computer software through proper banking channels and after duly complying with conditions for getting export invoices endorsed by the STPI, (the Central Government body which is also the nodal agency established for monitoring exports of computer software). The Revenue's appeal was allowed by the ITAT which followed its previous order.

4. For the assessment year 2007-08, the Assessing Officer and the Appellate Commissioner rejected the claim for benefit under Section 10B. The assessee in its appeal relied upon the previous two orders of the Tribunal. Before the Tribunal, the assessee relied upon Ex. No. 62 – Press Note 5 (1997 Series) and Ex. No. 38 – Press Note 2 (1993 Series) and also the letter dated 31.03.2011 issued by the Ministry of Commerce and Industry. The Tribunal noticed that Press Notes 2 and 5 which had been relied upon clearly stated that the Inter-Ministerial Standing Committee for EHTPS and ESTPC was competent to grant approval for STPI units to claim 100 % benefits under EOU Scheme. On the basis of this interpretation placed upon the letter dated 09.03.1993 (which was disclosed through communication dated 31.03.2011), the Tribunal held that the assessee was entitled to benefit of deduction under Section 10B of the Act. The said communication/letter dated 31.03.2011 reads as follows:

"Please refer to your RTI application dated March 10, 2011 received on 17.03.2011) on the subject mentioned above and to inform that no approval/ratification of STPI approval is required from BOA formed by Ministry of Commerce by power conferred under Section 14 of IDR Act, 1951. Inter-Ministerial Standing Committee for EHTPs and ESTPs (IMSC) is competent in grant approval for STPI unit to claim all benefits under 100% EOU Scheme as per Press Note 2 of 1993 (copy enclosed)."

5. The facts in respect of M/s Valiant Communications (ITA 2002/2010 – Assessment Year 2005-06; ITA 438 to 441/2012 – Assessment Years 2003-04, 2004-05, 2006-07 and 2007-08) are that the assessee, like in the case of Regency claimed deduction under Section 10B. It is engaged in the business of manufacturing and export of telecom transmission equipment. It had a registered unit with the Software Technology Park of India as a 100% EOU under Electronic Hardware Technology Park (EHTP) Scheme. The Assessing Officer had rejected the claim, stating that approval from STPI cannot be equated with the approval of the Board appointed under Section 14 of the Industries (Development and Regulation) Act, 1951. The CIT (Appeals) had held that the assessee was entitled to the benefit. The Revenue's appeal before the Tribunal for the appeal year 2005-06 was rejected; the Tribunal had relied upon its ruling in the case of Regency Creations.

6. It is argued by the Revenue in all the appeals that the benefit of deduction under Section 10B of the Act is radically different from the one envisioned under Section 10A. It was held that the Press Note -2 and Press Note 5 which had been relied upon by the Tribunal merely indicated that the Inter-Ministerial Standing Committee had been set-up for considering applications to set-up units under EHTP Scheme and the STP Scheme. Such Inter-Ministerial committees were deemed to be for the purpose of Section 10A. This position was clarified by Circular No. 1 of 2005 relied upon during the course of Tribunal's orders. Similarly, Instruction No. 1 of 2006 also underlined the fact that the Software Technology Park Scheme notified under Section 3 of the Foreign Trade Development (Regulations) Act, approvals received by the Inter-Ministerial Standing Committee qualified for deduction under Section 10A. It was submitted that neither of these circulars nor even the subsequent clarification dated 06.05.2009 ever spelt-out any misunderstanding on the part of the income tax authorities that approval by the Director STPI could be deemed valid approval for the purpose of Section 10-B.

7. Learned counsel for the assessees contended that the rationale for granting approval for Software Technology Park units was with the intention of their exporting services and products. The intention of Section 10B had to be, therefore, read in the context of the concerned Scheme, i.e. ETPI and STPI which was meant to permit growth of foreign trade in the sector, i.e. computer software. It was argued, besides, that the rule of consistency, enunciated by the Supreme Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321 and followed by this Court in CIT v. Jagson International Ltd. [IT Appeal No. 75 of 2006, Dated 14-11-2007], estopped the Revenue from contending that the assessee did not possess the requisite approval. It is also submitted that the Tribunal had correctly relied upon a clarification dated 31.03.2011 which put the matter beyond any shadow of doubt, i.e. that Press Notes 2 and 5 enured in favor of the assessee. They could clearly avail the benefit of deduction under Section 10B.

8. It is argued that the Appellate Commissioner and Tribunal were alive to the fact that the power to give approvals was initially with the Inter-Ministerial Standing Committee which was later delegated to the Director STP by the Note No. 5 (1997 Series). The assessee further relied upon the following extract of the CBDT circular dated (Notification under SO 388(E) dated 30.04.1995, which by para 2.10 stated as follows:

"2.10 The provisions of paragraphs 96,104,109, 110 and 112 to 117 of Chapter IX of the Export and Import Policy (1992-97) applicable to export oriented units (EOUs) and units in Export Processing Zones (EPZs) shall also apply to the STP units subject to the following modifications:

a. The word "STP" shall be substituted for the word "EOU/EPZ" "EOU" OR "EPZs" wherever they occur, in the paragraphs.

b. The words "Development Commissioner" wherever they occur shall be substituted by the words "Chief Executive of the STP Society."

c. The word "BOA" wherever it occurs, shall be substituted by the word "IMSC"."

9. Learned counsel for the assessee urged that the construction or interpretation to be adopted by the Court should be in consonance with the liberal interpretation of Parliament in promoting growth and development. In this regard judgment of the Supreme Court in Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 was relied upon. The Supreme Court in that case had held as follows:

"A provision in taxing statute granting incentive for promoting growth and development should be construed liberally, the restriction on it too has to be construed so as to advance objective of the provision and not to frustrate it."

Provisions of Law

10. Before a discussion about the rival contentions regarding merits of the case, it would be necessary to extract the relevant provisions, i.e. sections 10-A and Section 10B. They read as follows:

"Section 10A .Special Provision in Respect of Newly Established Industrial Undertakings in Free Trade Zones

(1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :-

(i) It has begun or begins to manufacture or produce articles or things 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;

(ia) In relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1995, its exports of such articles or things are not less than seventy-five per cent of the total sales thereof during the previous year;

(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 industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking 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.

(3) The profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any five consecutive assessment years, falling within a period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things specified by the assessee at his option

Provided that nothing in this sub-section shall be construed to extend the aforesaid five assessment years to cover any period after the expiry of the said period of eight years……

** ** **

Explanation : For the purposes of this section, -

(i) "free trade zone" means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify 316 for the purposes of this section;

(ii) "Relevant assessment years" means the five consecutive assessment years specified by the assessee at his option under sub-section (3);

(iii) "Manufacture" includes any -

(a ) Process, or

(b) Assembling, or

(iv) "Electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce 318b ;

(v) "Software technology park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce;

(vi) "Produce", in relation to articles or things referred to in clause (i) of sub-section (2), includes production of computer programmes…."

"Section 10B. Special Provision in respect of Newly Established Hundred Per Cent Export-Oriented Undertakings.

(1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export- oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee.

(2) This section applies to any undertaking which fulfils all the following conditions, namely :-

(i) It manufactures or produces any article or thing;

(ia) In relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1994, its exports of such articles and things are not less than seventy-five per cent of the total sales thereof during the previous year;

(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 industrial undertaking 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.

(3) The profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any consecutive assessment years, falling within a period of eight years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things, specified by the assessee at his option :

Provided that nothing in this sub-section shall be construed to extend the aforesaid five assessment years to cover any period after the expiry of the said period of eight years……

** ** **

Explanation : For the purposes of this section, -

(i) "Hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act…."

Notifications, circulars and instructions referred to

11. During the proceedings in this case, the Tribunal as well as the assessee relied upon certain circulars to say that once a software technology park received approval to function as such, since the notified approval was in the Central Government's circulars, given by an Inter Ministerial Committee, which in turn had been delegated to the Director, the unit was also entitled to avail the benefit under Section 10-B. It would therefore, be relevant to notice the circulars; they are extracted below.

12. The Tribunal relied on a circular of 2005; it reads as follows:

"CIRCULAR NO.1 OF 2005, DT. 6TH JAN., 2005

Sub: Tax holiday under section 10B of the Income-tax Act to 100% Export Oriented Undertaking – Certain clarification – Reg

6/1/2005

Exemptions

Section 10B

Section 10B of the Income-tax Act provides for 100% deduction of profits derived by a hundred per cent export oriented undertaking, form export of articles or things or computer software manufactured or produced by it. The deduction is available 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 articles or things or computer software. However, no deduction under section 10B is available after assessment year 2009-10.

2. The deduction under section 10B is available to an undertaking which fulfils all the following conditions:

(i) it manufacturers or produces any article or thing or computer software;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence except in the circumstances specified under section 33B of the IT Act.

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

3. Representations have been received from various quarters as to whether an undertaking set up in Domestic Tariff Area, which is subsequently approved as 100% EOU by the Board appointed by the Central Government in exercise of powers conferred under section 14 of the Industries (Development and Regulation) Act, 1951, is eligible for deduction under section 10B of the Income-tax Act.

4. The matter has been examined and it is hereby clarified that an undertaking set up in Domestic Tariff Area (DTA) and deriving profit from export of articles or things or computer software manufactured or produced by it, which is subsequently converted into a EOU, shall be eligible for deduction under section 10B of the IT Act, on getting approval as 100% export oriented undertaking. In such a case, the deduction shall be available only from the year in which it has got the approval as 100% EOU and shall be available only for the remaining 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 articles or things or computer software, as a DTA unit. Further, in the year of approval, the deduction shall be restricted to the profits derived from exports, from and after the date of approval of the DTA Unit as 100% EOU. Moreover, the deduction to such units in any case will not be available after assessment year 2009-10.

5. To clarify the above position, certain illustrations are given as under:

(i) Undertaking 'A' is set up in Domestic Tariff Area and starts manufacture or production of computer software in financial year 1999-2000 relevant to assessment year 2000-01. It gets approval as 100% EOU on 10th September, 2004 in the financial year 2004-05 relevant to assessment year 2005-06. Accordingly, it shall be eligible for deduction under section 10B from assessment year 2005-06 i.e., the year in which it fulfills the basic condition of being a 100% EOU. Further, the deduction shall be available only for the remaining period of ten years i.e. from assessment year 2005-06 to assessment year 2009-10. This deduction under section 10B for assessment year 2005-06 shall be restricted to the profits derived from exports, from and after the date of approval of the DTA unit as 100% EOU.

(ii) Undertaking 'B' set up in Domestic Tariff Area, begins to manufacture or produce computer software in financial year 1996-97 relevant to assessment year 1997-98. It gets approval as 100% EOU in Financial year 2007-08 relevant to assessment year 2008-09. No deduction under section 10B shall be admissible to undertaking B as the period of 10 years expires in financial year 2005-06 relevant to assessment year 2006-07, prior to its approval as 100% EOU.

(iii) Undertaking 'C' is set up in Domestic Tariff Area in the financial year 2000-01 relevant to assessment year 2001-02 and engaged in the business of providing computer related services, other than those notified by the Board for the purpose of section 10B. In financial year 2002-03, it acquires more than 20% of old plant and machinery and starts manufacturing computer software. It also gets approval as 100% EOU in financial year 2002-03. Undertaking 'C' shall not be eligible for deduction under section 10B, as there has been transfer of old plant and machinery.

(iv) Undertaking 'D' is set up and starts producing computer software in financial year 2003-04 relevant to assessment year 2004-05. It gets approval as 100% EOU in financial year 2006-07 relevant to assessment year 2007-08. It shall be eligible for deduction under section 10B from assessment year 2007-08. However, the deduction shall not be available after assessment year 2009-10.

(v) Undertaking 'E' is set up and starts producing computer software prior to 31st March, 1994. It gets approval as 100% EOU in financial year 2004-05 relevant to assessment year 2005-06. Undertaking 'E' shall not be eligible for deduction under section 10B as the period of deduction of 10 years expires prior to assessment year 2005-06."

The second document relied on were the Instructions of 2006, dated 31st March, 2006:

"INSTRUCTIONS NO.1 OF 2006, DT. 31ST MARCH, 2006

SUB: Deduction under Section 10A-Clarification-Reg.

31/3/2006

EXEMPTIONS

SECTION 10A

1. Section 10A of the Income-tax Act, 1961 provides for 100 per cent deduction of profits and gains derived by an undertaking from export of articles or things or computer software manufactured or produced by it. The deduction is available 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. The tax benefit under section 10A is available to an undertaking which fulfils all the following conditions:

(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 1st April, 1981, in any Free Trade Zone; or

(b) commencing on or after 1st April, 1994, in any Electronic Hardware Technology Park or Software Technology Park; or

(ii) it is not formed by the splitting up or the reconstruction of a business already in existence except in the circumstances and within the period specified in section 33B of the Income-tax Act;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

2. 'Software Technology Park' has been defined to mean any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry.

3. In exercise of the powers conferred by sub-section (1) of section 3 of the Foreign Trade (Development and Regulation) Act, 1992, the Ministry of Commerce notified the Software Technology Park Scheme wherein it was provided that a Software Technology Park may be set up by the Central Government, State Government, Public or Private Sector Undertakings or any combination thereof. An STP may be an individual unit by itself or it may be one of such units located in an area designated as STP Complex by the Department of Electronics. The scheme was required to be administered by the Department of Electronics, Government of India, through Directors of respective Software Technology Parks which form part of the Software Technology Parks of India (STPI), a society established by the Department of Electronics and registered under the Societies Registration Act, 1860. An application in the prescribed form for establishing a STP unit was required to be submitted to the Chief Executive of STP Complex along with the details of the Software project. Such application was to be considered by an Inter-Ministerial Standing Committee (IMSC) constituted under the Chairmanship of Secretary, Department of Electronics, Government of India.

4. Subsequently, vide Notification No. 4/(RE-95/92-97), dated 30th April, 1995 issued by the Director General (Foreign Trade), Ministry of Commerce, in exercise of powers conferred in sub-section (1) of section 3 of the Foreign Trade (Development and Regulation) Act, 1992, notified the amended STP Scheme. Para 2.3 of the aforesaid notification provides that the scheme is administered by the Department of Electronics, Government of India, through Directors of respective STPs which form part of the STPI, a society established by the Department of Electronics and registered under the Societies Registration Act, 1860. An application in the prescribed format for establishing a STP unit may be submitted to the Chief Executive of STP Complex along with the details of the software project. Such application will be considered by an Inter-Ministerial Standing Committee constituted under the Chairmanship of Secretary, Department of Electronics.

5. Instances have been brought to the notice of the Board that a large number of units registered/approved by the Directors of the STPI are claiming deduction under section 10A whereas the STP scheme requires approval by the Inter-Ministerial Standing Committee of the Department of Electronics. Accordingly, the cases of such claimants have been reopened by the field authorities.

6. The matter has been examined in consultation with the officers of the Department of Information Technology (earlier, Department of Electronics). In view of the ambiguity in the legal status of the approval by Director of STPs, the Inter-Ministerial Standing Committee will meet to consider the approvals by Director of STPs issued in the past. Therefore, with a view to avoid infructuous demand raised in assessment and reassessment of assessees claiming deduction under section 10A, it has been decided that the claim of deduction under section 10A of the Income-tax Act, shall not be denied to STP units only on the ground that the approval/registration to such units has been granted by the Directors of Software Technology Parks. However, it has to be ensured that all other conditions specified in section 10A are fully satisfied before allowing any such claim.

7. In cases where assessments/reassessments have already been completed, and the claim, under section 10A, has been disallowed only on the ground that the approval to the STP has not been granted by the Inter-Ministerial Standing Committee in accordance with the Scheme, the demand so arising should be kept in abeyance until further orders."

12.1 It would also be relevant at this stage to notice that Circular No. 694, dated 23-11-1994, one of the earliest instructions issued by the Central Government, pertinently stated that:

"….it is clarified that units in EPZs/EOUs which export software are as much eligible for availing of the five-year tax holiday under sections 10A and 10B as any other units in EPZ/EOU, even for the period prior to the previous year relevant to the assessment year 1994-95. The conditions stipulated in the provisions have, of course, to be fulfilled. The insertion of the Explanation of the term "produce" in 1993 should not be taken as a ground for denying the tax holiday to such units for earlier years. "

Earlier, the Department of Industrial Development, Ministry of Industry had, by notification No. 117-E dated 22-2-1993 constituted a committee to perform the functions specifically delegated, including the grant of approval for EHTPs and STPs. The said Notification reads as follows:

"Ministry of Industry

(Department of Industrial Development)

New Delhi, the 22nd Feb., 1993

Notification

S.O. No. 117(E)–In exercise of the powers conferred by Section 14 of Industries (Development and Regulation) Act, 1951 (65 of 1951), r/w Sub-rule (2) of Rule 10 of the Registration and Licensing of Industrial undertakings Rules, 1952 the Ministry of Industry, Department of Industrial Development, hereby appoints the following committee which shall perform the functions specified:

Inter-Ministerial Standing Committee for units in the Electronic Hardware Technology Parks (EHTP) and Software Technology Parks (STP)

Chairman

1. Secretary, Department of Electronics, or his nominee

2. Secretary, Department of Industrial Development, or his nominee

3. Secretary, Department of Science and Technology, or his nominee

4. Secretary, Ministry of Commerce, or his nominee

5. Chairman, Central Board of Excise and Customs, or his nominee

6. Secretary, Deptt. of Economic Affairs, Ministry of Finance, or his nominee

7. Secretary, Planning Commission, or his nominee

8. Economic Adviser, Department of Electronics

9. Secretary, Department of Small Scale Industries and Agro and Rural Industries or his nominee

10. Joint Secretary, Department of Electronics, Member- Secretary.

Functions of the Inter-Ministerial Standing Committee :

(i) The Committee shall consider all applications for setting up of units in the Electronic Hardware Technology Parks (EHTP) under the scheme of special facility (hereinafter referred to as the said scheme framed under the Government of India, Ministry of Commerce, Notification No. 42 (N-8)/1992-97 dt. the 14th Sept., 1992). The Committee shall also consider all applications for setting up of units under Software Technology Park scheme operated under Customs Notification Nos. 138 and 140 dt. 22nd Oct., 1991. The Committee shall consider proposals for industrial licence, foreign technical collaboration agreements and import of capital goods. The Committee shall not consider applications involving foreign equity with or without any other industrial approvals.

(ii) The Committee shall review the progress of implementation of letters of intent and industrial licences granted under the said scheme upto the stage of actual commissioning of capacity.

(iii) The Committee shall consider and make a report on policy questions arising from applications received under the said scheme or from the implementation of individual proposals thereunder in accordance with the policy laid down by the Central Government from time to time.

(iv) The Committee may refer any matter in its discretion for the consideration and decision of the Central Government in respect of matters falling within its competence".

Analysis

13. There is no dispute about the essential facts. Both assesses had received approval to start 100 per cent EOU under STP scheme. The question is whether this approval can be deemed one under Section 10-B of the Act. For that purpose a 100 per cent EOU is only that which is so approved by the Board appointed by Central Government in exercise of powers conferred under Section 14 of IDAR Act, 1951. The pre-conditions that govern units set up under STP scheme are different from those that govern the units set up as 100 per cent EOUs and so approved by the Board. Some conditions may undoubtedly overlap yet, criteria, such as fulfilment of the employment criteria, foreign exchange, etc., are not common.

14. The Inter-Ministerial Standing Committee set up for granting licences under STP scheme is also appointed by the Central Government in exercise of powers conferred under, Section 14 of IDAR Act. However, the question is whether that part of the Board's function (under Section 14 IDR Act) – to grant approval under Section 10-B also stands delegated. The assesses submit that the Inter-Ministerial Standing Committee has been replaced by the Board on the basis of the contents of para 2 of the notification of the Ministry of Commerce dt. 22nd March, 1994, is unpersuasive. That notification states that for the purpose of paras 111 to 117 of Chapter IX of the Export and Import Policy (1992-97), Board of Approval shall be substituted by the Inter-Ministerial Standing Committee. Paras 111 to 117 of Chapter-DC of Export and Import Policy (1992-97) do not deal with that aspect, but other questions such as subcontracting by EOU/EPZ, Sale of imported materials, Disposal of scrap, Private bonded warehouses, period of bonding, and de-bonding. The notification therefore extended incentives to EOUs to set up units under the STP scheme. However, for the Court to conclude that the Interministerial Committee was authorized to issue approval under Section 10-B and that its imprimatur or approval under Section 10-A ought to be deemed as an approval under Section 10-B, there ought to be more direct, or express authorization.

15. Section 10A extends the exemption to the units set up under STP scheme which start production of goods during the previous year relevant to the assessment year commencing on or after 1st April, 1994. The assessee's plea about eligibility of a 100% EOU STP eligible for exemption would render the amendment brought about by the Finance Act, 1993 (extending the benefit under Section 10A of the Act to the STPs from 1st April, 1994) superfluous. There is no reason for Parliament to amend the law, and extend benefits of Section 10A to units under STP scheme and, restrict the benefits to those commencing their operations in the year of account relevant to the Assessment year 1994-95, if a STP unit is otherwise eligible for exemption under Section 10B of the Act on the ground of its being 100 per cent EOU.

16. It is a settled principle of law that unless there is express authorization, in terms of a statute, and an actual delegation of power, a statutory authority in whom jurisdiction or power is reposed, is alone vested with it, to the exclusion of others (Ref. Hari Chand Aggarwal v Batala Engineering Co. Ltd AIR 1969 SC 483; and Ajaib Singh v. State of Punjab AIR 1965 SC 1619). In the absence of a statutory power to delegate, and further to that power, an actual delegation in accordance with law, such functions cannot be performed or deemed to have been performed by a third agency or authority. Another cardinal rule which binds the court to interpret statutes is that "where power is given to do a certain thing in a certain way, the thing must be done in that way or not at all, and other methods of performance are necessarily forbidden…" (See Nazir Ahmed v King Emperor [1936] I. L. R. 17 Lah 629).

17. In the present case, there is no notification or official document suggesting that either the Inter Ministerial Committee, or any other officer or agency was nominated to perform the duties of the Board (constituted under Section 14 of the IDR Act), for purposes of approvals under Section 10-B. Though the considerations which apply for granting approval under Sections 10-A and 10-B may to an extent, overlap, yet the deliberate segregation of these two benefits by the statute reflects Parliamentary intention that to qualify for benefit under either, the specific procedure enacted for that purpose has to be followed. There is nothing in any of the Circulars or instructions relied on by the Tribunal in all the orders, implying that approval for purposes of an STP also entitled the unit to a benefit under Section 10-B. The orders of the Tribunal are consequently erroneous, and its reasoning, unsupportable.

18. In the light of the above discussion, the question of law framed is answered in favour of the revenue, and against the assessee; the appeals are therefore allowed.

Effect of MAT on SEZ on Investors

TIOL-DDT 1997
06.12.2012
Thursday

THE provisions of Minimum Alternate Tax (MAT) have been made applicable to Special Economic Zone (SEZ) Developers and Units with effect from 1st April, 2012. The SEZ sector has seen a sharp slowdown due to a number of reasons including withdrawal of exemption from MAT and Dividend Distribution Tax (DDT) provisions, uncertain fiscal regime for SEZs, global slowdown in exports etc.

The number of applications for de-notification of SEZs has shown a significant increase in the last two financial years and the trend is continuing in the current financial year also with 40 of the total 52 de-notifications of SEZs having been approved in Financial Years 2010-11, 2011-12 and 2012-13 (upto 23.11.2012). Similarly, the number of new SEZs set up in 2010-11, 2011-12 and 2012-13 (as on 23.11.2012) has been 16, 9 and 3 respectively.

This information was given by the Minister of State for Commerce & Industry Dr. D. Purandeswari in written reply to a question in Rajya Sabha yesterday.

Income Tax

Whether deduction can be claimed for an expense incurred for purpose, which constitutes an offence - NO: HC

APPELLANT is a financial enterprise engaged in accepting fixed deposits and pays interest. During assessment, AO had made an addition on account of an amount which was claimed as interest paid to the depositors. It was disallowed on the basis that the maximum rate of interest payable under the Kerala Money Lenders Act was 14%. The amount, which was disallowed, represented the amount paid in excess of the legal limit. On appeal CIT(A) and Tribunal confirmed the AO's order. THE issues before the Bench are - Whether deduction can be claimed for an expense incurred for the purpose which constitutes an offence - Whether deduction can be claimed beyond the express provisions of the Act and Whether the expenditure incurred by way of payment of interest in excess of the limit imposed under the State Money Lenders Act, is allowable as business expenditure. And the verdict goes against the assessee.

Initial assessment year for computation of profits eligible for tax holiday is the year in which taxpayer exercises the option to claim deduction

Posted In Income Tax Case Laws | Judiciary | 2 Comments »

Velayudhaswamy Spinning Mills (P) Ltd. (Taxpayer) ,Madras High Court (HC) [38 DTR 57]

Under the Indian Tax Laws (ITL), a taxpayer carrying on the business of generation of electricity, which qualifies for income-linked deduction (eligible business), can opt to claim such deduction for a period of 10 assessment years (AYs) out of 15 years, beginning from the year in which the taxpayer commences generation of power. The Madras HC held that the first AY in which the taxpayer opts to claim the deduction would be the 'initial AY' from when the eligible business would be treated as the only source of income of the taxpayer. In computing profits qualifying for the deduction in the initial AY, the taxpayer is not required to reduce the losses incurred by it in the AYs prior to the initial AY.

Background

Under the ITL, taxpayers engaged in infrastructure development are eligible for an income-linked deduction. The business of generation of electricity qualifies as infrastructure development and, therefore, is eligible for deduction. The taxpayer has an option of claiming deduction for any 10 consecutive AYs out of 15 years, beginning from the year in which the taxpayer commences generation of power. For the purpose of computing the quantum of deduction, the eligible business is fictionally treated as the only source of income of the taxpayer. The issue before the Madras HC was whether the eligible business should be treated as the only source of income from the AY in which the taxpayer exercises the option to claim deduction or the AY in which the taxpayer commences the eligible business.

Facts

The Taxpayer carried on the eligible business and claimed the income-linked deduction in respect of the profits derived from such business. In this case, the Taxpayer opted to claim deduction from the initial AY, under the relevant provisions of the ITL.

The Taxpayer had incurred losses in some of the AYs prior to the initial AY. In computing profits qualifying for deduction in the initial AY, the Taxpayer did not take into account losses incurred in the eligible business in AYs up to the initial AY, which were set off by the Taxpayer against its other income. The Tax Authority reduced the amount qualifying for deduction by the amount of unabsorbed depreciation incurred in the AYs prior to the initial AY, on the ground that the eligible business should be fictionally treated as the only source of income of the Taxpayer from the commencement of such business.

The first appellate authority reversed the Tax Authority's order. It held that, as the unabsorbed depreciation pertaining to the earlier AYs had already been set off against other income of the Taxpayer in the respective

AYs, such unabsorbed depreciation cannot be notionally brought forward and considered for determining profits qualifying for deduction in the initial AY.

Placing reliance on the ruling of Ahmedabad Special Bench (SB) in the case of ACIT v. Goldmine Shares and Finance (P) Ltd. [116 TTJ 705], the Income Tax Appellate Tribunal (ITAT) reversed the first appellate authority's order.

Aggrieved, the Taxpayer appealed against the ITAT's order.

Taxpayer's contentions

The AY in which the option to claim deduction is exercised would be considered as the initial AY. The eligible business is fictionally treated as the only source of income of the Taxpayer only from the initial AY. This fiction does not extend to the AYs ending prior to the AY in which the

Taxpayer exercises the option to claim deduction.

Unabsorbed depreciation pertaining to the earlier AYs which had already been set off against other income of the Taxpayer in the respective AYs, should not be notionally brought forward and set off for determining profits of the initial AY to ascertain the amount qualifying for deduction.

Provisions under the ITL granting deduction are beneficial or incentive provisions and should be liberally construed.

In an unreported judgment (Tax Case (Appeal) No. 298 of 2004 dated 23 December 2009) of the Madras HC in the context of the erstwhile provisions allowing similar deduction under the ITL, it was held that for the purpose of claiming deduction, brought forward losses and unabsorbed depreciation need not be taken into consideration once they have been set off against other income in the earlier AYs.

Tax Authority's contentions

Profits derived from the eligible business have to be computed after setting off notionally the brought forward losses and unabsorbed depreciation, irrespective of the same being set off against other income in the earlier AYs.

Memorandum explaining the Finance (No. 2) Bill, 1980, [123 ITR (St) 154 (1980)], in the context of the erstwhile provisions allowing similar deduction, indicates that losses, depreciation etc. of the earlier years have to be taken into account in determining the quantum of deduction admissible, even though the same have been set off against the profits of the taxpayer from other sources.

Madras HC's decision

The AY in which a taxpayer exercises the option to claim deduction would be the initial AY for the purpose of reckoning the period of deduction. Once the option is exercised, the taxpayer is required to set off only those losses pertaining to the AYs beginning from the initial AY. The taxpayer is not required to set off losses pertaining to the earlier AYs if such losses have already been set off against other income of the taxpayer in the earlier AYs.

The fiction of treating the eligible business as the only source of income of the taxpayer is applicable only to the AYs beginning with the initial AY. This fiction does not extend to AYs ending prior to the initial AY. Hence, losses and unabsorbed depreciation pertaining to earlier AYs, which have been set off against other income of the taxpayer, cannot be notionally brought forward for determining quantum of profit eligible for deduction in the initial AY.

The Madras HC agreed with its own ruling referred to by the Taxpayer and the ruling of the Rajasthan HC in the case of CIT v. Mewar Oil and General Mills Ltd. [271 ITR 311], which were rendered in the context of similarly worded provisions allowing income-linked deduction under the ITL.

Comments

Under certain provisions of the ITL, which confer income-linked deduction in respect of profits derived from the business of infrastructure development, a taxpayer has the option to claim deduction for a period of 10 consecutive AYs out of 15 years (20 years in some cases). Also, such provisions mandate that the eligible business should be fictionally treated as the only source of income of the taxpayer. Such treatment would have consequences on claiming the set off of losses and unabsorbed depreciation incurred in the earlier years but set off against other income of the taxpayer, while determining the quantum of deduction from the eligible business in the subsequent AYs. There were contrary judicial decisions on the issue of set off of unabsorbed depreciation and losses. The Chennai ITAT, in the case of Mohan Breweries and Distilleries Ltd. [114 TTJ 532] , had ruled that losses and depreciation pertaining to the AYs prior to the AYs selected for claiming income-linked deduction, should not be set off in determining the quantum of profits qualifying for deduction.

The present ruling provides guidance to taxpayers engaged in businesses qualifying for income-linked deduction, where the taxpayers have an option to claim deduction for a period of 10 AYs out of 15/20 years.

: A mere reconstitution of partnership firm does not amount to splitting up or reconstruction of partnership business already in existence so as to deny exemption under section 10B

IT : In order to claim exemption under section 10B, custom-bonding is required only where imports are contemplated for purposes of manufacture, production, packaging etc. for purposes of export of goods or services out of India

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[2012] 28 taxmann.com 16 (Delhi)

HIGH COURT OF DELHI

Commissioner of Income-tax

Arts Beauty Exports*

S. RAVINDRA BHAT AND R.V. EASWAR, JJ.

IT APPEAL NOS. 79 & 80 OF 2012

SEPTEMBER 17, 2012

Section 10B of the Income-tax Act, 1961 - Export Oriented undertaking - Splitting up or reconstruction - Assessment years 2006-07 and 2007-08 - Whether a mere reconstitution of partnership firm does not amount to splitting up or reconstruction of partnership business already in existence so as to deny exemption under section 10B - Held, yes - Whether in order to claim exemption under section 10B, custom-bonding is required only where imports are contemplated for purposes of manufacture, production, packaging etc. for purposes of export of goods or services out of India - Held, yes [Para 26] [Matter remanded]

Circulars and Notifications : Instruction No. 2/2009, dated 9-3-2009

FACTS

• The assessee was a partnership firm engaged in the business of export of handicrafts items. In the return of income the assessee claimed the entire business income to be exempt under section 10B.

• The Assessing Officer rejected the assessee's claim on the following ground:

(i) There was a reconstitution of assessee-firm which resulted in reconstruction or splitting up of existing business.

(ii) The assessee was not engaged in the manufacture or production of any article or thing as required by clause (i) of sub-section (2) of section 10B..

(iii) The EOU belonging to assessee was not custom bounded and no bonding license had been obtained as required by the Development Commissioner, SEZ.

• The assessee filed some additional evidence before the Commissioner (Appeals) showing that there was no reconstruction or splitting up of existing business and, moreover, it was engaged in manufacture of wood and brass articles, chess boards etc.

• The Commissioner (Appeals) having accepted additional evidence so adduced, allowed the assessee's claim.

• The Tribunal upheld the order passed by the Commissioner (Appeals)

• On revenue appeal :

HELD

Mere reconstitution of partnership firm does not amount to splitting up of business already is existence :

• A mere reconstitution of the partnership firm can hardly be said to amount to the splitting up, or the reconstruction, of the partnership business which was already in existence. There is no dispute that after the partnership was reconstitued, the reconstituted firm had started a new business with an amendment to the partnership deed enabling the firm to carry on the manufacture and export of handicrafts items. Prior to the reconstitution the firm was authorized to merely carry on trading and exports of handicrafts etc. That apart the balance sheet as on 31-3-2006 undisputedly shows that the assessee had acquired tools and the machinery, which were not with the firm prior to the reconstitution. Even the profit and loss accounts drawn up after the reconstitution showed manufacturing expenses and wages. Therefore, the revenue cannot contend that the undertaking owned by the assessee was formed by the splitting up or reconstruction of the erstwhile partnership business. [Para 20]

Custom-bonding of EOU is not a pre-requisite for claiming exemption under section 10B :

• The other objection of the Assessing Officer that the assessee did not fulfils the conditions prescribed by Development Commissioner also did not appear to be of any substance. From the copy of the notification No. 53/97-customs dated 31-6-1997, that custom-bonding is required only where imports are contemplated for the purposes of manufacture, production, packaging etc. for the purposes of export of goods or services out of India. It has not been shown by the Revenue that the assessee imported any materials either of unfinished or semi-finished or in raw form, which it used in the manufacture or export of handicrafts. In this view of the matter, one does not see any purpose being served by insisting on the custom-bonding of the EOU. A reasonable way of construing the condition imposed by the Development Commissioner would be to understand the same as necessary only when imports are contemplated. Therefore, there is no merit in the objection. [Para 21]

Whether activities carried out by assessee amounted to manufacture so as to claim exemption under section 10B

• Coming to the merits, the assessee claimed, that it turned out a distinct commercial commodity from the raw or semi-finished components. The chess boards and brass items were received by the assessee in a raw or semi-finished or unfinished stage and the assessee carried out several processes thereon, such as carving, polishing and putting various embellishments such as velvet cloth and designs. Thereafter, the items were packed and exported as a separate commercial commodity. In support of said claim, the assessee filed additional evidence before the appellate authorities. [Para 25]

• No doubt the assessee was entitled in this case to have the additional evidence admitted by the Commissioner (Appeals). However, the claim of the assessee based on the additional evidence, even assuming that the additional evidence only elaborated the activities of the assessee, had to be properly verified by the Assessing Officer. The Assessing Officer did not appear to have had ample opportunity to examine them and process the claim of the assessee. The claim made by the assessee was important and it has been made for the first time in the assessment year 2006-07. Admittedly, the business of exports had commenced only in the previous year relevant to the assessment year 2006-07. The profit and loss account for this year was different from the profit and loss account for the earlier years in the sense that the assessee had debited manufacturing expenses, wages etc. in the profit and loss account for the year ended 31-3-2006. The balance sheet as on 31-3-2006 also showed for the first time machinery valued at Rs. 35,100. Thus, there was sufficient justification for the claim to be examined in depth as to whether the assessee was engaged in the manufacture or production of articles or things. Therefore, this issue was to be restored to the file of the Assessing Officer to enable him to process the claim of the assessee afresh in the light of the evidence brought on record. [Para 26]

CASE REVIEW

CIT v. Arts Beauty Exports [2011] 46 SOT 220 (Delhi) (URO)/[2011] 12 taxmann.com 223 (Delhi) (Para 26) set aside.

Abhishek Maratha and Ms. Anshul Sharma for the Appellant. Rajiv Saxena and Jagjeet Singh for the Respondent.

JUDGMENT

R.V. Easwar, J. - These are two appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961 ("Act" for short). They relate to the assessment years 2006-07 and 2007-08 and are directed against a common order passed by the Income Tax Appellate Tribunal ('Tribunal' for short) on 3rd June, 2011 in ITA Nos.2955 & 2956/Del/2010. The following questions, which are common to both the years, are sought to be raised as substantial questions of law:-

"A. Whether the Ld. ITAT was justified in the eyes of law in confirming the order of the CIT(A), which has been passed in utter disregard to Rule 46 A of the Income Tax Rules, 1962?

B. Whether the ITAT was justified in the eyes of law in approving the admission of the additional evidence by the CIT(A) in utter disregard to the remand report submitted by the AO?

C. Whether the ITAT was justified in the eyes of law in granting the exemption u/s 10B of the Act to the assessee, when the assessee doesn't fulfil the preliminary condition applicable for the grant of the exemption?

D. Whether the impugned order passed by the ITAT is perverse both in facts and law?"

2. The brief facts leading up to the filing of the present appeals may be noted. The assessee is a partnership firm engaged in the business of export of handicrafts items. We may first refer to the facts relating to the assessment year 2006-07 since the assessment order for that year was passed earlier on 15th December, 2008. In the return of income filed for that year, the assessee declared business income of Rs. 57,42,645/- and claimed the entire business income to be exempt under Section 10B of the Act. The Assessing Officer examined the claim and noted that the claim was made for the first time. He further noted that the firm came into existence under a partnership deed dated 1st October, 1993 with two partners and later on another partner was taken in under a fresh partnership deed dated 18th may, 2005 which was given effect from 1st April, 2005. This firm continued the same name and style and the same business, accounts etc. The assessee had applied, prior to the reconstitution, to the Development Commissioner, SEZ, Noida for setting up of a 100% Export Oriented Unit (EOU). A letter of permission ("LOP") was granted to the assessee by the Development Commissioner on 5th May, 2005 subject to certain conditions which are as under:-

(1) The unit shall export its entire production in the domestic tariff area as per the Export Oriented Undertaking Scheme for a period of five years for which an undertaking should be given.

(2) Import/local purchase of all items except those listed in the prohibited list will be permitted.

(3) The unit may procure indigenous wood from legally established units and from sawmills licenced by the forest department.

(4) An agreement shall be entered into with the Deputy Commissioner, SEZ, Noida for fulfilling the terms and conditions mentioned in the LOP.

(5) The unit will be custom bonded.

3. In accordance with the aforesaid terms, the agreement for fulfilling the terms and conditions was signed on 13th April, 2006. On this basis, the competent authority issued green card No. 95 dated 24th April, 2006 thereby according approval under the special scheme of the Government of India as "100%" Export Oriented Unit". The letter dated 25th April, 2006, which conveyed the acceptance of the agreement, also stated that the unit will be treated as working under the scheme from the date from which its starts functioning under a custom bond. Since one of the conditions was that the unit should be custom bonded, the Assessing Officer made enquiries with the Central Excise Department in response to which he received a letter dated 27th August, 2008 from the Assistant Commissioner, Central Excise Division-II, Karampura, New Delhi saying that the assessee has not approached them till that date for custom bonding of the unit.

4. After taking note of the above facts, the Assessing Officer further noted from the trading and manufacturing account that the assessee paid wages of only Rs. 21,500/- for the period from 1st April, 2005 to 5th May, 2005, but paid wages of Rs. 2,43,700/- for the rest of the period comprised in the year ended 31st May, 2006. Though he was satisfied that the wages for the rest of the period was in proportion to the wages claimed for the earlier period, he noted that there was no supervisory staff engaged by the assessee, though in its application to the Development Commissioner, SEZ, it had mentioned that about 150 such staff were proposed to be employed. Moreover the assessee did not also disclose any plant and machinery in the second period as was proposed in the application to the Development Commissioner. Except one computer for Rs. 40,660/-, scooter for 37,762, office equipment for Rs. 5,900/- and machinery of Rs. 35,100/-, there was no other fixed asset. Even the machinery of Rs. 35,100/- was only of general nature commonly used in normal business activities. Furthermore the manufacturing expenses incurred in the second period were only Rs. 1,37,978/- and the electricity expenses were only Rs. 75,629/- in the second period. There was no registration under Directorate of Industries, PF and ESI. Further, from the photocopies of the few purchase bills produced before the Assessing Officer to show purchase of raw material, he found that what was purchased was not raw material but were finished items of handicrafts etc. and the sales invoices showed that they mentioned only similar item or items containing a small change in the specification, but substantially the products purchased and the products sold were the same.

5. From the above facts the Assessing Officer came to the conclusion that there was no manufacture or production of any article or thing as required by clause (i) of sub-section (2) of Section 10B of the Act. He, therefore, issued a show cause notice to the assessee to explain why the claim made under Section 10B should not be disallowed. In response to the same the assessee claimed that the processes of assembling, arranging, labelling and repacking would come within the definition of "manufacture" and that the processes to which the items were subjected were necessary to make them complete as finished goods for export purposes. The attention of the Assessing Officer was also drawn to the definition of the term "manufacture" by the Ministry of Commerce and Industries which included processes such as refrigeration, repacking, polishing, labelling, reconditioning etc. Several other submissions were made before the Assessing Officer in support of the claim.

6. The Assessing Officer rejected all the submissions. He raised the following objections to the assessee's claim under Section 10B being allowed:-

(i) The assessee firm has come into existence in violation of clause (ii) of sub- section (2) of Section 10B.

(ii) The assessee is not engaged in the manufacture or production of any article or thing as required by clause (i) of sub-section (2) of Section 10B. No new product has come into existence having a distinctive name, character or use.

(iii) Letter dated 5th May, 2005 issued by the Development Commissioner, SEZ, Noida shows that it is only a communication while processing the assessee's application for approval as 100% EOU and that it is not an approval per se. It required the assessee to comply with 12 more conditions which were not complied with by the assessee. Predominantly the EOU has not been custom bonded and no bonding licence has been obtained.

In this view of the matter, the Assessing Officer rejected the claim of the assessee under Section 10B of the Act.

7. On appeal by the assessee to the CIT(Appeals), the assessee would appear to have filed detailed written submissions and a paper book consisting of additional evidence. It was submitted that a mere reconstitution of the partnership firm cannot amount to splitting up or reconstruction of business already in existence. It was submitted that the ownership, management and custody of the assets of the firm continued to remain with the partners, both before and after the approval given by the Development Commissioner, SEZ, Noida. On the point as to whether the assessee was carrying on any manufacturing activity it was submitted that it was engaged in the manufacture of wood and brass articles, chess boards etc. for which unfinished and semi-finished articles were got manufactured from various artisans as per specific instructions, that these semi-finished products were converted into finished products by the EOU after applying several manufacturing and mechanical processes such as rubbing the raw material by sand paper, buffing, carving, pasting velvet cloth on wooden boxes etc. Similar processes, it was urged, were undertaken on the brass items which were then assembled and polished. Evidence for purchase of raw material was furnished before the CIT(Appeals) in the form of a paper book. Several authorities were cited to show that what the assessee was doing amounted to a manufacturing activity thus satisfying the requirement of clause (i) of sub-section (2) of Section 10B.

8. As regards the evidence for manufacture is concerned, the assessee also drew the attention of the CIT(Appeals) to the purchase of machinery for Rs. 35,100/-consisting of various tools and the fact that the depreciation was actually allowed in the assessment for the assessment years 2005-06 and 2006-07 which established the claim that the machinery was used for the purpose of manufacturing operations. The attention of the CIT(Appeals) was also drawn to the various amounts debited as manufacturing expenses, wages etc.

9. The submissions of the assessee along with evidence adduced before the CIT(A) were sent to the Assessing Officer to enable him to submit a remand report after scrutiny. The Assessing Officer was also provided with the exhibits, namely, a raw chess board and finished chess board on which value addition had been allegedly done by the assessee. A copy of the letter dated 19th January, 2010 from the Ministry of Commerce, EPZ Section, which was obtained through an application filed under RTI Act, was also sent to the Assessing Officer.

10. The Assessing Officer vide letter dated 19th March, 2010 sent the remand report in which he objected to the admissibility of additional evidence under Rule 46A of the Income Tax Rules, 1962. He doubted the genuineness of the evidence obtained from various suppliers in the form of affidavits which, in any case, according to him did not establish the claim that there was manufacturing activity. The Assessing Officer also claimed one more opportunity to examine the correctness, genuineness and veracity of all the affidavits filed by the assessee. So far as other submissions made by the assessee are concerned, the Assessing Officer did not offer any comment. According to him, whatever was submitted before the CIT(Appeals) was additional evidence which could have very well been submitted by the assessee in the course of the assessment proceedings.

11. The assessee filed a rejoinder to the remand report and submitted that the additional evidence and affidavits filed before the CIT(Appeals) cannot strictly be so considered as they were filed only in continuation of the submissions made and evidence adduced before the Assessing Officer in the course of assessment proceedings. According to the assessee the additional documents filed before the CIT(Appeals) were in the nature of further clarification and not independent evidence. The mistake that had occurred in the note that the date of commencement of production was 22nd September, 2006 in the letter issued by the Development Commissioner was also pointed out to the CIT(Appeals) and it was submitted that all these facts were made known to the Assessing Officer at the time of the assessment proceedings; but he did not prefer to wait for the clarifications and proceeded to complete the assessment on 15th December, 2008, even though 15 more days were available to him for completing the assessment. Thus, it was claimed, that the Assessing Officer did not afford adequate opportunity to the assessee to adduce evidence which justified the admission of the additional evidence before the CIT(Appeals).

12. The CIT(Appeals) admitted the documents adduced as additional evidence on the ground that they only clarified the assessee's claim which was not exclusively based on those documents. He considered the approval given by the Development Commissioner for starting manufacturing operations as crucial as also the clarification issued on an application made under the Right to Information Act. He noted that the Assessing Officer had been given adequate opportunity to examine the additional evidence and file a remand report and in fact the Assessing Officer had taken more than 15 months to send the remand report. He referred to the clarification issued by the Development Commissioner, SEZ, Noida in which there was clear reference to the letter of approval as on 5.5.2005 to the export-oriented unit and opined that in the light of this, the Assessing Officer should have appreciated that the EOU was in existence from the date of issue of the letter of permission and therefore no further approval from any authority was required. This position, according to the CIT(Appeals), was clarified by the CBDT by instruction No.2/2009 issued on 9th March, 2009. In this view of the matter he held that no further documents or approvals were required by the assessee to substantiate his claim for deduction under Section 10B.

13. With regard to the objection of the Assessing Officer that the unit was not custom-bonded, the CIT(Appeals) took the view that since no imports were contemplated by the assessee in the manufacture of handicrafts, there was no need to custom-bond the unit.

14. The CIT(Appeals) also noticed that the assessee had carried out its operations from 5.5.2005 and had also effected export sales after 18.5.2005 in respect of which foreign exchange was realized. It was thus held by him that all the paper work had been completed by the assessee and nothing further was required to be done. He summed up the position in the following words :

"7.2.3 On careful and coherent appreciation of these terms, it will be sufficient to treat existence of a 100% EOU, if a valid letter of permission has been issued in this regard by the Development Commissioner. The CBDT has already clarified that, wherever such an issue of letter of permission was further ratified by the Board of Approval, the approval shall be deemed to have been issued from the date the letter of permission was issued, in the case of the appellant, since the letter of permission was issued on 5.5.2005 and which was further ratified on 21.7.2005, the EOU had come in existence, for the purpose of section 10 B of the of the (sic) I.T. Act, 1961 on 5.5.2005 itself. The learned AO has gone beyond the above accepted legal definition of EOU by contemplating that the EOU shall come into existence only when various procedural formalities entailed in the said LOP are also fulfilled. However these procedural formalities were relevant for the competent authority, which are empowered to even cancel or revoke the approval, if such essential conditions were not met. However, for the purpose of claiming deduction under section 10 B, it is sufficient that the letter of permission is issued for setting up the hundred percent, EOU. Since the relevant competent authorities have duly issued the necessary approval and have also sorted out the procedural formalities subsequently in their own way, e.g., even though the appellant did not require the facility of custom warehouse, prevailed upon him to have a custom-bound warehouse, prevailed upon him to have a custom-bound warehouse and based on that, have not revoke or cancelled the approval, therefore, the delay in meeting these conditions, did not have any bearing on the status of 100% EOU.

Therefore, the observations of the learned AO that the legal agreement was 24th of July 2006 and based on which, in the record of the Development Commissioner, the commencement date was recorded at 22 September 2006, were not relevant for determining whether 100% EOU, in terms of the Foreign Trade Policy and the provisions of section 10 B of the I.T Act, 1961, was in existence or not w.e.f. 5.5.2005."

15. The CIT(Appeals) also held that the assessee had commenced the manufacturing operations required by Section 10B. New machinery for Rs. 35,100/- was acquired during the previous year ended 31.3.2007. There was, according to the CIT(Appeals) a distinction between the manner in which the business activity of the firm was carried on prior to 1.4.2005 and after that date. Earlier to the said date, the activity of the firm was restricted to trading of handicrafts items. After the said date, under the new partnership deed, the scope of the business was enlarged to include manufacturing for the purpose of export of handicrafts items. The tax auditors had also made a reference to this in their tax audit report filed under Section 44AB. For the previous year relevant to the assessment year 2006-07, expenses in the nature of wages and manufacturing expenses as well as depreciation had been debited to the profit and loss account. The incurring of these expenses coupled with the manufacture of handicraft items for the purpose of export, satisfied the requirements of Section 10B(2).

16. With regard to the nature of the manufacturing carried on by the assessee, the CIT(Appeals) on a perusal of the bills for purchase of raw materials, semi-finished material, unfinished material etc. and also on examining the exhibits and samples in order to emphasize the value addition brought about by the assessee held that the activity carried on by the assessee amounted to manufacturing activity. He noted that the Assessing Officer, despite being given an opportunity, did not examine the value addition made to the raw materials and the semi-finished or unfinished materials. He also noted the clarification issued by the Ministry of Finance with regard to the definition of the term "manufacture" appearing under Section 2(f) of the Central Excise Act, 1944 by issue of a trade notice No. 6/2006 dated 24.7.2006 and held as follows :

"8.4 I find that in the business of export the work orders are placed on the basis of which only goods are manufactured. Looking to the facts of the case, I observe that these goods are purchased as per orders giving description of shape, size, design, weight, etc. which were ultimately manufactured for them. The appellant firm not only is clearly engaged in the business of manufacturing for which it purchased several finished and unfinished material on which further, processing was carried out to make it saleable in the international market. Therefore in view of the - above facts, it cannot be denied that the appellate firm had not done any "manufacturing" activity during the year for the purpose of export of handicrafts items."

17. Turning to the other condition of Section 10B(2), namely, that the undertaking owned by the assessee should not have been formed by the splitting up or the reconstruction of an existing business and dealing with the objection of the Assessing Officer that on reconstitution of the firm, there was a reconstruction or splitting up of the existing business, the CIT(Appeals) held that what happened on 18.5.2005 was merely that Gaurav Arora was inducted as a new partner and the existing partner Umesh Arora was divested of 50% of his share in the profits in favour of the new partner. This according to the CIT(Appeals) did not amount to splitting up of or reconstruction of an existing business. The reconstituted firm had started an altogether new business of manufacture and export of handicrafts items while the erstwhile firm was engaged merely in trading activity. The CIT(Appeals) perused the balance sheet of the reconstituted firm as on 31.3.2006 and found that the firm had acquired tools for the purpose of manufacturing for export of handicraft items. No such machinery was owned by the erstwhile firm. The erstwhile firm did not also incur any wages or manufacturing expense which was incurred by the reconstituted firm. In this view of the matter, the CIT(Appeals) held, agreeing with the assessee, that there was no reconstruction or splitting up of a business already in existence in order to form the undertaking owned by the assessee.

18. In the aforesaid view of the matter the CIT(Appeals) held that for both the assessment years under appeal the assessee was entitled to the deduction under Section 10B.

19. The revenue carried the matter in appeal before the Tribunal. It may be noted that both the assessments were completed within a short time gap and therefore both the appeals were taken up by the CIT(Appeals) for decision through a common order, which was passed on 30.3.2010. Therefore, the Tribunal also disposed of the appeals of the revenue on 3.6.2011 by a consolidated order. A broad perusal of the order of the Tribunal shows that it has substantially endorsed the findings and conclusions of the CIT(Appeals) and dismissed the appeals filed by the revenue.

20. The simple question which we have to address is whether the assessee has satisfied all the conditions of Section 10B of the Act. As far as the first objection raised by the Assessing Officer is concerned, namely, that the assessee was formed by the splitting up, or the reconstruction, of a business already in existence, we are of the view that the objection was rightly repelled by the CIT(Appeals). A mere reconstitution of the partnership firm can hardly be said to amount to the splitting up, or the reconstruction, of the partnership business which was already in existence. There is no dispute that after the partnership was reconstitued, the reconstituted firm had started a new business with an amendment to the partnership deed enabling the firm to carry on the manufacture and export of handicrafts items. Prior to the reconstitution the firm was authorized to merely carry on trading and exports of handicrafts etc. That apart the balance sheet as on 31st March, 2006 undisputedly shows that the assessee had acquired tools and the machinery, which were not with the firm prior to the reconstitution. Even the profit and loss accounts drawn up after the reconstitution showed manufacturing expenses and wages. We are, therefore, unable to appreciate how the Revenue can contend that the undertaking owned by the assessee was formed by the splitting up or reconstruction of the erstwhile partnership business. The contention is contrary to the facts on record.

21. The other objection of the Assessing Officer that the assessee did not fulfill the conditions prescribed by Development Commissioner in his letter dated 5th May, 2005 also does not appear to us to be of any substance. One of the main objections of the Assessing Officer was that the EOU was directed to be custom-bonded which was not complied with by the assessee. The CIT(Appeals) held that custom-bonding was required only where imports are contemplated and since the assessee-firm did not plan to import any materials to be used in the manufacture of ingredients, the EOU was not custom-bonded. It appears to us from the copy of the notification No.53/97 - customs dated 3rd June, 1997, that custom-bonding is required only where imports are contemplated for the purposes of manufacture, production, packaging etc. for the purposes of export of goods or services out of India. The notification was issued in exercise of the powers conferred by Section 25(1) of the Customs Act, 1962. It has not been shown by the Revenue that the assessee imported any materials either of unfinished or semi-finished or in raw form, which it used in the manufacture or export of handicrafts. In this view of the matter, we do not see any purpose being served by insisting on the custom-bonding of the EOU. A reasonable way of construing the condition imposed by the Development Commissioner would be to understand the same as necessary only when imports are contemplated. We, therefore, do not see much merit in the objection.

22. The main objection of the Revenue is that the assessee was wrongly held by the CIT(Appeals) and the Tribunal to be engaged in the manufacture or production of any articles or things in fulfilment of one of the conditions of Section 10B(2). It is also contended that the Tribunal erroneously approved the admission of additional evidence by the CIT(Appeals) and it did not follow the procedure laid down by Rule 46A of the Income Tax Rules, 1962 and that the CIT(Appeals) admitted the additional evidence in disregard of the remand report submitted by the Assessing Officer.

23. We may first take up the issue relating to the admission of additional evidence of the CIT(Appeals). In support of the contention that it was engaged in the manufacture of handicrafts items, the assessee had submitted various documents and samples/exhibits before the CIT(Appeals). The exhibits included raw chess board and finished chess board on the basis of which the assessee explained that it made a value addition to the chess board exports, which amounted to manufacture. The documentary evidence and the samples or exhibits were forwarded by the CIT(Appeals) to the Assessing Officer with the direction that a remand report be submitted by him. The documentary evidence included evidence from the supplier of raw material/semi finished goods along with other details. The letter of permission dated 19th January, 2010 issued by the Ministry of Commerce, EPZ Section which had been obtained under the RTI Act and filed before the CIT(Appeals) as additional evidence was also sent to him for comments. The Assessing Officer submitted remand report which was allegedly after a lapse of 15 months. The remand report was also commented upon by the assessee in its rejoinder. The Assessing Officer had objected to admission of the additional evidence, but the CIT(Appeals) overruled it as the additional evidence was only clarificatory in nature and the assessee's case was not exclusively based on it. He pointed out that the Assessing Officer could have carried out an enquiry before submitting a remand report and could have gone on a visit to the assessee's unit to carry out an inspection and see for himself the nature of the activity carried on by the assessee. The CIT(Appeals) held that the request of the Assessing Officer that he should be given one more opportunity of examining the evidence and the affidavits of the suppliers by summoning the deponents was not reasonable since the Assessing Officer had already taken more than 15 months to comply with the remand. He, therefore, held that it was not in the interest of justice to delay the proceedings further by giving further opportunity to the Assessing Officer. In this view of the matter he admitted the additional evidence.

24. The Tribunal dealt with this issue in paragraph 5 of its order. It noted that the additional evidence consisted of only the following:-

"(i) Copy of RTI Application dated 11.01.2010 addressed to Ministry of Commerce and Industry, Udvoy, Biawan. New Delhi.

(ii) Copy of reply dated 19.01.2010 received from EOU Section, Ministry of Commerce and industry, Government of India.

(iii) Affidavits of suppliers confirming about supplying the unfinished, unassembled and incomplete goods to the Assessee.

(iv) Exhibits 01 and 02 as Raw Chess Board and Raw Chess Pieces respectively and also Exhibits 03 and 04 as Finished Chess Board and Finished Chess Pieces respectively."

The Tribunal also found that all other evidence was part of the assessment proceedings. It was further noted that the only objection of the Revenue was that reasonable opportunity was not allowed to the Assessing Officer. The Tribunal rejected the contention saying that the Assessing Officer took 15 months and more to submit the remand report and, therefore, there was no merit in the contention of the Revenue that no reasonable opportunity was given to the Assessing Officer. Having regard to the Tribunal's observation in para 5.3 that the only objection raised by the Revenue before it was that no reasonable opportunity was granted to the Assessing Officer under Rule 46A, we are unable to say that the Tribunal erred in holding that the CIT(A) was justified in admitting the additional evidence. The additional evidence was rightly admitted.

25. Coming to the merits of the assessee's claim, accepted by the Tribunal, that the assessee manufactured handicrafts for the purpose of exports, the Tribunal has discussed the issue (in paragraphs 10.2 to 10.5 of its order). What we can glean from these paragraphs is that the Tribunal held that the assessee turned out a distinct commercial commodity from the raw or semi-finished components. The chess boards and brass items were received by the assessee in a raw or semi-finished or unfinished stage and the assessee carried out several processes thereon, such as carving, polishing and putting various embellishments such as velvet cloth and designs. Thereafter, the items were packed and exported as a separate commercial commodity. These included chess boards, brass items and what was called "5 indoor games", which are stated to be popular in foreign countries. According to the Tribunal the items purchased by the assessee were totally distinct and different from the items exported and this amounted to manufacture of articles or things. In coming to this conclusion the Tribunal noted the definition of the word "manufacture" given in the circular issued by the central excise department as meaning to make, produce, fabricate, assemble, process, calibrate by hand or by machine to bring out a new product having a distinct name, character or use. The definition included various processes such as cutting, polishing, blending, repacking, labeling, refurbishing etc. The Tribunal also placed strong reliance on the fact that the additional evidence adduced by the assessee before the CIT(Appeals) was sent to the Assessing Officer for filing a remand report which was sent by the Assessing Officer after a lapse of 15 months, during which period he could have examined the exhibits/samples, affidavits, purchase bills issued by the suppliers etc., and verified whether the assessee's claim that it was engaged in the carrying out of various activities amounting to manufacture was correct or not. It was thus held by the Tribunal that ample opportunity had been given to the Assessing Officer and despite this he had submitted only "a half-hearted remand report".

26. The difficulty in accepting the findings of the Tribunal is that it has erroneously proceeded on the footing that the Assessing Officer had ample opportunity to examine and verify the additional evidence adduced by the assessee before the CIT(Appeals). The Tribunal, as noted earlier, has stated that the Assessing Officer had delayed the remand report beyond 15 months. We are unable to see the basis of this statement. The appeals before the CIT(Appeals) were filed by the assessee on 18.1.2010. It was in the course of the appeal proceedings that additional evidence had been produced and a remand report was called for by the CIT(Appeals). The appeals were eventually disposed of by the CIT(Appeals) by a common order dated 30.03.2010. Thus the entire appeal proceedings had taken less than three months for completion. In this background, it is not understandable as to how the Assessing Officer can be blamed to have delayed his remand report beyond 15 months. This aspect of the matter has not been clarified either by the CIT(Appeals) or by the Tribunal and it was also not clarified before us. No doubt we have held that the assessee was entitled in this case to have the additional evidence admitted by the CIT(Appeals). However, the claim of the assessee based on the additional evidence, even assuming that the additional evidence only elaborated the activities of the assessee, had to be properly verified by the Assessing Officer. The Assessing Officer does not appear to have had ample opportunity to examine them and process the claim of the assessee. The claim made by the assessee is important and it has been made for the first time in the assessment year 2006-07. Admittedly, the business of exports had commenced only in the previous year relevant to the assessment year 2006-07. The profit and loss account for this year was different from the profit and loss account for the earlier years in the sense that the assessee had debited manufacturing expenses, wages etc. in the profit and loss account for the year ended 31.03.2006. The balance sheet as on 31.03.2006 also showed for the first time machinery valued at Rs. 35,100/-. Thus there is sufficient justification for the claim to be examined in depth as to whether the assessee was engaged in the manufacture or production of articles or things. We, therefore, restore this issue to the file of the Assessing Officer to enable him to process the claim of the assessee afresh in the light of the evidence brought on record. It is clarified that the Assessing Officer will examine only the question whether the assessee satisfied the condition stated in Section 10B(2)(i) of the Act. Accordingly, question "C" is answered in the negative but an order of remit is being passed as stated above.

27. For the aforesaid reasons we answer the first two questions of law in the affirmative, in favour of the assessee and against the revenue. The third question of law is answered in favour of the revenue, subject to our order of remit. The last question of law is answered in the negative, insofar as it relates to the admission of the additional evidence.

The appeals are thus partly allowed.

IT : In terms of provisions of section 10A, unless foreign remittances are credited in account of assessee or at least credited in account of bank, it can not be said that export proceeds have been received in or brought into India

IT : Subsidy granted specifically towards a particular asset has to be reduced from cost of that asset while computing depreciation

■■■

[2012] 28 taxmann.com 15 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'C'

Capital Foods Exports (P.) Ltd.

Assistant Commissioner of Income-tax-8(3) (OSD), Mumbai*

D. Manmohan, Vice-President

And Rajendra Singh, Accountant Member

IT Appeal No. 5137 (Mum.) of 2010

[Assessment year 2007-08]

August 8, 2012

I. Section 10A of the Income-tax Act, 1961 - Free trade zone - Receipt of export proceeds - Assessment year 2007-08 - Whether in terms of provisions of section 10A, unless foreign remittances are credited in account of assessee or at least credited in account of bank, it cannot be said that export proceeds have been received in or brought into India - Held, yes - Assessee, engaged in business of manufacturing and export of processed food products, claimed deduction under section 10A - Assessing Officer finding that the remittances of export proceeds had not been received within stipulated period of six moths in India in convertible foreign exchange, rejected assessee's claim - Whether since certificate issued by Bank did not state that foreign remittances had been credited in its account within period of six months so that it could be considered as having brought into India, assessee's claim was rightly rejected - Held, yes [Para 2.4] [In favour of revenue]

II. Section 43(1) of the Income-tax Act, 1961 - Actual cost - Subsidy - Assessment year 2007-08 - Whether subsidy granted specifically towards a particular asset only has to be reduced from cost of that asset while computing depreciation - Held, yes - Whether where there was no material to show that subsidy had been granted to meet cost of plant and machinery purchased by assessee, disallowance of depreciation corresponding to subsidy could not be upheld - Held, yes [Para 3.2] [In favour of assessee]

FACTS-I

• The assessee was engaged in the business of manufacturing and export of processed food products, it claimed deduction under section 10A in respect of export of products.

• The Assessing Officer finding that the remittances of the export proceeds had not been received within stipulated period of six months in India in convertible foreign exchange, rejected assessee's claim

• The Commissioner (Appeals) upheld the order of the Assessing Officer.

• On second appeal:

HELD-I

• The case of the assessee was that the foreign remittances had been sent by the foreign buyer to the banker who misplaced the same and, therefore, since remittances were received in India, claim of deduction should be allowed.

• Unless the foreign remittances are credited in the account of assessee or at least credited in the account of the bank, it can not be said that the export proceeds have been received in or brought into India. The assessee has placed on record a certificate from State Bank of India which only states that the proceeds of the foreign remittances had been credited to the account of the assessee. The certificate does not even state that the foreign remittances had been credited in the account of the Bank within the period of six months so that it could be considered as having brought into India. Thus export proceeds to that extent had not been received in or brought in India within a period of six months. This period had not been extended by the authorities as assessee had not applied for any such extension. Therefore, such export proceeds had to be excluded from export turnover, while computing deduction under section 10A. [Para 2.4]

FACTS-II

• The assessee had received grant from Ministry of Food Processing Industries. Since the assessee had received subsidy, the Assessing Officer reduced depreciation corresponding to the subsidy amount.

• On appeal, the assessee pointed out that it had not received subsidy towards any specific asset and, therefore, the same could not be reduced from the cost of asset while computing depreciation. The Commissioner (Appeals) noted from the letter of Ministry of Food Proceeding Industry that capital subsidy had been given for setting of unit for ready-to-eat foods. The Commissioner (Appeals) also observed that the entire amount was paid towards plant and machinery and not towards any civil work.

• He, therefore, confirmed the disallowance made by Assessing Officer.

• On second appeal:

HELD-II

Reduction of subsidy from cost of asset while computing depreciation :

• There was nothing on record to show that subsidy had been granted by the Government towards any specific asset or plant and machinery. The letter referred to by the Commissioner (Appeals) only showed that subsidy was for setting up of a unit for manufacture of ready to eat foods. The letter did not show that the subsidy had been given specifically to acquire any asset. Therefore, merely because amount received had been utilized for acquisition of plant and machinery, it could not be said that subsidy was to meet cost of any asset. It is a settled legal position that only subsidy granted specifically towards a particular asset has to be reduced from cost of that asset while computing depreciation. Since there was no material to show that the subsidy had been granted to meet cost of plant and machinery the disallowance of depreciation corresponding to subsidy could not be upheld. The order of Commissioner (Appeals) is, therefore, set aside and claim of the assessee was allowed. [Para 3.2]

Kishore M. Rajeshirke for the Appellant. N. Sathya Moorthy for the Respondent.

ORDER

Rajendra Singh, Accountant Member - This appeal by the assessee is directed against the order dated 16.4.2010 of CIT(A) for the assessment year 2007-08. The assessee has raised disputes on two different grounds which relate to disallowance of deduction under section 10A and disallowance of depreciation.

2. We first take up the issue relating to deduction under section 10A of the Income tax Act. The assessee was engaged in the business of manufacturing and export of processed food products. The assessee claimed deduction under section 10A in respect of export of products. The AO noted that there were three remittances of the export proceeds with aggregate value of Rs. 14,78,565/- which had not been received within the stipulated period of six months in India in convertible foreign exchange as required under law. The assessee submitted that the buyer Raja Foods Chicago had sent the remittances which were not traceable by bankers. The assessee was in regular touch with the bankers to trace the payment received. Since the remittances had been received in India, assessee should be allowed deduction under section 10A in relation to said remittances. The AO however observed that the assessee provided no concrete proof to substantiate that the remittances had been received in India. He, therefore, disallowed the claim and added the sum of Rs. 14,78,565/-to the total income as unrealized debts.

2.1 The assessee disputed the decision of AO and submitted before CIT(A) that remittances had been received but could not be credited to the assessee's bank account as the same were not traceable by the bankers. The assessee had not applied for extension beyond the period of six months as provided under section 10A(3) as remittance had been received. It was accordingly urged that the claim should be allowed. Alternatively it was submitted that deduction under section 10A is limited to net profit from export proceeds and not on entire sale proceeds and, therefore, it was submitted that the disallowance should be limited to 8% of the invoice amount being estimated profit. CIT(A) however, did not accept the contentions raised. It was observed by him that copy of the certificate submitted by the assessee from SBI did not prove that the amount had been credited to the account of the assessee. Therefore, the claim could not be allowed under section 10A. CIT(A) also rejected the alternate claim of disallowance of only net profit @ 8% on the ground that the assessee had already claimed the entire expenses in the P&L Account. CIT(A) confirmed the order of AO aggrieved by which assessee is in appeal before the Tribunal.

2.2 Before us the ld. AR reiterated the submissions made before lower authorities that the remittances had been received by the bankers in India and, therefore, the statutory requirement was fulfilled and claim should be allowed. He referred to the copy of certificate dated 24.1.2012 issued by SBI to point out that DD issued by foreign party was dated 13.11.2006 which had been received by bankers and therefore, claim should be allowed. He, also reiterated the alternate claim that disallowance if any should be limited to net profit from the remittances and not the entire remittances.

2.3 The ld. DR on the other hand submitted that bank certificate did not prove that the remittances had been credited in the account of the banker and, therefore it could not be said that the remittances had been received in India in convertible foreign exchange. He also supported the orders of authorities below for adding the entire amount as assessee had already claimed all expenses relating thereto in the P&L Account.

2.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of deduction under section 10A in relation to export proceeds aggregating to Rs. 14,78,565/- on the ground that the same had not been received in convertible foreign exchange in India within a period of six months as stipulated under the statutory provisions. Section 10A allows exemption of profit and gain derived from export of certain articles or things and computer software. Sub section(4) of section 10 provides that profit derived from export of articles or things shall be the profit of the business of the undertaking in the ratio of export turnover to total turnover. Export turnover has been defined in Explanation-2 to section 10A as consideration in respect of export of article or things received by the assessee or brought into India in convertible foreign exchange. Therefore, if certain export proceeds have not been received in or brought in India in convertible foreign exchange within a period of six months or within such period as extended by the competent authority under sub section-3, such receipts shall not form part of export turnover. In the present case, the case of the assessee is that the foreign remittances had been sent by the foreign buyer to the banker who misplaced the same and, therefore, since remittances were received in India, claim of deduction should be allowed. In our view unless the foreign remittances are credited in the account of assessee or at least credited in the account of the bank, it can not be said that the export proceeds have been received in or brought into India. The assessee has placed on record a certificate dated 24.1.2012 from State Bank of India which only states that the proceeds of the foreign remittances had been credited to the account of the assessee on 20.1.2011. The certificate does not even state that the foreign remittances had been credited in the account of the Bank within the period of six months so that it could be considered as having brought into India. Thus export proceeds to that extent had not been received in or brought in India within a period of six months. This period had not been extended by the authorities as assessee had not applied for any such extension. Therefore, such export proceeds have to be excluded from export turnover, while computing deduction under section 10A. However, these have to be considered as part of total turnover as the assessee was following mercantile system of accounting. It is not clear whether these remittances have been included in the total turnover in the P&L account. We, therefore, direct the AO to re-compute deduction under section 10A by including the said remittances in the total turnover and by excluding the same from export turnover and excess claim if any will be disallowed. The profit of business will be computed excluding the remittances in the total turnover. This will also take care of the alternate claim of the assessee

3. The second dispute is regarding disallowance of depreciation on plant and machinery. The assessee had received grant from Ministry of Food Processing Industries totaling Rs.49,00 lacs. 50% of which i.e. Rs. 24,54,000/- was received on 12.1.2007 and balance 50% on 19.3.2008 in the next year. Since the assessee had received subsidy the AO reduced depreciation corresponding to the subsidiary account @ 15% amounting to Rs. 7,35,000/-. The assessee disputed the decision of the AO and submitted before CIT(A) that though 50% of subsidy had been received in the next year the assessee had made provision for the entire amount in this assessment year. Assessee referred to the Accounting Standard-12 issued by ICAI as per which only capital subsidy received relating to specific assets is required to be reduced from the assets and no general subsidy. It was pointed out that the assessee had not received subsidy towards any specific asset and, therefore, the same could not be reduced from the asset. CIT(A) noted from the letter dated 22.12.2006 of Ministry of Food Processing Industry that capital subsidy had been given for setting of unit for ready-to-eat foods at Gandhidham, Gujarat. CIT(A) also observed that the entire amount was paid towards plant and machinery and not towards any civil work. He, therefore, confirmed the disallowance made by AO, aggrieved by which assessee is in appeal before the Tribunal.

3.1 Before us ld. AR for the assessee reiterated the submissions made before the lower authorities that the subsidy granted was a general subsidy and the same could not be reduced from the cost of assets. The ld. DR on the other hand placed reliance on the orders of authorities below.

3.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding treatment of subsidy received by the assessee from the Government in the computation of depreciation on plant and machinery. The AO reduced the subsidy amount from the cost of plant and machinery and accordingly depreciation was disallowed to that extent. CIT(A) confirmed the order of AO. On careful perusal of record we find that there is nothing on record to show that subsidy had been granted by the govt. towards any specific asset or plant and machinery. The letter dated 22.12.2006 referred to by the ld. CIT(A) only shows that subsidy was for setting up of a unit for manufacture of ready to eat foods. The letter does not show that the subsidy had been given specifically to acquire any asset. Therefore, merely because amount received had been utilized for acquisition of plant and machinery, it can not be said that subsidy was to meet cost of any asset. It is a settled legal position that only subsidy granted specifically towards a particular asset has to be reduced from cost of that asset while computing depreciation. Since there is no material to show that the subsidy in this case had been granted to meet cost of plant and machinery the disallowance of depreciation corresponding to subsidy can not be upheld. The order of CIT(A) is, therefore, set aside and claim of the assessee is allowed.

4. In the result appeal of the assessee is partly allowed.

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----- Forwarded Message -----
From: CA. V.M.V.SUBBA RAO <vmvsrao@gmail.com>
To: Kanigalla <kanigalla@hotmail.com>
Sent: Thursday, 6 December 2012 5:44 AM
Subject: Rule 5(1)- Ultra Vires

Service Tax (Determination of Value) Rules, 2006 - Constitutional validity of Rule 5

Re-imbursement of expenses in the value of taxable services for the purposes of levy of service tax - Company providing consulting engineering services - Petitioner receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc - It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients

Section 67 states that 'Service tax was to be charged on the gross value including reimbursable and out of pocket expenses' –

Charging Section 66 states that 'the charge of service tax is on the value of taxable services' - Section 67 (1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66 - This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else - Rule 5 (1) which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires Section 66 and 67.

Rule 5 may also result in double taxation - If the expenses on air travel tickets are already subject to service tax and is included in the bill, to charge service tax again on the expense would certainly amount to double taxation. It is true that there can be double taxation, but it is equally true that it should be clearly provided for and intended; at any rate, double taxation cannot be enforced by implication

Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made "for carrying out the provisions of this Chapter" i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax.

"The Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect." as decided in case of Taj Mahal Hotel (1971 (8) TMI 2 - SUPREME COURT)

Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider "in the course of providing taxable service". What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.

Sub-ordinate legislation - The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act.

Quash the show-cause notice and allow the writ petition in favour of assessee.

Delhi High Court strikes down Rule 5(1) of Service Tax (Determination of Value) Rules - Holds Rule is ultra vires Sections 66 and 67 of Finance Act, 1994

WHILE the Revenue had a winning spree in Supreme Court in recent past, it has got a big jolt from the Delhi High Court a few days back. In a judgment that has far reaching consequences, ( including a possible retrospective amendment) the High Court has struck down the Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 as ultra vires the provisions of Section 66 and 67 of the Finance Act, 1994.

The Petitioner Company is engaged in providing consulting engineer services and receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients. Department issued Show Cause Notice demanding service tax on the expenses reimbursed by invoking the provisions of Rule 5(1) of the Service Tax (Determination of value) Rules 2006. The Petitioner has challenged the provisions of Rule 5(1) in a Writ Petition.

The High Court, while allowing the Petition filed by the assessee, held:

++ Section 67, both before and after 01.05.2006 authorises the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money. It is only the value of such service that is to say, the value of the service rendered by the petitioner to NHAI, which is that of a consulting engineer, that can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him. Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made "for carrying out the provisions of this Chapter" i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax.

++ We have no hesitation in ruling that Rule 5 (1) which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires Section 66 and 67 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider "for such service" provided by him.

++ In the illustration given ( under Rule 5), the architect who renders the service incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc. to enable him to effectively perform the services. The illustration, therefore, says that these expenses are to be included in the value of the taxable service. The illustration clearly shows how the boundaries of Section 67 are breached by the Rule.

++ There is ample authority for the proposition that the rules cannot override or overreach the provisions of the main enactment.

++ Section 66 levies service tax at a particular rate on the value of taxable services. Section 67 (1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus in built mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. We are, therefore, undoubtedly of the opinion that Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires.

--
Best Wishes

CA. V.M.V.SUBBA RAO
Chartered Accountant
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Thursday, December 6, 2012

[aaykarbhavan] Fw: Rule 5(1)- Ultra Vires, Judgments, ITR Company Cases,

In view of this judgement of high court , all cases where deduction u/s 10B for 100% EOU has been given , needs to rechecked and whereever possible , necessary remedial action under relavant provisions of IT Act needs to be taken.

Approval by Central Government must to claim deduction u/s.10B for 100% EOU

Initial assessment year for computation of profits eligible for tax holiday is the year in which taxpayer exercises the option to claim deduction

COMPANY CASES (CC) HIGHLIGHTS

ISSUE DATED 7-12-2012

Volume 175 Part 5

ISSUE DATED 7-12-2012

Volume 175 Part 5

SUPREME COURT

HIGH COURTS

ENGLISH CASES

CLB

SAT

DRAT

STATUTES

JOURNAL

NEWS-BRIEFS

HIGH COURT JUDGMENTS

Company Law Board Orders

STATUTES AND NOTIFICATIONS

No comments:

Post a Comment

Thursday, December 6, 2012

[aaykarbhavan] Fw: Rule 5(1)- Ultra Vires, Judgments, ITR Company Cases,

In view of this judgement of high court , all cases where deduction u/s 10B for 100% EOU has been given , needs to rechecked and whereever possible , necessary remedial action under relavant provisions of IT Act needs to be taken.

Approval by Central Government must to claim deduction u/s.10B for 100% EOU

Initial assessment year for computation of profits eligible for tax holiday is the year in which taxpayer exercises the option to claim deduction

COMPANY CASES (CC) HIGHLIGHTS

ISSUE DATED 7-12-2012 Volume 175 Part 5

ISSUE DATED 7-12-2012

Volume 175 Part 5

SUPREME COURT HIGH COURTS ENGLISH CASES CLB SAT DRAT STATUTES JOURNAL NEWS-BRIEFS

HIGH COURT JUDGMENTS

Company Law Board Orders

STATUTES AND NOTIFICATIONS

No comments:

Post a Comment

ISSUE DATED 7-12-2012

Volume 175 Part 5

SUPREME COURT

HIGH COURTS

ENGLISH CASES

CLB

SAT

DRAT

STATUTES

JOURNAL

NEWS-BRIEFS