2012 (3) TMI 258 - AT - Income Tax

Tribunal upholds deduction under Section 10AA for trading activities in SEZ; doctrine of promissory estoppel applied

Deputy Commissioner of Income-tax, Circle-2 Versus Goenka Diamond & Jewellers Ltd.

Deputy Commissioner of Income-tax, Circle-2 Versus Goenka Diamond & Jewellers Ltd. - TMI Issues Involved:1. Eligibility of deduction under Section 10AA of the Income Tax Act, 1961.2. Definition and applicability of 'services' under Section 10AA.3. Applicability of the SEZ Act, 2005 definitions to the Income Tax Act.4. Doctrine of promissory estoppel and its application.Issue-Wise Detailed Analysis:1. Eligibility of Deduction under Section 10AA of the Income Tax Act, 1961:The primary issue was whether the assessee was entitled to a deduction of Rs. 12,26,32,018 under Section 10AA of the Income Tax Act, 1961. The assessee firm engaged in trading and manufacturing of precious and semi-precious stones, diamonds, and gold jewelry claimed this deduction for its Surat unit. The AO denied the deduction, arguing that the assessee was not engaged in manufacturing or processing but merely trading without any value addition. The AO's decision was based on the absence of fixed assets and machinery at the Surat unit and the nature of goods purchased and sold being identical.2. Definition and Applicability of 'Services' under Section 10AA:The AO contended that the definition of 'services' under the SEZ Act, 2005 could not be imported into the Income Tax Act. The AO relied on various judicial decisions to argue that definitions in one statute cannot automatically apply to another. The AO also emphasized that provisions conferring benefits should be interpreted strictly. The assessee argued that trading activities, specifically re-export of imported goods, should be considered as services under Section 10AA, as defined in Rule 76 of the SEZ Rules, 2006.3. Applicability of the SEZ Act, 2005 Definitions to the Income Tax Act:The CIT(A) and Tribunal held that Section 10AA was inserted into the Income Tax Act by the SEZ Act, 2005, and thus the definitions under the SEZ Act should apply. Section 51 of the SEZ Act states that its provisions have an overriding effect over other laws. The Tribunal noted that the SEZ Act's definition of 'services' includes trading activities, specifically re-export of imported goods, as per Rule 76. The Tribunal also referenced Section 27 of the SEZ Act, which states that the Income Tax Act applies to SEZ operations subject to modifications specified in the Second Schedule.4. Doctrine of Promissory Estoppel and Its Application:The Tribunal invoked the doctrine of promissory estoppel, referencing the Supreme Court's decision in Union of India v. Godfrey Philips India Ltd., to argue that the government is bound by its representations. The Ministry of Commerce's Instruction No. 4/2006 clarified that trading activities in the nature of re-export of imported goods are eligible for benefits under Section 10AA. The Tribunal held that the government had promised these benefits, and the assessee was entitled to rely on this promise.Conclusion:The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to allow the deduction under Section 10AA. The Tribunal concluded that the assessee's trading activities, specifically the re-export of imported goods, qualified as 'services' under the SEZ Act, and thus the assessee was entitled to the deduction. The Tribunal emphasized the overriding effect of the SEZ Act and the doctrine of promissory estoppel in its decision.