2015 (11) TMI 637 - AT - Income Tax

Tribunal grants Section 10B exemption for tea export; commission payments deemed legitimate business expenses.

The Tribunal ruled in favor of the assessee on both issues. The exemption under Section 10B was granted based on the established precedent that blending ... Eligibility for deduction u/s. 10B in respect to tea blended and exported - CIT(A) denied the exemption holding that even though assessee-company is a 100% Exported Oriented Unit (EOU for short) but merely engaged in trading activity in purchase and sale of tea and there was no processing or blending out of activities carried out by it - Held that:- There is a blending of tea in the present case of assessee and assessee before AO during remand proceedings have proved the complete procedure explaining that there is blending of tea. This is exactly in line with the order of Madhu Jayanti International Ltd (2012 (7) TMI 531 - ITAT KOLKATA). Hence, respectfully following the same issue is now covered against Revenue and in favour of assessee. Disallowance commission payment - whether payment of commission was illegal as it is in contravention to the UNO sponsored scheme of Óil for Food' programme in Iraq? - CIT(A) delted the disallowance - Held that:- This issue stands covered in favour of assessee and against Revenue and respectfully following the judgment of Hon'ble jurisdictional High Court in the case of Rajarani Exports P. Ltd. (2013 (5) TMI 410 - CALCUTTA HIGH COURT ) we confirm the order of CIT(A) in deleting the disallowance. Issues Involved:1. Denial of exemption under Section 10B of the Income Tax Act, 1961 for tea blending and export.2. Disallowance of commission payment under Section 37(1) of the Income Tax Act, 1961.Detailed Analysis:1. Denial of Exemption under Section 10B:The primary issue in both the assessee's and revenue's appeals was the denial of exemption under Section 10B of the Income Tax Act, 1961, regarding tea blending and export activities. The assessee, a 100% Export Oriented Unit (EOU), claimed exemption under Section 10B, supported by a Chartered Accountant's certificate in Form No. 56G. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied this exemption, reasoning that the assessee was merely engaged in trading activities without any processing or blending.The assessee argued that their activities involved blending different grades of tea to achieve a required standard, which should qualify as processing under Section 10B. The Special Bench of ITAT Kolkata, in the case of Madhu Jayanti International Ltd. v. Dy. CIT, had previously ruled that blending and packing of tea for export qualifies as manufacturing or production under Section 10B. The Tribunal found that the assessee had provided sufficient evidence of blending activities, aligning with the precedent set in Madhu Jayanti International Ltd. Consequently, the Tribunal allowed the assessee's appeal, granting the exemption under Section 10B, and dismissed the revenue's appeals.2. Disallowance of Commission Payment:The second issue pertained to the disallowance of commission payments made by the assessee, which the AO considered illegal under the UNO-sponsored Oil for Food program in Iraq, invoking the Explanation to Section 37(1) of the Income Tax Act, 1961. The CIT(A) deleted the disallowance, noting that the commission payments were made for legitimate business purposes, fully disclosed, and approved by relevant authorities, including the Reserve Bank of India and the United Nations.The Tribunal upheld the CIT(A)'s decision, referencing the Hon'ble Calcutta High Court's judgment in CIT v. Rajarani Exports P. Ltd., which supported the deductibility of such commission payments. The High Court had emphasized that the commercial expediency of the payments was not in question and that the payments were necessary for the assessee's business operations. Therefore, the Tribunal dismissed the revenue's appeals and confirmed the CIT(A)'s deletion of the disallowance.Conclusion:The Tribunal ruled in favor of the assessee on both issues. The exemption under Section 10B was granted based on the established precedent that blending and packing of tea for export qualifies as manufacturing or production. Additionally, the disallowance of commission payments was deleted, affirming that such payments were legitimate business expenses. The revenue's appeals were dismissed, and the assessee's appeals were partly allowed.