2016 (7) TMI 1016 - AT - Income Tax

Tribunal allows deduction under Section 10B from initial year of positive income. Revenue's appeal dismissed.

The Tribunal upheld the CIT(A)'s decision, allowing the assessee's deduction under Section 10B for ten consecutive years starting from A.Y. 2002-03, the ... Deduction under section 10B for a hundred percent export-oriented undertaking - Commencement of the ten consecutive assessment years for section 10B - Nature and requirement of declaration under section 10B(8) - Trial production and absence of positive export incomeDeduction under section 10B for a hundred percent export-oriented undertaking - Trial production and absence of positive export income - Assessee entitled to deduction under section 10B for A.Y. 2011-12 despite manufacturing having commenced in A.Y. 2001-02 because no positive export income arose in A.Y. 2001-02. - HELD THAT: - The Tribunal held that section 10B grants a deduction of profits and gains 'derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software'. The decisive element is the existence of profits and gains derived from export. Since the assessee's EOU had no export sales and no positive income in A.Y. 2001-02 (the year of trial/initial production), there was no occasion to claim deduction under section 10B in that year. The absence of a claim and the audited particulars showing no sales up to 31.03.2001 demonstrate that the fiscal benefit could not be invoked in A.Y. 2001-02. Consequently, the entitlement to the ten-year deduction period began only when positive export income first arose, and the claim for A.Y. 2011-12 fell within the allowable ten consecutive years counted from A.Y. 2002-03. [Paras 4, 6]Claim for deduction under section 10B for A.Y. 2011-12 is allowable because the ten-year period is to be counted from the first year in which positive export income arose (A.Y. 2002-03), not from the year of trial production (A.Y. 2001-02).Commencement of the ten consecutive assessment years for section 10B - Trial production and absence of positive export income - Ten consecutive assessment years for section 10B start from the assessment year in which the undertaking first derives positive profits and gains from export, not merely from the year manufacturing commenced if no export income arose. - HELD THAT: - Interpreting section 10B(1) in conjunction with the factual matrix, the Tribunal found that the statutory concession is tied to profits and gains 'derived' from export. Where the unit had only trial production and no export turnover or positive income in A.Y. 2001-02, the statutory benefit could not commence in that year. The Tribunal relied on the distinction between trial production and commercial production as relevant to the commencement of the tax benefit and observed that the assessee did not claim the deduction in its return for A.Y. 2001-02 and the audit report showed no sales up to 31.03.2001, supporting a commencement from A.Y. 2002-03. [Paras 4, 6]The ten-year period under section 10B is to be counted from A.Y. 2002-03 (the first year of positive export income), not from A.Y. 2001-02 when only trial production occurred.Nature and requirement of declaration under section 10B(8) - Directory versus mandatory filing - Furnishing a declaration under section 10B(8) is directory/ministerial in nature and not a precondition to the commencement of the deduction where there was no positive export income in the year in question. - HELD THAT: - The Tribunal examined section 10B(8), which allows an assessee to declare that the provisions of the section shall not apply for any relevant assessment years. It concluded that the provision is declaratory and operates where the assessee opts out; however, where there is no positive income from export in a year, there is no occasion to file such a declaration. The Tribunal referenced judicial authorities treating the filing requirement as directory and noted that the assessee had not claimed the deduction in A.Y. 2001-02 and hence had no obligation to file the declaration in that year. Accordingly, non-filing of the declaration did not defeat the assessee's entitlement once positive income arose in the subsequent year. [Paras 4, 6]Requirement to file a declaration under section 10B(8) is directory; absence of such declaration in a year with no positive export income does not preclude commencement of the ten-year benefit in the first year of positive export income.Final Conclusion: The Tribunal confirmed the CIT(A)'s order and dismissed the revenue's appeal: the assessee was entitled to claim section 10B exemption for A.Y. 2011-12 because the ten-year period is to be counted from A.Y. 2002-03 (first year of positive export income), and the declaration under section 10B(8) is directory and not a bar where no positive export income arose in A.Y. 2001-02. Issues Involved:1. Whether the CIT(A) erred in allowing deduction under Section 10B of the Income Tax Act.2. Whether the exemption under Section 10B is available to the assessee starting from the Assessment Year (A.Y.) 2002-03 or from A.Y. 2001-02.3. Whether the assessee fulfilled the conditions stipulated in sub-section (8) of Section 10B for A.Y. 2001-02.Detailed Analysis:Issue 1: Deduction under Section 10BThe revenue argued that the CIT(A) erred in allowing the deduction under Section 10B amounting to Rs. 1,34,31,888/-. The assessee firm, engaged in manufacturing and trading of precious and semi-precious stones, claimed this exemption for the A.Y. 2011-12. The Assessing Officer (AO) declined the benefit, stating that the exemption under Section 10B is available for ten consecutive assessment years starting from the year the manufacturing begins, which in this case was A.Y. 2001-02. Thus, the AO concluded that the exemption period ended in A.Y. 2010-11.Issue 2: Exemption Start YearThe CIT(A) allowed the appeal by the assessee, noting that no deduction under Section 10B was claimed in A.Y. 2001-02 due to a loss in the export-oriented unit (EOU). The CIT(A) observed that the assessee had claimed the deduction starting from A.Y. 2002-03, when it first had positive income, and thus the ten-year period should end in A.Y. 2011-12. The CIT(A) relied on the judgment in Tamilnadu Jai Bharat Mills Ltd., which stated that the exemption period can start from the year the assessee opts to claim it, provided there is no positive income in the initial years.Issue 3: Conditions under Section 10B(8)The revenue contended that the assessee did not file the required declaration under Section 10B(8), which mandates informing the AO in writing if the provisions of Section 10B are not to be applied. However, the CIT(A) and the assessee argued that this requirement is directory and not mandatory, especially when there is no positive income. The assessee cited the case of Moser Baer India Ltd., where it was held that the declaration for opting out is not mandatory.Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, emphasizing that the primary condition for deduction under Section 10B is the existence of positive income from exports. Since the assessee had no positive income in A.Y. 2001-02, there was no requirement to file the declaration under Section 10B(8). The Tribunal noted that the deduction period should start from A.Y. 2002-03, when the assessee first had positive income, and thus the ten-year period would end in A.Y. 2011-12. The Tribunal dismissed the revenue's appeal, confirming that the CIT(A) rightly allowed the exemption for the A.Y. 2011-12.Conclusion:The Tribunal concluded that the assessee is entitled to the deduction under Section 10B for ten consecutive years starting from A.Y. 2002-03, as the initial year of positive income, and not from A.Y. 2001-02. The requirement to file a declaration under Section 10B(8) was deemed directory and not mandatory in the absence of positive income. The revenue's appeal was dismissed, and the CIT(A)'s order was confirmed.