2018 (2) TMI 293 - AT - Income Tax

Tribunal grants deduction under Section 10AA, upholds consistency principle

The Tribunal ruled in favor of the assessee, directing the Assessing Officer to allow the deduction claimed under Section 10AA of the Income Tax Act. The ... Disallowance of deduction u/s 10AA - profits derived by SEZ unit of the assessee from the export of IT enabled services - claim allowed in initial assessment year - Held that:- Once the claim of deduction u/s 10AA has been accepted in the first year of the operations and also in the second year, then in the third year same cannot be withdrawn by examining the factors which were required to be seen in the first year of the claim. Thus, on this ground alone, we hold that the AO cannot deny the claim of deduction u/s 10AA with the assessee in this year and hence is directed to allow the same. Also none of the allegation which has been made by the AO appears to be correct, because if he see the expansion and growth of revenue of EOU unit and the revenue of the SEZ unit, as incorporated above, we find that there has been substantial increase in the revenue in the EOU unit also from the financial year 2011-12 to financial year 2016-17. Thus, it cannot be held that after the sun set period the revenue of the EOU has gone down. The chart as submitted by the Ld. Counsel clearly vitiates the observation and the finding of the AO; and hence on the point that there is a less growth of revenue in EOU unit and therefore, presumption can be drawn for splitting up or reconstruction of EOU unit is incorrect and cannot be upheld. The assessee continued to make addition to the fixed assets in the SEZ unit independently and there is no iota of any material to show that the additions to the fixed assets has been by way of transfer from EOU units. Likewise from the perusal of the list of technical man power, we find that except for two or three employees out of 30 employees are newly hired and therefore, it is not a case where the old employees of EOU unit have been entirely shifted to SEZ unit which seems to be the allegation of the AO. Thus, all the issues raised by the AO does not hold ground on the facts and material placed before us and hence on factual matrix also we hold that assessee has not violated any of the conditions prescribed in section 10AA and therefore, it is entitled for claim of deduction u/s 10AA in this year. - Decided in favour of assessee Issues Involved:1. Denial of deduction claimed under Section 10AA of the Income Tax Act.2. Examination of conditions under Section 10AA in the year of formation of SEZ unit.3. Allegation of non-compliance with Section 10AA(4) requirements.4. Principle of consistency in tax assessments.5. Allegation of SEZ unit formation by splitting up or diversion of existing business.6. Compliance with Circular 14/2014 and Instruction 17/2013 regarding hiring of new employees.Issue-Wise Detailed Analysis:1. Denial of Deduction Claimed Under Section 10AA:The assessee challenged the disallowance of a deduction amounting to Rs. 10,43,46,127 under Section 10AA relating to profits derived by its SEZ unit from the export of IT-enabled services. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) denied this deduction, alleging that the SEZ unit was formed by splitting up or reconstructing an existing business.2. Examination of Conditions Under Section 10AA in the Year of Formation of SEZ Unit:The assessee argued that the conditions prescribed in Section 10AA should be examined in the year of formation of the SEZ unit. The SEZ unit commenced operations in FY 2010-11, and the deduction was allowed in the assessment years 2011-12 and 2012-13. The AO issued a show-cause notice questioning the formation of the SEZ unit and its compliance with Section 10AA requirements.3. Allegation of Non-Compliance with Section 10AA(4) Requirements:The AO held that the SEZ unit failed to comply with Section 10AA(4), alleging that the unit was formed by splitting up or reconstructing the existing business. The AO's analysis included revenue and employee growth comparisons between the SEZ unit and the EOU unit, suggesting that the SEZ unit's growth was at the expense of the EOU unit.4. Principle of Consistency in Tax Assessments:The assessee contended that the principle of consistency should apply since the deduction under Section 10AA was allowed in the initial and subsequent years. The AO and DRP's decision to disallow the deduction in the third year was challenged on the grounds that the eligibility conditions were already examined and accepted in prior years.5. Allegation of SEZ Unit Formation by Splitting Up or Diversion of Existing Business:The AO alleged that the SEZ unit was formed by splitting up the existing business to continue enjoying tax benefits after the sunset clause for the EOU unit. The AO's observations included significant growth in the SEZ unit's revenue and employee hiring, compared to the EOU unit's declining growth.6. Compliance with Circular 14/2014 and Instruction 17/2013 Regarding Hiring of New Employees:The assessee argued that it complied with Circular 14/2014, which allows for the transfer or redeployment of up to 50% of technical manpower from the existing unit to the new SEZ unit without being considered splitting up or reconstruction. The assessee provided details of new hires and inter-unit transfers to support its compliance.Tribunal's Findings:1. Consistency in Allowing Deduction:The Tribunal held that once the deduction under Section 10AA was allowed in the first and second years, it could not be withdrawn in the third year without disturbing the initial year's assessment. The principle of consistency was upheld, and the AO's decision to deny the deduction was deemed incorrect.2. No Splitting Up or Reconstruction:The Tribunal found that the SEZ unit was established with fresh investment, had its own assets and employees, and contributed to the overall growth of the company. The AO's allegations of splitting up or reconstruction were not supported by evidence. The Tribunal noted that the SEZ unit's growth did not result from transferring existing business from the EOU unit.3. Compliance with Section 10AA Conditions:The Tribunal held that the assessee met the conditions prescribed in Section 10AA, including the hiring of new employees and investment in the SEZ unit. The AO's observations regarding revenue and employee growth were found to be incorrect and unsupported by facts.4. Compliance with Circular 14/2014:The Tribunal accepted the assessee's compliance with Circular 14/2014, noting that the assessee demonstrated the net addition of new technical manpower and provided details of new hires and inter-unit transfers.Conclusion:The Tribunal allowed the assessee's appeal, directing the AO to allow the deduction under Section 10AA. The principle of consistency was upheld, and the allegations of splitting up or reconstruction of the existing business were dismissed. The Tribunal found that the assessee complied with the conditions of Section 10AA and Circular 14/2014, entitling it to the claimed deduction. The appeal was allowed, and the issue of penalty proceedings was deemed premature and dismissed.