2026 (1) TMI 245 - AT - Income Tax

SEZ unit tax holiday and export definition under s10AA: extra five-year claim denied; other disallowances partly remanded/deleted

Interpretation of ss. 10A(7B) and 10AA: on insertion of s. 10A(7B), all SEZ units fall under s. 10AA; an SEZ unit cannot claim an additional five-year ... Deduction u/s. 10AA - Special provisions in respect of newly established Units in Special Economic Zones - deduction u/s 10A/10AA for the last two years of the ten consecutive years - assessee submitted that the assessee had set up a unit in Special Economic Zone (‘SEZ’), Surat - HELD THAT:- A conjoint reading of sections makes it evident that by insertion of sub-section (7B) to section 10A, the units in SEZ which were existing on or before commencement of SEZ Act were taken out from applicability of section 10A of the Act and the new regime of section 10AA was made applicable even to existing units in SEZ. Therefore, section 10AA was applicable to all SEZ units, whether they were established under the old regime or under newly enacted SEZ Act, 2005. However, we don’t concur with the finding of the Tribunal that the existing SEZ units which had begun to produce or manufacture articles or things in old regime will be entitled for deduction u/s 10A of the 1961 Act only for unexpired period of consecutive ten years and thereafter they will be entitled for further deduction for a period of five years under newly enacted provisions of section 10AA(1)(ii) of the 1961 Act. In our opinion the assessee was entitled for deduction u/s 10AA of the Act only, for the unexpired period of consecutive ten years, after the introduction of section 10A(7B) and section 10AA of the Act on the statute. Thus, we hold that the assessee was eligible for deduction u/s. 10AA of the Act for the unexpired period of ten consecutive assessment years. Accordingly, the assessee was entitled for deduction u/s 10AA(1)(i) of the Act for the A.Y. 2012-13, subject to fulfilment of other conditions as stipulated in that section. Grievance of the assessee is that deduction u/s. 10AA of the Act should be allowed on EPCG sales, zone-tozone sales and EOU sales as well - contention of the assessee is that the provision of SEZ Act shall have overriding effect notwithstanding anything inconsistent with any other law - As per definition of export given in Section 10AA of the Act the export in relation to SEZ means taking goods or providing services out of India from SEZ by land, sea, air or by any other mode whether physical or otherwise. It is, thus, evident that only sub-clause (i) of Section 2(m) of SEZ Act defining export is included in the definition of export as provided in Section 10AA of the Income Tax Act. Considering the fact that Section 10AA of the Act was introduced under the provision of Section 27 of SEZ Act, only the restrictive definition of “export” as given in Explanation-1 to Section 10AA of the Act has to be taken into consideration while working out the deduction u/s. 10AA of the Act. In view of this position of law, the contention of the assessee that the goods supplied or services rendered to domestic tariffs area or to another unit in SEZ is also covered in the definition of “export” for the purposes of working out the deduction u/s. 10AA of the Act, is not found correct and is, therefore, rejected. At the same time, we deem it proper to set aside the matter to the file of Jurisdictional AO with a direction to allow the deduction for the A.Y. 2012-13 in accordance with the “export” as defined u/s. 10AA of the Act, after allowing an opportunity of being heard to the assessee. Disallowance u/s. 35(2AB) - no certificate in Form No.3CL from DSIR was produced, which was a mandatory requirement for allowing the claim for deduction - According to the assessee, this form was received from the competent authority two days after the completion of assessment - HELD THAT:- Hon’ble Gujarat High Court has held in the case of Schaeffler India Ltd. [2023 (10) TMI 920 - GUJARAT HIGH COURT] that the assessee had filed Form No.3CM in the course of assessment certifying that its R&D facility was approved by the prescribed authority and merely because the Competent Authority had failed to send the intimation in Form 3CL during the course of assessment proceedings, it could not be a reason for denying the claim of deduction u/s. 35(2AB) of the Act. The facts involved in the present case are identical as the certificate in Form No.3CL was received two days after completion of assessment. In the interest of justice, we, therefore, deem it proper to set aside the matter to the file of the AO with a direction to verify the certificate in Form No.3CL issued by the prescribed authority. If the same is found to be in order, then the deduction as claimed by the assessee u/s. 35(2AB) of the Act should be allowed. The contention of the assessee regarding alternative deduction u/s. 37(1) of the Act, was rightly rejected by the AO as the assessee did not forgo its claim of deduction u/s. 35(2AB) of the Act while making this alternate claim. Disallowance u/s. 14A r.w.r. 8D - AO noticed that the assessee had made investment in shares of foreign subsidiaries and in the shares of Indian subsidiaries, however, no disallowance u/s.14A of the Act was made by the assessee - HELD THAT:- There is no dispute to the fact that no exempt income was earned by the assessee during the year. Hon’ble Supreme Court [2018 (7) TMI 567 - SC ORDER] has upheld the decision of Chettinad Logistics (P.) Ltd. (2017 (4) TMI 298 - MADRAS HIGH COURT) that where no exempt income was earned in the relevant assessment year by the assessee, the provision of Section 14A of the Act could not be invoked. In the case of UTI Bank Ltd. [2016 (6) TMI 961 - GUJARAT HIGH COURT] had held that no disallowance could be made u/s. 14A of the Act where assessee’s interest free funds far exceeded its interest free investments. In the present case, the assessee had sufficient interest free funds to explain the investment in the shares of subsidiaries companies. In view of this fact and also considering that no exempt income was earned by the assessee during the year, no disallowance u/s. 14A of the Act on account of interest expenses and management fee was called for - Decided in favour of assessee. Disallowance of interest u/s. 36(1)(iii) - According to the AO, the assessee could not prove the nexus between the interest free funds available and the interest free loans and advances, therefore, the interest @ 12% in respect of interest free loans and advances made by the assessee was disallowed u/s. 36(1)(iii) - AR submitted that the fact that the assessee had own funds far in excess of the interest free loans and advances was not considered by the AO - HELD THAT:- AO had disallowed the interest expense on the presumption that interest bearing funds were utilized for advancing interest free loan to Sahajanand Laser Technology Ltd., USA & SLT Energy Ltd. However, no evidence was on brought record to establish the nexus between the interest-bearing funds and the interest free advances made by the assessee. Thus, the addition is found to be on based on mere presumption. The fact that the assessee had its own surplus funds has not been controverted by the revenue. An identical decision was taken by the Co-ordinate Bench of this Tribunal in the assessee’s own case [2016 (5) TMI 50 - ITAT AHMEDABAD]. Respectively following the above referred decisions in the assessee’s own case and also the fact the assessee had own funds far in excess of the interest free advances given to the two parties, we are of the view that no disallowance u/s. 36(1)(iii) of the Act was called for. Belated Employees Contribution to PF & ESIC - AR submitted that for the month of July 2011, the due date of payment was 15.08.2011, which was a closed holiday. The assessee had made payment on next working day - HELD THAT:- As rightly pointed out, the payment for the month of July 2011 made on 16th August cannot be held as belated payment, as the due date of 15th August was a closed holiday. Accordingly, the assessee is allowed relief to the extent of Rs. 96,236/- and the balance addition stands confirmed. Addition of prior period income of the assessee was reduced twice by an amount - AR submitted that there was no mistake in the computation and the addition was made due to wrong understanding - HELD THAT:- The contention of the assessee is that if the prior period expenses are not admissible as deduction in the current year, following the same principle the prior period income also cannot be considered as income for the current year. Accordingly, the assessee had righty reduced the net prior period income in the computation of income for the current year. We do not find any mistake or arithmetical error in the computation of assessee. There was no double reduction of net prior period income as contended by the AO. Therefore, the addition as made by the AO is deleted. Disallowance of bad debts claim - AO had disallowed this claim only for the reason that the details of bad debts was not furnished - HELD THAT:- As assessee has now filed fresh evidence in this regard. We, therefore, deem it proper to set aside this matter to the file of the AO with the direction to verify the fresh evidence brought on record in respect of bad debt claim and, thereafter, decide the allowability of the claim in accordance with the provisions of the Act. Provision for pre-clinical test expense - assessee had claimed provision for pre-clinical test expenditure on the basis of proforma invoice of Rs. 60 Lakhs from Shriram Institute for Industrial Research, as per which 50% of the payment was required to be made before the commencement of pre-clinical test - AR submitted that bills for Rs. 12 lakh were not readily available but the same has now been filed as fresh evidence in the paper book. Considering the fresh evidence filed by the assessee, we deem it proper to set aside the matter to the file of the AO with a direction to verify the fresh evidence and, thereafter, decide the claim of the assessee in accordance with law. Issues: (i) Whether the assessee (unit in SEZ) was entitled to deduction for the unexpired period under Section 10AA/10A and whether EPCG/EOU/zone-to-zone sales form part of 'export turnover' for Section 10AA; (ii) Whether deduction under Section 35(2AB) should be allowed where Form No.3CL was received after completion of assessment; (iii) Whether disallowance under Section 14A was justified where no exempt income was earned; (iv) Whether interest expense was disallowable under Section 36(1)(iii) for interest-free advances absent nexus with borrowed funds; (v) Whether belated employees' contribution to PF/ESIC was liable to disallowance under Section 36(1)(va); (vi) Whether prior period income was wrongly adjusted; (vii) Whether bad debt claim could be disallowed for lack of particulars.Issue (i): Entitlement to deduction under Section 10AA/10A for unexpired period and scope of 'export turnover' for Section 10AA.Analysis: The Tribunal analyzed Section 10A(7B), Section 10AA (including Explanation 1) and the SEZ Act provisions (Sections 27 and 51). It held that SEZ units covered by section 10A(7B) are eligible for deduction under Section 10AA for the unexpired period of ten consecutive assessment years. The Tribunal distinguished the coordinate Bench view regarding additional five years and concluded that the assessee was entitled to deduction under Section 10AA(1)(i) for the unexpired period, subject to other conditions. For scope of export turnover, the Tribunal observed that Explanation 1 to Section 10AA incorporates only the overseas-export definition (taking goods/services out of India) and thus EPCG/EOU/zone-to-zone/domestic tariff area supplies do not qualify as 'export' for computing deduction under Section 10AA.Conclusion: In favour of Assessee for entitlement to deduction under Section 10AA for the unexpired period (partly allowed); against the assessee on inclusion of EPCG/EOU/zone-to-zone/domestic sales in 'export turnover' for Section 10AA.Issue (ii): Allowability of deduction under Section 35(2AB) where Form No.3CL was received after completion of assessment.Analysis: The Tribunal relied on the position that Form No.3CL is the material requirement and noted that the certifying form was received shortly after assessment completion. It referred to relevant High Court authority holding delay by the prescribed authority cannot defeat the deduction if the certificate exists and directed remand to the AO for verification of the Form No.3CL.Conclusion: In favour of Assessee; matter remanded to AO to verify Form No.3CL and allow deduction if certificate is in order.Issue (iii): Validity of disallowance under Section 14A when no exempt income was earned.Analysis: The Tribunal applied Supreme Court and High Court precedents holding Section 14A cannot be invoked where no exempt income was earned and noted that assessee had sufficient interest-free funds for investments.Conclusion: In favour of Assessee; addition under Section 14A deleted.Issue (iv): Disallowance of interest under Section 36(1)(iii) for interest-free advances absent nexus with borrowed funds.Analysis: The Tribunal found the AO's addition based on presumption without evidence of allocation of borrowed funds to interest-free advances, noted assessee's undisputed surplus own funds and relied on earlier decisions in assessee's own case and High Court authority.Conclusion: In favour of Assessee; interest disallowance deleted.Issue (v): Addition under Section 36(1)(va) in respect of belated employees' contribution to PF/ESIC.Analysis: The Tribunal examined payment dates and holidays; held payment made on next working day where due date was a closed holiday is not belated, but other belated payments remain covered by binding Supreme Court authority adverse to assessee.Conclusion: Partly in favour of Assessee; relief to the extent of amount attributable to payment on next working day, balance confirmed.Issue (vi): Addition relating to prior period income adjustment.Analysis: The Tribunal inspected financial note and computation, found net prior period income correctly reduced once and no double reduction or arithmetic error.Conclusion: In favour of Assessee; addition deleted.Issue (vii): Disallowance of bad debt for lack of particulars.Analysis: The assessee produced fresh particulars before the Tribunal; the Tribunal remanded the matter to AO to verify the fresh evidence and decide allowable claim in accordance with law.Conclusion: In favour of Assessee for remand; matter set aside to AO for verification and decision.Final Conclusion: The appeals are partly allowed overall; specific heads are allowed, deleted, or remanded to the AO as above, and other contested additions are confirmed only to the limited extent stated.Ratio Decidendi: A unit in SEZ covered by Section 10A(7B) is entitled to deduction under Section 10AA for its unexpired period of ten consecutive assessment years; for Section 10AA purposes 'export' is limited to taking goods or providing services out of India as defined in Explanation to Section 10AA; procedural delay in issuance of Form No.3CL by the prescribed authority does not automatically disentitle a taxpayer from deduction under Section 35(2AB) where the certificate is produced and verifiable.