TaxTMI 
TaxTMI 
2014 (10) TMI 470
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....fact, the assessment order is passed u/s 143(3) of the Act after thorough inquiry through show-cause notice and replies, and verification of all the issues sought to be revised. 3. That the learned CIT-IV, Ahmadabad has grievously erred in law and on facts in holding that the appellant's SEZ unit is not entitled to deduction u/s 10AA of the Act of Rs. 76.11 crores. 4. That the learned CIT-IV, Ahmadabad has grievously erred in law and on facts in holding that the appellant is not entitled to deduction u/s 10AA of the Act while computing book profit u/s 115JB of the Act. 5. On facts and in law, the entire income of appellant SEZ unit is not includible while calculating the book profit for the purpose of section 115JB of the Act. 6. That on facts and in law, the learned CIT-IV, Ahmadabad has grievously erred in holding that the interest income is required to be taxed as income from other sources, and that the appellant is not entitled to deduction u/s 10AA of the Act on the interest income. 7. That the learned CIT-IV, Ahmadabad has grievously erred in law and on facts in holding that the appellant is not entitled for set-off of brought forward business loss against income from ot....
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....so adjudicate the appeal for the Assessment Year 2010-11. So, we proceed to adjudicate the appeal for Assessment Year 2009-10. 4. We have heard the rival submissions, perused the written submissions filed by both the parties and gone through all the materials brought on record and the decisions relied upon by both the parties. 5. It is a settled position that the provision of section 263 provides power of suo motu revision upon the Commissioner of Income Tax when the order passed by the Assessing Officer is found both erroneous as well as prejudicial to the interest of the Revenue. 6. Further, the assessment order can be considered as erroneous when it is found by the Commissioner of Income Tax that the order contains some mis-application of law or mis-construction of facts or non-application of mind on the part of the Assessing Officer. 7. Non-application of mind in the context means acceptance of the claim of the assessee without making any inquiry. 8. It is also an accepted position of law that the lack of inquiry on part of the Assessing Officer will result in the order being termed as erroneous but merely because the inquiry though made was considered by the Commissioner ....
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.... As interest income earned on FDRs is to be taxed as income from other sources, Assessee would not be entitled for set off of brought forward business loss, if any available, against income from other sources." 13. The first contention of the Ld. Authorized Representative of the assessee before us is that the Assessing Officer had during the course of assessment proceedings called for the explanation of the assessee for its claim of deduction u/s 10AA, brought forward loss, interest receipt from bank on fixed deposits and computation of income u/s 115JB of the Act and the assessee in reply submitted its explanation with evidences and supporting decisions. 14. The Assessing Officer after making inquiries and considering the submissions of the assessee accepted the claim of the assessee for deduction u/s 10AA, set off of brought forward business loss, interest income on fixed deposit receipts as part of business income and computation of income u/s 115JB of the Act. The Ld. Authorized Representative in support of the above arguments drew our attention to the notice issued by the Assessing Officer u/s 142(1) of the Act. In view of the above, the contention of the Ld. Authorized Repr....
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....ction u/s 10AA of the Act. The Commissioner of Income Tax considered that the assessee was not entitled for deduction u/s 10AA on the ground that the assessee has not fulfilled the conditions for eligibility of deduction u/s 10AA for carrying out the services as per section 2(z) of the SEZ Act, 2005 i.e. import for the purposes of re-export and has not earned any foreign exchange for the country which is the main intention behind the provisions of section 10AA of the Act. In view of this, the Commissioner of Income Tax ordered that the assessee is not entitled to exemption u/s 10AA of the Act, both while computing income as per normal provisions of the Act and book profit u/s 115JB of the Act. For the above issue, it is necessary to give a look at the provisions of the sub-section (1) of section 10AA of the Act which reads as under: "10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment ye....
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....r being cited and on production of an undertaking by the concerned unit that no income tax benefits will be available by the unit for trading, except in the nature of re-export of imported goods." 21. Thus, it is clear that SEZ units are not entitled for deduction u/s 10AA in respect of trading goods exported from SEZ when such goods were procured from Domestic Tariff Area and the assessee is entitled for income tax benefit u/s 10AA in respect of trading which is in the nature of re-export of imported goods. To the same effect is the decision of the Jaipur Bench of the Tribunal in the case of DCIT Vs. M/s Goenka Diamond & Jewellers Limited ITA No. 509/JP/2011 Assessment Year 2008-09. 22. Further, it is also not in dispute that the above activity of the assessee was started during the Assessment Year 2008-09. Thus, the only other condition is that the assessee must be an entrepreneur as referred to in clause (j) of section 2 of SEZ Act, 2005. The Section 2(j) of SEZ Act, 2005 reads as under: "Entrepreneur" means a person who has been granted a letter of approval by the Development Commissioner under sub- section (9) of section 15." 23. Sub-section (9) of section 15 of SEZ Act, 2....
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.... and the rules and orders made thereunder, from Unit No. 364, on Plot No. 239, Surat Special Economic Zone, Sachin, Surat in the State of Gujarat. Authorized Operations:- Sr. No. Activity 01. TRADING:- Trading of Gold, Silver, Platinum, Palladium, Bars, Coins (other than legal tenders) and Medallions. {under chapter-71 of ITC (HS)} (1) CONDITIONS:- (i) You shall export the goods procured/imported, as per provisions of the Special Economic Zones Act, 2005 and Rules made there-under for a period of five years from the date of commencement of trading activities. For this purpose, you shall execute a fresh Bond- Cum-Legal Undertaking as prescribed under the Special Economic Zone Rules, 2006, for both manufacturing and trading operation consolidated. (II) You shall achieve positive Net Foreign Exchange (NFE) as prescribed in the Special Economic Zone Rules, 2006 for the period you operate as a Unit in the Special economic from the commencement of production, failing which you shall be liable for penal action under the Foreign Trade (Development and Regulation) Act, 1992. (iii) You may import or procure from the Domestic Tariff Area all the items required for ....
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....m the foreign exchange earnings of the assessee for calculating net foreign exchange earning. 27. The Ld. Authorized Representative of the assessee pointed out that the said Export Promotion Council for EOUS and SEZS Circular no. 42 dated 26.03.2007 contains only a proposed change in Rule 53 of SEZ Rules, 2006 but that change has not yet been incorporated. In support of the above, the Authorized Representative of the assessee filed before us clarification dated 27.02.2014 issued by Export Promotion Council for EOUS and SEZS no. EDC/SEZ/AM04/A.14 dated 26.02.2014 which reads as under: "From EPCES HO [email protected] Sent: Thu, 27 Feb. 2014 13:02:02:05 To "Mr. Mrugesh Shah" [email protected] Subject: Clarification-reg. Export Promotion Council for EOUS and SEZS Ministry of Commerce & Industry, Government of India 8G, Hansalaya Building, 15, Barakhamba Road, New Delhi-110001. Tel:23329767, 23329768, 23329769 Fax No. 011-23329770 O.P.Kapoor Dy. Director General Mobile: 9810850501 No. EPC/SEZ/AM04/A.14 February 26 2014 Dear Sir, This is with reference to your email regarding applicability of circulars on SEZs, in this regard, we are to inform you as under: 1. ....
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....he SEZ authorities showing positive net foreign exchange earnings were in accordance with the SEZ Act and SEZ Rules and the assessee complied with SEZ Act and SEZ Rules. 30. The Ld. Authorized Representative also pointed out that the approval committee of SEZ, who examined and approved the annual performance report filed by the assessee consists of various persons including Commissioner of Income Tax and they have not found any defect while monitoring assessee's working achieving positive net foreign exchange earnings as submitted in the annual performance report. 31. We find that no material has been brought on record by the Revenue to controvert the above submission of the assessee. Further, we find that the Hon'ble Supreme Court in the case of Gestatner Duplicators Private Ltd. Vs. CIT 117 ITR 1 (SC) held as under: "In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the Assessee's provident fund did not satisfy any particular condition mentioned in r.4. It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that t....
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....Income Tax to the extent it was held the assessee is not entitled to exemption u/s 10AA of the Act both while computing the income as per normal provisions of the Act and book profit u/s 115JB of the Act. 35. Before parting with this issue, we would like to observe that in view of the instruction no. 4 of 24.05.2006 quoted above, deduction u/s 10AA is not available to the assessee in respect of profit relating to trading activities wherein goods for export were procured from domestic tariff area. However, we find that in the instant case, it is not the case of the Revenue that benefit of section 10AA was allowed to the assessee by the Assessing Officer in the assessment order in respect of income arising from goods exported by procuring the same from domestic tariff area. Therefore, no interference by us in this respect is called for. 36. The next issue relates to the order of Commissioner of Income Tax whereby it was held that interest income earned by the assessee on its fixed deposit receipts with the bank is to be taxed under the head "income from other sources" and consequentially not entitled to exemption u/s 10AA of the Act and consequentially interest income is to be excl....
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.... the assessee acquired in the course and for the purposes of its business. The fixed deposit receipts being business assets, we find no reason as to why interest income earned from such fixed deposit receipts could not be assessed as business income of the assessee. Our above view finds support from the recent decisions of the Hon'ble Karnataka High Court in the case of CIT & anr. Vs. Motorola India Electronics (P) Limited (2014) 265 CTR 94 (Kar.) wherein it was held that: "No doubt Sub-section 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Subsection (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1). The substituted Sub-section (4) says that profits derived from export of articles or things or computer software shall be the amount which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles are different from the income derived from the profits of the business ....
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.... purpose of section 10AA of the Act. Sub-section (7) of section 10AA provides the manner in which the profits derived from "export of articles or things or services" is to be computed for the purposes of section 10AA of the Act. Therefore, in view of the above specific provision in the section itself, "profits derived from the export of articles or things or services" cannot be computed in any other manner. Sub-section (7) of Section 10AA reads as under: "For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on [by the undertaking]: [Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.]" 42. Thus, a perusal of the aforesaid sub-section takes us to the "profits of the business of....
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....ascribed to the words used in that sub-section should be controlled or tempered by the language used in sub-section (4). So constructed it appears to us that the profits of the business of the undertaking includes not merely the profits derived by or from the undertaking, but also include any profits or income which are incidental to the carrying on of the business of the undertaking." To the same effect is the decision of the Hon'ble Karnataka High Court in the case of Motorola India Electronics (P) Limited (supra). 43. In view of the above, we find that the view adopted by the Assessing Officer in this regard in the assessment order of not excluding interest income which was assessed as business income of the assessee for computing "profits derived from export of articles or things or services" was a possible view and therefore, the same could not be interfered in exercise of powers available u/s 263 of the Act. 44. We also observe that the Commissioner of Income Tax in the impugned order has observed that the assessee was indulging in financial arbitrage only in its SEZ unit. In other words, the true business of the assessee in its SEZ unit was that of financial arbitrage and....
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....r in the assessment order was a possible view. Therefore, we set aside the order of the Commissioner of Income Tax to the extent it directed that as interest income earned on fixed deposit receipts taxed as income from other sources, the assessee would not be entitled for set-off of brought forward business loss against such interest income. 47. The last issue relates to the order of the Commissioner of Income Tax whereby Commissioner of Income Tax directed the Assessing Officer to examine the correctness, genuineness and allowability of foreign exchange fluctuation loss of Rs. 70.97 crores and to decide the issue afresh. 48. According to the Commissioner of Income Tax, the Assessing Officer has not examined the correctness, genuineness and allowability of huge loss claimed by the assessee under the head "foreign exchange fluctuation". 49. We find from page no. 111 of paper book filed by the assessee that a query was raised by the Assessing Officer during the course of assessment proceedings which reads as under: "Give details of legal & professional charges, other expenses, repair & maintenance exp., Foreign exchange and Fluctuation, Exchange charges exp." 50. In reply thereto....