TaxTMI 
TaxTMI 
2015 (11) TMI 430
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....er which the issue with regard to claim of the Assessee for deduction u/s.10AA of the Act arises for consideration are as follows: The Assessee is a company. It was incorporated on 1.12.2004. It is engaged in the business of Data Processing, Software Development and business processing outsource. The Assessee has a unit at Salt Lake City, Kolkata which is registered with Software Technology Park, Kolkata as 100% Export Oriented Unit for computer software. The Assessee was claiming exemption u/s.10B of the Act up to AY 2008- 09. Under Sec.10B of the Act, which was introduced by the Finance Act, 1988 w.e.f. 1-4-1989, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export for articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. "Hundred per cent exportoriented undertaking" for the purpose of Sec.10B means, an undertaking which has been approved as a h....
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....duction u/s.10B of the Act for those AYs. 4. For AY 2008-09 also the Assessee was allowed deduction u/s.10B of the Act. The dispute between the Assessee and the Department in that year was about the computation of book profits u/s.115JB of the Act. While computing book profits u/s.115JB of the Act the Assessee, the assessee had reduced the deduction claimed u/s. 10B. The AO required the assessee to show cause as to why the said claim should not be disallowed as the provisions of section 115JB, amended w.e.f. 1.4.2008, do not permit the deduction u/s. 10A. In this respect the assessee submitted that the provisions of section 115JB(6) exempted the assessee from taxability u/s. 115JB. The assessee further took the plea that the provisions of section 115JB(6) exempted all units situated in Special Economic Zones from its rigors. The claim of the assessee was that it came within the meaning of the words "entrepreneur" and "unit" as defined in Special Economic Zone Act, 2005. However, the AO did not agree with the assessee. Ultimately the Tribunal in ITA No.1057/Kol/2012 order dated 19.2.2014, held that the Assessee's unit which was located in a unit located in Special Economic Zone (....
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.... and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Reinvestment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2). (2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely :- (a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised- (i) for the purposes of acquiring machinery or plant which is first put....
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....re a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone : Provided also that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1st day of April, 2006. (4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:- (i) it has begun or begins to manufacture or produce articles or t....
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....l have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years. (8) The provisions of sub-sections (5)82 and (6) of section 10A shall apply to the articles or things or services referred to in sub-section (1) as if- (a) for the figures, letters and word "1st April, 2001", the figures, letters and word "1st April, 2006" had been substituted; (b) for the word "undertaking", the words "undertaking, being the Unit" had been substituted. (9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. ^83[(10) Where a deduction under this section is claimed and allowed in respect of profits of any of the specified business, referred to in clause (c) of sub-section (8) of section 35AD, for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.] Explanation 1.-For the purposes of this section,- (i) "export turnove....
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.... any Special Economic Zone." 8. The AO denied the claim of the Assessee for deduction u/s.10AA of the Act on several counts. The CIT(A) however reversed the order of the AO. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal. 9. We will deal with each of the objections of the AO for not allowing deduction u/s.10AA of the Act and the order of the CIT(A) on those objections and the submissions made by the parties before us. The grounds of appeal raised by the Revenue are based on the objections of the AO for not allowing deduction u/s.10AA of the Act. 10. The first objection of the AO was that the Assessee's unit was not located in a Special Economic Zone. In this regard the AO has pointed out that deduction u/s.10AA(1) of the Act is allowed 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 year commencing on or after the 1st day of April, 2006. The definition of "Unit" u/s.2(zc) of the SEZ Act, is a....
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....sessee was not a Unit established in a Special Economic Zone. Hence, according to him benefit of sub-section 6 of section 115JB will not be available to it. According to him, ld.CIT(Appeals) fell in error in considering Falta Export Processing Zone as an SEZ. It was only a Software Technology Park. Sub-section 6 of sect ion 115JB of the Act did not include units functioning from Software Technology Park. Therefore, according to him, assessee was not eligible for any exemption from Minimum Alternative Tax. 7. Per contra, ld. AR supported the order of ld. CIT(Appeals). 8. We have heard the rival contentions and perused the material available on record. The short question before us is whether assessee, functioning from Falta Export Processing Zone, admittedly a Software Technology Park, was eligible for claiming the benefit of sub-section 6 of section 115JB of the Act . Sub-section 6 of section 115JB is reproduced hereunder : - "(6). The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April , 2005 from any business carried on, or services rendered by an entrepreneur or a Developer, in a Unit or Special Economic Zones, as ....
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....e Act was never an issue as the claim for deduction was made by the Assessee u/s.10A of the Act for the said AY. His submission was that the decision rendered in the context of Sec.115JB(6) of the Act and with reference to Sec.10A of the Act cannot hold good for allowing deduction u/s.10AA of the Act in the present AY. He reiterated the stand of the AO. 14. On behalf of the Assessee reliance was placed on the written submissions filed before CIT(A) which have been incorporated in the impugned order of the CIT(A). It was emphasised that the Assessee was an existing SEZ and existing unit within the meaning of SEZ Act and was entitled to benefits of Sec.10AA of the Act. It was reiterated that physical presence of unit within an SEZ was not required in respect of "existing SEZ" and "existing unit". 15. We have given a very careful consideration to the rival submissions. We need to set out the concept of SEZ. India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls an....
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....SEZ Act was passed by the Parliament and SEZ Rules came into force from February 10, 2006, which not only simplified procedures but also extended single window clearance for matters relating to central as well as state governments. 19. The Assessee set up a "Unit" in the Software Technology Park (STP) for rendering IT Enabled Services in the software Technology park set up by the Ministry of Commerce, Government of India, pursuant to its Information and Technology Policy for setting up and rendering ITES to the foreign country-customers in various fields for securing Net Foreign Exchange earnings for India This was aimed at building-up the foreign exchange reserves as quickly as possible, to strengthen India's balance of payment situation. For this purpose, Government of India placed the Export Processing Zone, STP's and Special Economic Zones (SEZ's) at par and gave similar support and entitlements to all these areas for augmenting Net Foreign Exchange earnings. In particular, the STP's were placed on level footing with the EPZ's and SEZ's as regards control and development, by placing them under the direction of Department of Commissioners and for this purpose the Director of ....
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....as described in Sec.10A above. 10AA was brought in along with the consolidation and quick development of export initiatives in all the units, past, present and future, located in SEZ's or which were in existence in all parts of India even prior to the promulgation of the SEZ Act, 2005. It is important to note that, for the first time, this section extended the exemption coverage to "Computer IT ES" besides computer software. The SEZ Act itself was brought into effect from 10th Febtruary, 2006, and was made applicable for and from AY 2006-07 and in respect of units set up and which commenced manufacture after 1.4.2005. It is to be noted that Sec.10AA was telescoped with the earlier Sec.10A, as that section was excluded for application from AY 2006-07 for the reason that Sec.10AA was made to continue to apply to the remaining span of the "left over" years of relief under Sec.10A and which would spill over to the remaining assessment year after 2006-07. 22. All these initiatives required that the earning of Foreign Exchange was to be "Net Surpluses" and were to be accruing to the Indian Economy. All the regulatory parameters were similar, as was the sole purpose of the Exports prom....
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....; l. "existing Unit" means every Unit which has been set up on or before the commencement of this Act in an existing Special Economic Zones; (za) "Special Economic Zone" means each Special Economi Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone; (zc). "Unit" means a Unit set up by an entrepreneur in a Special Economic Zone and includes an existing Unit, an Offshore Banking Unit and Unit in an International Financial Services Centre, whether established before or established after the commencement of this Act; 25. The following other provisions of SEZ Act also needs to be looked into: 4. Establishment of Special Economic Zone and approval and authorisation to operate it to, Developer 1. The Developer shall, after the grant of letter of approval under sub-section (10) of Section 3, submit the exact particulars of the identified area referred to in sub-sections (2) to (4) of that section, to the Central Government and thereupon that Government may, after satisfying that the requirements, under sub-section ....
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....Assessee which was an STP unit registered under STPI Scheme was "Existing SEZ" and "Existing Unit" under the SEZ Act and therefore can claim benefits available to an SEZ. As a corollary to the above conclusion, the physical presence of "existing SEZ" or 'Existing Unit' in a SEZ is not a condition for allowing deduction u/s.10AA of the Act. As we have already seen, Sec.10AA was telescoped with the earlier Sec.10A, as that section was excluded for application from AY 2006-07 for the reason that Sec.10AA was made to continue to apply to the remaining span of the "left over" years of relief under Sec.10A and which would spill over to the remaining assessment year after 2006-07. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the provisions of Special Economic Zones Act shall apply to such existing SEZ units. The above intent of the relevant statutory provisions also supports the conclusions which we have arrived at as above. 27. For the reasons given above, we concur with the order of the CIT(A) on this issue. 28. The second reason given by the AO for denying th....
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....the view that the reason given by the AO, to say the least, is frivolous. It is undisputed position that M/S.Last Peak BPO Pvt.Ltd. was enjoying STP unit status as it was in ITES. Therefore there was no question of the Assessee having been formed by splitting up or reconstruction of a unit already in existence. The Assessee is already an existing unit. The deduction u/s.10AA of the Act is claimed for the period within 10 years contemplated by Sec.10AA of the Act even after considering the exemption already availed by the Assessee. Even M/S.Last Peak BPO Pvt.Ltd. had not availed Sec.10A deduction for period beyond 10 years before amalgamation with the Assessee. In such circumstances, the very basis of application of Sec.10AA(4)(ii) & (iii) of the Act is flawed. We are of the view that the objection of the AO in this regard is without any merit. 32. The fifth objection of the AO that the Assessee did not operate from SEZ and therefore did not export goods from SEZ and derive income therefrom and therefore not entitled to deduction u/s.10AA of the Act, is not sustainable in view of our conclusion that the Assesssee was an "existing unit". 33. The sixth objection with regard to n....
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....after a particular AY, is less than a particular percentage of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of prescribed percentage. The percentage of book profits and rates are different for various AYs. It is not in dispute that the provisions of Sec.115JB of the Act are applicable to the Assessee as the percentage Book profits for the purpose of Sec.115JB of the Act has been defined to mean the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) i.e., profit and loss account prepared in accordance with the Companies Act, 1956 and laid before the General Meeting of the shareholders of a company. To this profit certain additions and deletions have to be made as laid down in the explanation below Sec.115JB(2). One of the items of exclusion from the profit as per profit and loss account referred to above is " the amount of income to which any of the provisions of section 10 other than the provisions contained in clause (38) thereof or section 11 or section 12 apply, if any such....
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....ill not be applicable. The CIT(A) agreed with the argument of the Assessee and deleted the addition made by the AO. 40. We have heard the rival submissions. The issue in question is no longer res integra and has been settled by the Hon'ble Supreme Court in the case of CIT Vs. General Insurance Corporation Ltd. 205 CTR 280 (SC) wherein it was held that expenditure incurred in connection with issuance of bonus shares, constitutes revenue expenditure. It was held that issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalization of reserves is merely a reallocation of company's fund. That being so, it cannot be held that the company acquires a benefit or advantage of enduring nature. Therefore, the expenditure on issuance of bonus shares is revenue expenditure. In view of the aforesaid decision, we are of the view that the order of CIT(A) has to be upheld on this issue. 41. The next issue that arises for consideration is the disallowance of depreciation by the AO. The AO disallowed depreciation to the extent of Rs. 29,88,000 by reworking the WDV of the a....
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....for increase in share capital of Rs. 7,21,02,983. 45. The plea of the Assessee before CIT(A) was that from the income eligible for deduction u/s.10AA of the Act there can be no set off of carried forward loss and deduction u/s.10AA of the Act has to be allowed on the said income only. The further claim of the Assessee was that the carried forward loss has to be allowed to be set off against "interest income on call money". 46. As already stated the CIT(A) without any discussion allowed the claim of the Assessee. We have heard the rival submissions. Sec.10AA(6) of the Act provides that Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off. The loss that is sought to be set off and carried forward in the present case is not that of the 10AA unit on which the Assessee has claimed deduction u/s.10AA of the Act. The loss in question is that of Last Peak BPO Pvt.Ltd. This loss pursuant to the order of amalgamation by the Hon'ble Kolkata High Court has to be considered as loss of the Assessee not relating....
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.... deduction u/s.10AA of the Act. The AO also excluded the sum of Rs. 13,73,888 which was interest on call money from the business income and was of the view that the same has to be considered not as business income but income from other sources. He however omitted to add the said sum to the total income of the Assessee. By an order dated 21.2.2012 he brought the said sum to tax and also treated the said sum as "Income from other sources". The dispute in this appeal is only on the head of income. There is no tax implication because the claim of the Assessee for set off of this income against the carried forward business loss has already been accepted. 50. The Assessee made available to its own bankers its funds as money on call. These were not fixed deposit but certificates of deposit that were callable at the option of the Assessee depending on market conditions and its exigencies of business as it perceived. The Assessee made these sums available as money's call against certificates of deposit as part of its normal business dealings activities and being its own treasury management function. Having regard to the volatility of the money market as the Assessee perceived and having ....