TMI Blog2014 (10) TMI 470X X X X Extracts X X X X X X X X Extracts X X X X ..... r Duplicators Private Ltd. Vs. CIT [1978 (12) TMI 1 - SUPREME Court] there was no material to arrive at the finding that the assessee has violated any provision of SEZ Act, 2005 or SEZ Rules, 2006 or that the assessee was not an entrepreneur referred to in clause (j) of section 2 of SEZ Act, 2005 - it cannot be held that the view adopted by the AO in holding that the assessee is entitled for deduction u/s 10AA of the Act was not a possible view - the interference by the CIT with that view of the AO in purported exercise of power available to him u/s 263 cannot be sustained – the order of the CIT is set aside. Taxation of interest on FDRs – Income from other sources or not – Held that:- The interest income which were earned by the assessee were from fixed deposit receipts with bank which were made by the assessee in the course of its trading business of import for the purposes of re-export, for obtaining Letter of Credit for its purchases - the relevant fixed deposit receipts on which interest were earned were business assets of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at interest income earned by the assessee on fixed deposit receipts are assessable under the head “business income” - set-off of brought forward business loss against such business income as done by the AO in the assessment order was a possible view – the order of the CIT is modified to the extent that 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. Genuineness of foreign exchange fluctuation loss – Held that:- Following the decision in CIT Vs. Honda Siel Power [2010 (7) TMI 38 - HIGH COURT OF DELHI] - while passing an order u/s 263, CIT has to examine not only the assessment order but the entire records - No doubt this presumption is rebuttable, but there must be some material to indicate that the AO had not applied his mind - no material could be brought on record in the impugned order passed u/s 263 to show that the AO had accepted the claim of exchange fluctuation loss without application of mind when record shows that the AO during the assessment proceedings called for details of exchange fluctuation loss and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 other sources. 8. That on facts and in law, the learned CIT-IV, Ahmadabad has grievously erred in setting aside and directing the AO to examine the correctness, genuineness and allowability of Foreign Exchange Fluctuation Loss of ₹ 70.97 crores, resulting into multiplicity of proceedings. The assessee has raised following grounds in its appeal for Assessment Year 2010-11: 1. That on facts, and in law, the learned CIT-IV, Ahmedabad has grievously erred in assuming jurisdiction u/s 263 of the Act. 2. That on facts and in law, the learned CIT-IV, Ahmedabad has grievously erred in holding that the learned AO has not done any inquiry nor any verification, whereas, in 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, Ahmedabad has grievously erred in law and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Income Tax as insufficient or not in the manner in which the Commissioner of Income Tax would have liked to be done will not make the order of the Assessing Officer erroneous within the meaning of section 263 of the Act. 9. Further, it is also an established position that when two views are possible and the Assessing Officer has adopted one of the possible views, then such an order of the Assessing Officer cannot be called erroneous. 10. Further, the provisions of section 263 cannot be invoked for merely providing the Assessing Officer a second innings to play unless the order passed by the Assessing Officer is found by the Commissioner of Income Tax as erroneous. 11. On the touchstone of the above settled position of law, the validity of the orders passed u/s 263 are to be tested. 12. In the instant case, the Commissioner of Income Tax has considered the order of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est 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 Representative was that as the above claims were accepted by the Assessing Officer after making due inquiries, therefore, the order of the Assessing Officer cannot be considered as erroneous. 15. Further, the Ld. Authorized Representative also contended that as a possible view in respect of the above issues was adopted by the Assessing Officer in the assessment order, therefore, the Commissioner of Income Tax was not justified in passing the impugned order in respect of above issues merely for taking a different view. In support of the above contentions, the Ld. Authorized Representative relied upon the decisions in the case of CIT Vs. Max India Limited 295 ITR 282 (SC) and Malabar Industrial Limited 243 ITR 82 (SC) and CIT Vs. Arvind Jewellers 259 ITR 502 (Guj.). 16. We find that in the impugned order, Commissioner of Income Tax has modified the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject 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 year commencing on or after the 1st day of April, 2006, a deduction of (i) hundred per cent of profits 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 Re-investment Reserve Account ) to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 2005 reads as under: The Development Commissioner may, after approval of the proposal referred to in sub- section (3), grant a letter of approval to the person concerned to set up a Unit and undertake such operations which the Development Commissioner may authorize and every such operation so authorized shall be mentioned in the letter of approval. 24. In the instant case, it is not in dispute that the assessee has been granted an approval by the Development Commissioner under sub-section (9) of section 15 of the SEZ Act, 2005. A copy of the said approval vide letter no. SSEZ/II/18/2007-08/603 dated 30.10.2007 is placed at page no. 908 of the Paper Book. 25. Further, originally Development Commissioner, Surat Special Economic Zone granted approval to the assessee s SEZ unit in respect of manufacturing of Gold, Silver, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mic 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 your authorized operations under this approval, except those promoted under the ITC (HS) Classifications of Export and Import Items. (iv) The benefits under Section-10AA of the Income Tax Act, shall exclude trading other than trading in the nature of re-export of imported goods only. If you envisage DTA procurement, you shall maintain separate account, etc. as provided under SEZ Act and Rules there-under. (v) Date of commencement of trading activities shall be intimated to the Development Commissioner. (vi) You shall undertake trading activities in a segregated premises and separate account shall be maintained with proper identification. (vii) You shall follow the RBI Regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Mrugesh Shah mrugesh@zaveriandco.in 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. As regards circular issued by EPCES N.16/2007-08 dated 11/7/07, kindly note that this circular is meant for EOUs only. 2. As regards EPCES Circular No. 42 dated 26/3/07, this suggestion was not included in SEZ Rule 53. To read the updated SEZ Rule 53, please visit website www.sezindia.nic.in. 3. As regards Circular No. 12/2008-Customs dated 24/7/08, this circular is also meant for EOUs only. Kindly note that EPCES has shifted its premises from Bhikaji Cama Bhawan to its own premises as the address mentioned above, kindly note the new address and contact details. With warm regards, Yours Sincerely (O.P. Kapoor) D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implied that the provident fund satisfies all the conditions under r. 4 of Part A of the Fourth Schedule to the Act and not sit in judgment over it. There is ample power conferred upon the CIT under r. 3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted if, in his opinion, the provident fund contravenes any of the conditions required to be satisfied for its recognition and if during the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 excluded for calculating benefit allowable u/s 10AA of the Act. 37. The undisputed facts relating to this issue are that the assessee imports goods on credit and re-exports the same from its SEZ unit. The import is made on a credit of 360/90 days against letter of credit. For obtaining the letter of credit, the assessee is required to offer fixed deposit receipt to the bank as a security. On expiry of the letter of credit period, the bank liquidates the fixed deposit receipt and makes payment to the importer. Further, the exports are made on immediate p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary there is specific provision like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les 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 the undertakings . Now, the profits of the business of the undertakings are to be computed as per the provisions of chapter-IVD of the Act and the only adjustment which is permitted by the legislature to be made to such profits of the business is to apportion the same in the proportion of exports turnover of the eligible services to the total turnover of the business carried on by the assessee. It is significant to note here that the specific provision like explanation (baa) of section 80HHC which provides for exclusion of 90% of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not of trading by way of re-export of imported goods. The Commissioner of Income Tax formed the above view as he observed that on exclusion of interest income, the result of the activities of the assessee are negative or loss only. 45. We find that the assessee was duly granted approval by SEZ authorities to set up SEZ unit for engaging in trading by way of re-export of the imported goods. The activities carried out by the assessee in the SEZ unit are monitored by the competent SEZ authorities. The annual performance rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and allowability of foreign exchange fluctuation loss of ₹ 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, the assessee furnished break-up of foreign exchange loss distinguishing between exchange loss on export and exchange loss on import of trading goods, copy of which is placed at page no. 115 of Paper Book-I. Further, in reply to consequential inquiry by the Assessing Officer, the assessee submitted transaction-wise details of exchange fluctuation loss before him, copies of which are placed at page nos. 131 to 164 of the Paper Book-I. 51. On the basis of the above document, it was contended by the Authoriz ..... X X X X Extracts X X X X X X X X Extracts X X X X
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