2015 (6) TMI 165 - AT - Income Tax

Deduction U/s 10AA - CIT(A) allowed claim - Held that - The word services as mentioned in Section 10AA cannot be construed inconsistently with the definition of services given in the SEZ Act. Under the SEZ act the trading is included in the services provided the trading is export of imported goods. We therefore feel that the assessee is entitled to deduction u/s 10AA of the Act and therefore the ld. CIT(A) was justified in allowing the exemption. - Decided against revenue. Addition of remuneration of Director - apportionment of salary among the taxable and non-taxable unit - Held that - The company is running various units which includes head office in jaipur Mumbai and SEz Unit at Surat. The overall work either trading or manufacturing is responsibility of the Directors when company deals in precious items cannot depend upon only employees and managers. They take the decision what type of rough diamond should be imported how it should be processed and re-exported. They not only take the business decision but also involve in the manufacturing proceeding which they performed at Surat. Therefore we find that apportionment of salary among the taxable and non-taxable unit is rightly done by the ld Assessing Officer and confirmed by the ld CIT(A). Accordingly we uphold the order of the ld CIT(A). - Decided against assesse.

Summary

Issues Involved:
1. Deduction under Section 10AA of the Income Tax Act, 1961.
2. Disallowance of directors' remuneration from the profits of the domestic unit.

Issue-wise Detailed Analysis:

1. Deduction under Section 10AA of the Income Tax Act, 1961

The primary issue in the revenue's appeal was whether the learned CIT(A) was justified in allowing a deduction of Rs. 25,37,14,968/- under Section 10AA of the Income Tax Act, 1961. The Assessing Officer (AO) had disallowed this deduction on the grounds that the assessee was not engaged in manufacturing activities, as it did not have the necessary machinery setup and was merely involved in trading, which involved import and export without any value addition.

The AO argued that the definition of 'services' could not be imported from the SEZ Act into the Income Tax Act, and thus, the assessee's activities did not qualify for the deduction under Section 10AA. The AO also noted that the assessee had not segregated expenses between the SEZ unit and the Mumbai unit, which inflated the profits of the SEZ unit.

Upon appeal, the learned CIT(A) allowed the deduction, referencing a prior decision by the ITAT, Jaipur Bench, which had ruled in favor of the assessee for A.Y. 2008-09. The CIT(A) observed that Section 51 of the SEZ Act states that its provisions will prevail over any other inconsistent laws, thereby including trading under the term 'services' for the purpose of Section 10AA.

The ITAT upheld the CIT(A)'s decision, noting that the revenue had not provided new facts or arguments to counter the findings of the ITAT in the earlier year. The ITAT reiterated that the SEZ Act's definition of 'services,' which includes trading, should apply, and therefore, the assessee was entitled to the deduction under Section 10AA.

2. Disallowance of Directors' Remuneration from the Profits of the Domestic Unit

The assessee's cross-objection challenged the disallowance of Rs. 14,06,790/- of directors' remuneration from the profits of the domestic unit. The AO had apportioned the directors' salaries between the SEZ unit and the domestic unit based on turnover, arguing that directors were involved in the overall planning, supervision, and execution of the company's business, including the SEZ unit at Surat.

The CIT(A) upheld the AO's decision, emphasizing that the directors, being promoters, bore ultimate responsibility for the financial success of all units, including the SEZ unit. The CIT(A) noted that the directors' hefty salaries were justified by their overall responsibility, even if they were not involved in day-to-day operations at a particular unit.

The ITAT agreed with the CIT(A), stating that the directors' responsibilities included significant decision-making for both trading and manufacturing activities, which could not be solely managed by employees and managers. Therefore, the apportionment of salary was deemed appropriate, and the disallowance was upheld.

Conclusion

The ITAT dismissed both the revenue's appeal and the assessee's cross-objection. It upheld the CIT(A)'s decision to allow the deduction under Section 10AA and confirmed the disallowance of a portion of the directors' remuneration from the profits of the domestic unit. The judgments were pronounced in the open court on 23.4.2014.