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2015 (11) TMI 430 - AT - Income TaxDeduction u/s.10AA - CIT(A) allowed the claim - Held that - 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. The unit to claim benefits of SEZ Act, 2005 need not be physically located within an SEZ, especially an existing unit such as the Assessee. As already discussed under the scheme of coverage, the existing EPZ s are included as SEZ s and the definitions of the term Entrepreneur includes the unit recognized as such by the STP Director who has been equated with the Development Commissioner for this purpose. The Assessee s license sets out three points. In addition the Directorate in charge of STPI, Kolkata, come within the EPZ/SEZ of Falta and this has also been confirmed in his letter dated 3.5.2011 that the Assessee s unit is an existing unit and has all the necessary accreditations from the Ministry of Information Technology with regard to the setting up of the unit as per the licence issued to it. By notification F.No.114/10/2003 FTT, existing Export Processing Zone (EPZ) were to be renamed as Special Economic Zone (SEZ s). 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. The second reason given by the AO for denying the benefit of deduction u/s.10AA of the Act to the Assessee was that as per Sec.10AA(4)(i) of the Act the unit has to begin manufacture or produce articles or things or provide services during the previous year relevant to AY commencing on or after the 1st day of April, 2006 (i.e., financial year 2005-06 or any subsequent year) in any Specialized Economic Zone and that the Assessee had begun production of article or thing prior to 1.4.2006 and has been claiming exemption u/s.10A of the Act, the deduction u/s.10AA of the Act cannot be allowed to the Assessee will not apply to the Assessee as in view of our conclusion that the Assessee was an existing unit . 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. 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 . The sixth objection with regard to non-filing of Form No.56F is a valid objection. But on this ground the Assessee cannot be denied the benefit of deduction u/s.10AA of the Act. The non-furnishing of Form No.56F along with the return of income is not mandatory. The Assessee is directed to file the report in the prescribed form for AO s consideration. The non-furnishing of Form No.3CEB report in respect of international Transaction which the Assessee had with it s Associated Enterprise in terms of Sec.92 of the Act, has nothing to do with allowing deduction u/s.10AA of the Act. This objection of the AO is therefore held to be unjustified. The last objection of the AO for not allowing deduction to the Assessee u/s.10AA of the Act was that the Assessee did not claim deduction u/s.10AA of the Act in the return of income. The CIT(A) has not commented on this issue. The Revenue in ground No.4 of the grounds has not chosen to take objection on this aspect. Nevertheless, the appellate authorities can take note of claim not made in a revised return of income, more so in the present case where a claim had been made in a revised computation of total income before the AO. This objection of the AO in our view is therefore devoid of any merits. Besides the above reasons, it is also seen that the AO, ought to have considered the claim of the Assessee for deduction u/s.10B of the Act, as made in the original return of income. He has chosen to ignore the same and sought to deny the benefit of Sec.10AA of the Act alone. The order of the AO is silent on the claim of the Assessee u/s.10B of the Act. This approach of the AO in our view is nor proper. We therefore reject this objection raised by the AO. - Decided in favour of assessee. MAT computation - deductibility of the amount allowable as deduction u/s.10AA of the Act while computing book profits u/s.115JB(6) - Held that - The profits of the Sec.10AA unit of the Assessee should be excluded for the purpose of computing book profits u/s.115JB of the Act from the profit as per Profit and Loss account referred to in that section.- Decided in favour of assessee. Disallowance of expenditure incurred to increase the authorized share capital - Held that - 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. (2006 (9) TMI 116 - SUPREME Court ) 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.- Decided in favour of assessee. Disallowance of depreciation - reworking the WDV of the assets of Last Peak BPO Pvt.Ltd., which got amalgamated with the Assessee during the previous year by invoking the provisions of Explanation 2 to Sec.43(6) - Held that - hough the Assessee raised a specific ground challenging the action of the AO in this regard, the CIT(A) has not adjudicated the same. The revenue has raised a ground on the presumption that the addition made by the AO in this regard was deleted by the CIT(A). On a careful perusal of the order of the CIT(A), we find that the CIT(A) has not adjudicated the issue at all. We are therefore the view that it would be just and appropriate to direct the CIT(A) to adjudicate this issue. Set off of brought forward loss - Held that - 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 to the business of the undertaking of the Assessee. Such loss is covered by the provisions of Sec.70 & 71 of the Act and not by the provisions of Sec.72(1) or Sec.74(3) of the Act. They are therefore to be allowed to be set off against the income of the Assessee under any other source.The CBDT in File No.279/Misc./M-116/2012-ITJ dated 16.7.2013 circulated to the Assessing officers has after referring to conflicting views on whether section 10A and 10B provisions are deduction provisions or exemption provisions, has expressed its view that section 10A/10B provisions are deduction provisions. The said circular becomes a benevolent circular when there is loss in the 10A/10B unit against taxable income of non- 10A/10B unit. Even on the basis of the circular to the extent it is benevolent in the facts and circumstances of the present case, has to be followed. Interest income on call money - treated as Income from other sources - Held that - We are of the view that 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. We therefore leave the question open without adjudication and uphold the conclusions of the CIT(A). - Decided against revenue
Issues Involved:
1. Eligibility for Deduction under Section 10AA of the Income Tax Act, 1961. 2. Computation of Book Profits under Section 115JB of the Income Tax Act, 1961. 3. Disallowance of Depreciation. 4. Set-off of Brought Forward Business Loss. 5. Treatment of Expenditure Incurred for Increase in Authorized Share Capital. 6. Classification of Interest Income on Call Money. Detailed Analysis: 1. Eligibility for Deduction under Section 10AA of the Income Tax Act, 1961: The primary issue was whether the Assessee's unit qualified for deduction under Section 10AA. The AO denied the claim, arguing the unit was not located in a Special Economic Zone (SEZ) and did not meet the conditions laid out in Section 10AA(4). The CIT(A) reversed this decision, and the Tribunal upheld the CIT(A)'s order. The Tribunal concluded that the Assessee's unit, being an existing unit within the meaning of the SEZ Act, did not require physical presence in an SEZ to claim benefits under Section 10AA. The Tribunal also found that the amalgamation of M/S. Last Peak BPO Pvt. Ltd. with the Assessee did not violate Section 10AA(4)(ii) & (iii). 2. Computation of Book Profits under Section 115JB of the Income Tax Act, 1961: The dispute centered on whether the profits of the SEZ unit should be excluded while computing book profits under Section 115JB. The AO contended that the Assessee's unit was not in an SEZ, thus not qualifying for exclusion under Section 115JB(6). The Tribunal, referencing its earlier decision for AY 2008-09, held that the Assessee's unit qualified for exclusion, and the profits should be excluded from the computation of book profits. 3. Disallowance of Depreciation: The AO disallowed depreciation by reworking the Written Down Value (WDV) of assets of Last Peak BPO Pvt. Ltd. The CIT(A) did not adjudicate this issue. The Tribunal directed the CIT(A) to adjudicate the issue of depreciation disallowance. 4. Set-off of Brought Forward Business Loss: The AO set off the business loss against the income computed by disallowing depreciation and other expenses. The CIT(A) allowed the Assessee's claim without detailed reasoning. The Tribunal upheld the CIT(A)'s decision, referencing Section 10AA(6) and relevant case law, concluding that the loss should be allowed to be set off against the income from other sources. 5. Treatment of Expenditure Incurred for Increase in Authorized Share Capital: The AO disallowed the expenditure incurred for increasing the authorized share capital, treating it as capital expenditure. The CIT(A) reversed this decision, and the Tribunal upheld the CIT(A)'s order, referencing the Supreme Court decision in CIT Vs. General Insurance Corporation Ltd., which held that such expenditure is revenue in nature when related to the issuance of bonus shares. 6. Classification of Interest Income on Call Money: The AO classified the interest income on call money as "Income from Other Sources," while the Assessee argued it was business income. The CIT(A) agreed with the Assessee. The Tribunal noted that the dispute was only on the head of income with no tax implications due to the set-off of business loss against this income. The Tribunal upheld the CIT(A)'s conclusion without adjudicating the classification issue. Conclusion: - The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 10AA. - The Tribunal confirmed that profits from the SEZ unit should be excluded while computing book profits under Section 115JB. - The issue of depreciation disallowance was remanded to the CIT(A) for adjudication. - The Tribunal upheld the set-off of brought forward business loss against other income. - The expenditure incurred for increasing authorized share capital was treated as revenue expenditure. - The Tribunal upheld the CIT(A)'s decision on the classification of interest income on call money, leaving the question open without adjudication.
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