2017 (10) TMI 1344 - HC - Income Tax

Eligibility for deduction u/s 10AA - surplus amount in the freight export account and in the insurance export as derived from export activities - whether ITAT has failed to appreciate the fact as brought on record by the Assessing Officer regarding disallowance of deduction u/s 10AA of deemed profit of ₹ 5021944/- not eligible for deduction u/s 10AA? - Held that - There is no evidence demonstrating the existence of any arrangement between the assessee company and M/s Dwarka Jewels aimed at producing more than normal profit in the hands of the assessee company. Hence, the action of the authorities in invoking provisions of section 10AA(9) read with section 80IA(10) cannot be sustained. In the result, the consequent additions made by the Assessing Officer and partly upheld by the ld. CIT(A) is hereby deleted. In the results, grounds taken by the assessee are allowed and ground of the revenue is dismissed. Briefly the facts of the case are that the ld. A.O. disallowed the deduction u/s 10AA in respect of the amount comprising surplus of freight, Insurance charges and Misc. Balances w/off on the allegation that the same constituted indirect income not derived from export of goods. Next question that arises for consideration is the definition of export turnover which has been defined in explanation 1 to section 10AA of the Act and whether the same would have any effect in the instant case. The term export turnover has been defined as consideration in respect of export by the undertaking, being article or thing received in or brought into India by the assessee but doesn t include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India. In our view, the same may not have any effect as where the freight or insurance charges are reduced from the export turnover, the same have to be reduced from the total turnover as well. The same has been the consistent stand of the various Coordinate Benches. Thus we donot find any infirmity in the order of the ld CIT(A) and confirm the allowance of exemption under section 10AA in respect of freight and insurance excess receipts. On parity of reason, the same position would hold good for misc balances written off. In the result, the ground no.1 of the revenue is dismissed. - We are in complete agreement with the view taken by the Tribunal. - No substantial question of law

Summary

Issues Involved:
1. Justification of ITAT's decision on the surplus amount in the freight export account and insurance export being derived from export activities and eligible for deduction under Section 10AA.
2. ITAT's appreciation of the facts regarding disallowance of deduction under Section 10AA of deemed profit not eligible for deduction under the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Justification of ITAT's decision on the surplus amount in the freight export account and insurance export being derived from export activities and eligible for deduction under Section 10AA:
The appellant department challenged the Tribunal's decision allowing the assessee's appeal and modifying the CIT(A)'s order. The Tribunal held that the surplus amount in the freight export account and insurance export is derived from export activities and therefore eligible for deduction under Section 10AA. The Tribunal relied on the Karnataka High Court's ruling in CIT vs. H.P. Global Soft Ltd., which stated that there must be material evidence indicating that the business arrangement was designed to inflate profits. The Tribunal found no such evidence in the present case, noting that the prices charged for silver and job work were at prevailing market rates, and no comparable data was provided by the Revenue to suggest otherwise. Consequently, the Tribunal concluded that the provisions of Section 80IA(10) could not be invoked, and the allowance of exemption under Section 10AA in respect of freight and insurance excess receipts was confirmed.

2. ITAT's appreciation of the facts regarding disallowance of deduction under Section 10AA of deemed profit not eligible for deduction under the Income Tax Act, 1961:
The Tribunal examined whether the business transactions between the appellant company and M/s Dwarka Jewels were arranged to produce more than ordinary profit for the appellant. It was noted that the appellant company made significant purchases from M/s Dwarka Jewels and paid job work charges, but the prices were at prevailing market rates. The Tribunal emphasized that for invoking Section 80IA(10), there must be demonstrable evidence of an arrangement designed to inflate profits, which was not present in this case. The Tribunal also pointed out that the authorities wrongly compared the profits of M/s Dwarka Jewels and the appellant company without considering the profits of unrelated third-party entities in similar businesses. The Tribunal found no evidence of an arrangement aimed at producing more than normal profit and thus rejected the Revenue's contention. The Tribunal's decision to delete the additions made by the Assessing Officer and partly upheld by the CIT(A) was upheld.

Conclusion:
The High Court agreed with the Tribunal's findings, stating that the Tribunal's observations were just and proper. No substantial question of law arose in the appeals, leading to the dismissal of the appeals.