2017 (4) TMI 867 - AT - Income Tax

Disallowance of exemption u/s 10AA - Held that - Profit derived from the units situated at SEZ, engaged in the business of trading activity in the nature of import and re-export of goods falls within the definition of the term services as defined in section 10AA of the Act. Consequently, the assessee is eligible for exemption u/s 10AA of the Act, towards export profit derived from eligible unit located at SEZ. The CIT(A), after considering the relevant provisions of the Act, has rightly deleted additions made by the A.O. towards disallowance of exemption u/s 10AA of the Act. We do not find any error in the order passed by the CIT(A). Hence, we uphold CIT(A) order and reject the ground raised by the revenue.- Decided against revenue Disallowance of bad debt written off in respect of debts receivable from export sales - Held that - The assessee has written off bad debts as irrecoverable in the books of accounts. We further observed that these debts are offered as income in computing income in the earlier years. The conditions prescribed u/s 36(1)(vii) and 36(2) of the Act has been fulfilled. Therefore, we are of the view that merely because assessee had not obtained approval of RBI to write off debts pertaining to foreign party, the claim of the assessee could not be disallowed. The CIT(A) after considering the relevant provisions of the Act and also relied upon the decision of Hon ble Supreme Court in the case of TRF Limited Vs. CIT (2010 (2) TMI 211 - SUPREME COURT ), has rightly deleted additions made by the A.O. towards disallowance of bad debt written off. - Decided against revenue Disallowance on loss of forward contracts - Held that - The assessee has entered into a forward exchange contracts with its bankers to hedge the export receivables in foreign currency, in order to safeguard against price fluctuation in realization of trade debtors. During the year, in respect of such hedging contracts, the assessee incurred loss of an amount of ₹ 3,41,583/-. We further observed that the assessee has achieved an export turnover of over ₹ 100 crores. We further observed that the transaction entered into by the assessee with its bankers is not in the nature of speculative transaction as defined u/s 43(5)(d) of the Act. Therefore, we are of the view that any loss incurred on forward contracts entered with its bankers to hedge the export receivables, in order to safeguard against price fluctuations in realization of trade debtors is in the nature of business loss, but not speculation loss as defined u/s 43(5)(d) of the Act. The CIT(A) after considering the relevant details has rightly deleted additions TDS u/s 194C - disallowance of clearing and forwarding charges u/s 40(a)(ia) of the Act, for non- deduction of tax at source - Held that - No disallowance can be made u/s 40(a)(ia) of the Act, for the amounts which have been paid on or before the end of the financial year. However, the assessee has failed to file necessary evidences with regard to paid and payable. Therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue with reference to the books of accounts of the assessee to ascertain the fact of paid and payable and if expenditure is paid within the same financial year, then the A.O. is directed to delete additions made u/s 40(a)(ia) of the Act. In other words, the A.O. is directed to restrict disallowance to the extent amount remaining payable at the end of the financial year.

Summary

Issues Involved:
1. Disallowance of exemption claimed under Section 10AA of the Income Tax Act.
2. Deletion of additions made towards bad debt written off.
3. Deletion of additions made towards loss on forward exchange contracts.
4. Partial confirmation of disallowance towards clearing and forwarding charges under Section 40(a)(ia) for non-deduction of tax at source under Section 194C.

Detailed Analysis:

1. Disallowance of Exemption under Section 10AA:
The assessee, engaged in trading activities at a SEZ unit, claimed exemption under Section 10AA for export profits. The AO disallowed this exemption, arguing that trading activities do not qualify as "services" under Section 10AA. The CIT(A) reversed this decision, considering the SEZ Act and Rules, which include trading as a service. The Tribunal upheld the CIT(A)'s decision, referencing the ITAT Visakhapatnam's earlier ruling and the SEZ Act's definition of services, concluding that the assessee's trading activities qualify for exemption under Section 10AA.

2. Deletion of Additions towards Bad Debt Written Off:
The AO disallowed the bad debts written off, arguing they arose from export turnover and contravened RBI guidelines. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision, citing the Supreme Court's ruling in TRF Limited vs. CIT, which states that writing off bad debts in the books is sufficient for deduction under Section 36(1)(vii). The Tribunal emphasized that the Act does not differentiate between domestic and export debts for this purpose.

3. Deletion of Additions towards Loss on Forward Exchange Contracts:
The AO disallowed the loss on forward contracts, treating it as speculative. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision, noting that the forward contracts were hedging transactions related to export receivables and not speculative in nature. The Tribunal referred to Section 43(5)(d) and concluded that such losses are business losses, not speculative losses.

4. Partial Confirmation of Disallowance towards Clearing and Forwarding Charges under Section 40(a)(ia):
The AO disallowed clearing and forwarding charges for non-deduction of TDS under Section 194C. The CIT(A) partly allowed this disallowance. The Tribunal, referencing the ITAT Visakhapatnam's special bench decision in Merilyn Shipping & Transporters vs. ACIT, held that no disallowance under Section 40(a)(ia) is applicable if the amounts were paid within the financial year. The Tribunal remanded the issue to the AO to verify the payment status and restrict disallowance to amounts payable at the end of the financial year.

Conclusion:
The Tribunal dismissed the revenue's appeals and allowed the assessee's appeal for statistical purposes, directing the AO to re-examine the clearing and forwarding charges disallowance based on the payment status. The Tribunal's decisions were consistent with previous rulings and legislative definitions, ensuring compliance with the relevant laws and judicial precedents.