2019 (2) TMI 1467 - AT - Income Tax

Deduction u/s. 10AA - SEZ unit - Trading activity in diamond and gold jewellery to be considered as service activity or not - Instruction No.4/2004- HELD THAT - In view of the decision of the Tribunal order in assessee own case 2017 (2) TMI 109 - ITAT MUMBAI we uphold the order of the Ld. CIT(A) in allowing the claim for deduction u/s. 10AA of the Act for the assessee as held that the assessee in the case on hand is eligible for deduction of its income earned from trading exports of diamonds under section 10AA of the Act and therefore uphold the finding of the learned CIT(A) on this issue in the impugned order - Ground No.1 of the grounds of appeal of the Revenue is dismissed. Interest receipts on fixed deposit kept with bank by way of margin money- HELD THAT - We observe that the Tribunal in the A.Y. 2011-12 held that interest income from fixed deposit kept with bank by way of margin money for the purpose of business of import / export trading in diamonds constitutes business receipts for the purpose of deduction u/s. 10AA There is no independent finding by the CIT(A) as to whether this interest was earned on fixed deposits utilized for margin money and used for the purpose of business. Ld. CIT(A) simply extracted the submissions of the assessee and following the order of the Tribunal deleted the interest disallowance. In the facts and circumstances we are of the view that this issue has to be reexamined by the Assessing Officer after obtaining the necessary information from the assessee to prove that this interest income was earned only on Fixed deposits made on margin money utilized for the purpose of business and not out of any surplus funds which were used for earning interest income by the assessee. Therefore the Assessing Officer is directed to examine the issue afresh in the light of the evidences produced before him - Appeal of the Revenue is partly allowed for statistical purpose

Summary

Issues Involved:
1. Deduction under section 10AA of the Income Tax Act for profits from trading activity.
2. Classification of interest receipts from fixed deposits as business income or income from other sources.
3. Reliance on the Tribunal's previous decision in the assessee's own case for A.Y. 2011-12.

Issue-wise Detailed Analysis:

1. Deduction under Section 10AA for Trading Activity:
The Revenue challenged the Ld. CIT(A)'s decision allowing the assessee's claim for deduction under section 10AA for profits arising from trading activities. The Tribunal had previously ruled in favor of the assessee for A.Y. 2011-12, determining that the assessee was engaged in the business of trading in diamond and gold jewelry and was entitled to deduction under section 10AA. The Tribunal referenced the SEZ Act, 2005, and SEZ Rules, 2006, which define 'services' to include trading activities, thus overriding the Income Tax Act due to the non-obstante clause in section 51(1) of the SEZ Act. The Tribunal upheld the Ld. CIT(A)'s decision, dismissing the Revenue's grounds.

2. Classification of Interest Receipts:
The second issue was whether the interest earned from fixed deposits kept as margin money for business purposes should be classified as business income or income from other sources. The Tribunal had previously held in the assessee's favor for A.Y. 2011-12, determining that such interest income constituted business receipts eligible for deduction under section 10AA. The Tribunal cited the case of M/s. Jewel Arts and other judicial precedents, supporting the classification of such interest as business income when the fixed deposits were made out of business funds as per bank requirements.

However, the Tribunal noted the absence of specific findings by the Assessing Officer and Ld. CIT(A) on whether the fixed deposits were made from surplus funds or were necessary for business operations. Therefore, the Tribunal remanded the issue back to the Assessing Officer for re-examination, directing the officer to obtain necessary information from the assessee to confirm the nature of the fixed deposits and their purpose.

3. Reliance on Previous Tribunal Decision:
The Revenue argued that the Tribunal's previous decision in the assessee's own case for A.Y. 2011-12 should not be considered as the Department had appealed against it, and the appeal was pending before the Bombay High Court. Despite this, the Tribunal upheld its earlier decision, noting that no new facts or legal arguments were presented to contravene the previous ruling.

Conclusion:
The appeal of the Revenue was partly allowed for statistical purposes. The Tribunal upheld the Ld. CIT(A)'s decision allowing the deduction under section 10AA for trading activities but remanded the issue of classification of interest receipts back to the Assessing Officer for further examination. The Tribunal's reliance on its previous decision in the assessee's own case for A.Y. 2011-12 was maintained, dismissing the Revenue's grounds on this matter.