2022 (5) TMI 517 - AT - Income Tax

Deduction u/s 10A - denial of exemption to profits derived by the assessee from its unit located in Software Technology Park (STPI), Gandhinagar jurisdiction, as per the provisions of Section 10A - expansion Unit not being approved as a bonded warehouse by the Customs and Central Excise authority as on the date of seeking approval - Whether assessee was approved as a STPI unit? - For denial of exemption, it was stated, was on account of and for the period, the expansion/new unit of the assessee, originally registered under STPI Gandhinagar jurisdiction, was allegedly not granted approval by STPI - HELD THAT - The violation was undoubtedly noted from the application filed by the assessee in January 2010 for approval of expansion Unit and it pertained to more particularly the expansion Unit not being approved as a bonded warehouse by the Customs and Central Excise authority as on the date of seeking approval i.e. January 2010. If the approval was with effect from April 2010,then the fact of the expansion unit not being approved so from January 2010 onwards would not tantamount as violation of prescribed Rules and Regulations so as to penalize the assessee. Even otherwise, the assessee having cured all defects from January 2010 onwards, paid penalty for the defects also, the fresh application filed in April 2010 is to be treated for all purposes in continuation of its original application filed in January 2010 .And the approval so granted by STPI vide letter dated April 2010 is therefore to be treated as in pursuance to the original application filed in January 2010.Which is how even the STPI authorities have treated it by certifying invoices relating to the January March 2010 period. Also gone through the Circular of 2005, which the Revenue contends operates against the assessee and we find that the scope of the said circular is with respect to exemptions claimed u/s. 10B of the Act and not 10A under which the assesse has claimed exemption. Also, we find that in response to representations received by the CBDT, whether Domestic Tariff Area (DTA) Units converted to export oriented unit (EOU) are eligible to exemption u/s 10B, it was clarified by way of the said Circular that such units shall be eligible to exemption, that too from the year of conversion and for the period remaining in the block of 10 Years since it began manufacturing as a new unit under DTA. The scope of operation of this circular is totally different and has no applicability to the facts of the case where the issue is whether the approval granted in lieu of renewed application filed can be treated as retrospective from the date of original application filed. We have no hesitation in holding that the assessee was approved as a STPI unit from Jan., 2010 onwards and was therefore eligible to claim the profits generated from turnover of the said unit as exempt under the provisions of Section 10A of the Act. The A.O. is therefore directed to grant the assessee exemption to its profits of Rs. 56,04,930/- - Appeal of the assessee is allowed in above terms.

Summary

Issues Involved:
1. Denial of exemption under Section 10A of the Income Tax Act, 1961.
2. Retrospective application of approval granted by the Software Technology Parks of India (STPI).
3. Procedural lapses and their impact on the approval process.
4. Applicability of CBDT Circular No. 1/2005.

Detailed Analysis:

1. Denial of Exemption under Section 10A:
The primary issue in the appeal was the denial of exemption to the profits derived by the assessee from its unit located in the Software Technology Park (STPI), Gandhinagar jurisdiction, as per the provisions of Section 10A of the Income Tax Act, 1961. The Assessing Officer (AO) denied the exemption on the grounds that the new/expansion unit was not granted approval by STPI during the relevant period. The AO noted that the unit had shifted to a new address in January 2010 but was approved by STPI only in April 2010. Consequently, the AO denied the exemption for the profits generated from activities carried out from September 2009 onwards, amounting to Rs. 1,56,32,460/-.

2. Retrospective Application of Approval:
The assessee contended that the approval granted in April 2010 should be treated as relating back to January 2010 when the application was initially filed. The delay in approval was attributed to procedural discrepancies in the application, which were later corrected. The Dispute Resolution Panel (DRP) held that the assessee was not entitled to the exemption for the period before the approval was granted but directed the AO to rework the disallowance based on actual operations starting from January 2010. The AO subsequently restricted the disallowance to Rs. 56,04,930/-.

3. Procedural Lapses and Their Impact:
The procedural lapses noted by STPI included an expired custom bonding license, the lease agreement not being on judicial stamp paper, and pending monthly or quarterly progress reports. The assessee rectified these discrepancies by renewing the custom bonding license, submitting the lease agreement on judicial stamp paper, and addressing the pending reports. The STPI penalized the assessee for these lapses, which the assessee paid. The tribunal noted that the STPI had certified the software exports for the disputed period, indicating that the unit was treated as approved during that time.

4. Applicability of CBDT Circular No. 1/2005:
The AO and DRP relied on CBDT Circular No. 1/2005, which states that exemption under Section 10B is available only from the year of approval. However, the tribunal found that this circular specifically pertains to Section 10B and not Section 10A, under which the assessee claimed exemption. The tribunal held that the circular was not applicable to the facts of the case.

Conclusion:
The tribunal concluded that the approval granted by STPI in April 2010 should be treated as effective from January 2010, as the procedural lapses were rectified, and the STPI had certified the software exports for the disputed period. The tribunal directed the AO to grant the assessee exemption for the profits amounting to Rs. 56,04,930/-. The appeal of the assessee was allowed in these terms.