2011 (1) TMI 1103 - HC - Income Tax

Exemption u/s 10B - Circular No. 684, dated June 10, 1994 - Held that - Section 10B was introduced in the year 1989 and the heading of the section made it clear-special provision is in respect of newly established 100 per cent. export-oriented undertaking. Even if those establishments were not exporting the substantial portion of what it manufactures, by mere obtaining a certificate under the Act, they were enjoying the benefit by selling their products in the local markets. After seeing how this provision has been abused by such EOUs, the proposed amendment was brought in with effect from April 1, 1994. By the proposed amendment, merely because a unit has obtained a certificate from the concerned authorities, that is not sufficient to avail of the benefit of exemption. After obtaining such a certificate, they must demonstrate that 75 per cent. of their manufactured items have been exported. From this undisputed fact, it is clear that the units, which are established prior to April 1, 1994, have the advantage of claiming this exemption even by exporting a fraction of their production. The mischief is sought to be avoided by this amendment by prescribing 75 per cent. as the level of exports, which has to be satisfied by the assessee - thus by a wrong interpretation, the AO has disallowed the exemption - Appeals are dismissed.

Summary

Issues:
- Eligibility for exemption under section 10B of the Income Tax Act based on the commencement of production and export percentage.

Analysis:

Issue 1: Eligibility for Exemption under Section 10B
The case involved appeals by the Revenue regarding four assessment orders where the Assessing Officer disallowed exemption under section 10B to a company engaged in software development and export. The company, a joint venture of HAL and British Aerospace, had commenced production before April 1, 1994. The Commissioner of Income-tax (Appeals) allowed the exemption, which was upheld by the Tribunal citing Circular No. 684, issued by the Central Board of Direct Taxes. The Revenue contended that the company did not satisfy the conditions of section 10B as its production began prior to the specified date and export percentage was below the required threshold. The Court noted that the amendment introduced in 1994 aimed to restrict the tax holiday to units exporting at least 75% of their turnover and that the company had the advantage of claiming exemption even with minimal exports before the amendment. The Court upheld the appellate authorities' decisions, dismissing the appeals as no substantial question of law was involved.

Issue 2: Interpretation of Pre-Amendment Law
The Court reviewed the law prior to the 1994 amendment, highlighting that under section 10B, a hundred per cent export-oriented undertaking needed approval from the prescribed Board but was not required to export its entire production. The Circular clarified that the amendment aimed to prevent abuse of the provision by units exporting less than 75% of their turnover. The amendment required units established after April 1, 1994, to demonstrate the export percentage, unlike units established earlier that could claim exemption based on certification alone. The Court emphasized that the amendment aimed to ensure substantial exports by setting the 75% threshold, which the company failed to meet. The Court concluded that the Assessing Officer's disallowance of exemption was incorrect, and the appellate authorities rightly set aside the orders based on the amended requirements.

In conclusion, the Court dismissed the appeals, affirming the company's eligibility for exemption under section 10B based on the post-amendment criteria, emphasizing the need for substantial exports and the amendment's intent to prevent misuse of the provision by units established before 1994.