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2014 (10) TMI 470 - AT - Income TaxJurisdiction u/s 263 SEZ Entitlement for deduction u/s 10AA or not Held that - The assessee is entrepreneur as referred to in clause (j) of section 2 of the SEZ Act, 2005 who began to provide services during the previous year relevant to the AY 2008-09 the AO s view that the assessee is entitled for deduction u/s 10AA cannot be held as an impossible view on the basis of the language employed u/s 10AA of the Act - The CIT considered that the assessee is not entitled for deduction u/s 10AA of the Act on the ground that net foreign exchange earning for the unit is negative - In calculating net foreign exchange earning as negative, the Commissioner of Income Tax relied upon Export Promotion Council for EOUS and SEZS Circular no. 42 dated 26.03.2007 and viewed that the purchases made by the assessee from domestic tariff area should be treated as import and therefore, the purchase value should be reduced from the foreign exchange earnings of the assessee for calculating net foreign exchange earnings. Relying upon Gestatner Duplicators Private Ltd. Vs. CIT 1978 (12) TMI 1 - SUPREME Court there was no material to arrive at the finding that the assessee has violated any provision of SEZ Act, 2005 or SEZ Rules, 2006 or that the assessee was not an entrepreneur referred to in clause (j) of section 2 of SEZ Act, 2005 - it cannot be held that the view adopted by the AO in holding that the assessee is entitled for deduction u/s 10AA of the Act was not a possible view - the interference by the CIT with that view of the AO in purported exercise of power available to him u/s 263 cannot be sustained the order of the CIT is set aside. Taxation of interest on FDRs Income from other sources or not Held that - The interest income which were earned by the assessee were from fixed deposit receipts with bank which were made by the assessee in the course of its trading business of import for the purposes of re-export, for obtaining Letter of Credit for its purchases - the relevant fixed deposit receipts on which interest were earned were business assets of the assessee acquired in the course and for the purposes of its business - The fixed deposit receipts being business assets, we find no reason as to why interest income earned from such fixed deposit receipts could not be assessed as business income of the assessee relying upon CIT & anr. Vs. Motorola India Electronics (P) Limited 2014 (1) TMI 1235 - KARNATAKA HIGH COURT - the view adopted by the AO showing interest income under consideration is business income cannot be held as not a possible view and therefore, the Commissioner of Income Tax was not justified in interfering with the view in the order. The assessment order of not excluding interest income which was assessed as business income of the assessee for computing profits derived from export of articles or things or services was a possible view and therefore, the same could not be interfered in exercise of powers available u/s 263 of the Act - the Commissioner of Income Tax in the order has observed that the assessee was indulging in financial arbitrage only in its SEZ unit - the true business of the assessee in its SEZ unit was that of financial arbitrage and not of trading by way of re-export of imported goods. The assessee was duly granted approval by SEZ authorities to set up SEZ unit for engaging in trading by way of re-export of the imported goods - The activities carried out by the assessee in the SEZ unit are monitored by the competent SEZ authorities - The annual performance report of the assessee are monitored and verified by approval committee formed under the SEZ Act. The assessee is recognized as an entrepreneur under the SEZ Act - the assessee was also granted renewal of approval for trading by competent authority under the SEZ Act - it would be not proper to characterize the activity of the assessee which consists of re-export of the imported goods and inter alia to acquire fixed deposits for obtaining letter of credit for receiving goods on credit in the case of import as merely financial arbitrage and not as trading by way of re-export of imported goods and consequentially service under the SEZ Act the order of the CIT(A) is set aside to the extent that interest income earned by the assessee on bank fixed deposit receipts is required to be taxed as income from other sources and such interest income is to be excluded from arriving at profits derived from export of services for the purposes of section 10AA of the Act. Set-off of brought forward loss Held that - The view adopted by the AO in the assessment order that interest income earned by the assessee on fixed deposit receipts are assessable under the head business income - set-off of brought forward business loss against such business income as done by the AO in the assessment order was a possible view the order of the CIT is modified to the extent that it directed that as interest income earned on fixed deposit receipts taxed as income from other sources, the assessee would not be entitled for set-off of brought forward business loss against such interest income. Genuineness of foreign exchange fluctuation loss Held that - Following the decision in CIT Vs. Honda Siel Power 2010 (7) TMI 38 - HIGH COURT OF DELHI - while passing an order u/s 263, CIT has to examine not only the assessment order but the entire records - No doubt this presumption is rebuttable, but there must be some material to indicate that the AO had not applied his mind - no material could be brought on record in the impugned order passed u/s 263 to show that the AO had accepted the claim of exchange fluctuation loss without application of mind when record shows that the AO during the assessment proceedings called for details of exchange fluctuation loss and a number of documents and details were filed by the assessee before the AO during the course of the assessment proceedings in support of its claim for deduction of exchange fluctuation loss - the CIT was not justified in concluding that the AO accepted the correctness, genuineness and allowability of the exchange fluctuation loss without any application of mind the order of the CIT is set aside Decided in favour of assessee.
Issues Involved:
1. Validity of jurisdiction assumed under section 263 of the Income Tax Act, 1961. 2. Inquiry and verification by the Assessing Officer (AO). 3. Eligibility for deduction under section 10AA of the Income Tax Act. 4. Computation of book profit under section 115JB. 5. Inclusion of SEZ unit income in book profit calculation. 6. Taxation of interest income as income from other sources. 7. Set-off of brought forward business loss against income from other sources. 8. Examination of Foreign Exchange Fluctuation Loss. Detailed Analysis: 1. Validity of Jurisdiction Assumed under Section 263: The assessee contended that the Commissioner of Income Tax (CIT) erred in assuming jurisdiction under section 263. The Tribunal noted that section 263 empowers the CIT to revise an AO's order if it is erroneous and prejudicial to the interest of the Revenue. The assessment order can be considered erroneous if there is a misapplication of law, mis-construction of facts, or non-application of mind by the AO. 2. Inquiry and Verification by the AO: The assessee argued that the AO conducted thorough inquiries and verifications during the assessment proceedings. The Tribunal observed that the AO had issued a notice under section 142(1) and received detailed replies from the assessee. The AO's acceptance of the assessee's claims after due inquiry cannot be considered erroneous merely because the CIT would have preferred a different approach. 3. Eligibility for Deduction under Section 10AA: The CIT held that the assessee's SEZ unit was not entitled to deduction under section 10AA as it did not fulfill the conditions of import for re-export and did not earn foreign exchange. The Tribunal examined the provisions of section 10AA and found that the assessee's activities of importing goods and re-exporting them qualified for the deduction. The Tribunal also noted that the SEZ authorities had granted approval for the assessee's activities, and there was no violation of SEZ Act or Rules. Therefore, the AO's view that the assessee was entitled to deduction under section 10AA was a possible view. 4. Computation of Book Profit under Section 115JB: The CIT's order that the assessee was not entitled to deduction under section 10AA while computing book profit under section 115JB was set aside. The Tribunal held that the AO's view on this matter was a possible view and should not have been interfered with by the CIT. 5. Inclusion of SEZ Unit Income in Book Profit Calculation: The Tribunal found that the AO's inclusion of the SEZ unit's income in the book profit calculation was a possible view and should not have been revised by the CIT. 6. Taxation of Interest Income as Income from Other Sources: The CIT directed that interest income earned on fixed deposits should be taxed as income from other sources, not as business income. The Tribunal noted that the fixed deposits were business assets used to obtain letters of credit for purchases. Therefore, the interest income should be considered business income. The Tribunal cited the Karnataka High Court's decision in CIT vs. Motorola India Electronics (P) Ltd. to support this view. 7. Set-off of Brought Forward Business Loss Against Income from Other Sources: Since the Tribunal held that the interest income was business income, the set-off of brought forward business loss against such income was permissible. The CIT's order to the contrary was set aside. 8. Examination of Foreign Exchange Fluctuation Loss: The CIT directed the AO to re-examine the foreign exchange fluctuation loss claimed by the assessee. The Tribunal found that the AO had already inquired into this matter during the assessment proceedings and had accepted the claim after due consideration. Therefore, the CIT's direction for re-examination was not justified. Conclusion: The Tribunal allowed the assessee's appeals, setting aside the CIT's orders under section 263 for both assessment years. The AO's views on the various issues were considered possible views, and the CIT's interference was found to be unwarranted. The Tribunal emphasized the importance of judicial discipline and maintaining certainty in tax administration.
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