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2015 (8) TMI 126 - AT - Income TaxDisallowance of exemption U/s 10AA - No manufacturing activities were executed in premises of the assessee firm situated in SEZ on or before 31/10/2006 - CIT(A) allowed claim - Held that - The assessee was issued first LOP vide letter dated 31/10/2003 for one year, which was later on extended for three years vide letter dated 06/12/2005. As per this letter, the assessee has to manufacture or produce the article/goods in SEZ unit on or before 31/10/2006. The AR has furnished the evidence for purchase of rough stones and had also furnished the evidence to issue for the same to the Karigars on 24/10/2006. The assessee has exported the goods on 28/10/2006 to M/s Fine Gems, New York, USA. These details were provided to the Assessing Officer during the assessment proceedings for A.Y. 2007-08. However, certificate of commencement of production issued by the Assistant Development Commissioner on 19/12/2011 were produced during the assessment proceedings for A.Y. 2009-10. - Without machinery the assessee could not have been started production but as claimed by the assessee that the assessee s activity is as such that it can be done by Karigars with the help of hand tools, which are made and carried by themselves. The assessee also produced the gate pass entry maintained by the SEZ authority to demonstrate that old Nageena machine was brought to the unit of the assessee. The final produce was exported by the assessee on 28/10/2006. The goods were shipped by flight NO. IC 612 dated 29/10/2006, which is evident from the noting on the back of the shipping bills. The invoice and shipping bill was duly signed by the Superintendent, Custom, Jaipur SEZ on 28/10/2006. Therefore, we are of the considered view that the ld CIT(A) was right to allow 10AA deduction in A.Y. 2007-08 and 2009- 10. - Decided in favour of assessee. Disallowances of interest - part of borrowed funds has been utilized in providing interest free loans to M/s Eros Exports - assessee, itself admitted that direct nexus between borrowings and advancing loan - CIT(A) deleted the addition - Held that - There was no credit entry in the account as claimed by the assessee that there was a business transaction with the proprietory concern namely M/s Eros Craft. The ld CIT(A) has wrongly concluded that these payments were for business purposes. - the order of the ld CIT(A) is not justified. We confirm the order of the Assessing Officer. Further the assessee s claim that deduction U/s 10AA is to be allowed on disallowance of interest is not accepted as this income has not been derived from SEZ unit, therefore we reverse the order of the ld CIT(A) and confirm the order of the ld Assessing Officer. - Decided against assessee.
Issues Involved:
1. Deletion of addition on account of exemption under Section 10AA of the Income Tax Act, 1961. 2. Deletion of addition on account of disallowance of interest. 3. Validity of reopening proceedings under Section 147/148 of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Deletion of Addition on Account of Exemption Under Section 10AA The core issue revolves around whether the assessee firm was entitled to exemption under Section 10AA of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the exemption claim of Rs. 1,98,09,347/- for A.Y. 2009-10 and Rs. 43,33,426/- for A.Y. 2007-08, arguing that no manufacturing activities were executed in the SEZ premises on or before 31/10/2006, a condition stipulated in the Letter of Permission (LOP). The CIT(A) allowed the appeal, observing that the assessee had complied with the SEZ conditions by exporting goods worth Rs. 7,75,420/- on 28/10/2006 and had purchased plant and machinery post 31/10/2006. The CIT(A) noted that the SEZ authorities did not withdraw the LOP, indicating compliance with SEZ terms. Additionally, the CIT(A) emphasized that once the department allowed the exemption in the initial year (A.Y. 2007-08), it could not be revoked in subsequent years without appropriate proceedings under Sections 263 or 147 of the Act. The Tribunal upheld the CIT(A)'s decision, confirming that the AO's reopening of the case was a change of opinion, which is not permissible under the law. The Tribunal also noted that the SEZ Act takes precedence, and the SEZ authorities' acceptance of the commencement date should be respected. Issue 2: Deletion of Addition on Account of Disallowance of Interest The AO disallowed Rs. 3,09,370/- on account of interest, arguing that the assessee had given interest-free loans to M/s Eros Exports while incurring interest expenses on borrowed funds. The CIT(A) partly allowed the appeal, recognizing a nexus between borrowed funds and interest-free advances but limited the disallowance to Rs. 1,31,130/-. The Tribunal confirmed the AO's findings, noting that the assessee admitted to a direct nexus between borrowings and advances. The Tribunal rejected the assessee's claim for deduction under Section 10AA on disallowed interest, as the income was not derived from the SEZ unit. Consequently, the Tribunal reversed the CIT(A)'s partial relief and upheld the AO's full disallowance of interest. Issue 3: Validity of Reopening Proceedings Under Section 147/148 For A.Y. 2007-08, the AO reopened the assessment under Section 147, based on the belief that income had escaped assessment due to non-compliance with SEZ conditions before 31/10/2006. The CIT(A) held the reopening proceedings invalid, citing that the AO had already examined and allowed the exemption under Section 10AA in the original assessment. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's reopening was based on a mere change of opinion, which is not permissible. The Tribunal referenced the Supreme Court's decision in CIT Vs. Kelvinator of India Ltd., affirming that reassessment should not be used as a tool for review. Conclusion: The Tribunal dismissed the revenue's appeal for A.Y. 2007-08, partly allowed the appeal for A.Y. 2009-10, and dismissed the assessee's cross-objection. The Tribunal confirmed the CIT(A)'s decision on the exemption under Section 10AA and upheld the AO's full disallowance of interest. The reopening proceedings under Section 147/148 were deemed invalid due to the change of opinion.
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