2016 (10) TMI 689 - AT - Income Tax

Allowance of of deduction u/s.10AA - whether the export sales as supporting manufacturer, Sales to EOUs and SEZs are eligible for deduction u/s.10AA? - Held that - In the present case, the goods have left India and consideration on sale of such goods having being received in India is not in dispute and in such a situation we are of the view that denial of deduction u/s 10AA of the Act is uncalled for more so, when as S.10AA of the Act does not provide for export of own goods or bringing in of foreign currency of the goods exported. We further find that Ld CIT(A) has relied on the decision of Hon ble Kerala High Court in the case of Electronics Control and Discharge Systems Pvt. Ltd. 2011 (7) TMI 541 - KERALA HIGH COURT in coming to the conclusion that only direct exports where the assessee brings foreign convertible exchange into India qualifies for being eligible export turnover for the purpose of computing deduction u/s 10AA of the Act. We find that Hon ble Kerala High Court in the aforesaid case was dealing with the provision of s. 10A and not with respect to s.10AA and in view of the difference in the definition of export turnover in both the sections, we are of the view that the aforesaid decision of Hon ble Kerala High Court cannot be relied by the Revenue authorities for denying the deduction to assessee. Before us, Revenue has not placed any other direct decision where the issue related to provisions of S.10AA in its support. In view of the aforesaid facts, we set aside the order of Ld CIT(A) and thus allow the ground of Assessee.

Issues Involved:

1. Disallowance of ?96,64,698/- under Section 10AA of the Income Tax Act.
2. Exclusion of export turnover of ?17,64,95,304/- from the total export turnover for deduction calculation under Section 10AA.
3. Alternative claims regarding the exclusion of export turnover and related expenditures.
4. Alleged breach of law and Principles of Natural Justice by the lower authorities.
5. Levying of interest under Sections 234A/B/C.
6. Initiation of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of ?96,64,698/- under Section 10AA:

The Assessee, a partnership firm engaged in manufacturing castor oil and its derivatives, filed its return declaring an income of ?43,94,110/-. The AO framed the assessment under Section 143(3), determining the total income at ?1,40,58,810/-. The AO disallowed ?96,64,698/- from the claimed deduction of ?18,29,20,780/- under Section 10AA, reasoning that the deduction is applicable only to direct exports made by the Assessee unit and not through other entities or agencies. The CIT(A) upheld the AO's decision, emphasizing that the Income Tax Act does not incorporate the concept of deemed export from the Special Economic Zones Act into Section 10AA. The Tribunal, however, found that the goods had left India and the consideration was received in India, fulfilling the conditions for "Export Turnover" under Section 10AA, and thus allowed the Assessee's appeal.

2. Exclusion of Export Turnover of ?17,64,95,304/-:

The AO excluded the export turnover of ?17,64,95,304/- from the total export turnover for calculating the deduction under Section 10AA, arguing that only direct exports qualify for the deduction. The CIT(A) supported this view, referencing the Kerala High Court's decision in the case of Electronics Control & Discharge Systems Pvt. Ltd., which dealt with Section 10A. The Tribunal, however, noted that the definition of "export turnover" under Section 10AA does not require direct exports or the bringing in of foreign currency, thus rejecting the exclusion of the export turnover.

3. Alternative Claims Regarding Exclusion of Export Turnover and Related Expenditures:

The Assessee argued that if the export turnover is excluded, the corresponding amount should be reduced from the total turnover or the related direct and indirect expenditures should also be excluded. The Tribunal did not specifically address these alternative claims, as it allowed the primary claim of the Assessee regarding the inclusion of the export turnover under Section 10AA.

4. Alleged Breach of Law and Principles of Natural Justice:

The Assessee contended that the lower authorities failed to properly appreciate the facts and ignored various submissions, leading to a breach of law and Principles of Natural Justice. The Tribunal's decision to allow the appeal implicitly addressed this issue by correcting the lower authorities' interpretation of the law.

5. Levying of Interest under Sections 234A/B/C:

The CIT(A) confirmed the AO's action of levying interest under Sections 234A/B/C. The Tribunal did not specifically address this issue, as the primary focus was on the eligibility of the export turnover for deduction under Section 10AA.

6. Initiation of Penalty under Section 271(1)(c):

The CIT(A) upheld the AO's initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not explicitly discuss this issue, but the allowance of the Assessee's appeal on the primary matter may impact the penalty proceedings.

Conclusion:

The Tribunal set aside the CIT(A)'s order and allowed the Assessee's appeal, concluding that the export turnover, including sales as a supporting manufacturer, sales to EOUs, and sales to SEZs, qualifies for deduction under Section 10AA. The Tribunal emphasized that Section 10AA does not stipulate the requirement of direct exports or the bringing in of foreign currency, distinguishing it from Sections 10A and 10B. The appeal was allowed, providing relief to the Assessee.

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