2019 (1) TMI 1015 - AT - Income Tax

Denial of exemption claimed u/s 10AA - sale made by one SEZ unit to another SEZ unit - assessee is engaged in the business of manufacturing of scaffoldings and there export directly - Section 51(1) of SEZ Act, 2005 overriding effect over the income Tax Act - Held that - Provisions of the Special Economic Zones Act, 2005 shall prevail over the provisions of the Income Tax Act and Hon ble Delhi High Court in the case of CIT(A) Vs. Vaisth Chay Vyapar Ltd. 2010 (11) TMI 88 - DELHI HIGH COURT has held that there is a provison in another enactment which contains non obstante clause then that would override the provision of the Income Tax Act. In such circumstances and facts of the case Section 51(1) of the Act as a non obstante clause and within the definition u/s 2(m) of the Special Economic Zones Act, 2005 exports includes providing services or supplying goods from one unit to another in the same or different Special Economic Zones. Accordingly, the view taken up by the CIT(A) and the A.O cannot hold good and is directed to be reversed. - Decided in favour of assessee. Addition of bad debts - Held that - Bad debts were actually written off in the books of accounts that can be seen from the books of account for Assessment Year 2010-11. The said has been accepted by the Revenue. Therefore, the decision in case of TRF Ltd. 2010 (2) TMI 211 - SUPREME COURT as well as the Circular No. 12/2016 dated 30/5/2016 is applicable in the present case. The CIT(A) as well as the Assessing Officer were not correct in making addition of ₹ 1,55,00,500/- under the head bad debts which were claimed by the assessee in the profit and loss account. - Appeal of the assessee is allowed.

Issues Involved:
1. Partial denial of exemption claimed under section 10AA of the Income Tax Act.
2. Disallowance of a sum on account of bad debts written off.
3. Alleged violation of principles of natural justice due to lack of fair hearing.

Detailed Analysis:

Issue 1: Partial Denial of Exemption under Section 10AA

The appellant challenged the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision to sustain a partial denial of exemption under section 10AA, amounting to ?30,58,708/- against the claimed sum of ?1,45,49,488/-. The appellant argued that the CIT(A) overlooked detailed oral submissions and erroneously directed the issue back to the Assessing Officer (AO) instead of deciding it himself, thereby misconstruing the statutory provisions.

The appellant emphasized that their company, an approved SEZ unit under the Special Economic Zones Act, 2005, operates as if located outside India. Consequently, sales to other SEZ units and exports through third parties should be deemed export sales, qualifying for section 10AA exemption. The CIT(A) failed to recognize that the SEZ Act's provisions override the Income Tax Act, making the sales eligible for exemption.

The Tribunal noted that this issue was previously resolved in the appellant’s favor for Assessment Years 2008-09 and 2009-10. The Tribunal reiterated that section 51(1) of the SEZ Act, 2005, which contains a non-obstante clause, has an overriding effect over the Income Tax Act. The Tribunal cited various precedents, including decisions by the ITAT Jaipur Bench and the Hon'ble Delhi High Court, supporting the appellant's position that SEZ Act provisions prevail. Consequently, the Tribunal allowed Ground Nos. 1 to 1.3 in favor of the appellant.

Issue 2: Disallowance of Bad Debts

The appellant contested the CIT(A)'s decision to sustain a disallowance of ?1,55,00,500/- on account of bad debts written off, claiming the disallowance was legally and factually incorrect. The appellant argued that the bad debts were written off in their books of accounts, and the income had been accounted for in previous years, meeting the conditions under section 36(1)(vii) of the Income Tax Act.

The Tribunal acknowledged that the bad debts were indeed written off in the books of accounts for Assessment Year 2010-11, which the Revenue had accepted. The Tribunal referenced the Hon'ble Supreme Court's decision in TRF Ltd. vs. CIT and CBDT Circular No. 12/2016, which support the appellant's claim. Consequently, the Tribunal found that the CIT(A) and the AO were incorrect in making the addition under the head bad debts, and allowed Ground Nos. 2 to 2.2 in favor of the appellant.

Issue 3: Violation of Principles of Natural Justice

The appellant argued that the CIT(A) sustained the addition without providing a fair and proper opportunity for a hearing, thereby violating the principles of natural justice. However, the Tribunal did not specifically address this issue separately, as the decisions on the substantive grounds (1 and 2) effectively resolved the appellant's grievances.

Conclusion:

The Tribunal allowed the appeal, reversing the CIT(A)'s decisions on both the partial denial of exemption under section 10AA and the disallowance of bad debts. The Tribunal affirmed that the SEZ Act has an overriding effect over the Income Tax Act, and the bad debts written off in the books of accounts were legitimate, thus favoring the appellant on all contested grounds. The order was pronounced in the Open Court on 18th January 2019.

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