2019 (9) TMI 406 - AT - Income Tax

Disallowance of deduction claimed u/s. 10AA - Development Commissioner had granted licence to the assessee with several conditions and the assessee has not shown that it has fulfilled those conditions - 50% deduction eligibility for the next five consecutive assessment years AO noticed that the assessee has commenced its operation on 31-10-2005 and deduction u/s 10AA is available only if the manufacture/production is commenced on or after 01-04-2006 - AO also held that the assessee has not created any reserve to be called Special Economic Zone Re-investment Reserve Account as mandated u/s. 10AA HELD THAT - Condition prescribed is that the eligible unit should begin to manufacture or produce articles/things or provide any services during the previous year relevant to any assessment year commencing on or after 01-04-2006. The previous year for the assessment year 2006-07 is the financial year 1-04-2005 to 31-03-2006, meaning thereby, the manufacture/production etc., should be commenced from 01-04-2005 onwards. In the instant case, the assessee has commenced its operation on 31-10-2005. Hence, it fulfills the first condition prescribed u/s. 10AA of the Act. Accordingly, the view taken by the tax authorities that the production should have commenced on or after 01-04-2006 is not in accordance with law and the same is set aside. Deduction u/s. 10AA is allowed @ 100% for the first five consecutive assessment years and then @ 50% for further five assessment years and thereafter. In clause (ii), it is stated that the assessee is also eligible for deduction for the next five consecutive assessment years also and in those years the assessee is required to create/reserve Special Economic Zone Re-investment Reserve Account , meaning thereby such kind of reserve is not required to be created during the first ten years claim for deduction. The word next , in our view, refers to the years after completion of two sets of five years, meaning thereby, from 11th year onwards. Hence the requirement of creating reserve shall commence from 11th year onwards only. Accordingly, the view expressed by the tax authorities on this issue also fails. Since the year of deduction for the A.Ys under consideration being 6th and 8th of the operation and since the assessee has been allowed a deduction in the preceding five assessment years tax authorities are not justified in denying the claim for deduction u/s. 10AA to the assessee. Even otherwise, the very fact that the Development Commissioner has extended approval would signify that the assessee has complied with the conditions. Direct the AO to allow the claim u/s 10AA of the Act @ 50% as claimed by the assessee in the assessment proceedings. - Decided in favour of assessee

Summary

Issues:
Appeals against CIT(A) orders confirming disallowance of deduction u/s. 10AA for AYs 2011-12 and 2013-14.

Analysis:
1. Common Issue: The appeals concern the disallowance of deduction claimed by the assessee u/s. 10AA of the Income Tax Act, 1961 for AYs 2011-12 and 2013-14. The deduction under this section is available at 100% for the first five years and 50% thereafter.

2. Manufacturing Commencement Date: The Assessing Officer contended that deduction u/s 10AA is available only if manufacturing commences on or after 01-04-2006. However, the ITAT observed that the assessee began operations on 31-10-2005, fulfilling the condition prescribed under section 10AA. The tax authorities' view was deemed incorrect.

3. Reserve Creation: The AO noted the absence of a "Special Economic Zone Re-investment Reserve Account" as mandated by section 10AA. The ITAT clarified that this reserve is required from the 11th year onwards, not in the initial ten years of claiming deduction, contrary to the tax authorities' interpretation.

4. Compliance with Conditions: The AO raised concerns about the assessee's compliance with conditions set by the Development Commissioner. The ITAT considered the renewal of approval by the Commissioner as indicative of compliance. Citing relevant case laws, the ITAT held that denial of deduction in the 6th and 8th years of operation was unjustified when the claim was accepted in the initial year.

5. Judgment: The ITAT set aside the CIT(A) orders and directed the Assessing Officer to allow the deduction u/s 10AA @ 50% as claimed by the assessee for the AYs under consideration. The ITAT emphasized that the Development Commissioner's approval signified compliance and justified the assessee's eligibility for the deduction.

In conclusion, the ITAT ruled in favor of the assessee, allowing the appeals and granting the deduction under section 10AA for the relevant assessment years.