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2020 (3) TMI 535 - AT - Income TaxDeduction u/s 10AA - profit generated from the alleged activity of the processing/blending of oil - assessee has its processing unit in SEZ and thus it claimed the deduction from the operations carried out therein (SEZ Unit) - HELD THAT - Definition of the manufacturing under section 10AA of the Act has already been provided for the assessee s claiming the benefit therein. Thus there was no need to import the definition provided under section 2(29B) of the Act while evaluating the fact whether the assessee is carrying out any manufacturing activity. In our considered view, the assessee in the present facts and circumstances is carrying out blending activity which is manufacture within the meaning as provided under SEZ Act. Accordingly, we hold that the assessee is engaged in the manufacturing activity. Deduction under section 10AA is also available to the assessee engaged in providing any services. As such we are inclined to elaborate the services eligible for deduction under section 10AA Trading activity carried out by the assessee is also eligible for exemption under section 10AA of the Act within the meaning of the provisions provided under section 2(z) of the SEZ Act read with the rule 76 of Special Economic Zone Rules 2006 as discussed above. Whether the assessee is eligible for deduction with respect to the income generated by it on account of currency fluctuation, interest income - these incomes are arising in the course of the business (import and export) carried on by the assessee in its SEZ Unit. As such these incomes are intrinsically linked with the operation of the assessee. Accordingly we hold that such income is eligible for deduction/exemption under section 10AA of the Act. Assessee has correctly calculated the amount of deduction in proportion to the export sales viz a viz domestic sales of the SEZ unit as provided under subsection 7 of section 10AA of the Act. Thus the AO erroneously has reduced the amount of domestic turnover from the total turnover of the assessee SEZ unit which resulted loss to the assessee. No reason to interfere in the order of the learned CIT (A). Accordingly, we uphold the same. Hence the ground of appeal of the Revenue is dismissed. Disallowance of the hedging loss - Absence of the documentary evidence - HELD THAT - Assessee has also not produced any documentary evidence at the time of hearing before us suggesting that the impugned losses were not speculative in nature. Thus in the absence of any information/documentary evidence we hold that such losses are speculative in nature and therefore the same cannot be setoff against the non-speculative income - income of the assessee from the SEZ unit shall stand increased on account of the disallowance of the impugned loss and the assessee shall be eligible for deduction on such enhanced income. Thus the ground of appeal of the Revenue is dismissed and the ground of appeal of the assessee is also dismissed. Addition u/s 36(1)(iii) - HELD THAT - Own fund of the assessee as on 31st 2010 was in excess of the amount of investment in the mutual fund. Thus, in such a situation an inference can be drawn that the own fund available with the assessee was utilized in the investment of such mutual funds as discussed above. Therefore, there cannot be any disallowance of interest expenses as the amount of borrowed fund was not diverted in such investment. See HDFC BANK LTD. 2014 (8) TMI 119 - BOMBAY HIGH COURT - No disallowance of interest expense claimed by the assessee can be made on account of investment in the mutual funds. Hence, we do not find any reason to interfere in the order of the ld. CIT-A. Hence, the ground of appeal of the Revenue is dismissed. Time limit for passing the order under section 143(3) r.w.s. 144C - HELD THAT - Admittedly, the time limit for passing the order under section 143(3) r.w.s. 144C of the Act was available only upo 31-3- 2015. But the AO made the assessment order dated 27-4-2015 despite the fact the TPO has passed the order dated 31 July 2014. In holding so we find support and guidance from the judgement of Honourable Delhi High Court in the case of Honda cars India Ltd 2016 (2) TMI 527 - DELHI HIGH COURT - assessment order framed by the AO is not sustainable. Accordingly we hold that, the assessment framed under section 143 3 read with section 144C of the Act is about by limitation and the same is not sustainable in the eyes of law. Accordingly we quash the same. Hence, the ground of appeal of the assessee is allowed.
Issues Involved:
1. Deduction under Section 10AA of the Income Tax Act. 2. Disallowance of hedging loss. 3. Disallowance of interest expenses under Section 36(1)(iii). Issue-Wise Analysis: 1. Deduction under Section 10AA of the Income Tax Act: The primary issue was whether the assessee's activity of blending oils in a Special Economic Zone (SEZ) qualifies as manufacturing under Section 10AA of the Income Tax Act. The assessee, a private limited company engaged in dealing with petroleum products, claimed a deduction under Section 10AA for its SEZ unit. The Assessing Officer (AO) disallowed this deduction, arguing that the blending activity did not constitute manufacturing as defined under Section 2(29BA) of the Act and that the equipment used was insufficient for such large-scale processing. The AO also excluded certain incomes (domestic sales, interest income, and foreign exchange gains) from the SEZ unit's eligible income, resulting in a loss. The CIT (A) reversed the AO's decision, stating that the definition of manufacturing under Section 10AA should align with the SEZ Act, which includes blending. The CIT (A) also noted that the assessee's blending activities were supported by technical reports and that the AO incorrectly applied the definition from Section 2(29BA). Additionally, the CIT (A) held that even if the activity were considered trading, it would still be eligible for deduction under Section 10AA as per the SEZ Act's definition of services. The Tribunal upheld the CIT (A)'s decision, confirming that blending qualifies as manufacturing and that the assessee correctly calculated the deduction. 2. Disallowance of Hedging Loss: The second issue involved the disallowance of a hedging loss of ?4,81,48,554. The AO disallowed this loss, treating it as speculative because the assessee failed to provide sufficient documentation to prove that the loss was incurred to hedge against price fluctuations in business transactions. The CIT (A) upheld this disallowance but allowed the assessee to claim a deduction under Section 10AA on the increased income resulting from this disallowance. The Tribunal confirmed the CIT (A)'s decision, noting that the assessee did not provide adequate evidence to support its claim that the hedging losses were non-speculative. Consequently, the losses were treated as speculative and not eligible for set-off against non-speculative income. However, the Tribunal agreed that the increased income due to this disallowance should be eligible for deduction under Section 10AA. 3. Disallowance of Interest Expenses under Section 36(1)(iii): The final issue was the disallowance of ?60,00,560 in interest expenses under Section 36(1)(iii). The AO argued that the assessee diverted borrowed funds to invest in mutual funds, which generated tax-exempt income, and thus disallowed the proportionate interest expenses. The assessee contended that the investments were made using surplus interest-free funds and that the borrowed funds were used for business operations. The CIT (A) accepted the assessee's explanation, noting that the investments were temporary and made from surplus funds. The CIT (A) also observed that the borrowed funds were used for business purposes, as evidenced by the financial statements. The Tribunal upheld the CIT (A)'s decision, referencing legal precedents that support the presumption that investments are made from interest-free funds if such funds are available. Conclusion: The Tribunal dismissed the Revenue's appeals and upheld the CIT (A)'s decisions on all issues. The assessee's cross-objections were also dismissed, except for the technical issue regarding the validity of the assessment order, which was quashed as it was passed beyond the prescribed time limit.
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