2022 (6) TMI 797 - AT - Income Tax

Disallowance of exemption u/s.10AA - assessee did not have adequate and sufficient fixed assets manpower and power/ fuel to carry out any manufacturing or processing activity to the extent shown by the assessee - CIT-A deleted the disallowance - whether CIT(A) is not justified in holding that provisions of the SEZ Act have overriding effect over provision of section 10AA of the Income-tax Act? - HELD THAT -From the above findings of CIT(A) it is vivid that provisions provided under the SEZ Act overrides the provisions of section 10AA of the Act and the SEZ Rules includes trading to be services - DR pointed out that SEZ Rules can not override the provisions of section 10AA of the Income Tax Act as these SEZ Rules do not have mandatory force as that of main provisions of the Act. He further pointed out that Rules can not override the main provisions of the Act. Even SEZ Rules cannot override the main provisions of the SEZ Act.Therefore ld DR prays the Bench that matter may be remitted back to the file of the assessing officer to examine the facts of the assessee s case in the light of main provisions of SEZ Act and Income Tax Act. The law is well settled that a person who claims exemption or concession has to establish that he is entitled to that exemption or concession. A provision providing for an exemption concession or exception as the case may be has to be construed strictly. Therefore we set aside the order of ld CIT(A) and remit this issue back to the file of the assessing officer to examine the conditions of section 10AA of the Act and SEZ Act and adjudicate the issue afresh in accordance with law. Therefore statistical purposes the appeal of the Revenue is treated to be allowed.

Summary

Issues Involved:
1. Disallowance of exemption under section 10AA due to inadequate fixed assets, manpower, and power/fuel for manufacturing or processing activity.
2. Applicability of SEZ Act provisions over section 10AA of the Income Tax Act.
3. Determination of whether the assessee's activities were manufacturing or trading.
4. Eligibility of interest income for deduction under section 10AA.

Issue-wise Detailed Analysis:

1. Disallowance of exemption under section 10AA:
The Assessing Officer (AO) disallowed the assessee's claim for deduction under section 10AA, amounting to Rs. 3,62,92,500/-, on the grounds that the assessee was engaged in trading rather than manufacturing. The AO noted discrepancies such as no closing stock, minimal electricity consumption, and insufficient machinery and manpower to justify the claimed production levels. Consequently, the AO added Rs. 3,71,87,492/- (including interest income) to the assessee's income.

2. Applicability of SEZ Act provisions over section 10AA:
The CIT(A) partially deleted the disallowance, stating that the SEZ Act provisions have an overriding effect over section 10AA of the Income Tax Act. The CIT(A) cited section 51(1) of the SEZ Act, which asserts that SEZ Act provisions override any inconsistent provisions in other laws. The CIT(A) noted that the SEZ Act includes 'trading' as a service, thus qualifying for the deduction under section 10AA.

3. Determination of whether the assessee's activities were manufacturing or trading:
The CIT(A) observed that the assessee admitted that merchandise trading in the nature of re-export of imported textile embroidery design was not eligible for deduction under section 10AA due to the lack of necessary permissions. The CIT(A) directed the AO to recalculate the disallowance based on the turnover and profit from this ineligible activity. The CIT(A) upheld the deduction for other activities, considering the SEZ Act's overriding provisions.

4. Eligibility of interest income for deduction under section 10AA:
The AO disallowed the deduction for interest income of Rs. 8,94,992/-, stating it was not earned from manufacturing and export activities. The CIT(A) upheld this disallowance, noting the assessee's inability to provide evidence that the interest income was related to business activities. The Tribunal remitted this issue back to the AO for re-examination, giving the assessee another opportunity to present evidence.

Separate Judgments Delivered:
The Tribunal set aside the CIT(A)'s order and remitted the main issue of section 10AA deduction back to the AO for fresh examination. The Tribunal also remitted the issue of interest income back to the AO for re-evaluation, granting the assessee another chance to provide supporting evidence.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes and remitted both the main issue of section 10AA deduction and the interest income issue back to the AO for fresh adjudication in accordance with the law.