2022 (7) TMI 840 - AT - Income Tax

Deduction u/s 10AA - assessee is a Diamond Trader and does its activities from its unit situated in the Special Economic Zone (SEZ), Surat - AO denied claim on the plea that Assessee is neither manufacturing any goods nor producing any goods for export which was the view of AO s predecessor which the present AO has followed - HELD THAT - The term service is given an inclusive definition which includes trading activity. As per the first explanation trading will be treated as service if it is related to the import of the goods for the purpose of the export. In this case there is no dispute that goods imported by the assessee are in fact exported to other countries from its unit at Special Economic Zone. We note that the exemption provided u/s. 10AA which are special provision in respect of newly established units in Special Economic Zone are for income received by providing any services. The other activity entitled for exemption is income from manufacturing and production of article or thing. So what has to be seen is whether the service definition given in the SEZ Rules as above reproduced can be read into for the purpose of claiming exemption u/s. 10AA of the Act; so that assessee can avail the benefit envisaged u/s. 10AA of the Act. From the reading of the provisions it is clear that the provisions as specified under The Special Economic Zones Act, 2005 would have overriding effect on the Income Tax Act because Special Economic Zone Act, 2005 is a Special Act and a later Act of the Parliament. Be that as it may be, it has been brought to our notice by the Ld. AR that in the previous year (AY 2012-13), the AO had disallowed the deduction claimed by the assessee under section 10AA of the Act. (1st year) which was confirmed by the Ld. CIT(A). However, this Tribunal 2019 (11) TMI 513 - ITAT MUMBAI was pleased to allow the same. In the light of the aforesaid decision of this Tribunal on the issue of deduction claimed under section 10AA of the Act, we respectfully following the same, allow the claim of assessee. Therefore, these grounds of appeal of assessee are allowed. Deduction under section 10AA of the Act in respect of Foreign Exchange Gains - HELD THAT - We find that the Assessee which has set-up its registered unit at SEZ and which is eligible for claiming deduction u/s 10AA of the Act, is in receipt of Foreign Exchange Gain which is derived from the export business. Then according to us, Foreign Exchange Gain derived from the export business has be given the benefit of deduction u/s 10AA of the Act. The reasons is that when the profit and gains are allowable as deduction under section 10AA of the Act, the Foreign Exchange Gain which is derived/related to the export/sale consideration and which has first degree nexus with the export/sale consideration must get the benefit of deduction under section 10AA of the Act. Therefore, we allow the claim of the assessee .

Summary

Issues Involved:
1. Denial of deduction under section 10AA of the Income Tax Act, 1961 for trading activities.
2. Denial of deduction under section 10AA of the Income Tax Act, 1961 for Foreign Exchange Gains.

Detailed Analysis:

Issue 1: Denial of deduction under section 10AA of the Income Tax Act, 1961 for trading activities.

The assessee, a Diamond Trader operating from a Special Economic Zone (SEZ) in Surat, claimed a deduction under section 10AA of the Income Tax Act, 1961. The Assessing Officer (AO) denied this claim, arguing that the assessee's activities were not manufacturing or producing goods but were trading activities, which are not eligible for exemption under section 10AA. This decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

The Tribunal examined whether the trading income from the SEZ unit qualifies for deduction under section 10AA. It noted that the SEZ Rules, framed under the Special Economic Zone Act 2005, include trading activities under the definition of "services" if they involve the import of goods for export. Rule 76 of the SEZ Rules 2006 explicitly states that "trading" for the purposes of the Act means import for re-export.

The Tribunal highlighted that section 51(1) of the Special Economic Zones Act, 2005 provides an overriding effect over other laws, including the Income Tax Act. Therefore, the definition of "services" under the SEZ Rules, which includes trading activities, should be considered for the purpose of claiming exemption under section 10AA.

The Tribunal referred to its previous decision in the assessee's own case for the Assessment Year 2012-13, where it had allowed the deduction under section 10AA for similar trading activities. It also cited the case of Goenka Diamonds & Jewellers Ltd., where the Rajasthan High Court upheld the Tribunal's decision that trading activities qualify as "services" under section 10AA.

Consequently, the Tribunal allowed the assessee's claim for deduction under section 10AA for its trading activities, following its previous decision and consistent with other similar cases.

Issue 2: Denial of deduction under section 10AA of the Income Tax Act, 1961 for Foreign Exchange Gains.

The AO noted that the assessee's net profit for the year included significant Foreign Exchange Gains on outstanding debtors and creditors. The AO denied the deduction under section 10AA, arguing that there were no trading transactions of diamonds in the relevant year. This view was confirmed by the CIT(A).

The Tribunal observed that the assessee is a trader in diamonds, importing them for re-export after sorting and grading, with a registered unit in the SEZ. The Tribunal had already held that the assessee's trading activities qualify as "services" under section 10AA.

The Foreign Exchange Gains in question arose from the realization of receivables from previous year's exports due to the increase in the USD exchange rate against the Indian Rupee. The Tribunal noted that Foreign Exchange Gains are directly related to the export business and have a first-degree nexus with the sale consideration.

The Tribunal referred to the case of Renaissance Jewellery Pvt. Ltd., where it was held that Foreign Exchange Gains are eligible for deduction under section 10A, which is similar to section 10AA. The Madras High Court in Pentasoft Technologies Ltd. also held that Foreign Exchange Gains related to export sales are eligible for deduction under section 10A.

Based on these precedents, the Tribunal concluded that Foreign Exchange Gains derived from the export business should be eligible for deduction under section 10AA. Therefore, the Tribunal allowed the assessee's claim for deduction on Foreign Exchange Gains.

Conclusion:

The Tribunal allowed the appeal of the assessee partly, granting the deduction under section 10AA for both trading activities and Foreign Exchange Gains. The remaining grounds were either consequential or general in nature and were dismissed. The order was pronounced in the open court on 13th May 2022.