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TMI Blog2013 (11) TMI 563X X X X Extracts X X X X X X X X Extracts X X X X ..... any interest on borrowings made for acquisition of assets for extension of existing business is required to be capitalized till the asset is first put to use - Authorities below have proceeded with the presumption that the assets had been acquired from borrowed funds. However, no basis for such finding has been given. The assessee has pointed out that most of the payments had been made in earlier years in which year there was no disallowance of interest. Therefore, in the earlier years, the payments were made from own funds - source of current payment is easily explained from own funds. Therefore, when the payment for acquisition of assets have been made from own funds, there cannot be any case of disallowance of interest - Decided in favour of assessee. Deduction u/s 10AA - Services under SEZ rules - Whether 'trading' is covered by the term 'services' - Held that:- assessee is engaged in trading of re-export of imported goods and, therefore, the assessee is entitled for deduction under Section 10AA - SEZ Act under Section 51, it has been clearly provided that the provision of SEZ Act will override the provision of any other Act, meaning thereby the provision provided under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction on the delay in payments which was received after the prescribed time and, therefore, he reduced the amount from export turnover for calculation of deduction under Section 10A of the Act. 6. Against the order of the AO, appeals were preferred before the CIT(A). Learned CIT(A) held that the interest income cannot be treated as derived from the undertaking and, therefore, the action of the AO was justified in treating the interest income as income from other sources. Learned CIT(A) also confirmed the action of the AO in respect of not allowing the netting of interest income and expenditure for the reason that the jurisdictional High Court of Bombay in the case of Asian Star Trading (Bom), reported in 326 ITR 56, has held that for the purpose of deduction under Section 80HHC, the Tribunal was justified in holding that interest on fixed deposit in the bank receipt by the assessee should be considered for the purpose of working out the deduction under Section 80HHC and not the gross interest. 7. Now, the learned counsel of the assessee here before the Tribunal stated that this issue is squarely covered by the decision of the Hon ble Apex Court reported in [2012] 343 ITR 89 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mehta Brothers Gems Pvt. Ltd. Vs. ACIT, decided in ITA No.6245/Mum/2010, for assessment year 2006-07, vide order dated 25-1-2012. Copy of which has also been filed. 13. On the other hand, learned DR fairly stated that the issue is covered by the order of the Tribunal in the aforesaid case, however, he placed reliance on the order of CIT(A). 14. After considering the order of the AO and CIT(A) and the order of the Tribunal in case of Mehta Brothers Gems Pvt. Ltd Vs. ACIT, decided in ITA No.6245/Mum/2010, for assessment year 2006-07, vide order dated 25-1-2012 and in ITA No.4791/Mum/2011 for assessment year 2007-08, vide order dated 18-5-2012, we noted that in this case also certain advance payments were made for the purpose of units at Bharat Diamond Bourse and Gujarat Hira Bourse and on similar manner, the additions were made by the AO, which was confirmed by the learned CIT(A). However, on appeal before the Tribunal, the Tribunal has deleted the addition by making the following observations in para 4 at page 3 while deciding the appeal for assessment year 2006-07 :- 4. We have perused the records and considered the rival contentions carefully. The dispute is regarding d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct itself defines 'services' to mean "tradeable services" satisfying sub-clause (i), (ii) (iii), thereon 18. The AO disallowed the deduction under Section 10AA for both of the years by observing that the exemption claimed u/s. 10AA is applicable only for manufacturing unit as per the Act, whereas the assessee was involved in trading activities carried out from Plot No.241, Unit No.374, Surat, SEZ, Sachin GIDC Road No.4, Surat. Therefore, the assessee was asked to explain as to why this exemption should not be disallowed. In response, the assessee filed reply dated 1.12.2009 stating therein that "as regards availability of Section 10AA for trading Activities,' it is stated that as per section 10AA benefits available to units providing services. Under the SEZ Act section 2(z_) defines "services' to include tradable services as may be prescribed by the Central Government for the purpose of this Act and Central Government has included trading as one of the services. The assessee further relied on the Rules notified under Special Economic Zone (SEZ) Act, 2005. The AO also observed that the exemption u/s. 10AA under the I.T.Act is applicable to those assesses who begin to manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia (267 ITR 9) discussing of difference between supply of services and sale of goods clearly defined that "Art 366 (29A)(f) of the Constitution does not conceptually or otherwise include the supply of services within the definition of sale and purchase of goods." Thus by no stretch of imagination can trading in goods can be considered as supply of service by the assessee. In view of the above, assessee's claim of exemption u/s. "10AA of the Act, of RS.1,58,06,018/- (Rs.2,33,18,511 - Rs.75, 12,493) for trading in gold and studded jewellery is rejected and the entire sum is considered as the taxable income of the assessee." 19. Before CIT(A), detailed written submission was filed, which has been incorporated in the order of the learned CIT(A) at pages 4 to 9, which are as under :- 2.1 In the appellant proceedings, the appellant has filed paper book and written submission from time to time and agitated against the action of the Assessing Officer. The written submissions dated 23/10/2010 and 01/03/2011 filed by appellant are as under: "The learned Assessing Officer erred in not allowing exemption uls.10AA with regard to trading activity carried on by your appellant's under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section. B. In this connection, please find enclosed herewith Instructions regarding SEZ Act 1 Rule. Instruction no. 612006 dated 03-08-2008 (Page Nos. 1 to3), Section 51 of the S5Z Act provides as follows:- '51(1) The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act". Hence, by virtue of Section 51 of the SEZ Act, the provisions of the SEZ Act and the Rules will have overriding ,-effect over the provisions contained in any other Act. We are further enclosing Special Economic Zones (Amendment) Rules, 2006 - Notification No. G. S.R. 470(#) dated 10-08-2006 (Page Nos. 4 to 6.) We are specifically reproducing an explanation for your kind consideration :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-08-2006). 5. By virtue of Section 51 of SEZ Act, the provisions of the SEZ Act and rules will have overriding effect over the provisions contained in any other Act. Thus provisions of the Income tax Act, 1961 merges with that of SEZ Act. 4. Word any services in Section 10AA (1) further strengthens case of the your appellant in view of special Economic Zones (Amendment) Rule 2006. In view of the above deduction u/s. 10AA may be granted as claimed by the appellant. 1. "Section 10AA was inserted by the Special,' Economic Zones Act, 2005, with effect from 10th February, 2006. Under section 27 of the Special Economic Zones Act, 2005, effective from 10th February, 2006, the provisions of the Income tax Act, 1961, as in force for the time being, apply to, or in relation to, the Developer or entrepreneur for carrying on the authorized operations in a Special Economic Zone or Unit subject to that Act. 2. We are enclosing copy of Schedule to SEZ which clearly gives directions for modification to the Income tax Act, 1961 for inserting section 10AA. 3. Please find enclosed herewith Instruction No.412006 which clearly guides to grant deduction u/s. 10AA to units ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submission and perusing the material on record, we found no infirmity in the finding of the learned CIT(A). The finding of the learned CIT(A) have been recorded in para 2.2 2.3 at page 9 and 10, which are as under :- I have carefully considered the findings of the Assessing Officer and submissions of the appellant. I have also gone through the relevant sections as well as provisions of SEZ Act and Circular NoAI2006 issued by the Government of India (Ministry of Commerce Industry). The Assessing office has disallowed deduction u/s.10AA on the trading activity by the appellant from plot No.241, Unit No.374, situated in Surat SEZ areas because he was not agreeable with the arguments of the appellant that trading activity carried out by the appellant are red by service. The Assessing Officer was of the view that such exemption ct is available only on manufacturing activity and not on trading of goods. He has relied upon the decision of Delhi High Court and Supreme Court to understand the meaning of the word 'service' because the service has not been denied in the Income-tax Act. After considering the entire facts and case laws as well as circular relied by the appellant I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -export trading activity of the appellant. However, no such benefits should e given in the local purchase and sale made by the appellant. He should ensure this fact again while giving effect to this order. Hence, this ground of appeal is allowed. We noted that learned CIT(A) has taken into considering the aspect and observation of the AO that deduction under Section 10AA is not allowable for the reason that the assessee has not carried out any manufacturing activity but has done trading of goods only. For this purpose, learned AO has placed reliance on the order of Hon ble Delhi High Court. Learned CIT(A) has taken into consideration these observation of the AO and thereafter he found that the Government of India has issues a circular No.17 of 29.5-2006, which was issued by Export Promotion Council For EOUs SEZ Unit (Ministry of Commerce Industry, Government of India). The contents of the Circular have also been incorporated in the finding of the learned CIT(A), which have also been reproduced somewhere above in this order. Therefore, we are not repeating the contents of that circular issued by the Ministry of Commerce Industry, Government of India). Under Section 51(1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the SEZ Act has to override on the provision of Section 10AA of the Income Tax Act. Under the rules, it is not provided but under Section 51 of the SEZ Act, it is provided, therefore, in our view, the contention raised by the learned DR is not tenable. Moreover, the issue is squarely covered by the decision of the coordinate Bench in the case of Goenka Diamonds and Jewellery Limited (supra). Therefore, respectfully following the decision of the Tribunal in the case of Goenka Diamonds and Jewellery Limited (supra) and in view of the reasoning given by the learned CIT(A), we confirm his order. 23. Now, we will take up the appeals in case of other assessee i.e. Gitanjali Gems Ltd. listed under ITA Nos.6949 6950/Mum/2011(for assessment years 2006-07 2007-08). 24. In these case also, the assessee is objecting in not allowing netting of interest against interest expenditure for the purpose of deduction under Section 10AA/10A. Similar issue was involved in case of M/s Gitanjali Exports Corporation Limited (ITA Nos.6947 6948/Mum/2011), whereby we have already discussed the issue, wherein we have decided the issue in part in favour of the assessee. Therefore, on the same reasoning, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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