, `'
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH,
AHMEDABAD
00 , ,
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER &
SHRI KUL BHARAT, JUDICIAL MEMBER
ITA No. 1395/Ahd/2013
(Assessment Year 2009-10)
&
ITA No. 1396/Ahd/2013
(Assessment Year 2010-11)
M/s Zaveri & Co. Pvt. Ltd. V/S The Commissioner of
Swagat Building, C.G. Road Income-tax-IV,
Ahmedabad-380009. Ahmedabad.
PAN: AAACZ2014N
(Appellant)/ (Respondent)/
Appellant by : Shri Mehul K. Patel with
Shri J.C. Shavedalal, AR
Respondent by : Shri R.K. Dhanesta, Sr. DR with
Sh. K.R.Meghwal & Sh. Subhash Bains, DR
/ Date of Hearing : 06-03-2014
/ Date of Pronouncement : 07-05-2014
()/ORDER
PER SHRI N.S. SAINI, ACCOUNTANT MEMBER:
These are the two appeals filed by the assessee against
the orders passed u/s 263 of the Income Tax Act, 1961 by the
Commissioner of Income Tax, both dated 19.04.2013 in respect of
Assessment Years 2009-10 and 2010-11.
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-2-
2. The assessee challenged the validity of the orders
passed u/s 263 on the following grounds in its appeal for
Assessment Year 2009-10:
1. That on facts, and in law, the learned CIT-IV, Ahmadabad
has grievously erred in assuming jurisdiction u/s 263 of
the Act.
2. That on facts and in law, the learned CIT-IV, Ahmadabad
has grievously erred in holding that the learned AO has
not done any inquiry nor any verification, whereas, in
fact, the assessment order is passed u/s 143(3) of the
Act after thorough inquiry through show-cause notice and
replies, and verification of all the issues sought to be
revised.
3. That the learned CIT-IV, Ahmadabad has grievously erred
in law and on facts in holding that the appellant's SEZ
unit is not entitled to deduction u/s 10AA of the Act of Rs
76.11 crores.
4. That the learned CIT-IV, Ahmadabad has grievously erred
in law and on facts in holding that the appellant is not
entitled to deduction u/s 10AA of the Act while computing
book profit u/s 115JB of the Act.
5. On facts and in law, the entire income of appellant SEZ
unit is not includible while calculating the book profit for
the purpose of section 115JB of the Act.
6. That on facts and in law, the learned CIT-IV, Ahmadabad
has grievously erred in holding that the interest income is
required to be taxed as income from other sources, and
that the appellant is not entitled to deduction u/s 10AA of
the Act on the interest income.
7. That the learned CIT-IV, Ahmadabad has grievously erred
in law and on facts in holding that the appellant is not
entitled for set-off of brought forward business loss
against income from other sources.
8. That on facts and in law, the learned CIT-IV, Ahmadabad
has grievously erred in setting aside and directing the AO
to examine the correctness, genuineness and allowability
of Foreign Exchange Fluctuation Loss of Rs 70.97 crores,
resulting into multiplicity of proceedings.
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-3-
The assessee has raised following grounds in its appeal for
Assessment Year 2010-11:
1. That on facts, and in law, the learned CIT-IV,
Ahmedabad has grievously erred in assuming jurisdiction
u/s 263 of the Act.
2. That on facts and in law, the learned CIT-IV, Ahmedabad
has grievously erred in holding that the learned AO has
not done any inquiry nor any verification, whereas, in
fact, the assessment order is passed u/s 143(3) of the
Act after thorough inquiry through show-cause notice
and replies, and verification of all the issues sought to be
revised.
3. That the learned CIT-IV, Ahmedabad has grievously
erred in law and on facts in holding that the appellant's
SEZ unit is not entitled to deduction u/s 10AA of the Act
of Rs. 38.20 crores.
4. That the learned CIT-IV, Ahmedabad has grievously
erred -in law and on facts in holding that the appellant is
not entitled to deduction u/s 10AA of the Act while
computing book profit u/s 115JB of the Act.
5. On facts and in law, the entire income of appellant SEZ
unit is not includible while calculating the book profit for
the purpose of section 115JB of the Act.
6. That on facts and in law, the learned CIT-IV, Ahmedabad
has grievously erred in holding that the interest income
is required to be taxed as income from other sources,
and that the appellant is not entitled to deduction u/s
10AA of the Act on the interest income.
7. That the learned CIT-IV, Ahmedabad has grievously
erred in law and on facts in holding that the appellant is
not entitled for set-off of brought forward business loss
against income from other sources.
8. That on facts and in law the learned CIT-IV, Ahmedabad
has grievously erred in setting aside and directing the AO
to examine the correctness, genuineness and allowability
of Foreign Exchange Fluctuation Loss of Rs 2.01 Crores,
resulting into multiplicity of proceedings.
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-4-
3. As the grounds of appeal and the issues involved in
the Assessment Year 2010-11 are same as in the Assessment Year
2009-10, both the parties before us admitted that adjudication of
appeal for the Assessment Year 2009-10 will also adjudicate the
appeal for the Assessment Year 2010-11. So, we proceed to
adjudicate the appeal for Assessment Year 2009-10.
4. We have heard the rival submissions, perused the
written submissions filed by both the parties and gone through all
the materials brought on record and the decisions relied upon by
both the parties.
5. It is a settled position that the provision of section 263
provides power of suo motu revision upon the Commissioner of
Income Tax when the order passed by the Assessing Officer is
found both erroneous as well as prejudicial to the interest of the
Revenue.
6. Further, the assessment order can be considered as
erroneous when it is found by the Commissioner of Income Tax that
the order contains some mis-application of law or mis-construction
of facts or non-application of mind on the part of the Assessing
Officer.
7. Non-application of mind in the context means
acceptance of the claim of the assessee without making any
inquiry.
8. It is also an accepted position of law that the lack of
inquiry on part of the Assessing Officer will result in the order being
termed as erroneous but merely because the inquiry though made
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-5-
was considered by the Commissioner of Income Tax as insufficient
or not in the manner in which the Commissioner of Income Tax
would have liked to be done will not make the order of the
Assessing Officer erroneous within the meaning of section 263 of
the Act.
9. Further, it is also an established position that when two
views are possible and the Assessing Officer has adopted one of the
possible views, then such an order of the Assessing Officer cannot
be called erroneous.
10. Further, the provisions of section 263 cannot be
invoked for merely providing the Assessing Officer a second innings
to play unless the order passed by the Assessing Officer is found by
the Commissioner of Income Tax as erroneous.
11. On the touchstone of the above settled position of law,
the validity of the orders passed u/s 263 are to be tested.
12. In the instant case, the Commissioner of Income Tax
has considered the order of assessment as erroneous as well as
prejudicial to the interest of the Revenue and has ordered as under:
"In view of the discussion made in the aforesaid paragraphs,
the assessment order passed on 19th Dec. 2011, u/s. 143(3)
of the Act by the Assessing Officer is treated as erroneous
and prejudicial to interest of revenue hence same is set aside
and to be modified as under:
(i) As Assessee has not fulfilled the conditions for
eligibility of deduction under Section 10AA for carrying
out the services as per Section 2(z) of SEZ Act, 2005
i.e. import for the purpose of re-export and has not
earned any foreign exchange for the country, which is
the main intention behind the provisions of Section
10AA of the Act, as discussed herein above, Assessee
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-6-
is not entitled to exemption under Section 10AA of the
Act, both while computing income as per normal
provisions of the Act and book profit u/s 115JB of the
Act.
(ii) The assessing officer will examine the correctness,
genuineness and allowability of Foreign Exchange
Fluctuation Loss of Rs 70.97 Crores and decide the
issue afresh after giving opportunity to the assessee.
(iii) The interest income earned by Assessee on bank FDR
is required to be taxed as income from other sources,
as discussed in detail hereinabove and the same
cannot be treated as profit derived from export of
service outside India and eligible business activity as
per SEZ Act, 2005. The Assessee will not be entitled
to exemption u/s 10AA on interest income earned on
Bank FDRs.
(iv) As interest income earned on FDRs is to be taxed as
income from other sources, Assessee would not be
entitled for set off of brought forward business loss, if
any available, against income from other sources."
13. The first contention of the Ld. Authorized
Representative of the assessee before us is that the Assessing
Officer had during the course of assessment proceedings called for
the explanation of the assessee for its claim of deduction u/s 10AA,
brought forward loss, interest receipt from bank on fixed deposits
and computation of income u/s 115JB of the Act and the assessee
in reply submitted its explanation with evidences and supporting
decisions.
14. The Assessing Officer after making inquiries and
considering the submissions of the assessee accepted the claim of
the assessee for deduction u/s 10AA, set off of brought forward
business loss, interest income on fixed deposit receipts as part of
business income and computation of income u/s 115JB of the Act.
The Ld. Authorized Representative in support of the above
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-7-
arguments drew our attention to the notice issued by the Assessing
Officer u/s 142(1) of the Act. In view of the above, the contention
of the Ld. Authorized Representative was that as the above claims
were accepted by the Assessing Officer after making due inquiries,
therefore, the order of the Assessing Officer cannot be considered
as erroneous.
15. Further, the Ld. Authorized Representative also
contended that as a possible view in respect of the above issues
was adopted by the Assessing Officer in the assessment order,
therefore, the Commissioner of Income Tax was not justified in
passing the impugned order in respect of above issues merely for
taking a different view. In support of the above contentions, the
Ld. Authorized Representative relied upon the decisions in the case
of CIT Vs. Max India Limited 295 ITR 282 (SC) and Malabar
Industrial Limited 243 ITR 82 (SC) and CIT Vs. Arvind Jewellers 259
ITR 502 (Guj.).
16. We find that in the impugned order, Commissioner of
Income Tax has modified the order of the Assessing Officer as
Commissioner of Income Tax has held that the assessee is not
eligible for deduction u/s 10AA of the Act, under both computation
i.e. computation u/s 115JB of the Act as well as under normal
computation (computation as per other provisions of the Act except
115JB), interest income earned by the assessee on fixed deposit
receipt is assessable under the head "income from other sources"
and not under the head "profit and gains of business and
profession". Consequentially, the assessee is not entitled for
deduction u/s 10AA in respect of such interest income and the
assessee is also not entitled for set-off of brought forward business
loss against such interest income. Thus, the Commissioner of
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-8-
Income Tax found that the view in respect of above issues adopted
by the Assessing Officer in the assessment order is unsustainable.
17. Therefore, it cannot be held that Commissioner of
Income Tax has considered the order of the Assessing Officer as
erroneous in respect of above issues on the ground that the
Assessing Officer accepted the claim of the assessee without
application of mind, but rather the substance of the order of the
Commissioner of Income Tax is that the view adopted by the
Assessing officer in respect of above issues is unsustainable i.e. not
a possible view in view of the facts of the case. Hence, we have to
adjudicate whether the view adopted by the Assessing Officer in
respect of above issues was a possible view or not.
18. The first issue is in respect of eligibility of deduction u/s
10AA of the Act. The Commissioner of Income Tax considered that
the assessee was not entitled for deduction u/s 10AA on the ground
that the assessee has not fulfilled the conditions for eligibility of
deduction u/s 10AA for carrying out the services as per section 2(z)
of the SEZ Act, 2005 i.e. import for the purposes of re-export and
has not earned any foreign exchange for the country which is the
main intention behind the provisions of section 10AA of the Act. In
view of this, the Commissioner of Income Tax ordered that the
assessee is not entitled to exemption u/s 10AA of the Act, both
while computing income as per normal provisions of the Act and
book profit u/s 115JB of the Act. For the above issue, it is
necessary to give a look at the provisions of the sub-section (1) of
section 10AA of the Act which reads as under:
"10AA. (1) Subject to the provisions of this section, in
computing the total income of an assessee, being an
entrepreneur as referred to in clause (j) of section 2 of the
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
-9-
Special Economic Zones Act, 2005, from his Unit, who begins
to manufacture or produce articles or things or provide any
services during the previous year relevant to any assessment
year commencing on or after the 1st day of April, 2006, a
deduction of--
(i) hundred per cent of profits and gains derived from the
export, of such articles or things or from services for a period
of five consecutive assessment years beginning with the
assessment year relevant to the previous year in which the
Unit begins to manufacture or produce such articles or things
or provide services, as the case may be, and fifty per cent of
such profits and gains for further five assessment years and
thereafter;
(ii) for the next five consecutive assessment years, so
much of the amount not exceeding fifty per cent 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 (2)."
19. In the instant case, we find that it is an undisputed fact
that the assessee in its SEZ unit is engaged in carrying on business
of trading in gold, platinum and diamond. The SEZ unit inter alia
imports goods from supplier of Dubai and re-exports it.
20. It is not in dispute that the income from above activity
qualifies for deduction u/s 10AA of the Act. The above view is
supported by the instruction no. 4 dated 24.05.2006 issued by
Government of India, Ministry of Commerce & Industry wherein it is
stated as under:
"This Department has been receiving representations on
difficulties faced by the existing SEZ units holding approval
to do trading, that their exports are adversely affected and
also that several of their orders are held up due to the
restriction on trading on account of the above instruction.
Taking cognizance of these representations, partial
modification of the above referred Instruction dated 24th
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 10 -
March, 2006, it has been decided that while units in the
Special Economic Zone who hold approval to do trading
activities will be allowed to carry out all forms of trading
activity, the benefits under Section 10AA will exclude trading
other than trading in the nature of export of imported goods.
Appropriate amendments in this regard are being issued.
2. In the meantime, sourcing from domestic area may be
permitted by units in the SEZs which are allowed to do
trading, subject to this circular being cited and on production
of an undertaking by the concerned unit that no income tax
benefits will be available by the unit for trading, except in
the nature of re-export of imported goods."
21. Thus, it is clear that SEZ units are not entitled for
deduction u/s 10AA in respect of trading goods exported from SEZ
when such goods were procured from Domestic Tariff Area and the
assessee is entitled for income tax benefit u/s 10AA in respect of
trading which is in the nature of re-export of imported goods. To
the same effect is the decision of the Jaipur Bench of the Tribunal in
the case of DCIT Vs. M/s Goenka Diamond & Jewellers Limited ITA
No. 509/JP/2011 Assessment Year 2008-09.
22. Further, it is also not in dispute that the above activity
of the assessee was started during the Assessment Year 2008-09.
Thus, the only other condition is that the assessee must be an
entrepreneur as referred to in clause (j) of section 2 of SEZ Act,
2005. The Section 2(j) of SEZ Act, 2005 reads as under:
"Entrepreneur" means a person who has been granted a
letter of approval by the Development Commissioner
under sub- section (9) of section 15."
23. Sub-section (9) of section 15 of SEZ Act, 2005 reads as
under:
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 11 -
"The Development Commissioner may, after approval of the
proposal referred to in sub- section (3), grant a letter of
approval to the person concerned to set up a Unit and
undertake such operations which the Development
Commissioner may authorize and every such operation so
authorized shall be mentioned in the letter of approval."
24. In the instant case, it is not in dispute that the assessee
has been granted an approval by the Development Commissioner
under sub-section (9) of section 15 of the SEZ Act, 2005. A copy of
the said approval vide letter no. SSEZ/II/18/2007-08/603 dated
30.10.2007 is placed at page no. 908 of the Paper Book.
25. Further, originally Development Commissioner, Surat
Special Economic Zone granted approval to the assessee's SEZ unit
in respect of manufacturing of Gold, Silver, Platinum, Palladium,
Coins (other than legal tenders), Plain Jewellery, Studded Jewellery
& Articles thereof or combination thereof with or without Diamonds
and/or semiprecious stones, Cut & Polished Diamonds, Semi
Precious Stones {under chapter-71 of ITC (HS)} vide letter no.
SSEZ/II/18/2007-08/663 dated 30.08.2007, copy of which is
placed at page nos. 908 to 910 of Paper Book-III. However, the
said certificate was amended vide letter no. SSEZ/II/018/2007-
08/824 dated 18.10.2007 wherein the assessee was granted
approval for trading also which reads as under:
"Government of India
Ministry of Commerce & Industry,
Office of the Development Commissioner
Surat Special Economic Zone
Near Sachin Railway Station, Diamond Park,
Sachin, SURAT-394230.
Phone No. (0261)2399247; 2397667;
Fax No. (0261) 2399247.
No. SSEZ/II/018/2007-08/824 Dated: 18th October, 2007
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 12 -
M/s Zaveri & Co. Pvt. Ltd.
"Swagat",
C.G. Road,
AHMEDABAD-380009.
Sub: Your proposal for Trading Activity in the Surat
Special Economic Zone.
Reference:- LOA No. SSEZ/II/18/2007-08/663 dated 30-08-
2007
Dear Sirs,
I am directed to refer to your letter dated 18-09-2007, on
the above subject and to convey the approval of the
Competent Authority/Development Commissioner for broad-
banding of Letter of Approval No. SSEZ/II/18/2007-08/663
dated 30-08-2007 as amended, and to include Trading and
Export of the following items with all the facilities and
entitlements admissible to a unit in the Surat Special
Economic Zone subject to the provisions of the Special
Economic Zones Act, 2005 and the rules and orders made
thereunder, from Unit No. 364, on Plot No. 239, Surat
Special Economic Zone, Sachin, Surat in the State of
Gujarat.
Authorized Operations:-
Sr. No. Activity
01. TRADING:-
Trading of Gold, Silver, Platinum, Palladium,
Bars, Coins (other than legal tenders) and
Medallions. {under chapter-71 of ITC (HS)}
(1) CONDITIONS:-
(i) You shall export the goods procured/imported, as per
provisions of the Special Economic Zones Act, 2005
and Rules made there-under for a period of five years
from the date of commencement of trading activities.
For this purpose, you shall execute a fresh Bond-
Cum-Legal Undertaking as prescribed under the
Special Economic Zone Rules, 2006, for both
manufacturing and trading operation consolidated.
(II) You shall achieve positive Net Foreign Exchange (NFE)
as prescribed in the Special Economic Zone Rules,
2006 for the period you operate as a Unit in the
Special economic from the commencement of
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 13 -
production, failing which you shall be liable for penal
action under the Foreign Trade (Development and
Regulation) Act, 1992.
(iii) You may import or procure from the Domestic Tariff
Area all the items required for your authorized
operations under this approval, except those promoted
under the ITC (HS) Classifications of Export and
Import Items.
(iv) The benefits under Section-10AA of the Income Tax
Act, shall exclude trading other than trading in the
nature of re-export of imported goods only. If you
envisage DTA procurement, you shall maintain
separate account, etc. as provided under SEZ Act and
Rules there-under.
(v) Date of commencement of trading activities shall be
intimated to the Development Commissioner.
(vi) You shall undertake trading activities in a segregated
premises and separate account shall be maintained
with proper identification.
(vii) You shall follow the RBI Regulations.
(2) If you fail to comply with the conditions stipulated
above, this Letter of Approval shall be cancelled as per
the provisions of the Special Economic Zones Act,
2005 and the rules and orders made there-under.
(3) This letter may be kept attached with the original
Letter of Approval, as amended. All future
correspondence may be addressed to the
Development Commissioner, Surat SEZ.
Yours faithfully
(R.P. Vaidya)
Officer on Special Duty,
For Development Commissioner
Surat Special Economic Zone"
Copy of the said letter is placed at page nos. 911 to 913 of Paper
Book-III. Further, validity of approval was renewed till 25.10.2017
vide letter no. SSEZ/II/18/2007-08/1229 dated 17.01.2013, copy
of which is placed at page no. 1282 of the Paper Book-IV.
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 14 -
26. Thus, we find that the assessee is entrepreneur as
referred to in clause (j) of section 2 of the SEZ Act, 2005 who
began to provide services during the previous year relevant to the
Assessment Year 2008-09. Therefore, in our opinion, the Assessing
Officer's view that the assessee is entitled for deduction u/s 10AA
cannot be held as an impossible view on the basis of the language
employed u/s 10AA of the Act. The Commissioner of Income Tax
considered that the assessee is not entitled for deduction u/s 10AA
of the Act on the ground that net foreign exchange earning for the
said unit is negative. In calculating net foreign exchange earning
as negative, the Commissioner of Income Tax relied upon Export
Promotion Council for EOUS and SEZS Circular no. 42 dated
26.03.2007 and viewed that the purchases made by the assessee
from domestic tariff area should be treated as import and therefore,
the purchase value should be reduced from the foreign exchange
earnings of the assessee for calculating net foreign exchange
earning.
27. The Ld. Authorized Representative of the assessee
pointed out that the said Export Promotion Council for EOUS and
SEZS Circular no. 42 dated 26.03.2007 contains only a proposed
change in Rule 53 of SEZ Rules, 2006 but that change has not yet
been incorporated. In support of the above, the Authorized
Representative of the assessee filed before us clarification dated
27.02.2014 issued by Export Promotion Council for EOUS and SEZS
no. EDC/SEZ/AM04/A.14 dated 26.02.2014 which reads as under:
"From EPCES HO epces@epces.in
Sent: Thu, 27 Feb. 2014 13:02:02:05
To "Mr. Mrugesh Shah" mrugesh@zaveriandco.in
Subject: Clarification-reg.
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 15 -
Export Promotion Council for EOUS and SEZS
Ministry of Commerce & Industry, Government of India
8G, Hansalaya Building, 15, Barakhamba Road,
New Delhi-110001.
Tel:23329767, 23329768, 23329769 Fax No. 011-23329770
O.P.Kapoor No. EPC/SEZ/AM04/A.14
Dy. Director General February 26 2014
Mobile: 9810850501
Dear Sir,
This is with reference to your email regarding
applicability of circulars on SEZs, in this regard, we are to
inform you as under:
1. As regards circular issued by EPCES N.16/2007-08
dated 11/7/07, kindly note that this circular is meant for
EOUs only.
2. As regards EPCES Circular No. 42 dated 26/3/07, this
suggestion was not included in SEZ Rule 53. To read the
updated SEZ Rule 53, please visit website
www.sezindia.nic.in.
3. As regards Circular No. 12/2008-Customs dated
24/7/08, this circular is also meant for EOUs only.
Kindly note that EPCES has shifted its premises from Bhikaji
Cama Bhawan to its own premises as the address mentioned
above, kindly note the new address and contact details.
With warm regards,
Yours Sincerely
(O.P. Kapoor)
Dy. Director General"
28. The Authorized Representative of the assessee also
submitted before us a clarification issued by the Government of
India, Ministry of Economic and Industry, office of the Development
Commissioner, Surat Special Economic Zone dated 03.03.2014
which reads as under:
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 16 -
"Government of India
Ministry of Commerce & Industry,
Office of the Development Commissioner
Surat Special Economic Zone
Near Sachin Railway Station, Diamond Park,
Sachin, Surat.
No. SSEZ/II/18/2007-08/1408 dated 3rd March 2014-
To,
M/s Zaveri & Co. Pvt. Ltd.
Unit No. 364 on Plot No. 239
Surat Special Economic Zone,
Surat.
Gentlemen,
Sub: Request for clarification reg.
Please refer to your letter 27.02.2014 on the above
mentioned subject and in this connection it is to clarify that:
a. EPCES Circular No. 16/2007 is not applicable to SEZs.
It pertains to EOUs only.
b. Regarding EPCES Circular No. 42, it is only a
suggestion by EPCES however, the suggestions have
not been incorporated in SEZ Act/Rules so far.
c. Circular No. 12/2008-Cus is not applicable to SEZs. It
pertains to EOUs only.
2. It is also to clarify that though SEZs and EOUs, both
are export promotion schemes, they are governed by
different provisions. SEZs are governed by SEZ Act, 2005
and Rules framed thereunder. 100% EOUs are governed by
Foreign Trade Policy.
Yours sincerely
(Vijay N Shewale)
Development Commissioner
Surat Special Economic Zone"
29. Further, the Ld. Authorized Representative of the
assessee pointed out that the assessee has received a renewal from
Development Commissioner, Surat Special Economic Zone on
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 17 -
17.01.2013 upto a period of 5 years i.e. upto 25.10.2017 which
conclusively proves that the annual performance report submitted
by the assessee before the SEZ authorities showing positive net
foreign exchange earnings were in accordance with the SEZ Act and
SEZ Rules and the assessee complied with SEZ Act and SEZ Rules.
30. The Ld. Authorized Representative also pointed out that
the approval committee of SEZ, who examined and approved the
annual performance report filed by the assessee consists of various
persons including Commissioner of Income Tax and they have not
found any defect while monitoring assessee's working achieving
positive net foreign exchange earnings as submitted in the annual
performance report.
31. We find that no material has been brought on record by
the Revenue to controvert the above submission of the assessee.
Further, we find that the Hon'ble Supreme Court in the case of
Gestatner Duplicators Private Ltd. Vs. CIT 117 ITR 1 (SC) held as
under:
"In that situation we do not think that it was open to the
taxing authorities to question the recognition in any of the
relevant years on the ground that the Assessee's provident
fund did not satisfy any particular condition mentioned in r.4.
It would be conducive to judicial discipline and the
maintaining of certainty and uniformity in administering the
law that the taxing authorities should proceed on the basis
that the recognition granted and available for any particular
assessment year implied that the provident fund satisfies all
the conditions under r. 4 of Part A of the Fourth Schedule to
the Act and not sit in judgment over it. There is ample
power conferred upon the CIT under r. 3 of Part A of the
Fourth Schedule to withdraw at any time the recognition
already granted if, in his opinion, the provident fund
contravenes any of the conditions required to be satisfied for
its recognition and if during the assessment proceedings for
any particular assessment year the taxing authority finds
that the provident fund maintained by an assessee has
contravened any of the conditions of recognition, he may
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 18 -
refer the question of withdrawal of recognition to the CIT but
until the CIT acting under the powers reserved to him
withdraws such recognition the taxing authority must
proceed on the basis that the provident fund has satisfied all
the requisite conditions for its recognition for that year; any
other course is bound to result in chaos and uncertainty
which has to be avoided."
32. To the same effect is the decision of the Hon'ble Gujarat
High Court in the case of Nitin P. Shah alias Modi Vs. DCIT (2005)
276 ITR 411 (Guj.) and decision of the Ahmedabad Bench of the
Tribunal in the case of Gujarat Information Technology Fund 64
DTR 169(Ahd.). In our considered view, it was not open to the
Commissioner of Income Tax to take the view contrary to the
approval already granted by the approval committee appointed
under SEZ Act, 2005 and SEZ Rules, 2006.
33. Thus, we do not find any material to arrive at the
finding that the assessee has violated any provision of SEZ Act,
2005 or SEZ Rules, 2006 or that the assessee was not an
entrepreneur referred to in clause (j) of section 2 of SEZ Act, 2005.
Therefore, in our considered view, it cannot be held that the view
adopted by the Assessing Officer in holding that the assessee is
entitled for deduction u/s 10AA of the Act was not a possible view.
Therefore, the interference by the Commissioner of Income Tax
with that view of the Assessing Officer in purported exercise of
power available to him u/s 263 cannot be sustained. We,
therefore, cancel the order of the Commissioner of Income Tax on
this issue.
34. As a consequence of our finding, we delete the order of
the Commissioner of Income Tax to the extent it was held the
assessee is not entitled to exemption u/s 10AA of the Act both
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 19 -
while computing the income as per normal provisions of the Act and
book profit u/s 115JB of the Act.
35. Before parting with this issue, we would like to observe
that in view of the instruction no. 4 of 24.05.2006 quoted above,
deduction u/s 10AA is not available to the assessee in respect of
profit relating to trading activities wherein goods for export were
procured from domestic tariff area. However, we find that in the
instant case, it is not the case of the Revenue that benefit of
section 10AA was allowed to the assessee by the Assessing Officer
in the assessment order in respect of income arising from goods
exported by procuring the same from domestic tariff area.
Therefore, no interference by us in this respect is called for.
36. The next issue relates to the order of Commissioner of
Income Tax whereby it was held that interest income earned by the
assessee on its fixed deposit receipts with the bank is to be taxed
under the head "income from other sources" and consequentially
not entitled to exemption u/s 10AA of the Act and consequentially
interest income is to be excluded for calculating benefit allowable
u/s 10AA of the Act.
37. The undisputed facts relating to this issue are that the
assessee imports goods on credit and re-exports the same from its
SEZ unit. The import is made on a credit of 360/90 days against
letter of credit. For obtaining the letter of credit, the assessee is
required to offer fixed deposit receipt to the bank as a security. On
expiry of the letter of credit period, the bank liquidates the fixed
deposit receipt and makes payment to the importer. Further, the
exports are made on immediate payment basis. Therefore, as the
purchases are made on credit basis, the purchase value is higher
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 20 -
than the prevailing rate on the date of purchase from purchases
which are made on immediate payment basis. The exports are
made on immediate payment basis at the market value which is
prevalent on the date of payment. Normally, the assessee's
purchase value is therefore more than its sale value. However, as
the assessee receives payment for sales immediately and the
payment for purchases are made at a later date and interest
income earned by the assessee during the intervening period on
sale value, the transaction were considered as commercially
expedient and results in overall income to the assessee. The
interest income in question are interest income which are earned by
the assessee on fixed deposit receipts which are kept or pledged by
the assessee with its bank for obtaining the Letter of Credit against
its purchases is not in dispute.
38. On the above undisputed facts, the interest income
earned by the assessee was assessed as business income of the
assessee by the Assessing Officer in the assessment order. This
view of the Assessing Officer was considered as not a possible view
by the Commissioner of Income Tax in the impugned order passed
u/s 263 of the Act and the Commissioner of Income Tax had held
that the interest are mandatorily assessable under the head
"income from other sources".
39. We find that in the instant case, it is not in dispute that
the interest income which were earned by the assessee were from
fixed deposit receipts with bank which were made by the assessee
in the course of its trading business of import for the purposes of
re-export, for obtaining Letter of Credit for its purchases. We thus
find that the relevant fixed deposit receipts on which interest were
earned were business assets of the assessee acquired in the course
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 21 -
and for the purposes of its business. The fixed deposit receipts
being business assets, we find no reason as to why interest income
earned from such fixed deposit receipts could not be assessed as
business income of the assessee. Our above view finds support
from the recent decisions of the Hon'ble Karnataka High Court in
the case of CIT & anr. Vs. Motorola India Electronics (P) Limited
(2014) 265 CTR 94 (Kar.) wherein it was held that:
"No doubt Sub-section 10(B) speaks about deduction of such
profits and gains as derived from 100% EOU from the export
of articles or things or computer software. Therefore, it
excludes profit and gains from export of articles. But Sub-
section (4) explains what is the profit derived from export of
articles as mentioned in Sub-section (1). The substituted
Sub-section (4) says that profits derived from export of
articles or things or computer software shall be the amount
which bares to the profits of the business of the undertaking
and not the profits and gains from export of articles.
Therefore, profits and gains derived from export of articles
are different from the income derived from the profits of the
business of the undertaking. The profits of the business of
the undertaking includes the profits and gains from export of
the articles as well as all other incidental incomes derived
from the business of the undertaking. It is interesting to
note that similar provisions are not there while dealing with
computation of income under Section 80HHC. On the
contrary there is specific provision like Section 80HHB which
expressly excludes this type of incomes. Therefore, in view
of the aforesaid provisions, it is clear that, what is exempted
is not merely the profits and gains from the export of articles
but also the income from the business of the undertaking.
8. In the instant case, the assessee is a 100% EOU,
which has exported software and earned the income. A
portion of that income is included in EEFC account. Yet
another portion of the amount is invested within the country
by way of fixed deposits, another portion of the amount is
invested by way of loan to the sister concern which is
deriving interest or the consideration received from sale of
the import entitlement, which is permissible in law. Now the
question is whether the interest received and the
consideration received by sale of import entitlement is to be
construed as income of the business of the undertaking.
Though it does not partake the character of a profit and
gains from the sale of an article, it is the income which is
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 22 -
derived from the consideration realized by export of articles.
In view of the definition of `Income from Profits and Gains'
incorporated in Subsection (4), the assessee is entitled to
the benefit of exemption of the said amount as contemplated
under Section 10B of the Act. Therefore, the Tribunal was
justified in extending the benefit to the aforesaid amounts
also. We do not find any merit in these appeals."
40. In view of the above, we find that the view adopted by
the Assessing Officer showing interest income under consideration
is business income cannot be held as not a possible view and
therefore, the Commissioner of Income Tax was not justified in
interfering with the said view in the impugned order.
41. The other connected issue is that as per the view of the
Commissioner of Income Tax, the interest income in question being
derived by the assessee from Indian Bank, the same is to be
excluded while computing profits derived from the export of articles
or things or services for the purpose of section 10AA of the Act.
Sub-section (7) of section 10AA provides the manner in which the
profits derived from "export of articles or things or services" is to be
computed for the purposes of section 10AA of the Act. Therefore,
in view of the above specific provision in the section itself, "profits
derived from the export of articles or things or services" cannot be
computed in any other manner. Sub-section (7) of Section 10AA
reads as under:
"For the purposes of sub-section (1), the profits derived from
the export of articles or things or services (including
computer software) shall be the amount which bears to the
profits of the business of the undertaking, being the Unit, the
same proportion as the export turnover in respect of such
articles or things or services bears to the total turnover of
the business carried on [by the undertaking]:
[Provided that the provisions of this sub-section [as
amended by section 6 of the Finance (No. 2) Act, 2009 (33
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 23 -
of 2009)] shall have effect for the assessment year
beginning on the 1st day of April, 2006 and subsequent
assessment years.]"
42. Thus, a perusal of the aforesaid sub-section takes us to
the "profits of the business of the undertakings". Now, the profits
of the business of the undertakings are to be computed as per the
provisions of chapter-IVD of the Act and the only adjustment which
is permitted by the legislature to be made to such profits of the
business is to apportion the same in the proportion of exports
turnover of the eligible services to the total turnover of the business
carried on by the assessee. It is significant to note here that the
specific provision like explanation (baa) of section 80HHC which
provides for exclusion of 90% of interest income from the profits of
business to arrive at the profits of the business has not been
provided by the legislature in section 10AA of the Act. In absence
of such a provision enacted by the Parliament in section 10AA of
the Act, it is not possible for any other person to read such
provision in section 10AA of the Act. Hon'ble Supreme Court in the
case of Sm. Tarulata Shyam Vs. CIT (1971) 108 ITR 345 (SC) held
that there is no scope for importing in the statute words which are
not there. Further, Hon'ble Supreme Court in the case of CIT Vs.
Shann Finance Private Limited (1998) 231 ITR 308 (SC) went on to
hold that in interpreting fiscal statute, court cannot proceed to
make good the deficiencies if there be any. The court must
interpret the statute as it stands, and in case of doubt, in a manner
favourable to taxpayer. Thus, we find no provision in the statute
on the basis of which it can be held that the interest income which
forms part of the profits of the business is to be excluded for
arriving at profits derived from "export of articles or things or
services" as prescribed under sub-section (7) of section 10AA of the
Act. Our above view also finds support from the decision of the
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 24 -
Bangalore Bench of the Tribunal in the case of Rajesh Exports
Limited Vs. ACIT, (2008) TIOL-457-ITAT-Bangalore wherein it was
held that:
"In the light of the aforesaid discussion, it seems to us that
the expression "profits of the business of the undertaking"
appearing in section 10B(4) has to be construed in a wider
sense than the expression "profits and gains as are derived
by a hundred per cent export-oriented undertaking from the
export of articles or things" appearing in section 10B(1) of
the Act. We have already noticed that sub-section (1) has
been expressly made subject to the provisions of the
Section. Therefore, the meaning to be ascribed to the words
used in that sub-section should be controlled or tempered by
the language used in sub-section (4). So constructed it
appears to us that the profits of the business of the
undertaking includes not merely the profits derived by or
from the undertaking, but also include any profits or income
which are incidental to the carrying on of the business of the
undertaking."
To the same effect is the decision of the Hon'ble
Karnataka High Court in the case of Motorola India Electronics (P)
Limited (supra).
43. In view of the above, we find that the view adopted by
the Assessing Officer in this regard in the assessment order of not
excluding interest income which was assessed as business income
of the assessee for computing "profits derived from export of
articles or things or services" was a possible view and therefore,
the same could not be interfered in exercise of powers available u/s
263 of the Act.
44. We also observe that the Commissioner of Income Tax
in the impugned order has observed that the assessee was
indulging in financial arbitrage only in its SEZ unit. In other words,
the true business of the assessee in its SEZ unit was that of
financial arbitrage and not of trading by way of re-export of
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 25 -
imported goods. The Commissioner of Income Tax formed the
above view as he observed that on exclusion of interest income, the
result of the activities of the assessee are negative or loss only.
45. We find that the assessee was duly granted approval by
SEZ authorities to set up SEZ unit for engaging in trading by way of
re-export of the imported goods. The activities carried out by the
assessee in the SEZ unit are monitored by the competent SEZ
authorities. The annual performance report of the assessee are
monitored and verified by approval committee formed under the
SEZ Act. The assessee is recognized as an entrepreneur under the
SEZ Act. After taking into consideration the activities of the
assessee in the SEZ unit, the assessee was also granted renewal of
approval for trading by competent authority under the SEZ Act.
Keeping in view the above fact, in our considered view, it would be
not proper to characterize the activity of the assessee which
consists of re-export of the imported goods and inter alia to acquire
fixed deposits for obtaining letter of credit for receiving goods on
credit in the case of import as merely financial arbitrage and not as
trading by way of re-export of imported goods and consequentially
service under the SEZ Act. In the above facts and circumstances,
we set aside the order of the Commissioner of Income Tax to the
extent the Commissioner of Income Tax held that interest income
earned by the assessee on bank fixed deposit receipts is required to
be taxed as "income from other sources" and such interest income
is to be excluded from arriving at profits derived from export of
services for the purposes of section 10AA of the Act.
46. The next issue relates to the set-off of brought forward
loss. The above issue is consequential to the finding of the
Commissioner of Income Tax in respect of head under which the
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 26 -
interest income earned by the assessee on fixed deposit receipts is
to be assessed. As we find that the view adopted by the Assessing
Officer in the assessment order that interest income earned by the
assessee on fixed deposit receipts are assessable under the head
"business income" on the facts of the instant case was found to be
a possible view and therefore, we have to also hold that set-off of
brought forward business loss against such business income as
done by the Assessing Officer in the assessment order was a
possible view. Therefore, we set aside the order of the
Commissioner of Income Tax to the extent it directed that as
interest income earned on fixed deposit receipts taxed as income
from other sources, the assessee would not be entitled for set-off of
brought forward business loss against such interest income.
47. The last issue relates to the order of the Commissioner
of Income Tax whereby Commissioner of Income Tax directed the
Assessing Officer to examine the correctness, genuineness and
allowability of foreign exchange fluctuation loss of Rs 70.97 crores
and to decide the issue afresh.
48. According to the Commissioner of Income Tax, the
Assessing Officer has not examined the correctness, genuineness
and allowability of huge loss claimed by the assessee under the
head "foreign exchange fluctuation".
49. We find from page no. 111 of paper book filed by the
assessee that a query was raised by the Assessing Officer during
the course of assessment proceedings which reads as under:
"Give details of legal & professional charges, other expenses,
repair & maintenance exp., Foreign exchange and
Fluctuation, Exchange charges exp."
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 27 -
50. In reply thereto, the assessee furnished break-up of
foreign exchange loss distinguishing between exchange loss on
export and exchange loss on import of trading goods, copy of which
is placed at page no. 115 of Paper Book-I. Further, in reply to
consequential inquiry by the Assessing Officer, the assessee
submitted transaction-wise details of exchange fluctuation loss
before him, copies of which are placed at page nos. 131 to 164 of
the Paper Book-I.
51. On the basis of the above document, it was contended
by the Authorized Representative that it cannot be held that the
Assessing Officer accepted the exchange fluctuation loss of the
assessee without application of mind. The Assessing Officer was
fully alive to the fact of incurring of foreign exchange loss by the
assessee and the Assessing Officer after due application of mind,
accepted the said exchange fluctuation loss as genuine, correct and
allowable. The view of the Assessing Officer is supported by the
decision of the Hon'ble Supreme Court in the case of CIT Vs.
Woodward Governor India Private Limited 312 ITR 254 (SC).
52. We find that the Hon'ble Delhi High Court in the case of
CIT Vs. Honda Siel Power 333 ITR 547 (Del.) has held as under:
"While passing an order u/s 263, Commissioner of
Income Tax has to examine not only the assessment
order but the entire records. When a regular
assessment is made u/s 143(3), a presumption can be
raised that the order has been passed upon an
application of mind."
53. No doubt this presumption is rebuttable, but there must
be some material to indicate that the Assessing Officer had not
ITA Nos.1395 & 1396 of 2013
M/s Zaveri & Co. Vs. CIT-IV, Ahd..
AYs 2009-10 & 2010-11
- 28 -
applied his mind. We find that no material could be brought on
record in the impugned order passed u/s 263 to show that the
Assessing Officer had accepted the claim of exchange fluctuation
loss without application of mind when record shows that the
Assessing Officer during the assessment proceedings called for
details of exchange fluctuation loss and a number of documents and
details were filed by the assessee before the Assessing Officer
during the course of the assessment proceedings in support of its
claim for deduction of exchange fluctuation loss. In view of the
above, in our considered view, the Commissioner of Income Tax
was not justified in concluding that the Assessing Officer accepted
the correctness, genuineness and allowability of the exchange
fluctuation loss without any application of mind. We, therefore, set
aside the order of the Commissioner of Income Tax on this issue.
54. In the result, both the appeals of the assessee are
allowed.
Order pronounced in the Court on Wednesday, the 7th of May,
2014 at Ahmedabad.
Sd/- Sd/-
(KUL BHARAT) (N.S. SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 07/05/2014
Ghanshyam Maurya, Sr. P.S.
|
