Exemption u/s 10AA available on goods re-exported by approved SEZ unit

Rialto Exim Vs ITO (ITAT Mumbai)

ITAT Mumbai held that exemption u/s 10AA of the Income Tax Act available in case imported goods are re-exported by a unit duly approved by development commissioner of concerned SEZ.

Facts-

The assessee is a partnership firm and filed its return of income on 13.10.2010 declaring total income at Rs. Nil by claiming deduction under section 10AA of the Income Tax Act, 1961 amounting to Rs. 13,13,66,314/-. Assessee’s case was selected for scrutiny under section 143(2) of the Act.

During the assessment proceeding, a show-cause was issued in respect of rejection of claim of deduction under section 10AA of the Act. The total turnover for the year under consideration has been shown at Rs. 239, 83, 80,927/- and Net Profit (NP) at Rs. 13, 13, 66,314/- (GP @ 5.47%). The entire NP claimed to be exempted under section 10AA of the Act.

Conclusion-

Held that not only profits and gains of manufactured goods but also trading of goods are allowed for getting the exemption us 10AA of the I.T. Act, 1961 if imported goods are re-exported by a unit duly approved by development commissioner of concerned SEZ. The assessee company’s entire purchases are import in SEZ unit. The entire goods are exported to foreign country. Further the assessee company also fulfils all other terms & conditions laid down in section 10AA of the I.T. Act, 1961 and as such deduction is claimed as per provisions of law and allowable as such.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These cross appeals by assessee and the Revenue are directed against the order of Ld. Commissioner of Income Tax (Appeals)-25, Mumbai [hereinafter referred to as the [‘Ld. CIT (A)’] vide common order dated 30.01.2014 for the Assessment Year (AY) 2010-11. We are taking ITA No. 2316/Mum/2014 for A.Y. 2010-11. The assessee has raised the following grounds of appeal:

“1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in law as well as on facts in allowing the income u/s 10AA by estimating the Net Profit at 8% against 9.16% of net profit as shown in the books of accounts of the Appellant without finding any faults in the financial records and/or rejecting the books of accounts as per provisions of section 145 of the Income Tax Act so as to estimate Net Profit and as such direction be given to restore the Net Profit as shown in the regular books of accounts.

2. on the facts and in the circumstances of the case and in law, the Learned CIT (A) erred in law treating the income from Fixed Deposit as income from other source where in the nexus of business transaction was already proved.

3. on the facts and in the circumstances of the case and in law, the Learned CIT (A) erred not allowing the expenditure from the income which was incurred solely for the purpose of earring the same.

4. Appellant reserves the right to add, amend, modify or alter the above grounds of appeal at any stage of appellate proceedings.”

2. Brief facts of the case are that the assessee is a partnership firm, filed its return of income on 13.10.2010 declaring total income at Rs. Nil by claiming deduction under section 10AA of the Income Tax Act, 1961 (for short ‘the Act’) amounting to Rs. 13,13,66,314/-. Thereafter a survey action under section 133A of the Act was conducted in this case on 21.09.2010. Assessee’s case was selected for scrutiny under section 143(2) of the Act.

3. During the assessment proceeding, a show-cause was issued in respect of rejection of claim of deduction under section 10AA of the Act. The total turnover for the year under consideration has been shown at Rs. 239, 83, 80,927/- and Net Profit (NP) at Rs. 13, 13, 66,314/- (GP @ 5.47%). The entire NP claimed to be exempted under section 10AA of the Act. In the immediate preceding year which was the first year of business assessee achieved turnover of Rs. 92,33,44,065/-and NP at Rs. 10,13,80,418/- (GP @ 11% and NP @ 10.89%) this issue is pending before ITAT against the order of Ld. CIT (A).

4. Ground Nos. 1, 2 and 3 are substantive in nature and ground no 4 is general ground raise .Hence our adjudication is limited up to ground no 1, 2 and 3.

5. Ground no -1 we have gone through the order of the A.O which is against the assessee, order of Ld. CIT (A)-25 (Mum) in response to assessee’s appeal and various workings and judicial precedents submitted by the assessee in the form of paper-book.

a) In this year of appeal under consideration, there are 4 (four) main grounds of appeal and over and above the income derived from manufacturing activity, there are two more sources of income for which the appellant have claimed as deduction u/s. 10 AA of the Act but the AO has rejected the total income and made additions in respect of the total income of the appellant.

b) The total consolidated taxable income of the appellant in respect of the above three sources as shown in the P & L Account is Rs.13,13,55,314/- The Id. ARs have bifurcated the said consolidated taxable income from the three sources of income as under:

Income from manufacturing activity in SEZ Zone.      …Rs.6,05,38,408/-

Income from Trading activity in SEZ Zone…………………. Rs.7,37,03,040/-

Interest Income from Fixed Deposits in SEZ treated as Business income. … (-28, 75,133/-)

Income eligible for deduction/s 10AA of the Act ……………………….. 13,13,66,314/-

The first ground of appeal challenges violation of principle of natural justice in not granting proper, sufficient, fair and adequate opportunity of being heard in the assessment proceeding by the AO. This ground of appeal is not pressed by the appellant. It is seen from the assessment order that enough opportunities of being heard were given and the order was passed u/s 143(3) of the Act. There is no merit in this ground and the same is dismissed accordingly.

7. The second ground of appeal can be divided in to two, i.e., (A) which challenges the denial of deduction u/s. 10AA of the Act in regard to manufacturing activities amounting to Rs.6,05,38,408/- & (B) trading in polished diamond amounting to Rs. Rs.7,37,03,040/-in respect of income deriving in the SEZ at Sachin, Surat.

7.1 This first ground (A) of appeal is related to addition of Rs.6, 05, 38,408/- in respect of income derived from manufacturing activity which the AO has denied deduction u/s. 10 AA of the-Income Tax Act. Identical and similar ground of appeal was taken up before the Id. CIT (A) -25 had passed an order in favour of the appellant wherein, the said income from manufacturing activity was treated as income eligible in for deduction u/s.10 AA of the Income Tax Act.

A survey action u/s 133A had been conducted by the AO on the manufacturing unit of the appellant at unit No.430 plot No.250, Sachin, Surat on 21/09/2010. Another survey was simultaneously conducted at Mumbai premises of the appellant. According to the appellant, the AO has without going into the facts and documents and circumstances of the case and without any concrete basis has come to the conclusion that there was no manufacturing activities carried out by the assessee at SEZ Unit at Sachin, Surat. The AO while passing the assessment order u/s 143 ( 3) of the Act has denied the allowance of deduction u/s. 10 AA of the Income Tax Act based on the following assumptions which are summarized as under:

• There is no manufacturing activity carried on by the appellant so as to allow the deduction.
• The profits shown by the appellant is on a higher side and needs to be read in conjunction with section 10 AA and section 80IA of the Income Tax Act.
• Gross profit ratio of the appellant is compared with those of other concerns and a conclusion drawn that the GP ratio is on a higher side.
• A further conclusion is drawn by the AO, stating that in case deduction u/s 10 AA is to be allowed then the same has to be restricted to reasonable profits of 2% and excess profits accordingly are liable to be disallowed.”

6. Based on above facts 3 basic question arisen for our consideration to adjudicate ground no-1

i Whether manufacturing activity has taken place at the premises of the  assessee at unit no 430, plot no 250, Sachin, Surat (special economic zone)?

In response to (i) above we are reproducing the list of documents submitted by assessee before A.O and Ld. CIT (A) as under:

a) There is no denial of fact that assessee having a manufacturing unit at SEZ Sachin and the Learned AO has not stated anything contrary to the same.

b) The LOP is given to assessee by Government of India, Ministry of Commerce & Industry, Office of Development Commissioner, Surat, Special Economic Zone. Thus, assessee can carry on any activity from the SEZ unit (both manufacturing and trading) which is actually permitted by customs authority.

c) Assessee’s SEZ unit is under the direct control & supervision of custom authority. Assessee has to take permission from them if any items are taken inside or outside the SEZ.

d) Further, assessee also required to submit the performance report on annual basis to custom authorities.

The complete details of transaction wise Import and Sale along with the flow of transactions are explained as under:-

√ The SEZ unit of assessee is working only for Export purposes. The unit is generally dormant when there is no export order.

√ Once the order for exports is received, Gold Bars are imported from Dubai. An Invoice copy is furnished along with the packing list which has the following details as follows.

• Name of assessee and address of unit No. 430, SEZ, Surat.
• The description, quantity and the purity of Gold.
• The name of the manufacturer of Gold.
• The description of AWB Number and the mode of transport. The valuation amount in USD.
• Individual Gold Bar Numbers of 1 kg each as per the Packing List

√ Import Cover Note mentioning therein the description, quantity and value as mentioned in the Purchase Invoice.

√ Airway bill mentioning the gross weight, the airport of departure to destination, the nature and quantity of the goods, etc.

√ House Airway Bill stating all the above description like value declared for Customs, origin place to final destination, the number of pieces and gross weight etc.

√ Receipt of Diamond & Gem Development Corporation Limited, SEZ Unit, Sachin, being custodian charges for imported gold bars brought in from Dubai to be kept in the strong room for manufacturing at the SEZ Unit. This receipt is issued by a Government undertaking which is responsible for keeping the goods in strong room.

√ Custom Bill of Entry prepared at Surat Customs Department mentioning therein the description, weight, quantity value etc.

√ Payment made to C& F Agent, B.V. Chinai& Co. (India) Pvt. Ltd. towards warehousing charges, sundry and shipping charges, D.O. Charges and Agency charges towards import of goods from Dubai.

√ Payment advice from bank on sending Foreign Outward Remittance to supplier of raw material towards the cost of Import made by assessee.

√ Receipt of Diamond & Gem Development Corporation Limited, SEZ Unit, Sachin, being custodian charges for gold medallions manufactured at SEZ Unit to be exported and kept in the strong room for delivery. This receipt is issued by a Government undertaking which is responsible for keeping the goods in strong room.

√ Export Invoice copy of assessee along with the Packing List mentioning therein the seller’s address, the description of finished goods, the value of Invoice including the additional value achieved in USD and duly certified by the Appraising SEZ etc.

√ Export Cover Note mentioning therein the description, quantity and value etc as in the Sales Invoice.

√ House Airway Bill stating all the above description like value declared for Customs, place to final destination, the number of pieces and gross weight etc.

√ Copy of the Exchange Control Declaration (GR) Form mentioning therein the quantity, value, place of loading, country of destination etc.

√ Assayer report from Government Approved Valuer certifying the class of goods and of finished goods (Gold Medallions) meant for export.

√ v’ Copy of the Shipping Bill for Export mentioning therein the description, quantity, value, place of loading, Country of destination etc and duly authenticated by the Appraising Office SSEZ, Assistant Commissioner of Customs and Deputy Commissioner of Customs.

√ Copy of Bill of Brinks Arya India Private Ltd towards secured transportation from Surat to Mumbai in respect of Exports Shipment.

√ Payment made to C & F Agent, B.V. Chinai & Co. (India) Pvt. Ltd. towards warehousing charges, sundry and shipping charges, D.O. Charges and Agency charges towards import of goods from Dubai.

√ Copy of Bank Realization Certificate issued by bank on their receiving Export proceeds in Convertible Foreign Exchange.

√ Customer Advice from Bank on receiving inward Foreign Remittance from the Overseas Seller towards the proceeds of Export Invoice.

In view of the above flow of transactions which have through the above process that leaves without any doubt that in the absence of any documents found or seized to disapprove the above facts and evidences, the core’ evidences cannot be ignored that indeed there was a manufacturing activity taken place in assessee’s SEZ Unit.

All the THREE PURCHASES AND SUBSEQUENT THREE SALES TRANSACTIONS have gone through the above process that leaves without any doubt that in the absence of any documents found or seized to disapprove the above facts and evidences, the core evidences cannot be ignored that indeed there was a manufacturing activity taken place in the SEZ Unit of assessee.

“There were total 3 transactions of manufacturing and sales during the year under consideration and the appellant has even the flow of each transaction of purchase and sale backed by documentary evidences. These evidences nowhere challenged or contradict by the A.O. moreover each and every activity under the SEZ is being controlled by the customs, there is a clear chain of documents between assessee, SEZ authorities and customs. Taking into consideration all the facts and evidences on record we can reasonably hold that assessee had carried out manufacturing activity for the purposes of sec 10AA.”

ii Whether income from trading activity in SEZ –Zone tantamount to service  for the purposes of sec10AA.

In response to (ii) above we are reproducing relevant instructions issued by department of Commerce and Industry, Govt of India and relevant provisions of SEZ Act, 2005.

During the year under consideration, assessee has been involved in the trading activity of Diamonds through the SEZ Unit in Sachin, Surat. There are total of 17 number of trading transactions during the year under consideration. The chart of the same is attached herewith. (P.B. No. 208 to P. B. No. 209).

We observed that assessee have been granted permission by the Development commissioner SEZ, to carry on business of manufacturing as well as trading in their SEZ unit (P.B. No. 211 to P.B. No 213).

We hereby found the letter issued by the Development Commissioner in respect of the overriding effect (Page No. 210).

We also found herewith a copy of the letter of permission issued by the Development Commissioner regarding the effect that if the import is for the purpose of export then section 10AA benefit is available to the SEZ unit in respect of the trading activities ( Page No. 212).

Assessee has specifically detailed all the trading transactions stating therein that all the imports and exports have been transacted through the SEZ Unit at Sachin thus making it abundantly clear that the import of diamond was for the purpose of export only.

The firm is authorized to carry on the activities which are permitted by the letter of approval issued by the Development Commissioner.

Thus assessee was granted a letter of approval (LOA) by the Development Commissioner, Surat w.r.t. section 15(9) of the SEZ Act, 2005 to set up a unit for undertaking the authorized operations of manufacturing and trading of the Diamonds and Jewellery as mentioned in the LOA which is not in dispute. As per the provisions of section 10AA of the I.T. Act, 1961 a unit established in SEZ is entitled to get an exemption of its income from manufacturing and services i.e. trading activities. The Section 10AA of I. T. Act, 1961 was inserted in Income Tax Act, 1961 by second schedule of Special Economic Zones Act, 2005 w.e.f. 10-02-2006 For sake of convenience and ready reference relevant portion of section 10AA is reproduced below:

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 (f) of section 2 of the 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 percent of profits and gains derived from the 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:

The word manufacture have been defined in sub-clause (r) of section 2 of SEZ Act, 2005. (r) “Manufacture” means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, reengineering, and includes agricultural, aquaculture, animal husbandry, floriculture, horticulture, poultry, sericulture, viticulture and mining.

The word services have been defined in sub clause (z) of section 2 of SEZ Act, 2005. (z) “Services “means such tradable services which

i. are covered under the General Agreement on Trade in Services annexed as IB to the Agreement the 15th day establishing of April,1994.the World Trade Organisation concluded at Marrakesh.

ii. May earn be foreign prescribed exchange; by the Central Government for the purpose of this Act: and

The Central Government has defined the services in the rule 76 of the SEZ Rules, 2006 which inter alia includes trading. The extract of the rule 76 is reproduced as under:

“Trading, warehousing, research and development services, computer software services, including information enabled services such as back-office operations, call centres, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centres and web-site services, off­shore banking services, professional services (excluding legal services and accounting) rental/leasing services without operators, other business services, courier services, audio-visual services, construction and related services, distribution services (excluding retail services), educational services, environmental services, financial services, hospital services, other human health services, tourism and travel related services, recreational, cultural and sporting services, entertainment services, transport services, services auxiliary to all modes of transport, pipelines transport.

Explanation: – The expression “Trading” for the purposes of the second schedule of the Act shall mean import for the purposes of export.”

Thus, trading activity has been included in the definition of “service” under Rule 76 of the SEZ Rules, 2006.

Explanation to Rule76 states that “trading”, for the purposes of the Second Schedule of the Act, shall mean import for the purposes of re-export.

*Under Income Tax Act: The term “trading” has not been defined. According to Explanation under section 10AA of the Income-tax Act, “export in relation to Special Economic Zone” means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise. which The Ministry inter alia of introduced Commerce, an Govt. explanation of India which has issued defined the notification word trading dated “Trading” 10-08-2006for the purpose of the second schedule of the Act, shall mean import for the purpose of re export.

Similarly the Ministry of Commerce, Govt. of India has also clarified vide instruction no.4/2006 that the trading activities will be allowed to carry out all forms of trading activity but the benefits u/s 10AA will be available to trading in the nature of re-export of imported goods. A copy of said instruction enclosed (P.B. No.220).

The said instruction is also made available on the web site of Govt. of India www.sezindia.gov.in

Assessee thus fulfils all the primary conditions of section 10AA for getting the exemption i.e.

a. Assessee is an entrepreneur (i.e. person who has granted approval by Development Commissioner) as per sec. 2(i) of SEZ Act, 2005.

b. The unit has started to provide services (trading i.e. import for the purpose of re-export only) and manufacturing activity during the previous year relevant to assessment year under proceeding.

c. Assessee has exported goods or services by filing bills of entry/shipping bill in physical mode. Assessee has claimed profits and gains of manufactured goods as well as of trading of goods as exempt w/s 10AA.

Thus total net profit of SEZ units does not include only profit of trading but that of manufacturing also. The Ld. A.O. held that assessee company is not providing any service in respect to the goods it exported from its Surat SEZ unit but merely purchasing and selling goods without applying any skills on it or improving its value quotient and transactions are devoid of basic fundaments of services and so cannot be termed as service also and so cannot be termed service also and, therefore, it is not entitled to deduction u/s 10AA of I. T. Act, 1961 as claimed by it.

In this connection it is observed that:

The scope of Section 10AA is mainly focused on encouraging the trading activity at an international level from newly established units operating in an SEZ. The intention behind the introduction of Sec. 10AA is to encourage international trade and in the process enable more and more organizations to participate in global trade.

The Section was introduced not as an amendment but as a modification to Income Tax Act, 1961 by the SEZ Act, 2005.Reference to the introduction of section in the I.T.Act, 1961can be found in the Second Schedule to the SEZ Act, 2005. Instructions given by the Ministry of Commerce and Industry under the SEZ Rules, 2006

*As per Instruction No. 4/2006, in respect of SEZ Rules (Issued by Department of Commerce) dated 24.5.2006. (F. No. F.5/1/2006-EPZ) which states as follows:

“Subject: Modification in Instruction No. 1/2006 dated 24th March, 2006 of the Department of Commerce regarding setting up of trading units in the Special Economic Zones – Reg.

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, in partial modification of the above-referred Instruction dated 24th March, 2006, it has been decided that while units in the Special Economic Zones 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 re-export of imported goods. Appropriate amendments in this regard are being issued.

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 availed by the unit for trading, except in the nature of re-export of imported goods. Development Commissioners are requested to note the above and take appropriate action.” The instruction specifies that the activity of trading in the nature of re-export of imported goods is eligible for benefit under section 10AA.

The assessee company on the activity of trading in the nature of re-export of imported goods claims benefit under Section 10AA justifying its classification under service (referred to as “provide any service” under the said section). As the Income Tax Act does not define the term “service”, the assessee company has to take reference to the definition of service referred to in the SEZ Act, 2005 (given that the Section 10AA was introduced by SEZ Act, 2005 and referred to in the Second Schedule to the said Act) and further the SEZ Act, 2005 has overriding effect on all other enactments by virtue of section 51 of SEZ Act, 2005 which reads as under: –

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.”

The Ld. A.O. has taken a stand on the issue which is not a logical interpretation, instead every effort has been made by him to overlook and misinterpret the meaning and logic behind the introduction of Section 10AA.

The term “service” has been examined by Ld. A.O. on the basis whether mere purchases and sale with no value addition as done by the assessee can be termed services. However there is no reason to deviate far from the immediately available definition of “Services” under the SEZ Act. (given that the Income Tax Act, 1961 does not define the term “(services”) and, therefore in accordance with Section 51 of SEZ Act, 2005 the definition given in SEZ Act, 2005 will apply more so when explanation to rule 76 clearly provides Trading for the purposes of the second schedule of the Act, (by which Section 10AA inserted in I. T. Act, 1961) shall mean import for the purposes of re-export. The Ld. A.O. in assessment order discussed irrelevant references to case laws and decisions that bear to relevance to case specifically on the fact that unit of assessee is established in the SEZ in accordance with section 10AA of I.T. Act, 1961 and SEZ Act, 2005. Thus the discussions references and decisions used in assessment order are not at all applicable in the case. It will be thus clear that trading activity in the nature of re-export of imported goods is falling under the head service u/s 10AA of I. T. Act, 1961 r/w section 2(z) of SEZ Act, 2005 r/w rule 76 of SEZ Rules, 2006 and above referred notification. Assessee also submitted herewith clarification issued by Development Commission SEZ, Sachin, Surat issued to the assessee company which is self explanatory and states that assessee company is entitled to the benefit of section 10AA of I. T. Act, 1961 in respect to import of goods which are re-exported to buyers in other countries in view of provisions of section 2(z) of SEZ Act, 2005 r/w Section 27 and section 51 of SEZ Act, 2005 r/w rule 76 of SEZ Rules. 2006.

In view of the above it is evident that not only profits and gains of manufactured goods but also trading of goods are allowed for getting the exemption us 10AA of the I.T. Act, 1961 if imported goods are re-exported by a unit duly approved by development commissioner of concerned SEZ. The assessee company’s entire purchases are import in SEZ unit. The entire goods are exported to foreign country. Further the assessee company also fulfils all other terms & conditions laid down in section 10AA of the I.T. Act, 1961 and as such deduction is claimed as per provisions of law and allowable as such.

In view of the above under the SEZ Act 2005 trading is included in the services provided for export of imported goods. As per sec 51 of the SEZ Act 2005 notwithstanding anything inconsistent therewith contained in any law for the time being in force, the provisions of SEZ Act 2005 will prevail. To substantiate our view we have relied on ITAT decision in the case of M/s Goenka Diamond and Jewellers Ltd Vs DCIT, ITA No 509/JP/2011, M/s Geetanjali Exports Co Ltd Vs ACIT, ITA No.

6947,6948,6781,6783,6949,6950,6785 and 6787/Mum/2011

In view of the above we are of the considered view that trading activity carried out by the assessee is entitled for deduction benefit u/s 10AA.

iii Whether without rejection of books of accounts accounting results declared by the assessee can be disturbed?

We have gone through the findings of the A.O and Ld CIT(A) .In this case focus of the A.O was on establishing the fact that the assessee had not carried out any manufacturing activity and his activity of trading is not entitled for the benefit provided in sec 10AA. In this regard we would like to go by the basic principle of “accepting the books of accounts is a rule and rejecting the same is an exception”. Both the A.O and the Ld. CIT (A) in their respective orders nowhere made out a case which justify the rejection of books of accounts maintained by the assessee

A.O/Ld. CIT (A) can re-sort to estimation of income only after invoking the provisions of sec 145(3). A.O must enlist the defects, discrepancies, inaccuracies or incompletion of the accounts of the assessee and then sec 145 comes into picture to deduce the right income of the assessee to be assessed. In the instant case there is not even a single finding about the inaccuracy of the books of accounts maintained by the assessee. We sustained the position of books of accounts maintained by the assessee and consequently direct the A.O to except the results declared by the assessee in manufacturing and trading activity for the purposes of benefit u/s 10AA. Moreover similar issue with identical facts in assessee’s own case has been decided in assessee’s favour by ITAT, Mumbai vide ITA NO. 5764 and 5800/Mum/2012, A.Y. 2009-10.

7 In the result, ground no -1 raised by the assessee is allowed.

8. Ground Nos. 2 & 3, We have gone through the entire facts and precedents of law on the similar issue. We found interest on FDR along with Forward Premium, Bank Charges and Interest paid are inextricable part of the business of the assessee. We rely on the decision of Hon’ble Karnataka High Court (Full Bench) in the case of CIT Vs. Hewlett Packard Global Soft Ltd. (2017) 87 com 182, CIT Vs. Motorola India Electronics Pvt. Ltd. (2014) 265 CTR 94 and Rajesh Exports Ltd. Vs. ACIT (2008) TIOL 457 (Bang.).

9. The assessee in the ordinary course of business had to furnish fixed deposits on the Import Export transactions to banks for the purpose of availing loans and making payments to the suppliers. A new Fixed Deposit is given to the Banks for each and every import export transaction who after completing all the formalities gives fresh loans to our clients. Thus each and every Fixed Deposit has a corresponding Bank Loan for each and every Import Export trading transactions undertaken by our clients. Therefore none of the Fixed Deposits are independent of business. The Banks charges interest/processing charges etc on all such loans given. The Net residue (difference between the Interest Earned and the Finance Loan and other Charges etc) if any, by our clients is nothing but an outcome of undertaking an Import Export Transaction which is in the normal course of trading business of diamonds eligible for exemption u/s. 10 AA of the IT Act. The above income can be compared to the Forex Gains which is earned due to Currency Fluctuations. Fluctuations in Forex Gains is considered to be a part of the business activity and is treated as a resultant of the Import Export Activity undertaken, thus exempt u/s. 10 AA of the Income Tax Act. Therefore on similar lines, since the Interest on Fixed Deposits are attributable and incidental to the trading business carried on by the assessee, the same has rightly been claimed as exempt u/s. 10AA of the I T Act. In the result, the results declared by the assessee after netting off the FDR Interest with interest paid and Forex loss are eligible to be adjusted against Business Profit. Ground No.2 & 3 raised by the assessee are allowed.

ITA No. 2426/Mum/2014 A.Y. 2010-11 by Revenue

The Revenue has raised the following grounds of appeal:

“1. The Ld. CIT (A) has erred in law as well on the fact in allowing deduction u/s 10AA of the Act by ignoring the fact that, the assessee has never conducted any manufacturing activities in the premises situated in SEZ at Surat which was established by the A.O.

2) The Ld. CIT (A) has further erred in law as well as on fact in allowing deduction u/s 10AA of the Act, on the income derived from the trading activity which appears to have managed to make believe that the assessee has done trading through SEZ, as the purchases and sales have been made on the same day from the same country.

3) Without prejudice to the above, the Ld. CIT(A) after accepting Dept.’s contention, the net profit offered by assessee is not reasonable, as wrongly directed to presume net profit at the rate of 8% rather than accepting profit of 2% adopted by the Assessing Officer as per provisions of section 10AA(9) of the I.T. Act, 1961

4) For these and any other reasons that may be urged at the time of hearing, it is requested that the order of CIT(A) be quashed and that of the A.O. be restored?”

10. The grounds raised by the revenue has already been dealt with supra in assessee’s appeal no ITA No. 2316/Mum/2014 (A.Y. 2010-11) in the light of above findings in the case of assessee’s appeal, appeal filed by the revenue became infructuous.

11. In the result appeal of revenue is dismissed.

Order pronounced in the open court on 14^th day of September, 2022.