We had earlier discuss in
detail about the concepts of exemption of section 10 along with various case
laws earlier in part –I. In case you want to refer, the part –I, please click
on the link below:
Over a period of time,
there are number of judgements comes from various levels of courts from
different locations of India and hence it is very important to know the same
for the correct treatment of exemption of section 10.
Section 10(1) -
Agricultural Income
Ø Assessee acquired land from
agriculturist on lease and constructed a green house floriculture project on
said land. It started growing of rose flowers / plants on bridge of plastic
trays erected with help of M.S. stand 2.3 ft. above land. The assessee claimed
the income from rose flowers as exempt. The Assessing Officer held that the
rose plants were not planted on earth land and no basis operation was carried
out by assessee on land hence, not eligible for exemption. According to
assessee, for plantation of roses a very well treated soil was required,
manures were mixed in soil for preparing a base for growing rose plants trays
were filed with mixture of soil, insecticides were sprinkled on plants to save
plants from any disease, root stocks were brought from market and planted in
green house, mother plant was otherwise reared on earth, subsequently saplings
were planted on plastic trays which were kept at height of 2-3 ft. placed on
M.S. stand, purpose of growing rose plants at a height was primarily to avoid
pest and to develop in a controlled atmosphere and green house was used for
various benefits so that sunlight and humidity level both could be maintained.
The Tribunal held that the claim of exemption was justified. Refer, Dy. CIT v.
Best Roses Biotech (P) Ltd., 49 SOT 277.
Section 10(10CC) - Tax
paid by employer
Ø The assessee
an employee claimed that the tax paid by the employer on his salary income is
not liable to be included in his total income as it is exempt under section
10(10CC). Assessing Officer disallowed the claim. The Tribunal following the
Special bench in RBF Rigs Corpn. LIC (RBFRC) v. ACIT (2007) 109 ITD 141 (SB)
(Delhi)(Trib.) held that tax borne by the employer on behalf of the employee
would constitute a non-monetary payment as such the same is exempt under
section 10(10CC).
Section 10A. – FTZ & SEZ
Ø Assessing Officer has
accepted the head count method adopted by the assessee for allocation of
indirect expenses between STP unit and non STP unit in the past but has
rejected it only for the years, under appeal, it would disturb or distort the
profits; method adopted by the assessee has been consistently accepted by the
departmental authorities and there being no just cause for abandoning the same
it could not be disturbed. Refer, CIT v. EhptIndia (P) Ltd, 65 DTR 187.
Ø The assessee company is
engaged in the business of Call Center operations. The assessee incurred
expenses in foreign exchange towards communication expenses. While arriving at
the total turnover, the assessee did not include the expenses incurred by it
towards communication expenses. Assessing Officer held that no deduction is
possible. The Tribunal relying on the judgment of Supreme Court in CIT v.
Lakshmi Machine Works (2007) 290 ITR 667 (SC) held that the expenditure
incurred should not form part of total turnover and directed the Assessing Officer
to recomputed the relief under section 10A of the Act, excluding the said
communication charges from export turnover as well as from total turnover. On
appeal by the revenue the Court held that for the purpose of computing
exemption under section 10A when the export turnover in the numerator is to be
arrived at after excluding communication expenses, the same should also be
excluded in computing the export turn over as a component of total turnover in
the denominator. Refer, CITv. Tata Elxsi Ltd.& Ors, 65 DTR 206.
Ø Assessee had shown the
income from the sale of software as long term capital gain. The Assessing
Officer held that the same is taxable as trading receipt. It was contended that
if it was held to be trading receipt the same is exempt under section 10A. The
Tribunal held that the assessee is entitled to exemption under section 10A. The
Court held that concurrent finding was arrived by the Assessing Officer,
Appellate Authority and Tribunal that income from sale of software was trading
income and not capital gains after establishment of STP unit, the assessee is
entitled to exemption under section 10A, the fact that the assessee did not
claim exemption under section 10A while filing the return cannot come in the
way of holding that assessee is entitled to benefit of section 10A,Since it was
alternatively argued before the Assessing Officer and the Appellate Authority
that if income is treated as trading receipt, exemption under section 10A may
be granted.High Court upheld the order of Tribunal. Refer, CIT v. Infosys Technologies
Ltd, 65 DTR 271.
Ø Assessee received pure gold
from a non‐resident converted same into jewellery and thereupon
exported it to said non–resident, activity undertaken by assessee amounted to
‘manufacture or production’ which qualified for deduction under section 10A/10B.
Refer, CIT v. Lavlesh Jain, 204 Taxman 134.
Ø Charity and miscellaneous expenses should be
excluded from allocation of expenses pertaining to export oriented unit. As
regards the management salary, the allocation should be made in the ratio of
sales turnover as adopted by the assessee itself to allocate other expenses.
This method of allocation was more accurate and correct to facts of the case.
The basis adopted by the assessee of time estimated in proportion to the
production capacity employed in export oriented units and non‐export oriented plants was
unreliable and unscientific. Refer, Dy. CITv. Cosmo Films Ltd, 13 ITR 340
(Delhi)(Trib.).
Ø The assessee claimed
deduction under section 10A /10B without claiming depreciation. The Assessing
Officer held that in the past the assessee has claimed the depreciation ,
accordingly the Assessing Officer has allowed the depreciation , which was
confirmed in appeal by Commissioner (Appeals). On appeal to the Tribunal , the
Tribunal following the ratio of decision in Indian Rayon Corporation Ltd v. CIT
( 2003) 261 ITR 98 (Bom ) , up held the order passed by the Assessing Officer.
Refer, Siemens Information Systems Ltd v. Dy.CIT, 135 ITD 196.
Ø Conversion of existing unit
to STP unit , rejection of claim was held to be justified. Refer, Infrasoft
Technologies Ltd, 135 ITD 19.
Ø The assessee claimed the
exemption under section 10A, without setting off of unabsorbed loss and
depreciation , which was allowed by the Assessing Officer. The said order was
revised under section 263. In an appeal by the assessee the revision order was
quashed . On appeal by the revenue the High court on merit held that profit for
purpose of deduction under section 10A should be allowed without setting off of
unabsorbed loss and depreciation and refrained the opinion as regards the
jurisdiction under section 263. The order of Tribunal was confirmed the appeal
of revenue was dismissed. Refer, CIT v. Tyco Electronics Tools India (P) Ltd, 205
Taxman 403.
Ø Tribunal held that the
losses of Section 10A eligible units are allowed to be set-off against the
normal business income of the assessee while calculating the income as per
normal provisions of the Act. Refer, Patni Computer Systems Ltd. v. Dy. CIT, 135
ITD 398.
Ø If any addition is made to
the profits by way of disallowance of expenses, the amount added would form
part of the profits of the business and the same has to be considered while
working out deduction u/s. 10A. Refer, Sanghvi Jewellery Mfg. Co. (P) Ltd v. ITO.
68 DTR 177(Mum).
Ø The assessee was engaged in
the business of manufacture of hardware and software and exported its products
(both hardware and software), the assessee claimed exemption in respect of its two units. It was
held that the AO was not entitled to presume existence of close connection or
arrangement of the assessee with the foreign buyer for purpose of invoking
Section 80I(9) and determine reasonable profits as there was no material to
indicate that the course of business had been so arranged so as to inflate profits.
Refer, CIT v. H.B. Global Soft Ltd., 342 ITR 263.
Ø Set off of losses. Brought
forward unabsorbed losses of Eligible and non- eligible unit-Deduction is
allowable without set off of losses of non-eligible units. Refer, CIT v. Black
& Veatch Consulting Pvt. Ltd, Mumbai High Court.
Ø Deduction under section
10A, cannot be worked on arm’s length price. Refer, Visual Graphics Computing
Services (India) P. Ltd v. Asst.CIT, 15 ITR 393.
Ø In the case of CIT v.
Sonata Software Ltd, 343 ITR 397 / 249 CTR 441 / 70 DTR 369 (Bom.) (High Court),
it was held that Acquiring a division on slump basis cannot be considered as
splitting up or reconstruction, exemption under section 10A cannot be denied.
Support services allocation on the basis
of turnover is justified.
Ø Training expenses need not
to be deducted from export. Wills Processing Services (India) P. Ltd. v. Deputy
CIT.
Ø Allocation of common
expenses on the consistent method. Refer, CIT v . EHPT India P. Ltd, 350 ITR 41.
Ø -Expenditure incurred by
assessee not forming part of export turnover to Excludible from total turnover.
Refer, CIT v. Samsung Electronics Co. Ltd, 350 ITR 65.
Ø Communication charges to be
excluded from export turnover as well as total turnover. Refer, Assistant CIT
v. Ckar Systems P. Ltd.,
Ø Assessee which had
commenced its manufacturing activities in the previous year relevant to A.Y.
1984-85, could claim exemption for A.Y. 1984-85 to 1988-89 and had no option of
choosing any five consecutive years for availing the benefit of exemption u/s
10A. In case of an assessee who had already started availing the benefit of S.10A
in any assessment year prior to substitution of sub-section (3), there is no
manner in which it could exercise option under the new sub-section (3), Hence
assessee could not claim exemption u/s 10A
for the assessment year, 1986-87 to 1990-91. Refer, Expo Packing v. ACIT,
76 DTR 12.
Section 10B. - newly
established EOU.
Ø Assessee company was
engaged in software development from its unit located at Gujarat. It commenced
its business in the year 1989.It was entitled to benefit of section 10B for a
period of 10 years. During 1992‐93 it shifted its unit to Bangalore and claimed deduction
under section 10B. Assessing Officer held that the shifting of unit will amount
to reconstruction of business, hence, not entitled to exemption under section
10B. High Court held that, when the shifting had been done with permission of
Government and after shifting, there was only one undertaking whose identity,
integrity and continuity was maintained, therefore the assessee was entitled to
claim exemption under section 10B. Refer, CIT v. Sasken Communications Tech.
Ltd, 204 Taxman 84.
Ø Assessee commenced its
production in the 100 percent EOU in the year 1993‐94 and claimed the
exemption for five years from 1993‐94 to 1997‐98. Amended provision came
into force on 1stApril 1999, under which the assessee was entitled to claim the
benefit of tax holidays for 10 years and accordingly the assessee claimed
deduction for 1999‐2000, 2000‐01 and 2001‐02. Assessing Officer
denied the deduction for the period 2001‐02. The High Court held
that where the assessee the entitled to the tax holiday under the amended
provision for further period of five years i.e. from 1993‐94 to 2002‐03 as per amendment of
section 10B w.e.f. 1st April, 1999 extending the benefit to 10 Years. Refer, CIT
v. DSL Software Ltd, 66 DTR 97/246 CTR 542.
Ø Assesses earlier
undertaking which started in the Assessment year 1994‐95, stopped its sales with
effect from the assessment years 1998‐99 onwards. New undertaking
was set up in the assessment year 2002‐03. The Tribunal held that
provisions of section 10B do not place any bar on the assessee having a separate
new undertaking for manufacture and production of same or similar goods as done
earlier. Development Commissioner did not take any objection. Process carried
on by assessee to produce quilts, bed sheets, bed spreads and bed covers etc.
are commodities different from the new raw cloth or consumables out of which
they are manufactured. Refer, Taurus Merchandising (P) Ltd. v. ITO, 143 TTJ 1/
65 DTR 48 (Delhi) (Trib.).
Ø DEPB as a profit derived
from export business for the purpose of computing deduction under section 10BA.
Revenue conceded the issue before the High Court. Refer, CIT v. Arts &
Crafts Exports, 66 DTR 85/ 246 CTR 463 (Bom.)(High Court).
Ø Loss in eligible unit could
be set off against profits of business. Refer, CIT v. Galaxy Surfactants Ltd, 343
ITR 108.
Ø The assessee suffered loss
in Unit eligible for deduction under section 10B and there was a business
income in an another Unit. The assessee set off the loss against the income of
another unit. The Assessing Officer held that Income of EOU is exempt under
section 10B ,which did not form part of the total income , hence the loss is
not allowed to be set off . On appeal the Commissioner (Appeals) confirmed the
order of Assessing Officer. On appeal to the Tribunal, the Tribunal held that there
is no restriction to set off the loss of the eligible industrial unit against
the income earned by the assessee in any other Unit. Section 10B(6), which is a
non obstante clause which provides that loss referred in sub section (1) of
section 72 or section 74(3) and section 74(1) , in so far as such loss relates
business of undertaking eligible under section 10B ,shall not be carried
forward or set off where it relates to any of the assessment year commencing
before 1-4-2011, however , it is pertinent to note that provisions of section
70 or 71 have not been included in the non obstante provision, therefore, it
cannot be said that the provisions of section 70 or section 71 cannot be
applied in computing the total income of the assessee. Accordingly the Tribunal
held that, loss in eligible unit for deduction
under section 10B and there was a business loss as per section 70 and if
after such set off still there is a business loss. Such loss can be set off
against other sources as per section 71. Refer, Bharat Resins Ltd v. Asst .CIT,
50 SOT 298.
Ø Export oriented
undertaking-Interest on income tax refund- claimed netting off same against
interest paid netting off is not allowable as income tax refund has no
connection with the business of assessee . Refer, Dy. CIT v. American Express
(India) (P) Ltd, 135 ITD 211.
Ø Exemption to be allowed
separately in respect of each unit without setting off of losses of the units.
Refer, Aithent Technologies (P) Ltd v. ITO, 144 TTJ 731 (Delhi) (Trib).
Ø After substitution by
Finance Act, 2000 w.e.f. 1st April ,2001, S. 10B is not a provision for
exemption , but a provision which enables an assessee to claim a deduction,
therefore a loss which is sustained by an eligible unit can be set off against
the income arising from other units under the same head of profits and gains of
business or profession. Refer, CIT v. Galaxy Surfactants Ltd, 343 ITR 108.
Ø To be computed without
setting off any carried forward losses of earlier assessment years. Refer, CIT
(Asst.) v. Charon Tec P. Ltd. (Chennai).
Ø Provisions of S.10B do not
place any bar on assessee having a separate new undertaking for manufacture and
production of same or similar goods, as done earlier because what is required
to claim exemption under said section is that undertaking established must be a
newly established undertaking. Existence of business is a pre-supposition for
formation of a new undertaking by reconstruction or splitting up thereof.
Therefore, in a case when there is no business in old unit of assessee before
start of production by new EOU, it cannot be concluded that new unit is formed
by reconstruction or splitting up of a business already in existence so as to
deny exemption u/s. 10B. In order to claim exemption u/s. 10B, there is no
legal bar against outsourcing of activities involved in manufacturer or
processing of goods as what is required is that undertaking must mainly engage
itself in manufacturer or processing of goods, either itself, or through some
agency under its supervisory control or direction. Refer, Taurus Merchandising
(P) Ltd. v. ITO, 138 ITD 204.
Ø The activity of
customization of SAP programmes as per the specification and requirements of
the overseas clients and transmission thereof through internet or e-mail by the
assessee fall within the definition of ‘computer programmes’ as clarified in S.
10BB as well as under Expln. 2 to S. 10B and the same fits into the definition of
the term ‘produce’ and, therefore, assessee is entitled for exemption u/s 10B
in respect of the receipts from overseas clients. Refer, Cyber-tech Systems
& Software Ltd. v. CIT, 149 TTJ 17.
In case you have any further clarification,
feel free to contact me at taxbymanish@yahoo.com or else you
can view more articles & news related to Indian tax & finance at http://taxbymanish.blogspot.in/.
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