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
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
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
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.
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.
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.
Assessee received pure gold from a nonâ€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.
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 nonâ€export oriented plants was unreliable and unscientific. Refer, Dy. CITv. Cosmo Films Ltd, 13 ITR 340 (Delhi)(Trib.).
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.
Conversion of existing unit to STP unit , rejection of claim was held to be justified. Refer, Infrasoft Technologies Ltd, 135 ITD 19.
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.
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.
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).
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.
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.
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.
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.
Training expenses need not to be deducted from export. Wills Processing Services (India) P. Ltd. v. Deputy CIT.
Allocation of common expenses on the consistent method. Refer, CIT v . EHPT India P. Ltd, 350 ITR 41.
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.
Communication charges to be excluded from export turnover as well as total turnover. Refer, Assistant CIT v. Ckar Systems P. Ltd.,
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.
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 1992â€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.
Assessee commenced its production in the 100 percent EOU in the year 1993â€94 and claimed the exemption for five years from 1993â€94 to 1997â€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 1999â€2000, 2000â€01 and 2001â€02. Assessing Officer denied the deduction for the period 2001â€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 1993â€94 to 2002â€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.
Assesses earlier undertaking which started in the Assessment year 1994â€95, stopped its sales with effect from the assessment years 1998â€99 onwards. New undertaking was set up in the assessment year 2002â€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.).
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).
Loss in eligible unit could be set off against profits of business. Refer, CIT v. Galaxy Surfactants Ltd, 343 ITR 108.
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.
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.
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).
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.
To be computed without setting off any carried forward losses of earlier assessment years. Refer, CIT (Asst.) v. Charon Tec P. Ltd. (Chennai).
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.
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.
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