Income Tax Appellate Tribunal - Delhi
Dcit, Cc-19, New Delhi vs Satya Prakash Gupta, New Delhi on 30 September, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "H" DELHI
BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER
AND
SHRI SUDHIR KUMAR, JUDICIAL MEMBER
ITA No. 1276/Del/2021
Assessment Year 2011-12
The DCIT Vs. Shri Satya Prakash Gupta,
Central Circle - 19, House No.H-3/1, Model Town-II,
New Delhi New Delhi - 110 055
TAN/PAN: AAHPG 0717 H
(Appellant) (Respondent)
Applicant by: Shri Gaurav Jain, C.A. and
Shri Vijay Singh, C.A.
Respondent by: Ms. Sapna Bhatia, CIT-D.R.
Date of hearing: 28 08 2024
Date of pronouncement: 30 09 2024
ORDER
PER PRADIP KUMAR KEDIA - A.M.:
The captioned appeal has been filed at the instance of the Revenue against the First Appellate Order passed by the Commissioner of Income Tax (Appeals)-27, New Delhi ('CIT(A)' in short) dated 28.01.2021 under section 250 of the Act arising from the assessment order dated 31.12.2019 passed by the Assessing Officer (AO) under Section 153A read with section 143(3) of the Income Tax Act, 1961 ('the Act') concerning A.Y. 2011-12 in question.
2. The grounds of appeal raised by the assessee reads as under:
"1. Whether in the circumstances of the case, the Ld.CIT(A) has erred on facts and in law in deleting the addition of Rs. 27,86,71,150/- by holding that the appellant is fulfilling the criteria u/s 10AA which make it eligible for deduction u/s 10AA, as claimed by it in the return of income.ITA No. 1276/Del/2021
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2. Whether in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in relying upon case laws without appreciating that the facts of present case are distinguished from the facts of relied upon cases.
3. Whether in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 27,86,71,150/- by holding that the appellant had requisite knowledge and competence to provide the services to M/s CMF and these services provided from M/s SSS set up in SEZ Noida are eligible for deduction u/s 10AA of the IT Act 1961 without considering that agreement that nowhere in the agreement it is mentioned that the assessee had specialized capabilities as per the requirements of Fedrigoni S.p.A. It was also not mentioned that for what technical capabilities the assessee had been hired by Fedrigoni.
4. Whether in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 27,86,71,150/- without appreciating that statement of Shri Atul Gupta was also recorded on Oath on 20.09.2017 in which sh. Atul Gupta was asked about Sterling Exports. As admitted by Sh. Atul Gupta, Sterling Exports did have some income and was certainly involved in consulting currency paper suppliers albeit to a small extent.
5. Whether in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 27,86,71,150/- without appreciating that the addition was based on seized document and the same was correctly made by the A.O.
6. (a) The Ld. Commissioner of Income Tax (Appeals) is erroneous and not tenable in law and on facts.
(b) The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal."
3. Briefly stated, the assessee filed original return of income on 29.09.2011 declaring Nil income after claiming exemption under Section 10AA of the Act for Rs.27,86,71,150/-. The assessment was framed under Section 143(3) of the Act vide order dated 31.03.2014. In the Assessment Order, deduction claimed under Section 10AA of the Act with respect to interest income arising to the assessee was denied but however, the exemption claimed on business profits from export of services were allowed. The income was assessed at Rs.1,73,06,048/-. The partial denial of exemption under Section10AA towards interest income to the extent of Rs.1,73,06,048/- was ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 3 A.Y. 2011-12 challenged by the assessee before the CIT(A). The CIT(A) vide order dated 07.05.2015 broadly accepted the claim of deductions under Section 10AA of the Act and remitted the matter to the Assessing Officer for fresh decision on certain aspects with which we are not concerned at present.
4. Subsequently, a search operation took place in the case of the assessee on 26.12.2016 under Section 132 of the Act. Pursuant to search, notice under Section 153A of the Act was issued and the assessment proceedings culminated in framing assessment order dated 31.12.2019 under Section 143(3) r.w.s. 153A of the Act determining the total income of the assessee at Rs.27,86,71,150/- by making disallowance of exemption claimed under Section 10AA of the Act in toto i.e. Rs.27,86,71,150/-.
5. Aggrieved, the assessee preferred appeal before the CIT(A). On appraisal of factual matrix and appreciation of legal position, the CIT(A) was of the opinion that the denial of exemption under Section 10AA of the Act by the Assessing Officer is not justifiable in the facts and circumstances of the case. The CIT(A) vide detailed order, granted relief to the assessee on merits and directed the Assessing Officer to restore the claim of exemption in entirety. The relevant operative para of the order of the CIT(A) is reproduced hereunder:-
"4.1 Facts of the case A search & seizure/survey operation u/s 132/133A was conducted on 26.12.2016 in the case of "Sh. Satya Prakash Gupta& others Group" including that of the appellant. In response to notice u/s 153A issued on 31.01.2018, the appellant filed letter dated 22.02.2018 stating that the original return already filed on 29.09.2011 may be treated as return filed in compliance to notice u/s 153A. In this return the appellant had declared "Nil" income after claiming exemption u/s 10AA of Rs. 27,86,71,150/-. During the course of assessment proceedings, the AO observed that the appellant was prop. of M/s Sterling Exports (SE) and M/s Sterling Security Systems (SSS). The appellant had been claiming exemptions u/s 10AA in M/s Sterling Security Systems since AY 2007-08 (FY 2006-07). The AO examined.ITA No. 1276/Del/2021
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(i) The paper seized during the search and reproduced at pages 12 & 13 of
the assessment order.
(ii) The agreement between the appellant and Cartiere Milani Fabriano
(CMF) dated 25th September, 2006.
(iii) The statement of Sh. Atul Gupta, son of the appellant recorded on oath on 20.09.2017
(iv) The statement of the appellant recorded u/s 132(4) of the IT Act.
And concluded as under:
(a) Therefore, it is clear that the assessee in year 2006, soon after the CMF won the contract for supply of currency paper to RBI, has set up an undertaking in SEZ in the name Sterling Security System. The same was set up after transferring the business already carried out by Sterling Export. Therefore, the new business at SEZ was a continuation, transfer, or reconstruction of the business of assessee already carrying out at Sterling Exports which was of providing "consultancy service" to foreign suppliers of currency paper and security products. It thus violates the conditions for the allowing of the deduction as laid down by Section 10AA(4) of the Act is that the Unit "is not formed by the splitting up, or the reconstruction, of a business already in existence".
(b) This proves beyond doubt the actual business of assessee was that of commission agent and not of providing any technical service and his claim that the same is Export of service is not correct. The assessee misused the provisions of exemption related to Export of Services from SEZ which were brought in to provide impetus to the Service sector.
(c) It has also been contended by assessee that scrutiny assessment the case of assessee has already been completed u/s 143(3) of the Act where the issue of exemption u/s 10AA of the Act has already been examined and accepted by the department. The submission of the assessee is not acceptable for the simple reason that at the time of scrutiny assessment u/s 143(3) of the Act, the facts which came to light during course of the search were not available to the Income Tax Authorities such as admission of Sh. Atul Gupta regarding pre-existence of M/s Sterling Exports as well as documents seized which show that the Sterling Exports was already in existence.
And disallowed the claim of exemption of Rs. 27,86,71,150/- made u/s 10AA of the IT Act.
4.2 The Issues raised by the AO while disallowing the claim of the appellant u/s 10AA can be summarised as under:
(i) The prop. concern of the appellant M/s Sterling Security Systems (SSS), where the exemption u/s 10AA has been claimed since AY 2007-08 onwards, has been formed in FY 2006-07 by reconstruction of business from the already ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 5 A.Y. 2011-12 existing prop. concern of the appellant M/s Sterling Exports, thereby violating the provisions of section 10AA (4).
(ii) The appellant is just doing the business of commission agent of M/s CMF Italy in M/s SSS and is not providing any technical services as defined in the provisions of section 10AA.
(iii) The acceptance of claim of the appellant u/s 10AA in earlier assessment years u/s 143(3) cannot automatically lead to res-judi-cata for disallowance of claim u/s 10AA for the year under consideration in view of the facts which came to light due to the search.
5. Issue of Nature of services raised by the AO 5.1 The AO has examined the various aspects of the services provided by the appellant and observed that the agreement with M/s CMF does not mention that the appellant has specialised capabilities as per the requirements of Fedrigoni S.p.A. The appellant is just a commission agent involved in liaison work.
5.2 The Statement of the appellant recorded u/s 132 (4) and reproduced in the assessment order read as under:
"Q.13 please explain the nature of technical services provides by you.
Ans. M/s Sterling Security System is my proprietorship. the specialized services provided by me included market situation., technical production, Logistics which were provided at their location. I am a frequent traveller since 1972 in Europe searching for raw material and technologies for setting up factory in India. I am attending most of the exhibitions in the world since 2004 till date dealing in security products and anti- counterfeiting solutions and therefore, fully conversant with the latest developments and different aspects to produce security features and anti- counterfeiting solutions. I am regularly attending bank-note conference, currency conferences and Intergraph (printing exhibitions) since last ten years being held in Europe and America which helps me to update my knowledge and helps me to update my experience and setting up of industry in India and the Make In India program initiated by our Hon'ble Prime Minister."
5.3 In this case the proceedings on the issue of claim of exemption u/s 10AA on the receipts of M/s SSS and interest on FDR was examined from AY 2007-08 onwards in the AY 2008-09 by the CIT-VII Delhi, under the proceedings u/s 263 of the IT Act 1961. The relevant portion of the order u/s 263 has been reproduced in subsequent para.
5.3.1 The proposal u/s 263 in view of audit objection raised by RAP was sent by the AO vide letter No ITO/Ward 20(1)/2011-12/645 dated 17.11.2011 is reproduced as under:
ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 6
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"To 17.11.2011
The Commissioner of Income-tax,
Delhi-VII, New Delhi,
Sir,
(THROUGH: AddI, CIT, Range-20, New Delhi)
Subject: Proposal under section 263 of the Income Tax Act, 1961- Shri Satya Prakash Gupta - AAHPG0717H -
Kindly refer to above subject.
1. In this connection it is respectfully submitted that in this case the regular assessment was made under section 143(3) on 16.07.2010 on a total income of Rs. 11850/- as against the returned income of Rs. 11,852/-. Later on, the assessment was subjected to audit by the Internal Audit Party, which raised certain audit objections against exorbitant net profit rate of 96.03% and deduction u/s 10AA claimed by the assessee.
2. The assessee had claimed deduction amounting to Rs. 23,42,20,336/- u/s 10AA. Nature of business of the undertaking was mentioned as consultancy of security paper and bank papers in form 56E filed with the Department. The assessee had declared a net profit of Rs. 23,42,17,188/- against total receipt amounting to Rs. 24,38,91,734/- in his proprietary concern of the name M/s Sterling Security System giving exorbitant net profit rate of 96.03%.
3. Section 10AA is available to a person if he is transacting eligible business in the unit located in SEZ. The unit should export goods or services by any mode physical or otherwise. The eligible services are prescribed under rule 76 of SEZ Rules.
4. The said concern was registered in the Noida SEZ. The concern was granted registration by the Development Commissioner, Noida SEZ vide letter dated 13.09.2006 authorizing the following operation:
"Services activities- Service provider to foreign and India company to sell raw material, projects, technology and plan investment in India/out of India."
5. The assessee is claiming that services being provided by him come under the category "Other business services" of Rule 76 of SEZ. He is relying on the following evidences in favour of his claim for providing eligible services:
1. Copy of agreement dated 25.09.2006 with M/s Cartiere Miliani Febriano SPA, an Italian Company.ITA No. 1276/Del/2021
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2. Copy of confirmation of receipts issued by PNB Mumbai.
3. Copy of confirmation from M/s CartiereMiliani Febriano SPA.
4. Copy of annual performance report of SEZ unit certified by CA.
5. Copy or correspondence by buyer (Government of India and Reserve Bank of India).
6. Copy of presentation prepared for the buyer.
7. Details of foreign travels.
8. Details of boarding and lodging in foreign countries.
9. Copy of pre qualification tender notice for the supplies to govt. of India RBI.
The audit scrutiny of the above document reveals that the above documents do not indicate that what the actual services were rendered by the assessee. For example the copies of correspondence of buyers (mentioned at SI. No. 5 above) are three general business enquiry letter between the Italian company, M/s Security Press Mill, Hoshangabad, India Security Press Nasik Road and Ministry of Finance, government of India. Even two of these letters were dated 22.12.2008 and 03.12.2008 which means the letters relied upon by the assessee related to a date beyond the assessment period. Further, these letters show no connection of the assessee in any manner with the business enquiries being made by the above mentioned entities. Copy of presentation also belongs to a later date of 07.10.2008. This also does not show any role of the assessee. The details of foreign traveling, boarding and lodging only show that the assessee had visited foreign countries but it did not reflect anything of the services claimed to have been provided by the assessee. Copy of pre qualification tender notice is a copy of advertisement of tender notice for supply of Bank note papers by M/s Bhartiya Reserve Bank Note MudranPvt. Ltd. Bangalore.
This is clear from the above submissions of assessee that he was not able to furnish any direct evidence in favour of eligible services he was claiming to have provided. It is strange that the assessee had claimed to have provided professional services of worth Rs. 24,38,91,734/, but he was not able to provide any direct evidence e.g. the bills raised for the services provided, the exact description of the services provided, the names of the clients to whom he met on behalf of the Italian company etc. He is only furnishing copies of some general correspondence or papers which do not have any connection with the assessee.
The assessee further vide letter dated 12.07.2010 that he under an agreement dated 25.09.2006 provided services to CartiereMiliani Febriano. M/s ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 8 A.Y. 2011-12 The affairs of the assessee needs to be investigated from assessment year 2007-08 to 2010-11 as prima facie it appears that the assessee is avoiding payment of legitimate tax on his income by indulging in devices which appears to be non genuine. I like to quote here from the famous decision of the Supreme Court in the case of McDowell & Co Ltd. vs CIT (154ITR 148) In view of the facts and circumstances of the case, the case is put up for a fresh assessment u/s 263 of the Income-tax Act, 1961."
5.3.2 As per the order of ITAT dated 7.3.2014 in the case of the appellant for AY 2008-09, the important events mentioned therein are reproduced as under:
"2.2. Thereafter, based on audit objection raised by income tax audit party, Id. CIT-VII, Delhi issued first notice u/s 263 dated 12-12-2011 (PB 76-81) raising following errors made by AO:
2.3. Assessee vide letter dated 2-2-2012 (PB 82) filed necessary replies and after considering the same and record the then CIT vide letter dated 4-3-2012 (PB 140-142) dropped the audit objections by following observations:
2.5. Assessee was surprised to receive a notice dated 31-1-2013 again issued by successor CIT contending that these 263 proceedings were pending and calling for explanation on the same issues, which according to assessee were already explained and dropped.
2.6. Assessee in reply raised various objections on jurisdiction and merits contending that 263 proceedings were already closed and filed its explanation. Ld. CIT by the impugned order accepted the assessee's explanation on the first issue i.e. eligibility of SSS to claim benefits u/s 10 AA. However, two issues were set aside to AO for re-verification, out of them only one was mentioned in the show cause notice. A new issue which was not raised in the original 263 notice Le. the loss incurred by assesse from Sterling Exports. Assessee objected to it. However, ignoring the objections, same was also set aside by ld CIT to assessing officer.
2.7. Aggrieved assessee is before us challenging the impugned second 263 order."
5.3.3 The CIT- VII Delhi in its order u/s 263 dated 26.3.2011 had examined the issue in the light of submissions made by the appellant and made other requisite enquiries during the proceedings, the relevant portion of this order on deduction u/s 10AA is reproduced as under:
"......In the Instant case a return of income for the A.Y. 2008-09 was filed on 29.09.2008 declaring a total income of Rs. 11,852/ The case was selected for scrutiny and a order was passed u/s 143(3) on 16.07.2010 wherein the assessing officer accepted the returner income. During the ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 9 A.Y. 2011-12 year the assessee had claimed exemption u/s 10AA of the I.T. Act amounting to Rs. 23,42,20,336/-.
The assessing officer did not make necessary inquiries regarding eligibility of the claim made u/s 10AA. It is pertinent to mention that the phrase 'prejudicial to the interest of Revenue' is of wide import and is not confined to loss of tax. In this case the A.O failed to make any inquiry or pass a speaking order regarding the claim of exemption u/s 10AA, which was claimed for the first time. The order of the assessing officer is found to be erroneous and also prejudicial to interest of the Revenue. Therefore, action u/s 263 of the Income Tax Act, 1961 was initiated.
As per letters dated 16.11.2011 the then Income tax officer ward 20 (1) wrote to the General Manager, Security paper Mill. Hoshangabad (M.P.) and General Manager, India Security Press, Nasik regarding transactions with
1. M/s Fabriano Security S.R.I. headquarter, Via Miano 71.20021 Osplate di Ballate (MI), Italy
2. Cartiere Milliani Fabriano- Societa' per Azioni, rome (RM), piazzaledella Marina n. 1 fiscal code and Registatio number under with the Register of Companies of Rome n. 00080600422.
3. Cartiere Milliani Fabriano- S.P.A, Diezione e Administrazione: Viale P. Milliani, 31/33 60044 Fabriano (AN). Italia.
to confirm if they had purchased any security Thread & other security features for the use in Bank Note paper, Non-judicial Stamp, and other securities document from the above mentioned companies during the financial year 2006- 07, 2007-08, 2008-09 and 2009-10.
In response to that a reply dated 17.11.2011 was received from the Office of General Manager, Security Paper Mill, Hoshangabad wherein it was stated that:- "It has been confirmed from our records that no transaction took place between M/s Fabriano Securities, M/s Cartiere Milliani Fabriano, Rome, M/s Cartiere Milliani Fabriano, s.p.a, Italy and Security paper Mill, Hoshangabad in the financial year 2006-07, 2007- 08, 2008-09 and 2009-10 for any item including all security items"
Further, in response to the query letter of the assessing officer dated 16.11.2011 a reply dated 16.12.2011 was received from the office of General Manager, India Security Press, Nashik Road, Maharashtra wherein it was stated that:-
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"with reference to above, it is to inform that India Security press, Nashik Road has not purchase/procure any security thread for use in Non- judicial stamp paper or other security documents".
In view of the above facts notice u/s 263 was issued to the assessee on 12.12.2011 by my predecessor and again on 31.01.2013 by the under signed wherein the following issues were brought to the notice of the assessee and the assessee was required to show cause as to why the assessment be not reframed by making the additions as suggested below. (A) 1. "It is noticed that the Assessment in this case was completed u/s 143(3) on an income of Rs. 11,850/- in the month of July, 2010. The assessee had claimed deduction amounting to Rs. 23,42,20,336/- u/s 10AA. Nature of business of the undertaking was mentioned as consultancy of security paper and bank papers in form 56F filed with the Department. The assessee had declared a net profit of Rs. 23,42,17,188/- against total receipt amounting to Rs.24,38,91,734/- in his proprietary concern of the name M/s Sterling Security Systems giving exorbitant net profit rate of 96.03%.
1. Section 10AA is available to a person if he is transacting eligible business in the unit located in SEZ The unit should export goods or services by any mode physical or otherwise. The eligible services are prescribed under rule 76 of SEZ Rules.
2. The said concern was registered in the Noida SEZ. The concern was granted registration by the Development commissioner, Noida SEZ vide letter dated 13-09-2006 authorizing the following operation:
"Services activities- Service provider to foreign and Indian Company to sell raw material, projects, technology and plan investment in India/out of India."
3. The assessee is claiming that services being provided by him come under the category "other business services" of Rule 76 of SEZ. He is relying on the following evidences in favour of his claim for providing eligible services:
1. Copy of Agreement dated 25-09-2006 with M/s Cartiere Miliani Febriano SPA, an Italian Company.
2. Copy of confirmation of receipts issued by PNB Mumbai.
3. Copy of confirmation from M/s Cartiere Miliani Febriano SPA.
4. Copy of annual performance report of SEZ unit certified 4 by CA.
5. Copy or correspondence by buyer (Government of India and Reserve Bank of India).
6. Copy of presentation prepared for the buyer ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 11 A.Y. 2011-12
7. Details of foreign travels.
8. Details of boarding and lodging in foreign countries.
9. Copy of pre qualification tender notice for the supplies to Govt. of India RBI.
The scrutiny of the above documents reveals that the above documents do not indicate that what were the actual services rendered by the assessee. For example the copies of correspondence of buyers (mentioned at SI.no.5 above) are three general business enquiry letters between the Italian company, M/s Security press Mill, Hoshangbad, India Security Press Nashik Road and Ministry of Finance, Government of India. Even two of these letters were dated 22-12-2008 and 03-12-2008 which means the letters relied upon by the assessee relates to a date beyond the assessment period. Further, these letters show no connection of the assessee in any manner with the business enquiries being made by the above mentioned entities. Copy of presentation also belongs to a later date of 07-10-2008. This also does not show any role of the assessee. The details of foreign travelling, boarding and lodging only show that the assessee had visited foreign countries but it did not reflect anything of the services claimed to have been provided by the assessee. Copy of pre- qualification tender notice is a copy of advertisement of tender notice for supply of Bank note papers by M/s Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore.
4. It appears from the above submissions of assessee that he was not able to furnish any direct evidence in favour of eligible services he was claiming to have provided. It is strange that the assessee had claimed to have provided professional services of Rs.24,38,91,734/- but he was not able to provide any direct evidence e.g. the bills raised for the services provided, the exact description of the services provided, the names of the clients to whom he met on behalf of the Italian company etc. He furnished only copies of some general correspondence or papers which do not have any connection with the assessee.
5. The assessee further submitted vide letter dated 12-07-2010 before the Assessing Officer that he, under an agreement dated 25-09- 2006, provided services to M/s Cartiere Miliani Fabriano SPA, an independent company incorporated under the laws of Italy. The copy of agreement was also enclosed the relevant clauses are reproduced here:
"Article 2 "It is hereby agreed that the above services shall be performed by the ASSOCIATED exclusively out of the territories of India, even for possible supplies in favour of Indian Concerned Buyers, in the offices of CARTIERE'S Group located out of such territories and in consultation with the officers of other Business Associates of CARTIERE.ITA No. 1276/Del/2021
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The performing of such services shall be occasional, non-professional and within the activity usually carried out by the ASSOCIATED.
Article 3 3.1 For each supply in South Asia in relation to which the ASSOCIATED provides his assistance to CARTIERE according to the terms and conditions of this Agreement, CARTIERE undertakes to assign to the ASSOCIATED (pursuant to Article 2554 of the Civil code) the right to receive a percentage (hereinafter, the "Shared Profits") of the net margin paid to CARTIERE By the Concerned Buyers (hereinafter, the "Net Margin").
The percentage of the Net Margin to be paid for each supply shall be agreed upon between the parties from time to time, taking in the account the importance and profitability of the supply, the activity carried out by the ASSOCIATED, the costs borne by CARTIERE, etc. The Parties in this case however undertakes by now that the percentage o the shares profits shall be 41% of the Net Margin or a guaranteed amount of 14% of the payment received. This percentage is valid for supplies made till 31 December, 2007.
Article 4 4.1 During the period of performance of this Agreement any every 3 months. CARTIERE shall draw up a statement of account for each supply, indicating the amount of share profits for such supply of the Relevant period (the "Statement of Account"). The "Relevant Period"
considered in the Statement of Account shall be:
• from January 1 to March 31;
• from April 1 to June 30%;
• from July 1 to September 30th;
• from October 1 to December 31";
The first Statement of Account shall be dated December, 2006 and shall consider all deliveries till the date. However, to meet the initial expenses, CARTIERE shall pay advance to ASSOCIATED as may be mutually decided between them.
4.2 The Statement of Account shall be sent by CARTIERE TO THE associated within 20 days from the last day of each Relevant Period.
4.3 The Statement of account shall be deemed as definitely approved and not disputed, should be ASSOCIATED fail to sent a written notice of ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 13 A.Y. 2011-12 contestation to CARTIERE within 10 days from the receipt of the Statement of Account.
4.4 The shared Profit shall be paid to ASSOCIATED within 10 days within the receipt of the Statement of Account by the ASSOCIATED, should such Statement of Account be undisputed." The issue in question relates to the fact that in this case that agreement only gives the scope of services supposed to be provided by the assessee. What services were actually provided by the assessee has to be explained by the assessee with credible evidence. The Agreements are not the final word. They are subject matter of security and needs to be proved in the light of surrounding circumstances. The following judgment of Supreme Court in the case. CIT, West Bengal Vs. Durga Parsad More [82 ITR-540] (SC) finds relevance in the facts and circumstances of this case- "it is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of present kind a party who relies on a recital in a deed has to establish the truth of those recital, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favor then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into surrounding circumstances to find out the reality of the recitals made in those documents.
6. Without prejudice to above it is pointed out that the agreement with the 6 Italian company clearly mentions that assessee shall receive the share of profit @ 41% of the net margin or guaranteed amount of 14% of the payment received in the relevant period by Cartiere from South Asia for its supply. The agreement provides that every 3 months Cartiere shall draw up a statement of account of each supply, indicating the amount of share profits for such supply of the relevant period (the statement of account). No such statements of accounts were produced by the assessee and he also failed to provide the information with respect to concerns to which he was instrumental in supplies made on behalf of the Italian company.
7. It is very clear from the above that the assessee failed to provide any supporting evidence in favour of his claim that he had provided any services as mentioned in Rule 76 of the SEZ Rules.
8. In fact the assessee himself know that the evidence furnished by him in favour of his claim of providing eligible services were insufficient. He submitted vide letter dated 14.07.2010 that the reason for not ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 14 A.Y. 2011-12 furnishing the details was that the detalls cannot be furnished in view of the confidential nature of the tender and that any such information in relation to above transaction are confidential as per tender condition and other directives of Government of India in the interest of National Security. What could be the bigger irony than that the assessee, a private person is claiming to have confidential information and he is not disclosing the same to a Government Office l.e. Income Tax Department on the pretext of the confidentiality. This may be mentioned here that the department is asking only the details of the services provided by the assessee. It is not asking the details of the services or suppliers being undertaken by the Italian company. Further, the Income Tax Department is interested only in financial details of the business and not in any other technical details and that cannot be held back in the name of confidentially. The assessee was giving false excuses for not furnishing the details of services.
9. The assessee further submitted that the services provided by the assessee to M/s cartiere Miliani Fabriano SpA have no connection with the supply made by M/s Cartiere Miliani Fabriano SpA to M/s Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore and Currency Note Press Nashik Road, Nashik, Ministry of Finance, Department of Economic Affairs, Government of India, New Delhi However in the very following paragraphs he has rebutted his own claim of having no connection with the supplies made to the government press by submitting that "the supplies are in relation to security products including security paper etc. the Tender document in respect of such supply is enclosed herewith at page 13 to 14 or Annexure to Reply. It may also stated here that, for each of the supply made by M/s Cartiere Miliani Fabriano SpA to M/s Bhartiya Reserve Bank Note Mudran Pvt. Ltd. The inspection is carried out by the official of Reserve Bank of India/Government of India. The assessee is instrumental in arranging necessary documentation for such inspection as would be evident from pages 15 to 17 of Annexure to Reply.
10. This may be mentioned here that the pages 13 to 14 and 15 to 17 as mentioned in the reply of the assessee above are the same papers as mentioned at SI. No. 5 and 9 of the Para-4 which had no connection with the assessee as discussed earlier.
11. It can be seen from above that the assessee is denying on one hand any connection of the services provided to M/s Cartiere Miliani Fabriano SPA for supplies made by the said company to Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore and currency Note Press Nashik on the other hand all the information/ papers submitted in favour of his claim of services provided relates to supplies made to the said govt. concerns.
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12. Now two possibilities emerge out of the failure on the part of the assessee to produce any evidence in support of the services claimed to have provided by him. Firstly, he had not provided any services at all and the receipts could be out of money laundering. The third party enquiries from the Italian company through FTD wing of CBTD and enquiries from Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore and Currency Note Press Nashik can bring out the truth. Secondly, the payments could have received in lieu of facilitating the supplies to the above sald govt. concerns. Now, it is the proclaimed policy of the government of India that there shall be no role of a middleman in supplies to any government concerns. Such services are illegal and such services cannot be the services as prescribed vide Rule 76 of SEZ Rules for claiming exemption under section 10AA of Income Tax Rule. In the both the eventualities the assessee is not entitled to deduction u/s 10AA and the same was wrongly allowed to the assessee.
(B) The assessee had invested Rs. 27,57,91,533/ in FDRs as on 31.03.2008. However, he has only declared interest income of Rs. 11,852/- only. It appears the assessee had not declared interest accrued on the said Fixed deposits. The A.O. should make enquiries from the Bank to ascertain the amount of interest accrued on the FDRs and brought the same to tax.
A show cause notice u/s 263 of the I.T. Act dated 12-12-2011 was accordingly issued to explained as to what services were rendered by him. He was also asked to produce statement of account with the Italian company and provide information with respect to concern to which he was instrumental in suppliers made on behalf of the Italian company. He was further asked to explained the basis on which interest income earned on FDRs were claimed as exempt u/s 10AA of the I.T. Act. In response to the same, Sh. S P Gupta, assessee, Sh. Mukesh Goel Advocate and Sh. Anil Sharma, CA attended the proceedings and furnished written submission from time to time.
The assessee has contested the above and made reference to submission made earlier before the Assessing officer pointing out that there was no agreement, services were rendered and payments were received. The assessee has filed a letter dated 04.01.2012 from Fabriano (page-428 and 429) of the paper book listing out the services provided by the assessee.
Para-5 of this letter reads as under:
"Mr. S.P. Gupta proprietor of sterling security system is providing us all business support services in Italy and to our benefit from the stage of locating the business, collection of pre-qualification business inquiries from the office of Bhartiya Reserve Bank Note Mudran Pvt. Ltd.ITA No. 1276/Del/2021
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Bangalore. Analyzing different documentations, supporting pre- shipments inspections and providing all other supports in Italy to our commercial, technical and shipping departments. To sum up Sterling Security System is our most important services provider from locating business inquiries in different parts of the World to successful completions of the same.
The evidence in support of payment received from the foreign company has already been filed.
Earlier as per their letter dated 04.01.2012 M/s Fedrigoni SpA, Viale Pietro Milliani, Italy had stated as under:-
• We confirm that M/s Sterling Security System is our exclusive business associate for the supply of different security items like Bank Note Paper, Security Thread, Non-Judicial Stamp Paper, Gummed Paper, Mould Covers, mould Cylinder etc. • We confirm that there is no other representative supporting us in relation to the above business in India.
• We confirm that we have been successful in doing business with Bhartiya reserve Bank Note Mudran Pvt. Ltd. And its nominated printing press like Currency Note Press, Nashik only with the support of Mr. S.P. Gupta of M/s Sterling Security System.
• We confirm that we shipped consignments of Bank Note paper on monthly basis to Bhartiya reserve Bank Note Mudran Pvt. Ltd. And to its nominated Currency Note Press, Nashik during the period from 01.04.2007 till 31.03.2008.
• Mr. S.P Gupta proprietor of Sterling Security Systems is providing us all business support services in Italy and to our benefit from the stage of locating the business, collection of pre-qualification business inquiries from the office of Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore, Analyzing different documentation, supporting pre-shipment inspections and providing all other supports in Italy to our commercial, technical and shipping departments. To sum up Sterling Security System is our most Important service provider from locating business inquiries in different parts of the World to successful completions of the same.
• We confirm that we are paying separately to M/s Sterling Security Systems all travel expenses from India to Europe and paying directly for their complete stay, boarding and lodging and all their local travels in Europe for the visits of Mr. S.P. Gupta or ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 17 A.Y. 2011-12 any other nominee of M/s Sterling Security System visiting us in Italy to support for better communication on monthly basis with Inspecting officials of the Government of India and our technical/commercial department. These pre-shipment inspections are mandatory and of vital condition of the contract with aforesaid customer prior to each regular monthly shipments to their printing presses.
• This clarification is issued in continuation to our agreement dated 25th of September, 2006. The copies of shipment documents during 01.04.2007 till 31.03.2008 to Bhartiya Reserve Bank Note Mudran Pvt. Ltd. or to its nominated Printing Press- Currency Note Press, Nashik could be provided to M/s Steling Security Systems on his absolute necessity with a non-disclosure agreement as it contains vital information in relation to quality & quantity of product.
• We confirm that our business association with M/s Sterling Security System is continuing successfully till date for the above items on exclusive basis for any business identified by them in South East Asia including India. Further we are successfully doing business with the aforesaid customer till date.
A letter dated 12.02.2013 was issued to M/s Fedrigoni SpA, Vilate Pietro Milliani, Italy to provide information about the nature/volume of work/services rendered by the assessee and also confirm to have business connection with the assessee. M/s Fedrigoni SpA by E-mail dated 14.02.2013 have confirmed that M/s Sterling Security System is their exclusive business associate for the supply of different security items like Bank Note Paper, Security Thread, Non-judicial Stamp Paper, Gummed Paper, Mould Covers, Mould Cylinder etc. And further confirmed that they are still having regular business relations with Mr. S.P. Gupta.
A letter was also issued on 12.02.2013 to the Assistant General Manager, BRBNMPL, Bangalore to confirm whether Credential Certificate was issued by them to the assessee and to confirm whether the certificate is still valid and has not been withdrawn. By e-mail dated 14.02.2013, the Asst. General Manager, BRBNMPL Corporate Office has confirmed that they have issued the credential certificate dated February 3, 2012 to the assessee and it is not withdrawn till date the same is reproduced as under.
"This is to certify that sh. S.P. Gupta Sterling Security System was authorized by M/s Fedrigoni SpA (Formerly Cartiere Miliani Fabriano SpA) Italy in our tendering process during the last five ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 18 A.Y. 2011-12 years for the purpose of coordination between BRBNMPL and the firm"
During the course of hearing on 19.03.2013, Sh. S.P. Gupta, assessee appeared and he was asked to produce the evidences in support of his claim of services rendered, on the basis of which deduction u/s 10AA is claimed by him. He was made clear that if such evidence were not produced within three days (i.e. by 22.03.2013) then it will be assumed that he had nothing to say in the matter. In continuation to the query raised above, the assessee was required as per letter dated 21.03.2013 to file the following details/explanation by 22.03.2013:-
1. As per agreement, the 'a' is entitled to 41% of total business done for its overseas enterprises. To furnish copies of bills raised, showing detail of service rendered and the basis on which the bills are raised.
2. As per the agreement, the 'a' is entitled to a minimum guarantee of 14% of the amount received out of total business procured for its overseas enterprises1. To furnish detalls of payments received by the overseas enterprise out of total business procured.
3. Correspondence and efforts made to procure the business for its overseas enterprise and to establish genuineness of the business transactions.
4. Copies of work/orders/supplies from the buyers in the name of assessee or his foreign enterprises as evidence to establish that the said work/order/supply was in fact made as a result of services rendered by the assessee for his overoseas enterprise.
5. Copies of tenders made by the 'a' to various departments/concerns for procuring the business for this overseas enterprise.
6. To explain as to why the address of the business of 'a' differs in the Audit Report and the approval of the Development Commissioner who he granted approval for setting up of unit.
7. Rent agreement/ownership proof in respect of business premise where the unit is set up.
8. Copies of electricity/telephone/other bills as evidence to prove that actual services were carried out at an SEZ.ITA No. 1276/Del/2021
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9. Details of employees with names and addresses, their designation and salary, mode of payment of salary who were engaged for providing the business services to his overseas enterprises.
10. Copies of correspondence made with any office/department while doing/providing business service in India or abroad.
11. Copies of bank statement of his overseas enterprises through which remittance are made.
12. Copies of bank statement of his overseas enterprises, audit report showing total turnover capital base etc, to prove the genuineness of the said concern.
On 22-03-2013, Sh. Mukesh Goel and Sh. Anil Sharma appeared and stated that reply to the above query letter would be filed on 25-03-2013 in the mean time, enquiry was made through the inspector of this office. He has submitted his report dated 22.03.2013 the same is reproduced as under:-
"As directed, I visited the following two business premises of M/s Sterling Security System at the given addresses today the 22nd march, 2013.
(i) SDF No. E-23B, Noida Special Economic Zone, Noida, UP and
(ii) SDF No. 1, Trading Block, SEZ, Noida, UP.
That in respect of the premises mentioned at serial number (i) above, enquiries were made from one Sh. Kirpa Shankar, Manager of M/s Mind Mill (the present occupant of the premises), who has stated that it is a software Development Firm and has been functioning from this premises since August, 2011. Further, he has stated that he does not know anything about M/s Sterling Security System and that this premises was vacant prior to their taking this premises on rent.
Regarding the premises mentioned at serial number (ii) above, on enquiries it was found that the premises is vacant and is locked. Further, on enquiry made from the guard posted at this premises (although he did not know anything about the nature of business or the activities in which Sterling Security System was engaged), it has been gathered that the premises was in possession of M/s Sterling Security System till four to six months back and that they have vacated this premises. The guard has also informed that one Mr. Pillai used to manage the affairs of M/s Sterling Security System."
It is a fact that the assessee entered into an agreement dated 25.09.2006 with M/s CARTIERE MILIANI FABRIANO-SOCIETA'PER AZIONI, a company duly organized and existing under the Law of Italy, with registered office in Rome (RM) Piazzale della Marina n.1, fiscal code ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 20 A.Y. 2011-12 and registration number with the Registrar of companies of Rome no. 00080600422 represented by Mr. Eligio Balabio, who is his quality of Export Sales Manager, the aforesaid Italian company is a company of an international group specialized in the production and sale of security papers and banknote paper. The assessee Sh. Satya Prakash Gupta prop. M/s Sterling Security System has expertise of this industry including providing services in preparation of tenders and bids for providing security papers and banknote papers in South Asia and in particular was in the condition (1) to report CARTIERE possible calls for possible tenders or similar initiative of Governmental Authorities or other concerned buyers in South Asia and (ii) to assist CARTIERE in carrying out in the best way any supply assigned by the concerned buyers to CARTIERE.
A Perusal of Article 2 of agreement dated 25.09.2006 would show that the following services were to be provided by the assessee to the Italian company:
1) The associated undertakes to provide CARTIERE with the assistance and collaboration for the participation to the possible Tenders and the carrying out of the suppliers, in particular undertaking;
a) To provide assistance for both the preparation and participation to the possible tenders and in carrying out the suppliers in favour of concerned buyers;
b) To collaborate with CARTIERE to manage its relationships and contacts with potential concerned buyers in South Asia;
c) To assist CARTIERE in providing/completing possible Tender Details;
d) To help CARTIERE to submit possible Tender documents;
e) To assist CARTIERE in completing visa documentation and solutions for eventual inspections performed by its representatives on the manufacturing process;
f) To collaborate with CARTIERE to fulfil eventual shipment procedure of the products fixed by concerned buyers;
g) To ensure assistance for any delivery requirement coming from concerned buyers as communicated to CARTIERE with appropriate notice, and to ensure that the relevant production schedule is arranged.ITA No. 1276/Del/2021
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h) To assist CARTIERE in all the information related to the execution of the supplies, including any major change in the delivery of the supplies, including any major change in the delivery schedule (including the ones of the other suppliers) which may affect CARTIERE delivery schedule;
i) To join up with CARTIERE'S officers any time CARTIERE will request it to meet concerned buyer's representatives;
(II) It is hereby agreed that the above services shall be performed by the ASSOCIATED exclusively out of the territories of India, even for possible supplies in favor of Indian concerned buyers, in the offices of CARTIRE'S Group located out of such territories and in consultation with the officers of other business Associates of CARTIERE.:
It is obvious that the total revenue is from business with aforesaid two parties. It is fully regulated by an agreement where the role of the assessee with overseas M/s Cartiere Milani Fabriano has been fully defined. Assessee provided all business services to M/s Cartiere Millani Fabriano to perform successfully which made them to continue in a business till date.
The assessee filed details of invoices made by M/s Cartiere Miliani Fabriano to Bhartiya Reserve Bank Note Mudran Pvt. Ltd. And Currency Note Press, Nashik for this year under a confidence that the same shall not be disclosed directly or Indirectly to any other person which proves that all remittances sent to the bank were 100% in line to the agreement and after receipt of payments by the M/s Cartiere Miliani Fabriano from Bhartiya Reserve Bank Note Mudran Pvt. Ltd. and currency Note press, Nashik. This also proves that each payment is following each business transaction. No separate bills were required to be generated and the remittances were sent directly to the bank account. The details of expenses incurred from time to time during this year for visits to M/s CARTIERE Milliani Fabriano were paid separately.
The copy of invoices filed along with the written submission dated
22.03.2013 as per page no. 32 to 134 support the contention of the assessment that services were provided to the Italian Company. I have carefully considered the submission and perused the invoices which are raised by M/s Cartiere Miliani Fabriano in the name of Bhartiya Reserve Bank Note Mudran Pvt. Ltd., Bangalore directly. Besides this some invoices on page no. 59,60,61 and 62 are raised on the General Manager S.P.M.C.I.L, Unit Currency Note Press, Nashik Road, Maharashtra- 422001, India. Each invoice gives details of item description, code u.m., quantity, unit price/currency, net weight (KG) and amount. Invoices also reflect payment details i.e. irrevocable L/C No, 100% FOB value percent value payable against LC and 10 percent payable within 90 days from ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 22 A.Y. 2011-12 the date of bill of lading by T.T. marks and numbers. It also provides details Net weight, gross weight, item no., FAB, partial shipment, outer dimension and case no. and also giving the details of quantity of supply. During the year no services were rendered by the assessee for the security paper mill, Hoshangabad (M.P.) as no supply was made by M/s Cartiere Miliani Fabriano to Bhartiya Reserve Bank Note Mudran Pvt. Ltd., Bangalore.
Further detailed additional note on the services rendered were also filed as per annexure-II filed along with written submission dated 22.03.2013 which appended below:-
(i) "Manufacturer- a multi-national company with highest degree of technical & commercial credentials, with great business integrities to the satisfaction to the Government of India as well as Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore a unit 100% owned by Reserve Bank of India have confirmed beyond any doubt on your inquiry directly to you that we are a professional business services provider to M/s Fabriano and our relations are valid till date.
(ii) It is further submitted that a long list of documents is already available on record to prove that we have providing all professional business support services to M/s Cartiere Miliani Fabriano for doing a business turnover EURO 24959235.30 during 01.04.2007 till 31.03.2008 between M/s Cartiere Miliani Fabriano S.p.A. and Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore and Currency Note Press- Nashik.
(iii) This turnover is a result of business opportunity, located by us after completing pre-qualification criteria, verification of technical & financial credentials, verification of integrities of the company by Government of India prior to dealing in most sensitive products, physical production & security verification and every day updates by Bhartiya Reserve bank Note Mudran Pvt. Ltd.-Bangalore and Currency Note Press- Nashik. Providing them tender documents/business opportunities against payment of tender fees and earnest money depósits. Preparation of Bank Guarantees, analysing and completing those tender documents, submission of these tender documents in time bound periods, attending of commercial tenders, the opening of commercial tenders, qualification of the technical tenders, attending opening of commercial tenders, providing all technical and financial support services in relation submission of tenders, analysing of these tenders and updating M/s Fabriano to price calculations, fund management, payment management, shipment managements of each consignment. The business starts only after reaching lowest in price and satisfaction to the customer on other business terms in this global tender business opportunities.ITA No. 1276/Del/2021
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(iv) This further involves management of regular delivery schedules,
production of a right material of right specifications means a support to M/s Fabriano for all pre-requisite requirements like preparation of layouts, preparation of moulds, preparation of moulds cylinders, preparation of cotton comber pulp with a right mix, management of security threads, management of paper pulp with adhesive, management of water mark and other security features like fluorescent fibers and electrolyte water mark, cutting & slitting of notch on paper sheets, managements of these sheets to a right specifications in relation to printing requirements.
(v) This further involves packing of the same in reams, management of packing material in reams, management, of packing material in pallets with due attention to marking of each sheet, each ream and each pallet inside the containers.
(vi) Booking of shipping space in Indian flag vessel with customer nominated forwarding agents, secured forwarding the materials to the ship and the management of the shipping documents in line to the L/C.
(vii) These need to qualify many pre-conditions on quality, quantity, packaging, marking, shipping dates and duration, quality and the owners of the vessel, shipping documents, management of payment against these documents from the Italian/Indian Bankers.
(viii) Professional business services is further provided by us in providing performance guarantees, clearance & delivery of the goods at the customer end, update M/s Fabriano on right quality of material received by the customer to attend all technical & commercial calls from Bhartiya Reserve Bank Note Mudran Pvt.
Ltd. Bangalore and Currency Note Press Nashik till the materials is not only used but remains to the satisfaction of Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore for a period of approximately one year after printing.
(ix) Further to this, we provide all technical, commercial, financial business services to M/s Fabriano from the day Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore conceives of buying these products till approximately one year after printing of the paper and normally this whole exercise takes around 2-3 years in completing one single transaction which needs a professional business support to M/s Fabriano on everyday basis.
(x) To sum, up we had provided to M/s Fabriano all professional business services from locating a business opportunity and completing the same which normally takes 2-3 years for completion of the single transaction and these services have been provided against obtaining valuable business orders, production of the same, supplying the same on regular basis to the customer like Bhartiya Reserve Bank Note Mudran Pvt. Ltd. Bangalore are Currency Note Press - Nashik.
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(xi) The details of professional business services provided to M/s
Cartiere Milliani Fabriano have been explained as above and it has been confirmed both by the manufacture as well as BRBNMPL Bangalore - a unit 100% owned by Government of India. The full details with all documentary evidences has already been provided to you and is on record.
(xii) These confirmations have further been verified directly by your good- self from these authorities and their fresh confirmation dated 14.02.2013 have been made directly to you by both the parties together with their declaration that our business relations are valid till date. These information already on your record."
In response to the query letter F.No. CIT-VII/263 (S.P. Gupta)/16(6)/2012-13/2138 dated 21.03.2013 duly issued on 21.03.2013 the assessee filed reply dated 25.03.2013 where in the assessee has submitted the following-
1. Kindly refer to page 1 of Annexure to this Reply in which complete details (including Gross Turnover, Cost of Goods and payments collected) of professional receipts against services rendered by the assessee to the overseas supplier have been provided. It proves beyond doubt that the assessee has been paid @ 41% of the business margin.
2. The overseas enterprise has complied with the condition of minimum guaranteed amount i.e. 14% of the amount received out of total business procured. Certificate from the overseas enterprise having paid the amount is already on record on page 149 of Annexure to Reply dated 02.02.2012.
3. Documents evidencing efforts made to procure the business for its overseas enterprises which establish genuineness of the business transaction are already on record. It is submitted that each shipment from the overseas enterprise has been made to Bhartiya Reserve Bank Note Mudran Pvt. Ltd.
(hereinafter referred to "BRBNMPL"), Bangalore under Irrevocable Letters of Credit opened by the banks in India in favour of the overseas enterprise. The Irrevocable Letter of Credit no. is mentioned on each and every invoice issued by the overseas enterprises to BRBNMPL. The complete details of currency papers including quantity, Rate, port of Shipment, port of arrival have also been provided the Invoices (page 32- 134 of the Reply dated 22.03.2013) raised by the overseas enterprise.
4. Kindly refer to contract no. 02/2007-08 dated July 4, 2007 between BRBNMPL and the overseas enterprises on page 4- ITA No. 1276/Del/2021
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29 of annexure to the Reply which proves the regular business between the two entities. Your kind attention is invited to page 29 of annexure to this Reply (page No. 29 of the Contract) on which the assessee's signature was recorded as witess No. 1 to the said contract. It proves beyond doubt the involvement of the assessee in getting this contract executed between the buyer and the overseas enterprise. The said contract is being submitted at your instance under a non- disclosure agreement. The details provided in the contract are secretive, sensitive and confidential in nature and should not be disclosed to anyone. Some pages carrying very sensitive information relating to the technical detail and specification of the products have been removed. It is submitted that leakage of any information from the said contract my result in cancellation of the business association of the assessee with the overseas enterprises resulting in great loss to us as well as to the nation in terms of foreign exchange earnings and in particular to the security of the nation.
5. Kindly refer to Contract no.02/2007-08 dated July 4, 2007 between BRBNMPL and the overseas enterprise on page 4-29 of annexure to the Reply which proves the regular business between the two entities. You kind attention is invited to page 29 of annexure to this Reply (page no. 29 of the Contract) on which the assessee's signature was recorded as witness No.1 to the said contract. It proves beyond doubt the involvement of the assessee in getting this contract executed between the buyer and the overseas enterprise. Pre-qualification tender is enclosed on page 333-334 of annexure to Reply dated 02.02.2012.
6. It is submitted the Unit in the NSEZ can be set up only after getting approval from the Development Commissioner. The office, address of which is mentioned in the Audit Report, was taken on rent to carry out the business in NSEZ after getting sanction letter dated 13th September 2006 in which different correspondence address in mentioned In this connection it is further clarified that initially NSEZ authority allotted the office space at SDF no. E-23B in NSEZ NOIDA which was subsequently changed to new building at SDF 1, Trading Block, NOIDA SEZ. Copy of allotment letter relating to E- 23B, NSEZ is enclosed on page 120 of Annexure to Reply dated 02.02.2012 and copy of Lease Agreement of SDF-1, Trading Block NOIDA SEZ is enclosed on Page 30-51 of annexure to this Reply.
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7. Copy of allotment letter relating to E-23B, NSEZ is enclosed on page 120 of Annexure to reply dated 02.02.2012 and copy of Leased Agreement for SDF 1, Trading Block, NOIDA SEZ is enclosed on Page 30-51 of annexure to this reply.
8. Copies of electricity/telephone bills as evidence to prove that actual services were carried out at NSEZ are enclosed on Page 263-264 of annexure to Reply dated 02.02.2012 and Page 2-3 of annexure to this Reply.
9. Copies of Identity Cards of employees issued by NSEZ Authority (Ministry of Commerce, Govt. of India). NOIDA already placed on record on Pages 170-182 and Pages 412- 424 of the Annexure to the Reply dated 02.02.2012
10. Copy of contract on page 4-29 of annexure to this Reply, Witness of assessee to the said contract, documents specifically refereed in reply to Para 3 above and the various already submitted with annexure to Reply dated 02.02.2012 prove beyond doubt the business services rendered by the assessee to the overseas enterprise.
11. It is submitted respectfully that the overseas Enterprise cannot provide the copes of their Bank Statement as it is against their normal business practice. In order to have cordial business relationship with them the assessee does not consider it appropriate to try to prevail upon them to get the bank statements.
However certificate from Offshore Banking Unit of Punjab National Bank and from the overseas enterprise are already on record on Page 146-149 of Annexure to the Reply dated 02.02.2012. The overseas enterprise is a large and reputed business organization. In order to have more information about the overseas enterprises you may kindly visit their website: http://www.fedrigoni.com Some extract from the website are enclosed on page 52-57 of annexure to this Reply.
12. Finally, it is respectfully submitted that proper evidence are now on recorded to demonstrate bonafide service rendered by the Assessee and the genuineness of the business transaction under which earning in foreign exchange has been made by him. It is thus prayed that the instant proceedings initiated under section 263 of the Act may kindly be dropped and admissibility of section 10AA of the Act may kindly be allowed with intimation to the assessee.
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Considering the submissions made by the assessee during the course of the proceedings, evidences placed on record and confirmations received from Fedrigoni SpA, Italy and the Asstt. General Manager, RBI, Bangalore, regarding the genuineness of transactions made by Sh. S.P.Gupta with M/s Fedrigoni SpA, Italy, it is found to be in order and as per the requirement of I.T. Act.
In the profit and loss account of the first unit which is engaged in providing consultancy serviced of security papers, the assessee has shown income of Rs. 24,38,91,734/- as professional receipts. However, in the second unit in the name of Sterling Exports, the assessee has shown a net loss of Rs. 23,02,984/-. Since this issue of loss related to second unit has not been considered at the stage of assessment as per the settled position of Law, The assessment on this point is considered erroneous as well as prejudicial to the interest or Revenue. The order of the assessing officer is set aside on this point. The assessee shall be given reasonable opportunities of being heard.
(B) The assessee had invested Rs.27,57,91,533/- in FDRs as on 31.03.2008. However, he has only declared interested income of Rs. 11,852/- only. It appears the assessee had not declared interest accrued on the said Fixed deposits. The A.O. should have made enquiries from the Bank to ascertain the amount of interest accrued on the FDRs and brought the same to tax.
In this regards the submissions of the assessee is as under "23.1 it is submitted that even financial advisories is an established financial services, what to say of planned investment in India/out of India, which is a strategic investment by our unit by investing with an off shore banking unit in a special economic zone directly from our 100% export proceeds which is a liquid till finally converted to Indian Rupees. This investment is strategic keeping in view the different rates of interest for different currencies, different rate of interest for different durations of time and also options available to the unit to invest anytime anywhere in the world with or without investment from different financial institutions in the form of FDI, ECB, PE business models, The interest/Income/Gains/Profit is earned in foreign exchange from another unit in special economic zone, which means earning is from export and is in foreign exchange so qualifies section 10AA. Investment in deposits with Banks in foreign exchange means the leasing out use of money to the bank and amounts to depriving the use of money for any other purpose as a planned investment subject to further terms & conditions. In other words the money ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 28 A.Y. 2011-12 invested in foreign exchange as deposit is an income in foreign exchange, derived from the authorized activity of planned investment from export. This investment had been made for the specific purpose to use this money with an off shore banking unit to use as capital or as margins with any consortium including the Italian Company for setting up a paper project or manufacturing of security features in India or in the worst case this investment can be paid to the customer in any eventuality of failure to pay by the Italian Company. This money is in foreign exchange till date and is therefore a liquid and is an export proceeds till converted into Indian Rupees. Therefore foreign exchange earned from export because of aforesaid investment palling qualifies beyond doubt and in totality to section 10AA particularly to sub-section 7 of section 10-AA of income tax Act and there is no under assessment of income of any kind whatsoever.
23.2 The interest income derived by the assessee is business income in line to his business authorization issued by the Development Commissioner and is from one SEZ into to another SEZ unit and is in foreign exchange till date and is therefore included in the declared receipts as it qualifies in totality to section 10AA."
It is pertinent to pin point that as per the Balance sheet, Schedule 5 the assessee has shown FDs of Rs 27,57,91,534/- against which interest income of Rs. 11,850/- only has been declared in the profit and loss account. It is further seen that (a) has shown closing balance of FDs with PNB at Rs 27,51,53,035/- but as per copy of account of PNB, amount of FDs are Rs 26,95,29,065/-. Difference of Rs 56,23,970/- appears to be interest on FDs with PNB which has not been declared in the accounts of relevant financial year.
I have carefully gone through Section 2. Definitions of THE SPECIAL ECONOMIC ZONE ACT, 2005. Section 2 (m) defines "exports" as under:
I. Taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or II. Supplying goods, or providing services. From the Domestic Tarrif Area to a Unit or Developer; or III. Supplying goods, or providing services, from one Unit to another Unit of Develop, in the same or different Special Economic Zone;
Further Section 2 (u) defines "Offshore Banking Unit" as under:-ITA No. 1276/Del/2021
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"means a branch of a bank located in a Special Economic Zone and which has obtained the permission under clause (a) of sub- section (1) of section 23 of the Banking Regulation Act. 1949 (10 of 194)"
And Section 2 (z) defines "services" as under:-
I. are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organisation concluded at Marrakesh on the 15th Day of April, 1994;
II. may be prescribed by the Central Government for the purposes of the Act; and III. earn foreign exchange;
Since this issue has not been considered at the stage of assessment as per the settled position of Law, the assessment on this point is considered erroneous as well as prejudicial to the interest of Revenue. The AO is directed to make necessary inquiries and examine the matter in this respect and decide the issue as per I.T. Act. 1961. The order of the assessing officer is set aside on this point to be decided afresh. The assessee shall be given reasonable opportunities of being heard....."
5.3.4 Thus the CIT-VII Delhi had examined the issue of exemption u/s 10AA in details & even enquiries have been conducted before reaching to conclusion that exemption u/s 10AA had been rightly claimed by the appellant. However, the CIT VII, Delhi had set aside the order of AO u/s 263 on the following issues,
(i) Issue of adjustment of loss of M/s Sterling Exports against profits of M/s SSS
(ii) Examination of interest income on FDR for claim of exemption u/s 10AA 5.3.4.1 In the appeal against the order of CIT-VII u/s 263, the ITAT had vide order dated 7.3.2014 held as under:
"5. We have heard the rival contentions and perused the material available on record. As mentioned above the issue of eligibility of sec 10AA for the unit SSS has been accepted by the CIT and is not before us. Apropos the issue of loss incurred by the assesse in another propriety concern i.e. Sterling Exports. It was not raised in 263 notice, consequently assessee was also not heard on this issue. In our considered opinion an error which is not raised in the 263 notice cannot be raised by the CIT, our view is supported by Hon'ble Delhi court judgment in the case of Contimeters Electricals (supra), holding as under:ITA No. 1276/Del/2021
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"The Tribunal considered the rival contentions and referred to the Supreme Court's decision in the case of Commissioner of Customs v. Toyo Engineering India Limited, 7 SCC 592 wherein the Supreme Court noted that the department cannot travel beyond the show cause notice. The Tribunal was of the view that the ground that the assessee had not fulfilled the conditions laid down under section 80-IA did not form part of the show cause notice. The Tribunal accepted the argument of the assessee that the Commissioner of Income Tax did not even call for any explanation on this issue and, therefore, the assessee did not have any opportunity to meet this ground. The Tribunal was of the view that it would be against the principles of natural justice that a person who has not been confronted with any ground be saddled with the liability thereof. Consequently the Tribunal held that as the said issue did not form part of the show cause notice and the assessee was not even confronted with it, even before the CIT, it cannot for the basis for revision of the assessment order under section 263." 5.1. This view is further supported by Hon'ble Supreme court judgment in the case of Toho Eng. (supra). In view of these facts and circumstances, the issue of SE loss having not been mentioned in 263 show cause notice, the setting aside order by CIT in this behalf can not be sustained. 5.2. Apropos the remaining issue i.e. FDR interest in the case of SSS Id counsel contends that the error mentioned in the 263 notice is limited to audit parties objection that perusal of record reveals that though the FDR interest amounted to Rs. 27,57,91,533/-, only Rs. 11,852/- was declared in interest a/c. According to assessee it has been demonstrated from the assessment record and audited statements that the entire interest was duly entered in the books and the final balance of Rs. 11,852/-, l.e. the net result of interest a/c was reflected in the P&L a/c.
5.3. Assessee's explanation was verified from record by audit party, CIT(predecessor) and CIT (Audit). The proceedings were closed after such verifications.
5.4. Assessee has challenged the 263 action on various legal issues and merits:
(i) 263 proceedings were dropped by predecessors CIT after verification of record, audit record and assesses explanation. The successor CIT cannot review his order on the same issues and consider the concluded proceedings as pending and then review the earlier proceeding u/s 263.
(ii) The notice was for verifying whether the FDR interest of Rs.7,57,91,533/- from export receipt for meeting export contractual obligations in SSS was included in income or not;
there is no show cause to examine about its eligibility u/s 10AA. The inclusion of income in profits has been accepted, however, ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 31 A.Y. 2011-12 now a direction is given in 263 order by setting it aside to A.O. to examine its eligibility u/s 10AA. Thus an issue which is not raised in the 263 show cause notice cannot be set aside by CIT. Besides eligibility u/s 10AA of the SSS unit as a whole has already been dropped not only by predecessor but also by the successor CIT. So this directions of successor CIT and verification is untenable.
(iii) The successor CIT without verifying record issued notice to the assessee that 263 proceedings are pending and passed the impugned order by setting aside two issues for re examination by AO. Thus, the show cause itself is bad in law.
(iv) The contention of Id. CIT that it is a case of lack of inquiry by A.O. is not supported by record as its perusal reveals that necessary explanations were asked and furnished by assessee. It emerges from the above chart of proceedings.
5.5. It will be desirable to adjudicate the legal issues first. In this case there are two incumbent CITs who have examined the 263 proceedings. First incumbent corresponded with AO; CIT(Audit); considered record; assessee's explanation and audit correspondence. Based on the entirety of facts on record he held the assessee's explanation to be satisfactory and thereafter returned the record to AO. This clearly demonstrates that first CIT concluded the 263 proceedings requiring no further intervention and returned the record accordingly. In our considered view ld. successor CIT can not take up the closed 263 proceedings on the same issues and review the order of her predecessor on same issues. Thus looking at the language of sec. 263 and catena of judgments cited, successor CIT becomes functus officio in this regard after the exercise conducted by predecessor CIT. Therefore we have no hesitation to hold that the 263 order is not sustainable on these legal counts.
5.6. On merits also when the issue is not mentioned in 263 show cause notice, any revisional order is bad in law on that issue. Apropos the FDR interest issue also the show cause notice was to verify whether interest income was included in the books or not. Assessee had demonstrated this aspect to the satisfaction of audit party, CIT(Audit) and predecessor CIT. In these circumstances, the set aside for a new issue i.e. eligibility of FDR interest u/s 10AA cannot be sustained.
5.7. There is another angle to it. CIT had issued a notice for examining the eligibility of sec 10AA of the unit SSS, which includes all the items. This issue has been examined by CIT and sec. 10AA eligibility has not been disturbed in 263 order. Thus the direction to re-examine eligibility of 10AA qua the FDR interest has to fail on both counts i.e. it is not raised in show cause notice and sec. 10AA has been not disturbed.
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5.8. As long as the audit correspondence, letter of CIT(Audit) and predecessor CIT correspondence and order are available on record, they become part of record. Successor CIT cannot gloss over the same as it implies non perusal of record and non application of mind. These omissions violate the 263 provisions. Therefore, we are not impressed by Id. DR's arguments that such correspondence has no relevance to the issue in question.
5.9. In view of aforementioned we are unable to agree with the contentions of Id CIT(DR).
5.10. Since we are quashing the 263 order on other legal issues and merits, we offer no comment on the issue about relevancy of audit objection in 263 proceeding, as the issue of relevance is concluded with the consideration and order of predecessor CIT.
5.11. With above observations we have no hesitation to hold that the impugned 263 order deserves to be quashed on law as well as on merits.
6. In the result assessee's appeal is allowed."
5.3.5 From the above discussion on various events in the case of the appellant, it is observed that CIT-VII had undertaken extensive exercise in the proceedings u/s 263 to verify the nature of services provided by M/s SSS and competency of Sh. S P Gupta to provide these services. It is clear from the order u/s 263 that the CIT-VII, Delhi had perused the following documents:
• Submissions of the appellant in response to SCN u/s 263 as reproduced at pages 9 & 10 of order u/s 263.
• Letter dated 4.1.2012 of M/s Fedrigoni SpA, Italy confirming the services and their transactions where the appellant is involved as per pages 10 & 11 of order u/s 263.
• E-mail dated 14.2.2013 of M/s Fedrigoni SpA, Italy in response to letter dated 12.2.2013 issued by CIT-VII as per page 11of order u/s 263.
• E-mail dated 14.2.2013 of M/s AGM, BRBNMPL, Banglore in response to letter dated 12.2.2013 issued by CIT-VII as per page 12of order u/s
263. • Report of inspector dated 22.3.2013 regarding physical verification of M/s SSS at the claimed premises as per page 14 of order u/s 263.
• Agreement dated 25.9.2006 with M/s CMF and relevant article 2 mentioning all the services to be provided by the appellant, as per page 15/16 of order u/s 263.
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• Invoices raised by the appellant to M/s CMF and various expenses Incurred in running of business of providing services, as per page 16/17 of order u/s 263.
• Detailed additional note on services rendered filed by the appellant as per pages 17 to 19 of order u/s 263.
• Response dated 25.3.2012 of the appellant on various points raised by CIT-VII vide letter dated 21.3.2013 as per pages 20-23 of order u/s 263.
5.3.6 On the examination of all these evidences and results of enquiries made by the CIT-VII Delhi, on the issue of claim of exemption u/s 10AA by the appellant, it was concluded as under:
"Considering the submissions made by the assessee during the course of the proceedings, evidences placed on record and confirmations received from Fedrigoni SpA, Italy and the Asstt. General Manager, RBI, Bangalore, regarding the genuineness of transactions made by Sh. S.P.Gupta with M/s Fedrigoni SpA, Italy, it is found to be in order and as per the requirement of I.T. Act"
5.4 After perusing the records, submissions of the appellant, the order of CIT-VII u/s 263 and the assessment order, I am of the opinion that the issue of services provided by the appellant to M/s CMF had been thoroughly examined by the CIT-VII in the 263 proceedings. The statement of Sh. S P Gupta u/s 132(4) recorded during search is mentioning the same nature of services as mentioned during the 263 proceedings. The agreement with M/s CMF was examined by the CIT VII along with other evidences like confirmation from M/s CMF & its clients in India regarding services provided by the appellant, various replies of the appellant, the report of physical inspection of inspector etc as enumerated in para 5.3.5 above. There is nothing adverse brought on record by the AO consequent to search or any enquiries to negate the findings of CIT-VII, Delhi arrived after detailed thorough examination on the issue of nature of services provided by the appellant through M/s SSS. In the absence of any adverse evidence against the appellant brought on record regarding the nature of services provided by it, the allegation of the AO on this issue is not sustainable. Accordingly, it is held that the appellant is providing services to M/s CMF as per the article 2 of the agreement dated 25.9.2006 with M/s CMF. Without prejudice to it, it is further observed that the appellant had not made any investment with M/s CMF for its right of share in profits of M/s CMF. The natural corollary of it is that the appellant is being made partner for its capability to provide the services listed in the agreement. In view of these facts and circumstances of the case, it is held that the appellant had requisite technical competence in providing services to M/s CMF through its prop concern M/s SSS situated in SEZ Noida, which were eligible for claim of exemption u/s 10AA. Thus the claim of exemption u/s 10AA denied by the AO on the issue of "Services" provided by the ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 34 A.Y. 2011-12 appellant is not sustainable and it is held that the services provided by the appellant duly qualify for the claim for exemption u/s 10AA.
6. Issue of reconstruction of Business 6.1 The AO had referred to the seized document reproduced in assessment order vs the actual agreement of M/s SSS dated 25.9.2006 with CMF, certain exhibits referred in the statement of Sh. Atul Gupta taken u/s 132(4) during the search to reach at the conclusion that M/s SE was existing prior to M/s SSS and there is reconstruction of business of M/s SE into M/s SSS, which violates provision of section 10AA(4) of the IT Act.
6.2 Thus the question to be answered is what is reconstruction of business and do the facts of the case, in the light of seized document/statement of Sh Atul Gupta, point towards reconstruction of existing business of M/s SE into business of M/s SSS.
6.2.1 The relevant clause invoked by the AO, of section 10AA read as under:
"...4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:-
(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 338, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose........
6.2.2 This clause is in existence since many decades in all deduction/exemption clauses, wherever the Government is promoting new industrial undertakings or earning of foreign exchange оr employment/investment in certain areas, though Income Tax Act right from the introduction of section 15C in the IT Act., 1922. The words Reconstruction" and " Splitting up" have not been defined in the IT Act 1961, however, the courts have interpreted their meanings w.r.t. their positioning in all the sections allowing deduction/exemption of profits from income of the appellant e.g. 801, 801, 80IA, 10AA etc. It is observed that the ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 35 A.Y. 2011-12 clauses relating to these words have remained same throughout without any change in their meaning. However, the interpretation of Courts had been to include the variations provided in the respective sections giving policy boosts at different times.
The three words (i) formed (ii) splitting up and (iii) reconstruction appearing in section 10AA (4) (ii) need deep analysis and interpretation. None of the words have been defined in the Act.
As per Oxford English Dictionary, the word "form" means, "come into being, go to make up, compose" etc. While formation refers to the newly set up industrial undertaking which is considered eligible or otherwise to get the deduction u/s 10AA of I.T. Act. Therefore, formation means beginning or setting up of such industrial undertaking. Setting up of any industry normally requires four factors of production commonly called as 4Ms viz., (1) Man (employees) (ii) method (technology) (knowledge) (ⅲ) Machines/materials and (iv) money (capital). The word 'formed' is preceded by the negative term 'not'. Therefore in order to be new, or to go out of the restraint provision of section 10AA (4)(ii), the industrial undertaking should bring in everything new or at least should not bring any of these four factors from its old and existing business because that would bring it within the ambit of restrictions of 'splitting up' or 'reconstruction'.
In fact, splitting up occurs when the old existing business gets divided into two or more, almost equal parts, each part getting separate names and shares from the old business dividing all the four factors of production obliterating the identity of old undertaking and, hence, such case is much more discernible from the case of 'Reconstruction'.
The meaning of reconstruction is very liberal and also interpreted very liberally by the courts. The Act itself provides that the newly formed undertaking may use the machineries of the old undertaking with 20% tolerance limit vide section 801A.
6.2.3 The various courts including the Apex Court have defined there terms in specific schemes of sections of exemptions/deductions, where the conditions of 10AA(4) (ii) were also existing.
(i) In the case of Textile Machinery Corporation Limited v. CIT (1977) 107 ITR 195 (SC), the Ld. CIT (A) went on to observe that -
......The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under section 15C of the 1922 Act. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 36 A.Y. 2011-12 and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15C or not.
.......However, in order to be entitled to the benefit under section 15C of the 1922 Act, the following facts have to be established by the assessee, subject always to time- schedule in the section:
(1) investment of substantial fresh capital in the industrial undertaking set up, (2) employment of requisite labour therein, (3) manufacture or production of articles in the said undertaking, (4) earning of profits clearly attributable to the said new undertaking, and (5) above all, a separate and distinct identity of the industrial unit set up.
There is no bar to an assessee carrying on a particular business to set up a new industrial undertaking on account of which exemption of tax under section 15C of the 1922 Act may be claimed....
The legislature has advisedly refrained from inserting a definition of the word "reconstruction" in the Act. Indeed, in the infinite variety of instances of restructuring of industry in the course of strides in technology and of other developments, the question has to be left for decision on the peculiar facts of each case.
If any undertaking is not formed by reconstruction of the old business that undertaking will not be denied the benefit of section 15C of the 1922 Act simply because it goes to expand the general business of the assessee in some directions"
Thus, the ratio is, the new industrial undertaking must have a separate physical existence and must have an identity as a viable unit. If this condition is fulfilled, the negative conditions that it has come into existence by virtue of transfer of capital, machinery or man power or technology etc., would not be able to restrict it from getting the benefit of section 10AA of I.T. Act.
(ii) The Delhi High Court in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. [1973] 92 ITR 173 (Delhi) observed as under
"In the reconstruction of a business, as in the reconstruction of a company, there is an element of transfer of assets and of some change, ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 37 A.Y. 2011-12 however partial or restricted it may be, of ownership of the assets. The transfer, however, need not be of all the assets. It is none the less imperative that there should be continuity and preservation of the old undertaking though in an altered form. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit. The object of section 15C of the 1922 Act is to provide an incentive for the setting up of new industries so as to accelerate the process of industrialisation. It does not appear to have been the intention of the legislature as envisaged by section 15C of the 1922 Act, that the benefit of the said section would be confined to the industrial undertakings of those parties who had not already set up such undertakings in the past but would not be extended to parties who have past experience of running similar undertakings.
(iii) The Delhi High Court in the case of CIT v. Hindustan General Industries Limited (137 ITR 851) (1981) has interpreted that the term 'reconstruction' is no doubt very wide but it does not hold in a case of a company setting up or establishing a totally independent and viable industrial unit for carrying on the same or similar business even though it might be so set up by way of expanding the already existing business. The emphasis is not on business but on undertaking. The exemption is granted to new undertakings and the essence of the exemption is that it is a new industrial unit that is established and that it is not merely a rehash of an already existing unit.
(iv) The Apex Court in Metropolitan Springs (p) Ltd v. CIT (191 ITR 288) has held that even if some employees are common to the old and the new unit, it will not be a bar on eligibility or deduction. A similar view was taken by the Apex Court in Indian Aluminium Company Ltd Vs CIT (108 ITR 367) where it was held that even if the new unit manufactures the same commodity as the old unit, it will be an eligible undertaking. While deciding whether there is splitting up or reconstruction of an undertaking, it is not necessary to see whether the new undertaking has produced a different article than that produced by the Old undertaking as held by the Madras High court in the case of Premier Cotton Mills Ltd Vs CIT (240 ITR)
(v) The Hon'ble Allahabad High Court in the case of CIT v Mahesh Chand Gupta (279 ITR 396) has laid down that the commonalities of the customers, employees and the common agents of the old and the new units do not invalidate the claim of the assesses that it is operating a new unit and that law does not bar rightful claim of the assesses due to these aspects.ITA No. 1276/Del/2021
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(vi) The Delhi High Court in the case of CIT vs Mahan Foods Ltd (216 CTR
148) while examining reconstruction of business already in existence had made a finding that that the formation of the new undertaking is not as a consequence of the transfer of plant and machinery of the old business and that there were substantial investments in new plant and machinery. It was also a case where a separate and distinct unit was put up for manufacturing the same item. Thus, it was held that nature of product manufactured is not the criteria for deciding whether a new unit has been set up or not.
(vi) The Delhi High Court in Pr.Commissioner of Income-tax v. Macquarie Global Services (P.) Ltd [2019] 102 taxmann.com 272 (Delhi) had held as under:
"Sanjiv Khanna, J. This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 ('the Act', for short) in the case of M/s. Macquarie Global Services Pvt. Ltd. relates to the assessment year 2013-14 and arises from order of the Income Tax Appellate Tribunal ('Tribunal', for short) dated 23.01.2018.
2. The respondent-assessee had 100% Export Oriented Unit (EOU unit) income from which was entitled to exemption under Section 10A of the Act upto the assessment year 2011-12.
3. The respondent-assessee had set up a new unit in Special Economic Zone (SEZ) income from which was claimed as exempt under Section 10AA of the Act for a period of ten years commencing from the Assessment Year 2010-11.
Exemption was allowed in the Assessment Years 2011-12 and 2012-13 but was disallowed by the Assessing Officer in the Assessment Year 2013- 14, citing clause (ii) to sub-section (4) to Section 10AA of the Act.
4. The issue and question raised by the Revenue in this appeal relates to satisfaction of conditions mentioned in clause (ii) to sub-section (4) to Section 10AA of the Act.
5. Sub-section 4 to Section 10AA reads as under:-
This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:-
(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;ITA No. 1276/Del/2021
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(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.
Explanation. The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub- section as they apply for the purposes of clause (ii) of that sub-section.
6. Sub-section (4) stipulates the conditions which an undertaking as a unit must fulfill to get benefit under Section 10AA of the Act. Thus the eligibility requirements are unit specific and not assessee specific. Conspicuously, the legislature in Section 10AA of the Act has referred to the 'unit' of the assessee as a person eligible and entitled to exemption. Each unit in the SEZ must meet the conditions specified in clauses (1) to
(iii) of sub-section (4) to Section 10AA of the Act. In case there are multiple units in the SEZ, each unit would, on satisfaction of the conditions, be entitled to exemption. Thus, the eligibility requirements in clauses are unit specific and not, unless so stipulated, assessee specific.
7. There is no dispute that the respondent-assessee fulfils the conditions in clauses (i) and (iii) of sub-section (4) of Section 10AA of the Act. We have to therefore examine whether the respondent-assessee satisfies the condition stipulated in clause (ii) to sub-section 4 of Section 10AA of the Act.
8. Negative stipulation in Clause (ii) to sub-section (4) of Section 10AA mandates that to claim exemption the unit should not be formed by 'splitting up' or 'reconstruction of a business already in existence. The words and terms 'splitting up' or 're-construction' used in clause (ii) to sub-section (4) to Section 10AA reflect a deliberate forethought in the choice of words. Plain as well as intelligible legislative mandate is not to disqualify existing assessee in the same line of business, albeit the unit set up should not be by way of 'splitting up' or 'reconstruction'. Any other interpretation would defeat the purpose and objective behind Section 10AA which was to encourage setting up of new units in the SEZ, and thereby create and add jobs, contribute to growth of the economy and earn foreign exchange. Choice of words in clause (ii) is therefore of great significance. Proviso restricts the scope and ambit of the clause (ii) in certain situations, with which we are not concerned in the present case.
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Clause (iii) in a way exposits and affirms that the negative ambit of clause (ii) would not encompass to include a new unit in SEZ. It stipulates that the unit in SEZ should not be formed by transferring machinery or plant previously used for any purpose to the new unit/business. Clause (iii) therefore accepts that there could be similar business already in existence. However, a scrutiny and verification must be made to ensure that the unit set up in the SEZ is not created by "splitting up" or "reconstruction" of the existing business. The restriction given in the second clause is not to deny any benefit to new unit being set up in the SEZ. Income earned by the new unit on satisfaction of the statutory conditions is exempt under Section 10AA, notwithstanding that the assessee, who has set up the new unit, had availed of benefit under Section 10A of the Act.
9. Impugned order has referred to the decision of the Delhi High Court in CIT v. Heartland Delhi Transcription Services (P.) Ltd. [2014] 52 taxmann.com 521/[2015] 228 Taxman 326 (Mag.)/[2014] 366 ITR 523 wherein interpreting an identical provision in Section 10B of the Act, it was observed that the objection under Clause (ii) should be taken in the first year when the new unit was set up and when exemption is for the first time claimed under Section 108 (ii of the Act. Relying on the language of sub-section (1) to Section 10B and clause (ii) of sub-Section 2 of Section 10B, it was held:-
"Sub-section (1) refers to deduction of profit and gains of an undertaking. The deduction is to be allowed for a period of 10 years from the year in which undertaking begins to manufacture, produce etc. articles, things or computer software. The beginning and end points for claiming the deduction are stipulated. These have reference to the eligible undertaking. Sub-clause (ii) to section 108(2) Incorporates a negative condition and states that the undertaking must not be formed by splitting up or reconstruction of business already in existence. Clause (ii) refers to the date on which the undertaking mentioned in sub-section (1) is created or formed. On the date of formation, the undertaking should not violate the condition stipulated in clause (ii) l.e. that it should not be created by splitting up or reconstruction of a business already in existence. Clause (ii) does not have any reference to the period of 10 years stipulated in sub- section (1) of Section 10B, after an undertaking is formed or created without violation of Clause (ii) to Section 108(2). Clause (ii) to Section 108(2) does not apply to the period, post formation of the undertaking, covered under sub-section (1), when the undertaking which at the time of formation meets the requirements of clause
(ii) to section 108(2). The undertaking, of course meet the requirements and fulfill the condition that it manufactures or produces articles, things or computer software during the ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 41 A.Y. 2011-12 assessment year. The proviso equally supports the said interpretation as it also refers to the date of formation of the undertaking, for seeking benefit under Section 10B(1). The requirements under clauses (ii) and (iii) in this manner do not relate to the subsequent period, i.e. post or after formation."
10. An earlier decision of the Delhi High Court in CIT v. Tata Communications Internet Services Ltd. [2012] 17 taxmann.com 241/204 Taxman 606 had interpreted sub-section (3) to Section 80IA of the Act, which bears similar language and negative stipulation to hold that the question of violation of sub- section (3) to Section 801A is to be raised and considered in the first year of the claim for deduction. If the assessee was using new plant and machinery that had not been previously used for any purpose and the new undertaking was not formed by 'splitting up' or 'reconstruction' of the business already in existence, the entitlement in deduction under Section 801A cannot be denied in the subsequent year.
11. It is an accepted and admitted position that the unit in the SEZ had commenced business in the period relating to the Assessment Year 2011-12. The assessee had claimed and was allowed deduction under Section 10AA in the Assessment Years 2011-12 and 2012-13. The Assessing Officer did not disallow exemption claim under Section 10AA in the assessment orders passed after scrutiny under Section 143(3) of the Act.
12. The Tribunal has examined whether the SEZ unit was formed and set up by 'splitting up' or 'reconstruction' of existing business. The Tribunal has referred to the facts in the form of data and figures to hold that the new unit in the SEZ was a new unit and not set up by 'splitting up' or 'reconstruction' of existing business. Table drawn in para 7 of the impugned order quotes and refers to the revenue earned from the existing business i.e. EOU unit and new SEZ unit which was entitled to exemption under Section 10AA from Assessment Year 2011-12. The table is as under:-
FY Revenue from Growth % Revenue from unit Growth % Total Revenue Growth % taxable business 2009- 10 48,93,15,919 48,93,15,919 2010-11 64,21,36,965 31% 3,61,10,980 67,82,47,945 39% 2011- 12 62,32,14,978 -3% 45,72,63,241 1166% 108,04,78,220 59% 2012- 13 66,95,57,158 7% 60,88,25,616 33% 1,27,83,82,769 18% 2013-14 73,08,34,134 9% 89,68,09,135 47% 16,27,64,32,69 27% 2014-15 88,07,79,281 21% 1,24,18,87,704 38% 2,12,26,66,985 30% 2015-16 103,00,00,296 17% 1,40,43,25,578 13% 2,43,43,25,875 15% 2016-17 141,96,91,400 38% 1,23,61,22,529 -12% 2,65,58,13,929 9% ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 42 A.Y. 2011-12 There was increase in revenue from taxable business of 31%, 7%, 9%, 21% and 17% in the assessment years 2011-12, 2013-14, 2014-15, 2015- 16 and 2016-17 respectively. In the assessment year 2012-13, there was a small reduction in revenue by 3% from Rs. 64,21,36,965/- to Rs.62,32,14,978/-. Revenue from the new Unit in the said year was Rs.60,88,25,616/- which was ninety five percent of the revenue of the existing business. The increase in revenue in the new unit was 1166% higher. Obviously the existing business was not transferred and the new unit had generated revenue almost equal to the revenue earned by the existing business. Respondent-assessee had also carried out the expansion of the non-exempt EOU unit by adding additional area of 21817 sq. feet. There has been increase of 33%, 47%, 38% and 13% in the revenue earned by the exempt unit during the period relevant to the assessment years 2013-14 to 2016-17 respectively. However, the revenue earned by the non-exempt unit/business has not deceased and has shown Increase as noted above between the financial years 2012-13 to 2015-16.
The Tribunal had also examined technical manpower employed in the new unit and has noted that percentage of new employees in the SEZ unit was 83% and 64% during the period relevant to the assessment years 2011-12 and 2013-14. Clearly new employment opportunities and jobs were created. Business had grown and increased substantially on setting up of the new unit, which was a legitimate and wise business decision and not subterfuge and an illegal act.
13. In the factual background, the Tribunal has accepted that the new unit was a separate identity for its income to qualify for exemption under Section 10AA for it was not formed and created by 'splitting up' or 'reconstructing' the existing business. The new unit was also not formed by transferring any machinery or plant previously used. Fresh investment was made in the new unit. The revenue earning and profits generated were clearly attributable to the new unit.
14. In view of the aforesaid factual background and the earlier decisions of this court, we do not find any substantial question of law arises for consideration. The appeal is dismissed with no order as to costs."
(vii) The Mumbai High Court in the case of Principal Commissioner of Income-tax-10v. Hinduja Ventures Ltd [2017] 88 taxmann.com 589 (Bombay) had held as under:
"Section 10A of the Income-tax Act, 1961 Free trade zone Assessment year 2005-06-Where assessee engaged in business of IT and IT enabled services, set up two new units with fresh investment, new plant and machinery, fresh set of employees and different customers, said units could not be said to be formed by reconstruction or an expansion of earlier business and though permission of STPI for those units was ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 43 A.Y. 2011-12 sought by way of an expansion, assessee would be entitled to exemption under section 10A for said units [In favour of assessee] The assessee had four units engaged in the business of IT and IT enabled services. It claimed deduction under section 10A in respect of unit II and unit III. The Assessing Officer did not allow deduction under section 10A on the ground that the assessee in his application to the STPI authorities had stated that these units were expansion and not distinct undertakings.
Held that both the units were set up with fresh investments. The assessee purchased plant and machinery for these units and it was not the case that these units were formed by splitting or reconstructing existing business. Separate books of account were maintained. The employees of each of the units were fresh set of employees and were not transferred from existing business. The nature of activity of both units was totally different, not only vis-à-vis each other, but also vis-à-vis the activity carried on by the first unit. The customers of each unit were completely different and unrelated and both the units had new and independent sources of income. In light of the aforesaid facts, it would be clear that the unit II and unit III could not be said to be formed by reconstruction nor could be said to be an expansion of earlier same business. Though the permission of STPI was sought by way of an expansion, the facts on record categorically and succinctly establish that the business of unit II and unit III were independent, distinct and separate and are not related with each other or even with unit I. Therefore the assessee would be entitled for benefit of section 10A."
(viii) The Delhi High Court in the case of Commissioner of Income- taxv. Delhi Press Patra Prakashan Ltd. [2013] 34 taxmann.com 3 (Delhi) had held as under:
"Section 80-1 of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings, etc., after certain dates [Conditions precedent] Assessment years 1991-92 to 1994-95 Whether for availing benefit under section 80-1 it is not essential that workers employed by assessee in carrying out activities in industrial undertaking must be directly engaged by assessee; persons may even be deployed in carrying out activities through sister concern Held, yes Whether further, an industrial undertaking carrying on manufacturing process on job work basis is also entitled to avail benefit of section 80-1-Held, yes Whether production of any new article or thing by an industrial undertaking would be sufficient to entitle industrial undertaking to claim deduction under section 80-1(2)(iii); whether same is marketable as new product is not relevant Held, yes Whether a new undertaking would not be treated as formed by splitting or reconstruction of a business already in existence and would not be disqualified under section 80-1(2)(1) simply for reason that activity carried on in a new undertaking was of a similar nature to ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 44 A.Y. 2011-12 one of activities being carried on in existing undertaking where new industrial undertaking is established in addition to existing one without transfer of any assets to newly formed undertaking Held, yes Whether where assessee had old unit no. 1 publishing house while new unit nos. 2 and 3 were printing houses In which work of printing was carried out through high speed printing machines and this was a business which could be carried out by unit nos. 2 and 3 Independent of unit no. I, new unit nos. 2 and 3 could not be stated to have been formed by splitting up or in reconstruction of existing business and, thus, fulfilled condition under section 80-1(2)(1) Held, yes Whether qualification as to whether any industrial undertaking fulfils condition as specified under section 80- 1 has to be determined in year in which new industrial undertaking is established; said deduction cannot be denied in a subsequent year without undermining basis on which deduction was granted in initial assessment year Held, yes (Paras 38, 39, 45, 57, 68 and 76] [In favour of assessee)"
(ix) The Apex Court in the case of Principal Commissioner of Income- tax, Centralv. Green Fire Exports [2019] 106 taxmann.com 33 (SC) had held as under:
"Section 10AA of the Income-tax Act, 1961 Special economic zone (Splitting up or Reconstruction of business) Assessment year 2007-08 Assessee-firm was carrying on business of manufacture and export of jewellery It claimed deduction under section 10AA being a SEZ unit Assessing Officer noticed that one of partners of assessee-firm was carrying on similar business as a sole proprietorship concern as well He further found that there had been direct intake of capital by assessee-firm from said proprietorship concern - Assessing Officer thus taking a view that it was merely a case of reconstruction of business, rejected assessee's claim for exemption under section 10AA Tribunal, however, noted that apart from capital received from proprietorship concern, huge amount of fresh capital had also been introduced in assessee- firm Moreover, assets appearing in balance sheet of old concern i.e. sole proprietorship, had not been shifted to assessee-firm Tribunal thus taking a view that it could not be a case of reconstruction of business, allowed assessee's claim for exemption High Court upheld order passed by Tribunal Whether, on facts, SLP filed against order of High Court was to be dismissed Held, yes [Para 1] [In favour of assessee)"
6.3 The first fact to be examined is whether the prop. concern M/s Sterling Exports was in existence prior to FY 2006-07, before the prop concern M/s Sterling Security Systems came into existence and whether the Prop concern M/s SSS is formed from the reconstruction of M/s SE already in existence.
ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 45
A.Y. 2011-12
6.3.1 The first evidence of existence of M/s Sterling Export in FY 2005-06 referred by the AO, is the document reproduced at pages 12/13 in the assessment order, On perusal of this document following observation are made:
• These are rough minutes of meeting (MoM) dated 20.12.2005 between CFM, Fabriario Securities (FS) and the appellant prop concern M/s Sterling Exports as CMF agent.
• The object discussed is regarding Market Possibility for FS in India for supply of securities thread on exclusive basis for India Banknote paper.
• The specifications of security thread have been mentioned with estimated quantity.
• There is working of cost, market study costs, commission of agent, total price @ Euro 50 per KM of thread at Rs 30 Million Euros and working of split between different cost components.
• Then there is proposal for upfront payments to be made to M/s Sterling Exports at various stages and return of these payments in case the objective is not achieved.
6.3.2 It can be observed from these MoM that it is a proposal discussed between three parties mentioned therein including the appellant as prop of Sterling Exports. The purpose of this meeting was to get the policy of RBI changed to make the use of security thread of M/s FS by all suppliers of banknote papers to RBI. The appellant was to receive commission @ 10% of gross profits of M/s FS and for this project the upfront payments were to be made to the appellant as follows:
(i) Euro 200,000/- at signature agency contract
(ii) Euro 200,000/- at decision of GOI to review actual securities features and FS is part of list of suppliers
(iii) Euro 400,000/- at formal decision to put FS thread into technical specs.
Then there is a condition that if above object is not achieved, the money payment made upfront will be returned by the appellant.
6.3.3 It is observed from the return of Income filed by the appellant for FY 2005-06 that the proposal papers seized by the IT Department during search never got executed as the appellant had not shown any business Income in AY 2006-07 from these activities. Further the business income shown by the prop concern M/s Sterling Exports in FY 2006-07 also does not show any income from the activities referred to in these MoM. The appellant claimed that this proposal ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 46 A.Y. 2011-12 was never executed and he never got first instalment of Euro 2,00,000/- as no agency agreement was signed between him and M/s FS. In the assessment order, the AO has not brought anything on record to prove that these MoM culminated into any agreement between the appellant & M/s FS or receipt of any advance or income by the appellant in pursuance to these MoM. There is no doubt that the name M/s Sterling Export had been mentioned in these MoM document seized. But the fact is that there is no evidence that anything fructified out of these efforts of the appellant.
6.4 The other evidence relied by the AO is the statement u/s 131 of Sh. Atul Gupta (Son of the appellant) recorded on 20.09.2017, reproduced in the assessment order, which had referred to some exhibits found in search, which point towards existence of M/s SE as agent of M/s CMF.
6.4.1 At page 11 of Q No 8, there is reference of letter dated 29.08.2005 issued by export manager of M/s CMF to BRBNMPL certifying the appointment Sh. Atul Gupta of M/s Sterling Exports as their exclusive agent in India. The Q No 9 refers to Exhibit 2, wherein letter dated 21.10.2005 of M/s CMF to BRBNMPL certifying that M/s SE is their exclusive agent in India to represent the business of CWBN paper in India and authorisation to Mr SP Gupta & Mr Atul Gupta to collect tender documents for supply of CWBN paper to BRBNMPL. The third exhibit in Q No 10 is the signed forward on letterhead of M/s Sterling Exports to M/s BRBNMPL about their authorisation by M/s CMF. Further AO had mentioned that some draft agreements were found during search, for which there is no specific reference.
6.4.2 It is observed from the statement of Sh. Atul Gupta that in reply to Q No 6, he had stated that M/s SE was not in any regular business. It was prospecting for businesses. There was nominal business of trading in chemicals, paper and horticulture. Further it is observed that the statement of Sh. Atul Gupta recorded in 2017 did not refer to the business of M/s SE in any specific year and this statement had been assumed to be on the facts of case in FY 2005-06. Sh. Atul Gupta was not the proprietor of M/s SE, but was just associated with his father as per this statement. Even he had been referred to as "Atul Gupta of M/s SE appointed as Agent of CMF in India". Sh. Atul Gupta had pointed that they were appointed agents for some specific work. This is even clear from the exhibit 2, wherein they have been authorised to collect tender document only. Further AO had mentioned that some draft agreements were found during search, for which there is no specific reference made in the assessment order. It is clear from these documents that some activity of looking for business was being explored by the appellant with M/s CMF under the name of Prop concern M/s Sterling Export, but there is no evidence that any of these efforts culminated into any Business in M/s SE. Further these documents have not been even confronted to the appellant. The statement of Sh. Atul Gupta, for the period 2005-06 may not fully reliable on facts due to the facts that (i) He was not the prop. of M/s SE and even there is no evidence on record to prove his employment with it in the FY 2005-06. What was his role and association with M/s SE cannot be fully relied in the absence of any confirming statement of the appellant that Sh. Atul Gupta was fully authorised to ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 47 A.Y. 2011-12 state the facts relating to M/s SE for AY 2006-07 (ii) The matter being 12 years old may have faded memory on certain facts. There is no evidence on record that these documents have culminated into any business for the appellant in prop concern M/s SE in AY 2006-07.
6.4.3 It is submitted that in the absence of any setup, except the office address & the appellant, M/s Sterling Export cannot be said to have setup/commenced Business. There should be assets, employees, capital employed, acts of business & expenses to establish the setting up of any business. The claim of expenses or generation of revenues is conclusive evidence of commencement of business. Without these elements, it cannot be said that the business of any undertaking had been set up or commenced. These letters referred are on letterheads of M/s CMF or M/s SE and do not constitute any legally enforceable agreement between the appellant's Prop concern M/s SE and CMF, wherein obligations & rights(revenues/income) of M/s SE have been defined. There is claim of the appellant that these letters were for some specific tasks, when the business opportunities were being explored. It appears from these documents that the appellant was exploring the business opportunities under the name of its prop concern M/s SE. However these do not prove conclusively that M/s SE was having any business of agency of M/s CMF for supply of CWBN paper to BRBNMPL in FY 2005-06 (AY 2006-07) or FY 2006-07 (AY 2006-07).
6.5 The appellant had submitted during the course of assessment proceedings (reproduced in the assessment order) that there was no business activity in M/s Sterling Export in the FY 2005-06 and the appellant had shown Salary & interest income in his return of income for AY 2015-16.
Further it had claimed that business unit of the Prop concern M/s SSS came Into existence on 13.9.2006 prior to setting up of business in M/s SE on 10.01.2007. The appellant had claimed that as business of M/s SE had come into existence after the set up of business in M/s SSS, there is no questions of "reconstruction of business" of M/s SE into M/s SSS. Further the appellant had contended that the business of M/s SE is trading of chemicals, goods etc., whereas the business of M/s SSS is export of services. Separate books of accounts, different premises, plant & machinery , employees and investment had been made and there is no transfer of assets or employees in setting up of M/s SSS from any other business.
6.5.1 During the course of appellate proceedings, the appellant was asked to file the copies of his returns of income for the AYs 2005-06 & 2006-07, P&L account of M/s SE & M/s SSS from AY 2006-07 & 2007-08 along with audit reports. The appellant had filed his copy of return of income of return for AY 2005-06, 2006-078 2007-08, from which it is observed that the appellant has shown only income from salary and other sources (interest Income) in FY 2005-
06. The appellant has filed income tax return of FY 2015-16 in "Saral- form 2D"
on 28.07.2006, wherein income from " Business or Profession" has been shown at "Nil". Similarly, the ITR filed by the appellant for FY 2004-05 on 29.07.2005 in "Saral- form 2D" shows income from salary and other sources only. On the ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 48 A.Y. 2011-12 basis of these records it can be safely concluded that the appellant was not in any business till 31.03.2006.
6.5.2 The appellant had filed copy of agreement with M/s CMF, the audited accounts along with 3CD reports of both the prop. concerns for FY 2006-07 (AY 2007-08). On perusal of these documents, the following observations are made:
(i) FY 2006-07 is the first year of operation of both the concerns
(ii) In the Form 3CD, in the case of M/s SSS the nature of business had been mentioned as "Consultancy of security papers and Bank Note papers" whereas in M/s SE it had been mentioned as "Trading of Chemicals"
(iii) The purchase of all assets in both the concerns had been shown in the depreciation schedule in the second half of the year.
(iv) In col11(b) of 3CD report, under the heading "whether there has been change in the method of accounting applied"
• In M/s SSS, the comments are "This is first year of business"
• In M/s SE, the comments are "Not applicable since this is the first year of operation. Business was commenced w.e.f. 10.01.2007.
(v) In M/s SE, as per the P & L account for AY 2006-07, the sales are at Rs 4.1 lakhs against the purchase of Rs 1.5 lakhs apart from interest income of Rs 87,200/-. The opening & closing stocks have been shown at "Nil" and the net profit has been shown at Rs 1,69,921/- for the year under consideration. Whereas In M/s SSS, as per the P & L account for AY 2006- 07, the professional receipts have been shown at Rs 3.58 Cr, misc. Income had been shown at Rs 11.48 lakhs and after claim of expenses of Rs 25.94 lakhs (out of which travelling expenses of Rs 15.45 lakhs is the main expense), the net profit had been shown at Rs 3.43.Cr.
(vi) Further from the records submitted by the appellant it is observed that the appellant had set up a unit namely M/s SSS in SEZ Noida on 13.09.2006 with the approval provided by Ministry of Commerce & Industry, Department of Commerce, Noida for providing Services. It had entered into an agreement with M/s CMF on 25.09.2006 for providing services to it as per the terms of the agreement, which was later modified through letter dated 20.12.2007. The appellant had claimed exemption u/s 10AA from AY 2007-08 onwards for its profits from export of services from the unit at rented premises in SEZ Noida. As per the 3CD the other prop concern M/s SE was involved in trading of chemicals from the premises at A-6, G.T. Karnal road, Industrial Area, delhi-110033. The ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 49 A.Y. 2011-12 income from export of services to M/s CMF had only been received in M/s SSS and not in M/s SE where there is small local trading income.
6.5.3 The AO had only relied on certain documents, wherein M/s SE was mentioned as agent of M/s CMF, but the appellant had claimed that it was using the name of M/s SE for some prospecting business opportunities or were for some specific job like for the purpose of collecting tender documents and no formal business was set up in M/s SE. This is evident from the copy of the return filed by the appellant for AY 2006-07, which has been filed in ITR-1 showing only source of income of the appellant from salary & interest and not from any business in this year. These evidences prove that there was not business in existence in AY 2006-07. Therefore, it can be observed that:
• The AO had not rebutted the submissions of the appellant w.r.t AY 2006-
07 & 2007-08 with any adverse evidence on record.
• The documentary evidences of existence of business of M/s SE, as per seized material referred to by the AO of activities in FY 2005-06, is not backed by any other evidence on record. These documents do not refer to any formal legally enforceable terms & agreement between appellant and M/s CMF for agency, which can culminate into set up of providing any services by the appellant and consequent receipt of revenues by M/s SE.
• Submissions of the appellant along with proof of return of income for AY 2006-07, clearly points toward the fact that M/s SE was only on paper exploring business opportunities, which could not fructify in AY 2006-07.
6.5.3.1 The appellant might have been proposing to do prospective export business under this name in the prop concern M/s SE and when the association with M/s CMF worked out, the appellant had decided to provide the export of services through a dedicated unit for this job from the tax free SEZ Noida, for which a separate unit M/s SSS was set up to provide these services. It is pertinent to note here that as per Form 3 CD & copy of permission from competent authorities for registering M/s SSS in SEZ for export of services, submitted by the appellant M/s SSS was set up on 13.9.2006. There is no evidence brought on record that M/s SE was having any business for export of same services till 13.09.2006 or even thereafter.
6.5.3.2 As per the 3CD form submitted by the appellant for M/s SE, it is observed that the business in M/s SE actually started on 10.01.2007. The assets for running of the business of trading were purchased by the appellant as per the schedule of depreciation (few bills were also submitted) in the second half of FY 2006-07. There was no evidence on record to prove any business activity in M/s SE before 10.01.2007. Although name of M/s SE had been used by the appellant for exploring various businesses in FY 2005-06 & 2006-07, but actually there was no business set up and nothing tangible fructified which can be said to a business to yield any revenues or expenses incurred for future revenues. There is ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 50 A.Y. 2011-12 no evidence of receipt of any money from any foreign client on any account, what to talk of export services, in the books/bank account of M/s SE in AY 2006- 07 or 2007-08. There is no evidence of even claim of any expenses either in AY 2006-07 or in AY 2007-08 (between 1.4.2006-13.9.2006). These facts point that although the appellant was trying to explore businesses in the prop concern M/s SE, actually there was no set up of business or any tangible business in M/s SE even till the time M/s SSS was set up.
6.5.3.3 The appellant had set up new business in SEZ, which had been registered in the name of Prop concern M/s SSS for export of services. Taken the premises on rent in SEZ, which is even finding of the search, for providing export services. Bought new assets for running the set up. Had signed agreement with M/s CMF on 25.9.2006. Provided dedicated services to M/s CMF from new premises at SEZ & at premises of M/s CMF. Received the foreign exchange in India as per his share of profit specified in the agreement. The first amount of Euro 148172.15 for its services was paid to the appellant on 09.10.2006 as per letter of CMF filed by the appellant. No assets or employees (except the prop.) were common from any other business existing before 13.9.2006. As the business grew, the appellant had made substantial investment in subsequent years in infrastructure and staff in this SEZ Noida unit for export of services. Thus M/s SSS was the new undertaking set up in SEZ Noida for providing export of services to M/s CMF.
6.5.3.4 It is further observed that :
o M/s SE is involved in the business of local trading of chemicals etc., whereas M/s SSS is in export of services.
o They both were operating from different premises.
o The business of M/s SE had been set up on 10.01.2007, subsequent to business set up in M/s SSS on 13.9.2006 o There is no transfer of any assets, capital or manpower from M/s SE to M/s SSS and vice versa in AY 2006-07 or 2007-08.
On the basis of the discussion made above, it can be safely concluded that there is no evidence on record that M/s SE was in any business before 13.09.2006, when M/s SSS was set up. If there was no business in existence in M/s SE, then there can be no question of any "Reconstruction" of business.
6.5.3.5 Without prejudice to it, as there was no business as on 13.09.2006 in M/s SE, it was open for the appellant to register even this name to set up unit in SEZ and export the services under this name. It appears that after observing some business opportunity to fructify, the appellant had chosen to set up new dedicated unit in SEZ with name M/s SSS and continued to explore further business opportunities in M/s SE till it set up & commenced the local trading ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 51 A.Y. 2011-12 unit in M/s SE on 1.10.2007. It is the prerogative of the businessman to organise his business affairs to suit his best business interests. The appellant had set up new dedicated unit in SEZ after proper registration and other actions for putting together the elements for setting up of new unit in M/s SSS. It may be mentioned here that generally new businesses or expansion of earlier businesses emanate from existing businesses and such new set up of businesses (even including of expansion) have not been held "reconstructions" in various court decisions cited above if certain conditions are met.
6.5.3.6 The appellant had contended that such issue of reconstruction can be looked into in the first year and exemption u/s 10AA(4)(ii) cannot be denied in any of subsequent years if it had been allowed in the first year. It is observed that the onus is very heavy on the Revenue to examine the facts in the very beginning i.e., the initial year to come to a conclusion whether the benefit u/s 10AA(4)(ii) be denied or not. The support is drawn from the rulings of -
• CIT v. Nippon Electronics (India) Private Limited (1990) 181 ITR 518 (Kar);
• Sami Labs Ltd., v. ACIT (2011) (334 ITR 157) • Tata Communications Internet Services v. ΙΤΟ (2010) 130 TTJ Delhi ITAT 'E' Bench It is observed that the case of the appellant had been scrutinised from the year 2007-08 onwards. Further the proposal u/s 263 was sent on 17.11.2011 for AY 2007-08 to 2010-11 for examining the exemption u/s 10AA. The CIT VII Delhi had accepted the issue of exemption u/s 10AA but had set aside the assessment on the issue of interest on FDR and adjustment of loss of M/s Sterling Exports. It is observed that the first year of setting up of M/s SSS i.e.2007-08, had got time barred as on date search and cannot be reopened u/s 153A. The AO had in assessment u/s 153A commented that the seized documents reflecting existence of M/s SE before M/s SSS were not available with the department before search to examine this issue. Therefore, in my opinion, if subsequently gathered facts of the case point towards the violation of 10AA(4) (ii) in the first year and the first year is barred by imitation, even then other re- assessable non time barred years can be given effect of findings of the first year. However it is observed that the documents found during search do not prove that M/s SE was doing any business before M/s SSS was set up. These documents only prove that the appellant was exploring business opportunities in M/s SE. Existence of name of any prop concern does not mean existence of business. Thus there are no evidence of existence of business in M/s SE before the date of set up & commencement of business in M/s SSS. Therefore the documents found during search do not materially alter the facts of case before search (which have been thoroughly examined) in the absence of any corroborating evidence of any tangible business in M/s SE. Exploring business under some name without proper set up of execution is different from actual set up of tangible business. Therefore, in the present facts of the case, on the basis of seized documents, it cannot be said that ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 52 A.Y. 2011-12 there is violation of provisions of section 10A(4) (ii) in the case of M/s SSS in the first year of its existence.
7. In view of the discussion made in para 5 & 6 above, it is held that:
(i) The appellant had requisite knowledge and competence to provide the services to M/s CMF and these services provided from M/s SSS set up in SEZ Noida are eligible for deduction u/s 10AA of the IT Act 1961.
(ii) The seized papers do not represent any actual business activity in M/s SE during the period referred in these papers.
(iii) M/s SSS was set up prior to M/s SE and both these units are in separate lines of business, being operated from different premises, therefore, there is no re construction of business of M/s SSS from the existing business of M/s SE. Therefore, there is no violation of provisions of section 10AA (4) as alleged by the AO.
In these facts and circumstances of the case, it is held that there is no violation of the provisions of section 10AA and the appellant is fulfilling the criteria u/s 10AA which make it eligible for deduction u/s 10AA, as claimed by it in the return of income. Accordingly, the addition of Rs 27,86,71,150 made by the AO on account of disallowance u/s 10AA is hereby deleted and these grounds of appeal on merit are allowed.
7.1 In view of the decision in para 7 above, the other technical grounds of appeal taken by the appellant are not adjudicated, as it will have only academic value.
8. Ground No. 10 relates to charging of interest u/s 234B of the IT Act, 1961. Charging of interest is consequential in nature and, therefore, the Assessing Officer is directed to look into this grievance of the appellant while giving effect this order.
9. Ground No. 11 relates to initiation of penalty u/s 271(1)(c) of the IT Act 1961. As no penalty has yet been imposed by the Assessing Officer under the said section, there is no cause for any grievance on the part of the appellant. Hence, this ground of appeal is dismissed as immature.
10. In the result the appeal of the appellant is "partly allowed".
6. Aggrieved by the relief granted by the CIT(A), the Revenue is in appeal before the Tribunal.
ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 53
A.Y. 2011-12
7. The learned CIT-DR for the Revenue relied upon the Assessment Order and submitted that;
(a) The assessee has failed to show that criteria's for claiming exemption under Section 10AA of the Act has been fulfilled. On the other hand, the Assessing Officer has justified his action by showing that the assessee has not fulfilled all criteria to enable him to claim exemption.
(b) The assessee did not have the expertise competence and established capabilities to render services giving rise to amount received from Cartiere Milani Fabriano (CMF) and thus the deduction under Section 10AA of the Act was not available to the assessee.
(c) Shri Atul Gupta S/o the assessee in the statement under Section 131 of the Act stated that other proprietorship concern of the assessee namely, 'Sterling Exports' was involved in the consulting currency paper suppliers albeit of a small amount. The proprietorship concern 'Sterling Export' is not situated in SEZ and therefore, profits arising to the assessee are not eligible under Section 10AA of the Act.
The learned CIT-DR also, in effect, stated that the additions made are based on seized documents and thus the additions were permissible within the scope of Section 153A of the Act. The learned CIT-DR thus urged for reversal of relief granted by the CIT(A).
8. The learned Counsel for the assessee, on the other hand, broadly relied upon the submissions made before the CIT(A), discussion thereon by the CIT(A) and findings returned thereon by the CIT(A) and reiterated the factual and legal position.
ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 54
A.Y. 2011-12
8.1 The learned Counsel also referred to application under Rule 27 of the
Income Tax Appellate Tribunal Rules, 1963 dated 28.08.2024 and assailed the order of the CIT(A) in not granting relief to the assessee on jurisdictional point raised towards limited scope of Section 153A of the Act. The learned Counsel submitted that the impugned additions / disallowance with reference to Section 10AA of the Act was made in the completed /unabated assessment de hors any incriminating material which may suggest any unaccounted income found in the course of search. Elaborating the point, the learned Counsel submitted that any and every material in relation to a transaction recorded in the books of accounts would not constitute "incriminating material" per se. In the present case, the additions / disallowances have been made on fresh interpretation of existing agreement between the assessee and the recipient of services i.e. CMF which by no stretch of imagination can be regarded as incriminating material found. The learned Counsel thus submitted that in view of large number of judgments rendered by jurisdictional High Court and various other Courts culminating in judgments delivered by the Hon'ble Supreme Court in the case of Abhisar Buildwell Pvt. Ltd., the jurisdiction of the AO, to revisit the exemption/deduction under Section 10AA based on fresh appreciation of factual matrix (already assessed in the first round of proceedings and thereafter, scrutinized by appellate authorities), is clearly ousted.
8.2 The learned Counsel also stoutly asserted that the Revenue cannot adopted pick and choose approach and is bound to abide by sacrosanct doctrine of consistency. The learned Counsel submitted that A.Y. 2011-12 in question is the 5th year for claiming deduction and no additions / disallowance has been made by the Revenue in earlier 4 years of such claim on identical facts. Thus, the exemption claimed on the same facts cannot be denied ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 55 A.Y. 2011-12 arbitrarily in the 5th year of operation. The action of the Revenue thus cannot be validated even on this point.
8.3 The learned Counsel, in elaboration, took us through the submissions placed before the CIT(A) and the findings of the CIT(A) thereon, which we shall deal with, in the subsequent paragraphs as and when considered expedient.
9. We have heard the rival submissions and perused the material available on record. As per the Grounds of appeal, the Revenue has challenged the propriety of claim of exemption under Section 10AA of the Act in the facts and the circumstances of the case.
10. While the Revenue has challenged the action of the CIT(A) holding the claim of exemption under Section 10AA of the Act to be legitimate and within the bounds of law, the assessee has apart from supporting the order of CIT(A) on merits of claim however, simultaneously assailed the action of the Revenue in usurping wrongful jurisdiction under Section 153A of the Act by moving separate petition under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963.
11. Briefly stated, the assessee is an individual who had been carrying on the business through two sole proprietorship concerns which 'Sterling Exports' and 'Sterling Security Systems'. It is the case of the assessee that business of export of services which is subject matter of dispute, was carried on through 'Sterling Security Systems' whereas other business mainly relating to domestic trading etc. were carried on through 'Sterling Exports'. During the Assessment Year 2011-12 under consideration, the export oriented undertaking namely Sterling Security System situated at SEZ Noida reported ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 56 A.Y. 2011-12 profits eligible for exemption under Section 10AA of the Act. As further stated, the Assessment Year 2011-12 is not the first year of consultancy business or claim of exemption in question. The consultancy services from SEZ concern commenced from A.Y. 2007-08 and the Assessment Year 2011- 13 in question is the fifth year of business and claim of exemption. The Revenue has accepted the propriety of claim of exemption in all other Assessment Years. For the Assessment Year 2011-12 also, the original assessment was completed under Section 143(3) of the Act wherein the claim of exemption qua profits of 'Sterling Security System' under Section 10AA of the Act and was duly accepted.
11.1 Subsequently however, pursuant to search under Section 132 of the Act on 26.12.2016, the proceedings under Section 153A of the Act were initiated wherein the exemption under Section 10AA of the Act in this fifth year has been denied resulting in present proceedings.
11.2 In the impugned Assessment Order passed under Section 153A, the AO disallowed the aforesaid claim of exemption of profits arising in the hands of proprietorship concern 'Sterling Security System' broadly on two counts;
i) The services rendered by the assessee to a foreign company viz. Fedrigoni SpA to facilitate export of currency paper by that foreign company to companies belonging to RBI, did not constitute any export of services, entitling for exemption under Section 10AA of the Act.
ii) The business of Sterling Security System, claimed to be export- oriented unit located in SEZ, was established in A.Y. 2007-08 by splitting up/reconstruction of the same business of export of services being carried on ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 57 A.Y. 2011-12 by other proprietor unit/business of the assessee, carried on in the name of 'Sterling Exports'.
11.3 The assessee contends that in so far as the first allegation raised by the AO towards nature of services is concerned, the AO did not built its case in Section 153A proceedings with reference to any single "material" found in the course of search. The allegation so made is based on re-appreciation of documentary evidences available at the time of regular assessment. As regards the second allegation of "splitting up/reconstruction", the allegation of AO is based on (i) The statement of Sh. Atul Gupta (son of assessee) recorded u/s 131 of the Act during the investigation proceedings subsequent to search and
(ii) extracts of minutes of meeting (MoM) dated 20.12.2005 found in the course of search. Based on the statement of Sh. Atul Gupta and MoM found in the course of search, it is the case of the AO that impugned business of export of services was originally contemplated to be carried out through Sterling Exports, which was, instead, subsequently carried out in Sterling Security System. Such act of the assessee, as per the AO, tantamount to splitting up, reconstruction of business of 'Sterling Exports' to 'Sterling Security System'.
12. As noted in the preceding paragraph, the denial of exemption claimed under Section 10AA of the Act by the AO in search assessment under Section 153A of the Act was challenged by the assessee before the CIT(A) both on the grounds of lack of jurisdiction to invalidate the exemption claimed under Section 153A of the Act as well as on merits of eligibility of such claim. The CIT(A) adjudicated the appeal of the assessee on merits in his favour after detailed factual analysis. The CIT(A) rejected the allegation of the AO towards absence of export of service by the assessee with reference to Section 10AA of the Act. For this purpose, the CIT(A) analyzed the revisional order passed under Section 263 of the Act by the Revisional Commissioner for the ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 58 A.Y. 2011-12 Assessment Year 2008-09 wherein identical issue of eligibility of deduction was raised in the show-cause notice under Section 263 of the Act. But however, this aspect was accepted in favour of the assessee in the revisional order. The Revisional Commissioner while passing the order under Section 263 of the Act proposed revision on certain other issues which were, in turn, challenged by the assessee before ITAT and the assessee succeeded on other issues. In short, the nature of services rendered by the assessee (proprietorship concern Sterling Security System) to foreign company were duly substantiated in the earlier proceedings under Section 143(3) of the Act as well proceedings initiated by the CIT under Section 263 of the Act and found satisfactory by the AO as well as Revisional Commissioner. In this backdrop, the CIT(A) (in the present case) considered the documentary evidences on merits and also the revisional order passed by the CIT under Section 263 of the Act on same facts and reversed the disallowance made by the AO on merits.
13. As regards the other aspect of allegation of the AO that business/export of service through 'Sterling Security System' is not eligible for deduction under Section 10AA of the Act on the premise that such concern has been formed through splitting up or reconstruction of business of 'Sterling Exports'. The CIT(A) inter alia examined the financials and income generated by both the concerns and found that 'Sterling Exports' was not in existence at the time of setting up/commencement of business by 'Sterling Security System'. Whereas 'Sterling Exports' came to be setup on 10.01.2007, the EoU concern i.e. 'Sterling Security System' was formed on 13.09.2006. Furthermore, even after 'Sterling Exports' having been setup, this concern was never engaged in the business of export of services. Thus, there is no probability of splitting up or reconstruction of Sterling Exports into Sterling Security System. With reference to the statement of Sh. Atul Gupta and MoM found in the course of ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 59 A.Y. 2011-12 search heavily relied upon by the AO to adopt a different view, the CIT(A) meticulously dealt with these aspects and concluded that neither the statement nor the MoM prove actual carrying on business of export of services by Sterling Exports (situated in non-SEZ area). The trade name of 'Sterling Exports' was loosely used by the son of the assessee in the MoM prepared at the initial stages of negotiation and conceptualization of the business of exports, to be carried on between assessee and the foreign company. In the wake of substantive evidences to justifying execution of services through Sterling Security System located in SEZ area, the CIT(A) dislodged the case built by the AO on merits and restored the claim of the assessee. The appeal of the assessee was thus allowed by CIT(A) on merits on all counts.
14. In the factual background noted above, two questions arises for consideration of the Tribunal. Firstly, propriety of claim of exemption under Section 10AA of the Act on merits in the facts of the case and secondly validity of disallowance of exemption under Section 10AA of the Act on the touchstone of jurisdiction available under Section 153A of the Act in the facts of the case.
15. To begin with, we shall address ourself on justifiability of claim of deduction under Section 10AA on merits. The Revenue has assailed the order of the CIT(A) which was granted relief on merits. In this regard, we straightaway observe that identical issue has been examined threadbare in the Assessment Year 2008-09 by the CIT in revisional proceedings and found that the prerequisite of claiming exemption under Section 10AA of the Act are existing. The proprietorship concern is located in SEZ area and export services were carried out from the concern located in SEZ. The ingredients of Section 10AA of the Act were thus found to be fulfilled by the CIT(A). Besides, we also observe that the assessee has claimed the exemption right from ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 60 A.Y. 2011-12 Assessment Year 2007-08 onwards and this is the fifth year of claim of exemption. There being no change in facts which were in existence in Assessment Year 2007-08 and later years, in our view, it is not open to the Revenue to deny the benefit of Section 10AA of the Act in Assessment Year 2011-12 arbitrarily in isolation to other Assessment Years. The CIT(A) has correctly recorded the finding that neither the proprietorship concern Sterling Security System has come into existence prior to 'Sterling Exports' nor 'Sterling Security System' is formed by splitting up/reconstruction. Export services have been rendered by the concern situated in SEZ and hence there is no warrant to deny benefit of exemption to the assessee in the fresh proceedings for the same Assessment Year initiated post search.
16. The CIT(A), in our view, has rightly allowed the claim of exemption under Section 10AA of the Act. The question thus, raised on behalf of the Revenue requires to be answered in negative and against the Revenue. The appeal of the Revenue is thus dismissed.
17. We, now advert to the challenge raised on behalf of the assessee towards lack of jurisdiction to reexamine the claim of exemption under Section 10AA of the Act within the ambit of Section 153A of the Act. As noted above, the assessment for the A.Y. 2011-12 was completed under Section 143(3) of the Act prior to search and therefore, the additions/disallowance under Section 153A of the Act is permissible only with reference to incriminating material found in the course of search as held in PCIT Vs. Abhisar Buildwell (P.) Ltd. (2023) 454 ITR 212 (SC). In the present case, the jurisdiction under Section 153A of the Act has been assumed to reassess the claim of exemption under Section 10AA of the Act based on (i) Statement of Sh. Atul Gupta son of assessee under Section 131 of the Act recorded in post search inquiries wherein he has made reference to 'Sterling ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 61 A.Y. 2011-12 Exports' for services in contemplation giving raise to exemption and (ii) MoM found in the course of search from the premises of the assessee. It is the contention of the assessee that statement of Sh. Atul Gupta has been recorded under Section 131 of the Act and therefore, cannot constitute incriminating material found in the course of search per se. Secondly, reference of trade name Sterling Exports in the Minutes of Meeting (MoM) also cannot be construed as any incriminating material. The Minutes of Meeting loosely uses the word "Sterling Exports" by the son of the assessee and such MoM scribbling was carried out at the initial stages of negotiation and conceptualization of potential business of exports. A mere noting of this type in minutes is of inconsequence. It is a matter of record that actual business of export of services was carried out from Sterling Security System located in SEZ which was formed prior to Sterling Exports coming into existence. The proposal papers, by itself, do not signify or constitute any incriminating material to give raise to such drastic action. It is a matter of record that actual business of service of exports were carried out by SEZ unit - Sterling Security System which is determinative of eligibility of claim.
18. It is noticed that the assessee had raised the point in issue even before CIT(A). The CIT(A), however, declined to entertain the jurisdictional issue stating it to be of academic nature and thus summarily dismissed the question, since the issue on merits was decided in favour of the assessee.
19. We find force in the plea towards lack of jurisdiction to reexamine the deduction claimed under Section 10AA of the Act within the remit of Section 153A of the Act. The Minutes of Meeting showing preliminary discussion of development of business giving reference to one of the units of the assessee, by itself by no stretch of imagination, can be construed as incriminating material of any sort. It is open to the assessee to do business from other ITA No. 1276/Del/2021 DCIT vs. Satya Prakash Gupta 62 A.Y. 2011-12 concern, if so, desired. As long as the business has been actually carried out by the concern located in SEZ, such MoM showing the name of some other concern of the same person is not any significant material far less any incriminating material. Similarly, statement of son of the assessee subsequent to search making reference to trade name Sterling Exports is again of no consequences in the wake of substantial evidences available to the contrary. Be that as it may, the statement under Section 131 of the Act post search do not constitute any incriminating material contemplated under Section 153A of the Act for the purposes of assumption of jurisdiction.
20. We, thus, find palpable merit in the objections raised on behalf of the assessee under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. The jurisdiction assumed under Section 153A of the Act to reassess exemption claimed under Section 10AA is thus, without sanction of law. The objection of the assessee under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963 thus, succeeds.
21. In the result, the appeal of the Revenue is dismissed on all counts. Order pronounced in the open Court on 30th September, 2024.
Sd/- Sd/-
[SUDHIR KUMAR] [PRADIP KUMAR KEDIA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
DATED: 30th September, 2024
* Subodh Kumar/Priti Yadav, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
Assistant Registrar