LOTUS FOOTWEAR ENTERPRISES LIMITED-INDIA BRANCH,TIRUVANNAMALAI V. DCIT, INTERNATIONAL TAX 1(2), CHENNAI

ITA 800/CHNY/2022

AI Insights

The case involves M/s. Lotus Footwear Enterprises Ltd., which operates two units in the Cheyyar SEZ. The dispute centered on the eligibility of Unit 2 (LU2) for a 100% deduction under Section 10AA of the Income-tax Act, 1961, claimed as a new unit. The Assessing Officer (A.O.) and the Dispute Resolution Panel (DRP) viewed LU2 as an extension of Unit 1 (LU1), resulting in a restriction of the deduction to 50%. The Tribunal examined whether LU2, established after LU1 reached full capacity, qualified as a new unit under the Act, considering factors like the transfer of machinery and interdependence between the units. The Tribunal's decision partially overturned the lower authorities' findings, allowing the deduction under Section 10AA before the set-off of losses and depreciation, but upheld the view that LU2 was not a new unit.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 107034 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 1 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-09-2024
• Assessment Year: 2019-2020
• Appeal Filed On: 21-09-2022
• Other Referred Cases: CIT v. Yokogawa India Ltd., Amnet Systems P Ltd
• Laws Referred To: Income-tax Act, 1961, Special Economic Zones Act, 2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NILAY BARAN SOM
• Assessee Lawyers: SRIRAM SESHADRI; C.A
• Keywords: Depreciation; Principle of natural justice; Unabsorbed depreciation; CHAPTER IV
• Section: 143(3); 13; 274; 234B; 28; 133A; 115JB; 72; 10B; 10AA

Judgement Text

"आयकर अपीलीय अिधकरण, ‘ए’ \u0011ा यपीठ, चे\u0016ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH: CHENNAI \u0019ी एबी टी. वक\u001e, \u0011ा ियक सद! एवं \u0019ी जगदीश, लेखा सद! क े सम( BEFORE SHRI ABY T. VARKEY, JUDICIAL MEMBER AND SHRI JAGADISH, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.20/Chny/2021 for Assessment Year 2016-17 आयकर अपील सं./ITA No.798/Chny/2022 for Assessment Year 2017-18 आयकर अपील सं./ITA No.799/Chny/2022 for Assessment Year 2018-19 आयकर अपील सं./ITA No.800/Chny/2022 for Assessment Year 2019-20 M/s. Lotus Footwear Enterprises Ltd. - India Branch, Plot No.3B & 3C, SIPCOT Industrial Park, Mangal Village, Mathur Post, Vembakkam Taluk, Tiruvannamalai District – 613 701. Vs. The Dy. Commissioner of Income Tax, International Taxation-1(2), Chennai. [PAN: AABCL 3407G] (अपीलाथ\u0007/Appellant) (\b\tयथ\u0007/Respondent) अपीलाथ\u001e की ओर से/ Appellant by : Shri Sriram Seshadri, C.A HIथ\u001e की ओर से /Respondent by : Shri Nilay Baran Som, CIT सुनवाई की तारीख/Date of Hearing : 09.09.2024 घोषणा की तारीख /Date of Pronouncement : 20.11.2024 आदेश / O R D E R PER JAGADISH, A.M : Aforesaid fours appeals filed by the assessee for Assessment Years (AYs) 2016-17 to 2019-20 arises out of final assessment orders dated 26.02.2021 & 28.07.2022 passed by Learned Asst. Commissioner of Income Tax, International Taxation-1(2), Chennai, IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 2 -: u/s.143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (hereinafter “the Act”) pursuant to the directions of Ld. Dispute Resolution Panel-2, Bengaluru u/s 143(3) r.w.s 144C(1) of the Act dated 22.01.2021 & 08.06.2022. 2. The facts in all the appeals of the assessee are identical and issues are common hence, we proceed to pass a common order. For brevity, we shall take up the appeal in IT(TP)A No.20/Chny/2021 for A.Y 2016-17 as lead case. The grounds of appeal raised by the assessee for A.Y 2016-17 are as under: “I. General Grounds 1. The lower authorities have erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed. 2. The lower authorities have finalized their order with improper adjustments to the total income of the Appellant, as a result of misapplying the provisions of the Act without considering the information, arguments and evidence provided by the Appellant. II. Claim of deduction under section 10AA of the Act 3. The lower authorities have erred in restricting the claim of deduction under 10AA of the Act made by Unit 2 (\"LU2\") to INR 1,63,1o,312 by erroneously concluding that LU2 was formed by splitting up or reconstruction of LU1 without appreciating substantial investment in plant and machinery made by LU2 and set up of a new unit after obtaining an approval as a separate unit from the concerned Authorities under the Special Economic Zones Act, 2005 ('SEZ Act') 4. The lower authorities have failed to appreciate that LU2 is a separate unit recognized under the SEZ Act and was set up IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 3 -: consequent to LU1 achieving near full capacity in production process. 5. The lower authorities have failed to examine the overall increase in turnover of LU1 and LU2, which indicates a new undertaking being set up, and has erred in adopting a narrow product- based approach to conclude that there is splitting up of business. 6. The lower authorities erred in not appreciating the legal requirement relating to transfer of machinery and erroneously concluded that the Appellant has violated the condition prescribed in section 10AA of the Act. 7. The lower authorities misapplied the provisions of the Act and circulars issued by the Central Board of Direct Taxes in holding that LU2 is an extension of LU1 merely because there was transfer of certain employees to LU2. 8. The lower authorities erred in concluding that LU1 and LU2 are interdependent without appreciating the evidences and documents provided during the assessment proceedings demonstrating their independence. 9. The lower authorities have erred in concluding that LU2 is only an expansion of LU1, when there is no such treatment by the SEZ authorities and as such, the approval for a new unit, i.e. LU2 is binding on the lower authorities. III. Manner of computation of deduction under section 10AA of the Act 10. The lower authorities erred in law in setting off the brought forward loss and unabsorbed depreciation before allowing deduction under section 10AA of the Act without giving any specific opportunity to the Appellant. 11. The lower authorities did not consider the judicial precedents, as rendered in the Assessee's own case by the Hon'ble Tribunal, wherein it has been held that deduction under section 10AA of the Act shall be granted prior to set off of brought forward business loss and unabsorbed depreciation. IV Allowance of MAT credit 12. The lower authorities have erred in not allowing the credit of taxes paid under section 115JB of INR 46,54,86,95 as disclosed in the return of income of the Appellant. IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 4 -: V Consequential Relief 13. The respondent erred in charging interest under Section 234B of the Act which is consequential in nature. The grounds of appeal raised by the Appellant herein are without prejudice to each other. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.” 3. Grounds No.1 & 2 are general in nature hence, no adjudication is required. 4. Grounds No.3 to 9 are relating to not allowing claim of deduction u/s. 10AA of the Act in respect of Unit-2 (LU2) at 100% , holding it extension of existing unit-1(LU1)against the claim of new unit. 5. The assessee-company is a branch of Lotus Footwear Enterprises Ltd., which is incorporated in British Virgin Islands. The assessee is a contract manufacture of Nike brand shoes of various models on behalf of M/s. Growth-Link Overseas Company Limited (“GLO”) and supplies it to NIKE, as per the instance of NIKE and gets paid from GLO as per the agreed price. The assessee company (LU1) was manufacturing various shoe models and was operating almost full capacity and therefore, decided to set up second unit LU2 and commenced operation on 2nd April, 2014. A survey u/s. 133A of the Act was conducted in the premises of the assessee on 31st October, 2018 and assessment u/s. 143(3) of the Act was completed, where IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 5 -: the A.O on the basis of findings of survey proceedings held that LU2 has been formed by splitting up of LU1 and therefore, held LU2 to be an extension of LU1 and restricted the deduction claimed for LU2 u/s. 10AA of the Act to 50% as against 100% deduction claimed by the assessee u/s. 10AA of the Act in respect of LU2 as new unit. The A.O in the draft assessment order has held that LU2 is an extension of LU1 and is formed by splitting up and re-construction of LU1 for following reasons: 1. There was huge transfer of employees from LU1 to LU2; 2. Some products i.e, young athlete shoe manufactured in LU1 are manufactured in LU2; 3. Transfer of machinery from LU1 to set up LU2 and 4. Interdependence of LU1 and LU2 6. The assessee against the draft assessment order has filed objections before Hon’ble DRP and the Hon’ble DRP has agreed with the findings of A.O. 7. Before us, The Ld. Authorized Representative (A.R) of the assessee has argued that the provisions of Section 10AA of the Act do not envisages in condition with respect to movement of employees between the units, for denying the benefits u/s. 10AA of the Act. As IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 6 -: regards to same product being manufactured by LU1 and LU2, the Ld. AR has submitted that young athlete shoe model is a basis shoe model produced by the assessee catering to the requirements of kids and is the simplest model of shoes manufactured and it does not require significant skilled labour for production. Accordingly, the said model was initially produced by LU2 in the year of formation. As regards to transfer of machinery, the Ld. AR has argued that the A.O has wrongly considered the transfer of machinery from Unit 1 to Unit 2 during Financial Year 2013-14 at 22.10 percentage when the production has started on 02.04.2014 i.e., in Financial Year 2014-15. The Ld. AR has argued that the A.O has considered the transfer of machinery at more than 20% and therefore, not eligible for deduction u/s. 10AA of the Act, but if the date of year of starting the production of 2014-15 is considered the transfer of machinery is only 9.6 % and AO is not justified to treat the new unit as a transfer of old machinery. 8. As regards to interdependence of LU1 & LU2, the Ld. AR has argued that LU2 operates as an independent unit and has entered into a separate lease agreement with Cheyyar SEZ Developers Private Limited and obtained a separate letter of approval from the SEZ authority. The Ld. AR has also submitted that two units are separated IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 7 -: by a compound walls and have a separate entries and exit, and have separate earmarked RB & IP departments, ETP, sub-station for power, warehouse, parking lots, administration building etc. 9. The Ld. Departmental Representative (DR), on the other hand, supported the order of A.O and submitted that second unit, LU2 is not a new unit but only an extension of the first unit LU1. The Ld. DR has further submitted that the production started from 02.04.2014, but the unit was ready for production on 31.03.2014 and on that date the percentage of machinery transferred is 22.01 percent which is more than 20% provided in explanation 2 to section 80IA(3) and therefore not eligible for deduction as per section u/s. 10AA (4) (iii) of the Act. 10. We have heard the rival submissions, and perused the materials available on record. The A.O and Ld. DRP have considered the new unit LU2 set up as an extension of old unit LU1 and therefore has not allowed the claim of deduction @100% as allowable to new unit. The AO has allowed the claim u/s. 10AA of the Act @ 50% which is the rate of deduction allowable to LU1. The only issue to adjudicate is whether the second unit (LU2) which commenced production on 2nd April 2014 in Cheyyar SEZ is formed by transfer of machinery IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 8 -: previously used in other unit as provided in Section 10AA(4) (iii) read with explanation 2 to section 80IA(3) and therefore not eligible for deduction u/s 10AA as new unit. 11. The second unit LU2 had made application to set up new unit in Cheyyar SEZ to Development Commissioner MEPZ on 24th May 2013 and commenced production from 2nd April 2014. The AO has noted that as on 31.03.2014, the assessee company has purchased new machinery of Rs.11,99,23,856/ and transferred machinery of value Rs.3,40,34,392/ from the other unit and therefore the percentage of transferred machinery is 22.10%. As per explanation 2 to Section 80IA(3) read with explanation to section 80IA(4), only where machinery transferred to new business does not exceed the twenty per cent of the total value of machinery, it will be said to be not formed by the transfer to a new business of machinery or plant previously used for any purpose which is requirement as per section 10AA(4)(iii) to be eligible to claim deduction under section 10AA. In the case of assessee company the percentage of transferred machinery is more that 20%, hence section 10AA(4)(iii) is clearly attracted. The Ld AR’s argument that production started in financial year 2014-15, therefore the percentage of transferred machinery as on 31.03.2015, which is IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 9 -: 9.6% should be taken is not acceptable as assessee company has commenced production on 2nd April 2014 and the unit was in ready condition as on 31.03.2014. The Ld AR’s argument that AO has not included the capital WIP in new purchase of machinery for LU2 while arriving the 22.10 % of transferred machinery and if WIP is included the percentage of transferred machinery would be 14.57% is rejected as, the Ld AR has not been able to substantiate the above claim by accounts either before the A.O or DRP or before us. We, therefore agree with the order of Ld. AO that the second unit (LU2) is formed by the transfer of machinery previously used and therefore not eligible to claim deduction under section 10AA as new Unit. Accordingly, these grounds of appeal are dismissed. 12. Grounds No.11 & 12 are relating to computation of deduction u/s 10AA and set off of brought forward losses and depreciation. 13. The A.O in the assessment order has noted that assessee in the computation has claimed set off brought forward business loss and unabsorbed depreciation after claiming the deduction under section 10AA, however as per assessment order up to A.Y 2015-16 there is no brought forward business loss or unabsorbed depreciation determined, therefore there is no question of allowbility of the same. However, AO IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 10 -: has held that deduction u/s.10AA of the Act is to be allowed only after setting off of brought forward loses and unabsorbed depreciation. The Ld. AR has submitted that the Hon’ble ITAT in assessee’s own case for A.Y 2012-13 has held that the deduction u/s. 10AA of the Act shall be first granted and then the remaining profit if any can be set off against the brought forward losses. 14. The Ld. AR has further submitted that this ratio has been approved by Hon’ble Madras High Court in the case of Amnet Systems P Ltd – 138 Taxmann.com 333. The Ld. AR has further submitted that this issue now squarely covered by the decision of Hon’ble Supreme Court in the case of CIT v. Yokogawa India Ltd. 15. The Ld. DR, on the other hand, has supported the orders of lower authorities. 16. We have heard the rival submissions, and perused the materials available on record. The Co-ordinate Bench of this Tribunal in assessee’s own case for A.Y 2013-14 & 2014-15 in ITA No.3228 & 3229/Chy/2017, relying on the decision of Hon’ble Supreme Court in the case of CIT v. Yokogawa India Ltd., supra, has directed AO to grant deduction u/s.10AA of the Act and thereafter, set off from the IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 11 -: remaining profit if any brought forward losses and unabsorbed depreciation as under: 5. We have heard the rival submissions and carefully perused the materials on record. From the facts of the case, it is apparent as pointed out by the Ld.AR that on similar circumstances this Bench of the Tribunal in the case M/s. SKM Engg Products Export India Ltd., cited supra had held the issue in favour of the assessee by relying in the decision of the Hon’ble Apex Court in the case M/s. Yokogowa India Ltd., reported in 391 ITR 274. The gist of the decision of the Tribunal is reproduced herein below for reference:- “2. The Revenue has raised four grounds in all these appeals, however, the crux of the issue is that the Ld.CIT(A) has erred by directing the Ld.AO to allow deduction u/s.10B of the Act even before set off of brought forward depreciation. 3. The brief facts of the case are that the assessee is a public limited company engaged in the business of manufacturing egg powder, filed its return of income for all these AYs claiming deduction u/s.10B of the Act. The Ld.AO while computing the eligible profit for allowing deduction u/s.10B of the Act excluded the brought forward losses and depreciation. Thereafter, the matter reached the Tribunal and the Tribunal following the decision of the Hon’ble Apex Court in the case of CIT Vs. Yokogowa India Ltd., reported in [2017] 291 CTR 0001 (SC) & 391 ITR 274 directed the Ld.AO to grant the benefit of deduction u/s.10B of the Act without setting off of the brought forward losses of the earlier years. However, the Ld.AO while passing the giving effect order u/s.150 of the Act dated 16.08.2017 excluded the brought forward depreciation from the profits of the assessee company for the purpose of granting deduction u/s.10B of the Act by observing as under: Hon’ble ITAT has directed to grant assessee the benefit of deduction u/s.10B without set off of the brought forward losses of the earlier years. Also as per ruling of the Hon’ble Supreme Court in the case of CIT Vs. Yokogawa lndia Ltd. Income has to be first computed as per the provisions of section 28 to 44 and thereafter deduction under section 10B has to be allowed. Brought forward depreciation is allowable as deduction as per provisions of section 32(2), which reads as follows; where in the assessment of the assessee, full effect cannot be given to any allowance under subsection 32(1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance then the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 12 -: the allowance for the previous year. Thus, in view of this section, i.e. 32(2), the brought forward depreciation gets merged with the current years depreciation and therefore forms part of the computation of income as per the provisions of section 28 to 44. Also brought forward depreciation is dealt with by section 32(2) and brought forward loss by section 72 of the Income-tax Act, 1961. Appeal effect is accordingly given while following the directions of the Hon’ble ITAT. Aggrieved by the order of the Ld.AO the assessee carried the matter before the Ld.CIT(A). The Ld.CIT(A) following the decision of the Hon’ble Apex Court and the Tribunal directed the Ld.AO to compute the eligible deduction before setting off of the brought forward unobserved depreciation and business losses. 4. At the outset, we do not find any infirmity in the order of the Ld.CIT(A). The Hon’ble Apex Court has categorically held the deduction u/s.10A/B of the Act has to be granted before setting off of carried forward of business losses and depreciation. The relevant para of the decision of the Hon’ble Apex Court in the case of Yokogowa India Ltd., reported in 391 ITR 274 is extracted below for reference: 17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (IA) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression “total income of the assessee” in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee’ in Section 10A as ‘total income of the undertaking'. 18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter IV. All the appeals shall stand disposed of accordingly. Since Ld.CIT(A) has rightly followed the decision of the Hon’ble Apex Court cited supra and the decision of the Tribunal we do not find it necessary to interfere in his order.” IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 13 -: Following the above decision and the ratio laid by the Hon’ble Apex Court, we hereby direct the Ld.AO to first grant deduction U/s.10AA of the Act and thereafter set-off from the remaining profit if any the brought forward losses and unabsorbed depreciation. It is ordered accordingly.” 17. We, therefore direct the A.O to allow the set off of brought forward losses and depreciation accordingly. Hence, these grounds of appeal are allowed. 18. We find that the identical issues are involved in assessee’s appeals for A.Ys 2017-18, 2018-19 & 2019-20 also and accordingly, our adjudication above in A.Y 2016-17 is mutatis mutandis applies therein also. Therefore, for the similar reasons, the appeals filed by the assessee in ITA NOs.798, 799 & 800/Chny/2022 are also partly allowed accordingly. 19. In the result, all the four appeals filed by the assessee are partly allowed. Order pronounced on 20th November, 2024. Sd/- Sd/- (एबी टी. वक\u001e) (ABY. T. Varkey) \u0011ाियक सद! / Judicial Member (जगदीश) (Jagadish) लेखा सद! /Accountant Member चे\u0010नई/Chennai, \u0013दनांक/Dated: 20th November, 2024. EDN/- IT(TP)A No.20/Chny/2021 ITA NOs.798, 799 & 800/Chny/2022 :- 14 -: आदेश क\u0016 \bितिल\u0019प अ\u001aे\u0019षत/Copy to: 1. अपीलाथ\b/Appellant 2. \t थ\b/Respondent 3. आयकर आयु\u0010/CIT, Chennai 4. िवभागीय \tितिनिध/DR 5. गाड\u0019 फाईल/GF "