INCOME TX ACT, 1961

--Deduction under section 10--Undertaking in a free trade zone Computation--Assessee-wholly owned subsidiary of a German company had two divisions in India. One division at Kandla in the Kandla Free Trade Zone engaged in the manufactures and export of industrial sewing machine needles and the other division at Mumbai engaged in trading in industrial sewing machine needles. Assessee claimed exemption of its income from manufacturing divison at Kandla under section 10A. Assessing officer opined that abnormal profits had been declared in respect of Kandla division as the income was exempt under section 10a, therefore, by applying the provision of section 10A read with section 80-IA(10) he held that profits of the business of the assessee for the purpose of deduction under section 10A had to be arrived at by adopting 60 per cent gross profit ratio as against 77.91 per cent shown by the assessee. Held: Was not justified as merely because an assessee had extra-ordinary profits, it would not lead to the conclusion that the same was due to any arrangement between the assessee and its German principal and this contention would also penalize efficient functioning of assessee. More so, the industrial sewing machine need imported and traded by the Mumbai division were different from those manufactured and exported by Kandla division which also established that there was no such arrangement between the parties to show extra ordinary profits. Held: Tribunal has considered the entire evidence and on facts come to the conclusion that the profits earned by Kandla division of the respondent-assessee is not abnormally high due to any arrangement between the respondent-assessee and its German principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that this is an arrangement between the parties. This would penalize efficient functioning. Further, the authorities have also recorded a finding that the industrial sewing machine needles imported and traded by the Mumbai division are different from those manufactured and exported by the Kandla division. Consequently, this also negatives any arrangement between the parties to show extraordinary profits in respect of its Kandla division so as to claim deduction under section 10A of the Act. These are findings one of facts. The appellant-Revenue have not been able to show that the findings are perverse or arbitrary.

Income Tax Act, 1961 Section 10(A)(7)

Income Tax Act, 1961 Section 80-IA(10)

INCOME TAX ACT, 1961

--Deduction under section 10A--Undertaking in free trade zone Whether before availing deduction under section 10A set-off of losses from the trading unit against profits of the export-oriented unit was made--assessing officer held that the trading loss from assessee's trading division at Mumbai should be first set off against its manufacturing income at Kandla division before deduction under section 10A claimed by Kandla division. Held: Was not justified as the issue was covered in where it was held that section 10A is a provision which is in the nature of a deduction and not an exemption and the deduction under section 10A had to be given effect at the stage of computing profits and gains of business. This is an anterior to the application of provisions of section 72 which deals with the carry forward and set off of business losses. Thus deduction under section 10A had to be computed without setting off of the loss from the trading unit against profits of the export-oriented unit entitled to deduction under section 10A.