2008 (8) TMI 597 - AT - Income Tax

Assessee's Appeal Dismissed: Deduction Disallowed for STP Unit

The appeal by the assessee against the disallowance of deduction under section 10A of the Income-tax Act for a Software Technology Park (STP) Unit was ... Free trade zone Issues Involved:1. Disallowance of deduction u/s 10A of the Income-tax Act for a Software Technology Park (STP) Unit. Summary:Disallowance of Deduction u/s 10A:The appeal by the assessee is against the order dated 11-3-2003 of CIT(A) for the assessment year 2001-02, concerning the disallowance of deduction of Rs. 13,35,646 claimed u/s 10A of the Income-tax Act for a software technology park unit (STP Unit).The assessee had established a software unit at SEEPZ in 1990, which was not eligible for exemption u/s 10A for the assessment year 2001-02. To benefit from the new government policy exempting income from STP Units, the assessee set up a new unit approved as an STP unit on 29-3-2000. The assessee claimed exemption of Rs. 13,35,646 for the new unit u/s 10A. The Assessing Officer (AO) examined the new unit's workings and noted minimal additions to plant, machinery, and furniture, with no indication of software development assets. The AO concluded that the new unit was formed by splitting/reconstruction of the existing business, thus disallowing the exemption u/s 10A, citing sub-section (2)(ii) of section 10A and relevant judgments.On appeal, CIT(A) agreed with the AO, noting that the new unit had employees transferred from the old unit, and the actual onsite activity was carried out by employees of the existing unit. CIT(A) upheld the AO's decision, leading to the present appeal by the assessee.Before the Tribunal, the assessee argued that the new unit was separate and independent, with only some employees transferred from the old unit. The assessee cited the Chennai Bench Tribunal decision in ITO v. DSM (Softs) (P.) Ltd. [2008] 115 TTJ (Chennai) 469 and provided details of different clients and a decline in the old unit's turnover to support their claim. The revenue, however, supported the findings of the lower authorities, emphasizing that the software development work was carried out by existing employees of the old unit.The Tribunal considered the records and arguments, noting that u/s 10A, the new undertaking should not be formed by splitting up or reconstruction of an existing business. The AO found minimal additions to assets and that the software development work was done by existing employees transferred to the new unit. The Tribunal concluded that the new unit was formed by splitting up the business of the old unit, thus disallowing the exemption u/s 10A.The Tribunal distinguished the present case from DSM (Softs) (P.) Ltd., where substantial investment and new services justified a new independent unit. In contrast, the present case involved minimal investment and the same business executed by existing staff in a new office. The Tribunal upheld the CIT(A)'s order, dismissing the assessee's appeal.Conclusion: The appeal of the assessee is dismissed, and the disallowance of deduction u/s 10A is upheld.