2010 (12) TMI 857 - HC - Income Tax

Court Rules Business Setup in Falta SEZ Not Reconstruction; Shift Allowed

The court concluded that the business set up at Falta SEZ was a new unit and not a reconstruction of an existing business. The Tribunal and the Assessing ... Exemption u/s 10A - transfer of existing businss from ‘Non-SEZ Area’ to ‘Falta Free Trade Zone’ - splitting up or reconstruction of a business already in existence - held that:- the unit of the business of the assessee at SEZ at Falta is the new one and merely some old stocks of the raw materials were used in old business does not amount to reconstruction. It is to be found on evidence that materials were brought and with the running of the old business simultaneously at non SEZ. Under this circumstances, neither the learned Tribunal nor the Assessing Officer on the given fact correctly interpreted the reconstruction. - Decided in favor of assessee. Issues Involved:1. Interpretation of Section 10A of the Income Tax Act, 1961.2. Whether the business was shifted/reconstructed or newly established.3. Compliance with procedural requirements under Section 10A(5).Issue-wise Detailed Analysis:1. Interpretation of Section 10A of the Income Tax Act, 1961:The primary issue revolves around whether the Tribunal misdirected itself in law by adopting an erroneous approach in interpreting subsections (2) and (5) of Section 10A of the Income Tax Act, 1961. The appellant claimed exemption under Section 10A for profits derived from a new industrial undertaking set up at Falta Free Trade Zone. The Tribunal denied this exemption, reversing the order passed by the Commissioner of Income Tax (Appeals) which had allowed the exemption. The Tribunal held that the appellant's business was a reconstruction of an existing business, thereby falling within the mischief of Section 10A(2)(ii).2. Whether the business was shifted/reconstructed or newly established:The Tribunal and the Assessing Officer concluded that the appellant had shifted her existing business to the SEZ, thereby reconstructing it rather than establishing a new unit. The Assessing Officer noted that the appellant used the same stock, manpower, and machinery from the non-SEZ area, indicating that it was not a new business. However, the Commissioner of Income Tax (Appeals) found that the business activity at SEZ was neither a split-up nor a reconstruction. The CIT (Appeals) based this conclusion on detailed fact-finding and evidence, noting that the appellant had obtained necessary permissions and clearances for setting up the business at SEZ and had exported finished goods during the relevant period.3. Compliance with procedural requirements under Section 10A(5):The appellant contended that filing the audit report with the returns under Section 10A(5) is procedural and not mandatory, and that the requirement is fulfilled even if the report is filed during the assessment or appellate proceedings. The Assessing Officer, however, disallowed the exemption claim on the grounds that the appellant did not submit the accountant's report in the prescribed form along with the returns of income.Comprehensive Analysis:Interpretation of Section 10A:The court analyzed whether the business set up at Falta SEZ was a split-up or reconstruction of an existing business. The Tribunal and the Assessing Officer interpreted the business shift as reconstruction, thus disqualifying it from exemption under Section 10A. However, the court found that the Assessing Officer's interpretation was flawed. The term 'reconstruction' implies reorganization or reshaping at the same place, not at a different location. The court emphasized that the statute does not prohibit shifting of business but prohibits splitting up of business.Nature of Business Set Up:The court noted that the appellant had been carrying on her old business at a non-SEZ area and had set up a new unit at SEZ with necessary permissions. The CIT (Appeals) found that the new unit was an independent entity and not a mere extension of the old business. The court supported this view, stating that the use of old stock in the new unit does not constitute reconstruction. The court referenced various judgments, including those of the Supreme Court and High Courts, which clarified that the establishment of a new industrial unit, even if it manufactures some of the same products as the old unit, does not amount to reconstruction.Procedural Compliance:The court agreed with the appellant's contention that the filing of the audit report is procedural. The requirement is considered fulfilled if the report is submitted during the assessment or appellate proceedings, provided it is before the assessment is completed. The court found that the procedural aspect should not be a ground for denying the exemption if the substantive conditions of Section 10A are met.Conclusion:The court concluded that the Tribunal and the Assessing Officer had erred in interpreting the provisions of Section 10A. The business set up at Falta SEZ was not a reconstruction of the existing business but a new unit. The judgment and order of the Tribunal were set aside, and the order of the CIT (Appeals) was restored. The court directed the Assessing Officer to act in accordance with the judgment of the CIT (Appeals). The appeal was allowed without any order as to costs.