2012 (4) TMI 99 - HC - Income Tax

High Court upholds Tribunal decision on tax exemption for software division transfer under Income Tax Act.

The High Court affirmed the Tribunal's decision in favor of the assessee regarding entitlement to exemption under Section 10A(2) of the Income Tax Act, ... Exemption u/s 10A(2) - Depreciation - Deduction u/s 80HHE - Capital or revenue expenditure - Assessing Officer held that the undertaking was carrying on the same business before Assessment Year 1995-96; it was formed by splitting up or reconstruction of a business already in existence since the same business was being carried on by the software division of IOCL before the assessee came into existence and all the assets and liabilities including plant and machinery previously used were transferred to the Section 10A undertaking - In relation to a software technology park, the condition required that the undertaking must begin to manufacture or produce articles or things during the previous year relevant to the Assessment Year commencing on or after 1 April 1994 - the test in law is as to whether the undertaking is formed by splitting up or reconstruction of a business already in existence - Tribunal in the present case has come to the conclusion that where a running business is transferred lock, stock and barrel by one assessee to another assessee the principle of reconstruction, splitting up and transfer of plant and machinery cannot be applied - Reconstruction is of a business already in existence and there must be a continuation of the activities and business of the same industrial undertaking - In the present case, the entire business of the software undertaking was transferred to the Assessee - Decided in favor of the assessee Issues Involved:1. Entitlement to exemption under Section 10A(2) of the Income Tax Act, 1961.2. Allowability of depreciation, repairs, and maintenance on plant and machinery, and interest on borrowings as deductions.3. Inclusion of excess provisions in total turnover for determining deduction under Section 80HHE.4. Exclusion of miscellaneous income in the computation of deduction under Section 80HHE.5. Entitlement to claim under Section 80HHE despite not meeting the stipulated time limit and required audit report filing.6. Classification of expenditure on indigenization of software as capital or revenue expenditure.Issue-wise Detailed Analysis:1. Entitlement to Exemption under Section 10A(2):This issue pertains to whether the assessee was entitled to an exemption for profits derived from the Software Technology Park (STP) undertaking. The Tribunal held that the assessee fulfilled the conditions of Section 10A(2), as the manufacturing activities in the STP commenced after the stipulated date of 1 April 1994. The software division, initially part of IOCL, was transferred to the assessee as a going concern. The Tribunal relied on the decision in CIT Vs. Gaekwar Foam and Rubber Company Ltd., which distinguished between reconstruction and sale of a business. The Tribunal concluded that the transfer of the software division did not constitute a reconstruction or splitting up of an existing business. The High Court upheld this view, stating that the undertaking was not formed by splitting up or reconstruction of a business already in existence, and thus, the first question of law was answered in favor of the assessee.2. Allowability of Depreciation, Repairs, and Maintenance:The Tribunal found that the assessee had bifurcated its expenditure into three categories: STP unit, non-STP unit, and support services. The expenses of the support services were allocated between Section 10A and non-Section 10A activities based on turnover ratio. The Tribunal directed the Assessing Officer to allocate interest and depreciation of the support services division accordingly. The High Court found no substantial question of law arising from this finding and upheld the Tribunal's decision.3. Inclusion of Excess Provisions in Total Turnover:The Tribunal noted that this issue, along with the fourth and fifth issues, were alternative grounds that would be rendered infructuous if the first question was decided in favor of the assessee. Since the first question was indeed decided in favor of the assessee, these issues were rendered moot, and no further analysis was provided by the High Court.4. Exclusion of Miscellaneous Income in Computation of Deduction:As with the third issue, this was an alternative ground that became infructuous following the decision on the first question. Therefore, no substantial question of law arose from this issue.5. Entitlement to Claim under Section 80HHE:This issue was also rendered infructuous due to the favorable decision on the first question. The High Court did not provide further analysis on this matter.6. Classification of Expenditure on Indigenization of Software:The Tribunal held that the expenditure incurred for indigenization of software was allowable as revenue expenditure, given the high obsolescence of software products. The High Court agreed with this finding, noting that no substantial question of law arose from the Tribunal's decision.Conclusion:The High Court disposed of the appeal, affirming the Tribunal's findings on the key issues and rendering other issues moot based on the favorable decision for the assessee on the primary question regarding Section 10A exemption. The appeal was disposed of with no order as to costs.