2011 (11) TMI 448 - HC - Income Tax

High Court Upholds ITAT's Exemption Decision for Assessment Year 1999-2000

The High Court upheld the ITAT's decision to grant exemption under Sec. 10A to the respondent assessee for the assessment year 1999-2000, finding the STP ... Deduction u/s 10A - denial as unit was set up by reconstruction of the assessee's business and more than 20% of the P&M already available in the old establishment has been utilized for manufacturing in the STP unit - Held that:- The material produced would clearly show that there was no reconstruction of already existing business and all the assets purchased after 31.3.1996 are stated to be located at STP unit, electronic city, while the assets purchased upto 31.3.1996 are stated to be located in earlier establishment and are still there. Therefore, Tribunal rightly allowed the deduction u/s 10A. See Textile Machinery Corpn. Ltd. v. CIT (1977 (1) TMI 3 - SUPREME COURT) stating that How the end products are used is immaterial and in Addl. CIT v. Hutti Gold Mines Co. Ltd.(1981 (1) TMI 59 - KARNATAKA HIGH COURT)that The new industrial unit would not lose its separate and independent identity even though it has been set up by company which is already running an industrial unit before the setting up of the new unit - Decided in favor of assessee. Deduction of Provision for Doubtful Debts, Doubtful investments and doubtful advances while computing Book Profit u/s 115JB - Held That:- Apex court decided in case of HCL Comnet Systems & Services Ltd (2008 (9) TMI 18 - SUPREME COURT) that bad and doubtful debts can never be said to be liability and cannot be added up for computing the book profit u/s 115JA(2)(c) - decided in favor of assessee. Issues:1. Interpretation of provisions of Sec. 10A for exemption claim.2. Treatment of bad and doubtful debts for calculating book profit under Sec. 115JB.Issue 1:The case involved appeals by the Revenue against the ITAT's order granting exemption under Sec. 10A to the respondent assessee for the assessment year 1999-2000. The Assessing Officer had disallowed the exemption, citing non-compliance with Sec. 10A(2)(i)(b), 10A(2)(ii), and 10A(2)(iii). The Commissioner of Income Tax (Appeals) upheld the disallowance based on non-compliance with Sec. 10A(2)(ii), considering the establishment a reconstruction of the old unit. However, the ITAT reversed this decision, finding the STP unit to be an independent establishment and allowed the appeals. The High Court analyzed the facts and held that the conditions of Sec. 10A(2)(i) and 10A(2)(iii) were satisfied by the assessee. The ITAT's conclusion that it was not a case of reconstruction was upheld, emphasizing that assets purchased after a certain date were located at the STP unit, indicating independence from the earlier unit. The High Court referred to legal precedents to support its decision, emphasizing the commercial independence of the new unit from the old one. The first substantial question of law was answered in favor of the assessee, dismissing the Revenue's appeal.Issue 2:The second substantial question of law dealt with the treatment of bad and doubtful debts for computing book profit under Sec. 115JB. The respondent argued that bad and doubtful debts should not be added back for this purpose, citing a Supreme Court decision that clarified such debts are not liabilities and should not be included in calculating book profit. The High Court agreed with the respondent, citing the Supreme Court's reasoning that a provision for bad debts does not represent a liability as the debt is receivable by the assessee, not payable. Therefore, the provision for doubtful debts cannot be considered a provision for a liability. Based on this legal principle, the High Court answered the second substantial question of law in favor of the assessee, dismissing the Revenue's appeal. The appeals were ultimately dismissed by the High Court.