2012 (10) TMI 612 - AT - Income Tax

Tribunal confirms deduction eligibility but denies for specific year due to demerger

The Tribunal confirmed the eligibility for deduction under section 10A for the assessee company based on previous decisions but held that the deduction ... Deduction under section 10A - assessment in the hands of resulting company or demerged company (assessee) - denial as STPI unit was started only by splitting up of existing infrastructure - ‘Appointed Date’ of scheme of demerger - Held that:- After perusal and consideration of the provision of sections 2(19AA), 10A(1), 10A(7A) and 72A(4) of the Act, it is necessary to arrive at a harmonious construction to assume that the intention of legislature is not frustrated especially in view of the decision of the Hon'ble Apex Court in the case of K.P. Varghese Vs. ITO [1981 (9) TMI 1 - SUPREME COURT] wherein the Hon'ble Apex Court has ruled that a literal construction of a statute that leads to an absurdity, or unjust result or mischief is to be avoided. If the income of the STPI undertaking for the period 1.4.2004 to 30.9.2004 were to be assessed in the hands of the assessee, then the income become fully taxable as in accordance with the provision of section 10A(7A), the same is not eligible for deduction in the hands of the assessee and in which event it runs contrary to the provisions of section 10A(1). Thus no part of the income of the STPI undertaking for the Assessment Year 2005-06 is to be treated as income of the assessee. AO is directed to delete the income pertaining to the demerged STPI undertaking from the taxable income of the assessee and pass necessary orders to give effect to the same so that the said income is treated as income of the resulting company - in favour of assessee. Issues Involved:1. Eligibility for deduction under section 10A of the Income Tax Act, 1961.2. Impact of demerger on the eligibility for deduction under section 10A.3. Interpretation and application of section 10A(7A) of the Income Tax Act.4. Allocation of income between the demerged company and the resulting company.Issue-Wise Detailed Analysis:1. Eligibility for Deduction under Section 10A:The assessee company set up an approved STPI unit and claimed deduction under section 10A from Assessment Year 2002-03 onwards. The Assessing Officer disallowed the deduction for Assessment Year 2005-06, arguing that the STPI unit was formed by splitting up an existing business, thereby making it ineligible for the deduction. The CIT(A) allowed the deduction based on the Tribunal's decision in the assessee's favor for earlier years.2. Impact of Demerger on Eligibility for Deduction under Section 10A:The STPI unit was demerged and transferred to M/s. L & T Valdel Engineering Pvt Ltd (Resulting Company) effective from 1.10.2004. The Assessing Officer argued that due to this demerger, the provisions of section 10A(7A) applied, making the assessee ineligible for the deduction for the entire year. The CIT(A) allowed the deduction for the period before demerger (1.4.2004 to 30.9.2004), following the Tribunal's earlier decision.3. Interpretation and Application of Section 10A(7A):Section 10A(7A) states that no deduction shall be admissible to the demerged company for the year in which the demerger took place. The Tribunal agreed that this provision applied, and thus, the assessee was not entitled to the deduction for the entire Assessment Year 2005-06. However, the Tribunal also noted that the income for the entire year should be considered the income of the resulting company, not the demerged company, to avoid any absurdity or unjust result.4. Allocation of Income Between the Demerged Company and the Resulting Company:The Tribunal held that the income of the STPI unit for the entire year (1.4.2004 to 31.3.2005) should be deemed to be the income of the resulting company. The Tribunal directed the Assessing Officer to delete the income of Rs. 1,16,68,627 from the taxable income of the assessee and treat it as the income of the resulting company for Assessment Year 2005-06. This was in line with the harmonious construction of sections 2(19AA), 10A(1), 10A(7A), and 72A(4) of the Act, ensuring that the benefits of section 10A reached the intended person.Conclusion:The Tribunal dismissed the Revenue's grounds challenging the eligibility for deduction under section 10A, confirming the CIT(A)'s order based on the Tribunal's earlier decision. However, it allowed the Revenue's ground regarding the application of section 10A(7A), holding that the assessee was not entitled to the deduction for Assessment Year 2005-06. The Tribunal further directed that the income of the STPI unit for the entire year be assessed in the hands of the resulting company, not the demerged company, to avoid any absurdity or unjust result. The appeal was disposed of accordingly.