2014 (4) TMI 897 - HC - Income Tax

High Court grants exemption under Section 10B of Income Tax Act for conversion of DTA unit to EOU

Super Auto Forge Ltd. Versus Additional Commissioner of Income-Tax

The High Court allowed the appeals, granting exemption under Section 10B of the Income Tax Act to the assessee. The conversion of a Domestic Tariff Area ... Eligibility for exemption u/s 10B of the Act – Structures of industry to be included or not - Whether the Tribunal is right in holding that the structure of the industry constitutes building and is not eligible to be included in computing the plant and machinery for the purpose of determining the eligibility u/s 10B of the Act – Held that:- Following Commissioner of Income Tax V. Heartland KG Information Ltd. [2013 (9) TMI 375 - MADRAS HIGH COURT] to attract Section 10B favourably to an undertaking, such undertaking should not be formed by transfer to a new business any machinery or plant previously used for any purpose - even if there be transfer of machinery previously used for any purpose is transferred, the total value of the machinery at plant so transferred should not exceed 20% of the total value of the machinery used in the business. When a DTA unit is converted into 100% EOU unit, there is neither a transfer nor a creation of a new business to attract section 10B(2)(iii) of the Act - there is no specific prohibition to an industrial unit formed by transfer of entire business, there is no transfer at all to a new business and what was already in existence as a DTA unit, by reason of the recognition granted by the statutory authority, it became a 100% EOU unit - Thus the status granted to a DTA unit as a 100% EOU unit does not result in a transfer or splitting up or re-construction of a business already in existence so as to fall u/s 10(2)(iii) of the Act - going by the Circular No.1 of 2005 dated 06.01.2005.17 clarifying the stand that the DTA unit on conversion to 100% EOU unit eligible for exemption under Section 10B of the Income Tax Act also – thus, the order of the Tribunal is set aside – Decided in favour of Assessee. Issues Involved:1. Eligibility for exemption under Section 10B of the Income Tax Act for a unit converted from Domestic Tariff Area (DTA) to Export Oriented Unit (EOU).2. Classification of factory building as part of plant and machinery for the purpose of determining eligibility under Section 10B.Detailed Analysis:1. Eligibility for exemption under Section 10B of the Income Tax Act for a unit converted from DTA to EOU:The assessee, engaged in manufacturing auto parts, claimed exemption under Section 10B of the Income Tax Act for its 100% Export Oriented Unit (EOU) at Thirumudivakkam for the assessment year 2001-02. The Assessing Officer (AO) denied the exemption, stating that the value of old machinery transferred to the EOU exceeded 20% of the total value of machinery, violating Clause (iii) of sub-section (2) of Section 10B. The Commissioner of Income Tax (Appeals) partially allowed the claim, restricting it to the period from 1.8.2000 to 31.3.2001. The Income Tax Appellate Tribunal upheld the AO's decision, leading to the present appeal.The High Court examined whether the conversion of a DTA unit to an EOU constituted the formation of a new business by the transfer of used machinery, thus disqualifying it from the exemption under Section 10B. Referring to the decision in Commissioner of Income Tax V. Heartland KG Information Ltd. (2013) 359 ITR 1, the Court held that the conversion of a DTA unit to an EOU did not constitute a transfer or creation of a new business. The Court emphasized that Section 10B(2)(iii) should not apply to such conversions, as there was no specific prohibition against the transfer of an entire business unit.The Court also referred to Circular No.1 of 2005 issued by the Central Board of Direct Taxes, which clarified that a DTA unit converted to an EOU is eligible for deduction under Section 10B from the year of approval as an EOU. The deduction would be available for the remaining period of ten consecutive assessment years, starting from the year the unit began manufacturing as a DTA unit.Based on these interpretations and clarifications, the Court concluded that the assessee's conversion from a DTA unit to an EOU did not violate Section 10B(2)(iii) and thus, the assessee was eligible for the exemption under Section 10B.2. Classification of factory building as part of plant and machinery for the purpose of determining eligibility under Section 10B:The AO and the Tribunal held that the factory building could not be classified as plant and machinery for calculating the 20% limit on transferred machinery under Section 10B. The Tribunal relied on the decision in CIT V. Anand Theatres (244 ITR 192), which distinguished between 'plant and machinery' and 'building.'The High Court upheld this view, stating that the factory building should not be treated as plant and machinery for the purpose of determining the eligibility under Section 10B. The Court noted that the assessee had not classified the building as part of plant and machinery in its income tax return and had claimed depreciation at the normal rate for buildings. The attempt to reclassify the building as plant and machinery for claiming the exemption was deemed an afterthought and unsustainable in law.Conclusion:The High Court allowed the appeals, setting aside the Tribunal's order and granting the exemption under Section 10B to the assessee. The Court clarified that the conversion of a DTA unit to an EOU did not constitute the formation of a new business by the transfer of used machinery, thus not violating Section 10B(2)(iii). The factory building could not be classified as plant and machinery for the purpose of determining the eligibility under Section 10B.