Assessee eligible for deduction under Section 10A, not 10B, as separate entity.

The ITAT held that the assessee was eligible for deduction under Section 10A, not 10B, as it was found to be a separate entity from the existing business and met the criteria for a new industrial undertaking. The matter of the Bangalore unit's eligibility for deduction under Section 10A was remitted for further examination. Additionally, the issue of disallowance of provision for expenses under Section 115JB was also sent back for verification by the AO.

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Issues Involved:
1. Eligibility for deduction under Section 10A/10B of the Income Tax Act.
2. Determination of whether the assessee's business was formed by splitting up or reconstruction of an existing business.
3. Transfer of used plant and machinery.
4. Alternative claim for deduction under Section 10A for the Bangalore unit.
5. Disallowance of provision for expenses while computing book profit under Section 115JB.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 10A/10B:
The assessee, a subsidiary of CoreEL Microsystems Inc. (CMS), claimed deductions under Section 10B for AYs 2001-02 to 2004-05 and 2008-09. The AO denied the deduction, stating that the assessee was not a new undertaking but was formed by splitting up or reconstructing an existing business (CG CoreEL Logic Systems Ltd. - CGCLS). The CIT(A) upheld this view. The ITAT, however, directed the CIT(A) to reconsider the claim under Section 10A, observing that the assessee might be eligible for this deduction despite mistakenly claiming it under Section 10B.

2. Splitting Up or Reconstruction of Existing Business:
The AO and CIT(A) concluded that the assessee was formed by splitting up or reconstructing CGCLS, citing common shareholders, directors, employees, and transfer of assets. The ITAT examined whether the assessee's business was a separate and distinct entity from CGCLS. The ITAT referred to the Supreme Court's decision in Textile Machinery Corporation Ltd. Vs. CIT, which laid down tests for identifying a new industrial undertaking, including substantial fresh capital investment, employment of adequate labor, and separate identity. The ITAT found that the assessee met these criteria and was not formed by splitting up or reconstructing CGCLS.

3. Transfer of Used Plant and Machinery:
The AO argued that the assessee violated Section 10B(2)(iii) by transferring used machinery from CGCLS. However, the ITAT noted that the transferred assets constituted less than 20% of the total assets, complying with the permissible limit under the law. The ITAT held that the assessee did not violate this condition and was eligible for the deduction.

4. Alternative Claim for Deduction under Section 10A for Bangalore Unit:
The assessee claimed that if the deduction under Section 10B was denied for the Pune unit, it should be granted for the Bangalore unit under Section 10A. The CIT(A) rejected this, stating that the assessee treated both units as one business, maintaining common books of accounts and payroll. The ITAT remitted the matter back to the AO to verify if the Bangalore unit was formed independently and not by splitting up or reconstructing the Pune unit.

5. Disallowance of Provision for Expenses under Section 115JB:
For AY 2008-09, the AO disallowed Rs. 98,77,157 as contingent liabilities while computing book profit under Section 115JB. The CIT(A) upheld this, stating that the assessee did not provide sufficient details to prove the liabilities were ascertained. The ITAT remitted the issue back to the AO to verify the nature of the provisions and decide accordingly.

Conclusion:
The ITAT concluded that the assessee was eligible for deduction under Section 10A, not 10B, and directed the AO to allow the deduction accordingly. The matter regarding the Bangalore unit's eligibility under Section 10A was remitted back to the AO for fresh consideration. The issue of disallowance of provision for expenses under Section 115JB was also remitted back to the AO for verification.

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