2018 (11) TMI 1787 - HC - Income Tax

Court upholds assessee's tax holiday claim, emphasizes continuity of ten-year period.

The Commissioner of Income Tax, The Dy. Commissioner Of Income Tax, Circle11 (5), Bengaluru Versus M/s. L.G. Soft India Private Limited

The Commissioner of Income Tax, The Dy. Commissioner Of Income Tax, Circle11 (5), Bengaluru Versus M/s. L.G. Soft India Private Limited - TMI Issues:1. Claim of exemption under Section 10A of the Income Tax Act for the assessment year 2004-05.2. Violation of conditions stipulated in Section 10A(2)(ii) & (iii) of the Act.3. Disallowance by the Assessing Officer and subsequent appeals.4. Interpretation of tax holiday period under Section 10B.Analysis:Issue 1: Claim of exemption under Section 10AThe assessee, engaged in software development, filed a return of income for the assessment year 2004-05, claiming exemption under Section 10A of the Act. The Assessing Officer disallowed the claim citing violation of conditions under Section 10A(2)(ii) & (iii) due to alleged split-up and reconstruction of the business. However, on appeal, the order of assessment was set aside, and relief under Section 10A was granted. The Revenue appealed before the Tribunal, which dismissed the appeal, leading to the present appeal in Income Tax Appeal 368 of 2010.Issue 2: Violation of Conditions under Section 10A(2)(ii) & (iii)The substantial question of law considered was whether the Tribunal's finding confirming the order that the assessee did not violate the conditions of Section 10A(2)(ii) due to an organizational change was erroneous. The Revenue contended that the grant of relief was incorrect, emphasizing the alleged violation. However, the assessee argued that the unit had been consistently operational for eight years, and the disallowance in the 8th year was unjustified, citing a similar judgment from the High Court of Delhi in favor of the assessee.Issue 3: Disallowance and AppealsThe High Court noted that the unit had been functioning since 1996-97, and the disallowance in the 8th year was unprecedented. It emphasized that the tax holiday period of ten years under Section 10B is continuous and consecutive, not affected by changes in the undertaking. Referring to previous judgments, the Court held in favor of the assessee, rejecting the Revenue's contention that a change in the undertaking would restrict the tax holiday.Issue 4: Interpretation of Tax Holiday Period under Section 10BThe Court clarified that the tax holiday period of ten years under Section 10B is tied to the undertaking, unaffected by transfers or changes. It referenced judgments from the High Courts of Madras and Bombay to support this interpretation. Consequently, the substantial question of law was answered in favor of the assessee and against the Revenue, leading to the disposal of the appeal.In the related Income Tax Appeal 367 of 2010 for the assessment year 2005-06, the substantial question of law was answered in favor of the assessee following the judgment in Income Tax Appeal 368 of 2010.