2016 (6) TMI 425 - AT - Income Tax

Tribunal rules in favor of assessee, dismisses Revenue's appeal on disputed additions

DCIT, Circle-1, Kolkata Versus M/s Axsys Technologies Ltd.

DCIT, Circle-1, Kolkata Versus M/s Axsys Technologies Ltd. - TMI Issues Involved:1. Deletion of addition of Rs. 74,16,576/- on account of disallowance of exemption under Section 10A of the Income Tax Act.2. Deletion of addition of Rs. 17,30,808/- under Section 36(1)(iii) of the Income Tax Act.Detailed Analysis:1. Deletion of Addition of Rs. 74,16,576/- under Section 10A:The first issue revolves around the deletion of an addition amounting to Rs. 74,16,576/- under Section 10A of the Income Tax Act. The assessee, a Private Limited Company engaged in the sale and export of software and IT-enabled services, claimed this exemption. The Assessing Officer (AO) disallowed the exemption, arguing that the assessee was formed by splitting off or reconstructing an existing business, Vision Comptech Integrators Ltd. (VCIL). The AO pointed out that several software personnel were transferred from VCIL to the assessee, and the company had debited its profit and loss account with gratuity and leave encashment payments in its first year, which indicated a shift of business from VCIL to the assessee.The assessee contended that it was a separate entity with different directors, its own plant and machinery, and a separate STP license. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's arguments, noting that no plant and machinery were transferred from VCIL and that the physical place of business and the Board of Directors were different for both companies. The CIT(A) concluded that the use of human resources from VCIL did not amount to the reconstruction of the business under Section 10A(2)(ii).The Revenue appealed against this decision, arguing that the shareholders of both companies were the same, implying a reconstruction of the business. However, the Tribunal upheld the CIT(A)'s decision, citing several legal precedents. For instance, in Textile Machinery Corp. Ltd. vs. CIT (1977) 107 ITR 173 (SC), it was held that a new undertaking manufacturing the same articles as an existing unit does not constitute reconstruction. Similarly, in CIT vs. Quality Steel Tubes (P) Ltd. (2006) 280 ITR 254 (All), it was held that even if substantial persons start a new unit, it does not amount to reconstruction if the new unit is a separate and distinct entity.The Tribunal concluded that the assessee was a separate legal entity with its own plant and machinery, and the transfer of employees and shared liabilities with VCIL did not constitute reconstruction. Therefore, the Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeal on this ground.2. Deletion of Addition of Rs. 17,30,808/- under Section 36(1)(iii):The second issue concerns the deletion of an addition of Rs. 17,30,808/- under Section 36(1)(iii) of the Income Tax Act. The AO disallowed this amount, arguing that the assessee had given an interest-free loan of Rs. 1,73,00,808/- to VCIL while having insufficient own funds and thus used borrowed funds for this purpose. The AO calculated the disallowed interest at 10% per annum on the said loan amount.The assessee argued before the CIT(A) that it had sufficient interest-free funds to cover the loan and that the transactions with VCIL were part of its business operations. The CIT(A) accepted these arguments, noting that the assessee had sufficient interest-free funds and that the transactions with VCIL were reflected in the ledger accounts. The CIT(A) also observed that the assessee had received interest income and had debited interest expenses related to export packing credit and term loans.The Revenue appealed against this decision, but the Tribunal upheld the CIT(A)'s order. The Tribunal noted that the AO's action was based on surmise and conjecture and that the assessee had sufficient own funds to cover the loan to VCIL. The Tribunal also observed that the debit balance in VCIL's account was not consistent throughout the year and that the assessee had sufficient interest-free funds. Therefore, the Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the Revenue's appeal on this ground.Conclusion:In conclusion, the Tribunal dismissed the Revenue's appeal on both grounds. The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 74,16,576/- under Section 10A, concluding that the assessee was a separate legal entity and not formed by reconstructing an existing business. Similarly, the Tribunal upheld the deletion of the addition of Rs. 17,30,808/- under Section 36(1)(iii), concluding that the assessee had sufficient interest-free funds to cover the loan to VCIL.