2020 (3) TMI 360 - SC - Income Tax

Supreme Court confirms company's eligibility for tax deduction under Section 80IA

The Supreme Court upheld the decision that the assessee-Company was eligible for a deduction under Section 80IA of the Income Tax Act. The conversion of ... Deduction u/s 80IA - whether assessee fulfilled the condition of sub-Section (4)(i)(b) of Section 80IA? - partnership firm was converted into a company on 28.3.2000 under Part IX of the Companies Act - HELD THAT:- For the purpose of considering compliance of clause (a) of Section 80IA ( 4)(i), the assessee must be an enterprise carrying on business of (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility, which enterprise is owned by a company registered in India. That stipulation is fulfilled in the present case, as the registered firm was converted into a company under Part IX of the Companies Act on 28.3.2000, which is before the commencement of Assessment Year 2002-2003. For the assessment year under consideration, the activity undertaken by the assessee is only maintaining and operating or developing, maintaining and operating the infrastructure facility, inasmuch as, the construction of the road was completed on 27.3.2000 and the same was inaugurated on 1.4.2000, where after toll tax was being collected by the assessee-Company. In the present case, the agreement was initially executed between the erstwhile partnership firm and the State Government, but with clear understanding that as and when the partnership firm is converted into a company, the name of the company in the agreement so executed be recorded recognising the change. Notably, the agreement itself mentions that M/s. Chetak Enterprises as party to the agreement was meant to include its successors and assignee. Further, the State Government had granted sanction to the company and the original agreement entered into with the firm automatically stood converted in favour of the assessee-Company, which came into existence on 28.3.2000 being the successor of the erstwhile partnership firm. Thus understood, even the stipulation in clause (b) of Section 80IA( 4)(i) is fulfilled by the assessee-Company. Since these are the only two issues which weighed with the assessing officer to deny deduction to the assessee-Company as claimed under Section 80IA the first appellate authority was justified in reversing the view taken by the assessing officer. For the same reason, the ITAT, as well as, the High Court have justly affirmed the view taken by the first appellate authority, holding that the assessee-Company qualified for the deduction under Section 80IA being an enterprise carrying on the stated business pertaining to infrastructure facility and owned by a Company registered in India on the basis of the agreement executed with the State Government to which the respondent/assessee-Company has succeeded in law after conversion of the partnership firm into a company. Issues Involved:1. Eligibility for deduction under Section 80IA of the Income Tax Act.2. Effect of conversion of a partnership firm into a company under Part IX of the Companies Act.3. Compliance with clauses (a) and (b) of Section 80IA(4)(i) of the Income Tax Act.Detailed Analysis:1. Eligibility for Deduction under Section 80IA of the Income Tax Act:The core issue was whether the assessee-Company was entitled to the deduction under Section 80IA of the Income Tax Act for the Assessment Year 2002-2003. The assessing officer initially denied this deduction, but the decision was reversed by the Commissioner of Income Tax (Appeals) and subsequently confirmed by the Income Tax Appellate Tribunal (ITAT). The High Court upheld the ITAT's decision, affirming that the assessee-Company met the conditions stipulated under Section 80IA. The Supreme Court also upheld this view, confirming that the assessee-Company was eligible for the deduction as it fulfilled the necessary conditions of carrying on the business of developing, maintaining, and operating an infrastructure facility.2. Effect of Conversion of a Partnership Firm into a Company under Part IX of the Companies Act:The conversion of the erstwhile partnership firm into a private limited company was a significant factor in this case. The firm, M/s. Chetak Enterprises, was converted into M/s. Chetak Enterprises (P) Ltd. on 28.3.2000 under Part IX of the Companies Act. This conversion was communicated to the Chief Engineer (Roads), P.W.D., Rajasthan, Jaipur, who acknowledged the change and provided a fresh registration code to the assessee-Company. The Supreme Court noted that under Section 575 of the Companies Act, all properties, movable and immovable, vested in the firm, automatically vested in the company upon its registration. This statutory vesting meant the company succeeded the firm, inheriting its rights and liabilities. Thus, the business carried on by the firm was considered to be carried on by the company post-conversion.3. Compliance with Clauses (a) and (b) of Section 80IA(4)(i) of the Income Tax Act:- Clause (a): The assessee must be an enterprise carrying on the business of developing, maintaining, and operating any infrastructure facility, owned by a company registered in India. The Supreme Court confirmed that this condition was met as the firm was converted into a company before the relevant assessment year, and the company continued the business of maintaining and operating the infrastructure facility.- Clause (b): The assessee must have entered into an agreement with the government for developing, maintaining, and operating an infrastructure facility. The agreement initially executed with the partnership firm was understood to be transferred to the company upon its conversion. The agreement explicitly included the firm’s successors and assigns, and the State Government recognized the company as the successor to the firm. Thus, the Supreme Court concluded that the assessee-Company fulfilled this requirement as well.Conclusion:The Supreme Court dismissed the appeal filed by the Department, affirming that the assessee-Company was entitled to the deduction under Section 80IA of the Income Tax Act. The Court held that the conversion of the partnership firm into a company did not affect the eligibility for the deduction, as the company succeeded the firm in law, inheriting its rights and liabilities. The decision of the High Court, ITAT, and the first appellate authority were upheld, confirming that the assessee-Company met all the necessary conditions for the deduction under Section 80IA.