2006 (7) TMI 283 - AT - Income Tax

Tribunal Grants Exemption u/s 10A for 1999-2000, Validating Business Continuity Post-Ownership Change.

Kumaran Systems (P) Limited. Versus Assistant Commissioner Of Income-Tax.

The Tribunal allowed the appeal, granting the assessee the exemption under Section 10A of the IT Act for the assessment year 1999-2000. It determined that ... Allowability of 10A exemption - letter issued by STPI on 15th April, 1999 covers the assessment year period under consideration or not - Entitlement of section 10A exemption to the erstwhile firm. Allowability of 10A exemption - main reason for which the exemption was denied by the lower authorities was that the assessee was not approved by STPI for the assessment year. under consideration and it was approved only on 15th Feb., 1999 which falls under the asst. yr. 2000-01 - HELD THAT:- There is force in the contention of the assessee that the assessee is not a new unit and it was carrying on the business which entitles deduction under s. 10A vide STPI recognition dt. 6th Oct., 1998 which was in the name of M/s Kumaran Software and the firm was re-named as Kumaran Systems on 20th Oct., 1998 which was converted into a private limited company in the name and style of Kumaran Systems (P) Ltd., due to operation of law as per Part IX of Companies Act, 1956 and all the properties and liabilities of the firm were vested with the limited company. There was a mere change of name and the composition in the ownership of the undertaking and the business of the undertaking have not changed as the same partners have become directors of the company. The business activities of the newly constituted company remains the same. The business of the assessee was not formed by splitting of the old business or reconstruction. The undertaking of the assessee company remained the same. Whether the letter issued by STPI on 15th April, 1999 covers the assessment year period under consideration? - HELD THAT:- The letter clearly states that all the approval issued by their office like permission, IE Code, Green Card etc. stand valid under new name. Thus, it means that the authorities of STPI substituted the name of Kumaran Software with Kumaran Systems (P) Ltd. - As held in the case of Valli Patabhirama Rao & Anr. vs. Sr. Ramanuja Ginning & Rice Factory (P) Ltd. & Ors. [.....................................], there shall be statutory vesting of all the properties of the previous firm in the newly incorporated company without any need for separate conveyance. In view of this, if the firm, Kumaran Software/Kumaran Systems (P) Ltd., is entitled for 10A exemption, the assessee is also entitled for this exemption, because the assessee company has stepped into the shoes of Kumaran Systems (P) Ltd. Entitlement of section 10A exemption to the erstwhile firm - HELD THAT:- The erstwhile firm is entitled for s. 10A exemption for ten consecutive assessment years beginning from the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture articles or things. The period of ten years commences from the financial year relevant to the assessment year in which the undertaking begins to manufacture or produce articles or things - In the instant case, the firm started to manufacture in the asst. yr. 1999-2000. Since the registration was granted by STPI on 6th Oct., 1998, the assessee is entitled for exemption under s. 10A from the asst. yr. 1999-2000 for a period of ten consecutive assessment years. The question of splitting up or reconstitution does not arise as the authorities below, themselves have admitted that it is not a new business formed by splitting up or reconstitution of existing business and the assessee is entitled for deduction for the asst. yr. 2000-01. When the lower authorities have admitted that this undertaking was not formed by splitting up or reconstitution, there are no reason for denial of the exemption for the asst. yr. 1999-2000 - the assessee is entitled for exemption under s. 10A of the IT Act though the STPI letter was issue on 15th April, 1999. Appeal of assessee allowed. Issues Involved:1. Entitlement to deduction under Section 10A of the IT Act.2. Entitlement to deduction under Section 80HHE of the IT Act.Detailed Analysis:Issue 1: Entitlement to Deduction under Section 10A of the IT ActThe primary issue revolves around whether the assessee, after converting from a partnership firm to a private limited company, is entitled to the exemption under Section 10A of the IT Act for the assessment year 1999-2000. The assessee filed a return of income for the assessment year 1999-2000, claiming an exemption under Section 10A, which was initially allowed. However, upon reassessment, the AO denied the exemption on the grounds that the company was not recognized by the Software Technology Parks of India (STPI) during the relevant period, as the recognition was granted only from 15th April 1999, whereas the conversion from a partnership firm to a private limited company occurred on 15th February 1999.The assessee argued that the conversion was a mere change in ownership and not a reconstruction, and thus, the business remained the same. The approval from STPI was merely for a change of name and did not constitute a new recognition. The Tribunal agreed with the assessee, noting that the business activities and ownership composition remained unchanged, and the statutory vesting of assets and liabilities occurred under Part IX of the Companies Act, 1956. The Tribunal emphasized that the exemption under Section 10A is available to the business of the undertaking, not the owner, and since the business remained the same, the exemption should apply.The Tribunal also referred to the letter from STPI dated 15th April 1999, which acknowledged the change of name and validated all previous approvals under the new name. This indicated that the recognition granted to the firm continued to apply to the company. Consequently, the Tribunal held that the assessee is entitled to the exemption under Section 10A for the assessment year 1999-2000, despite the STPI letter being issued on 15th April 1999.Issue 2: Entitlement to Deduction under Section 80HHE of the IT ActThe second issue pertains to the alternative claim of deduction under Section 80HHE of the IT Act. The AO denied this deduction on the basis that the erstwhile partnership firm had already claimed it for the income earned up to the date of conversion (14th February 1999). The CIT(A) upheld this view.However, the Tribunal refrained from dealing with this ground separately, stating that it was academic in nature since the main issue regarding Section 10A covered this aspect as well. The Tribunal's decision to allow the exemption under Section 10A rendered the need to address the Section 80HHE claim moot.Conclusion:The Tribunal allowed the appeal filed by the assessee, granting the exemption under Section 10A of the IT Act for the assessment year 1999-2000. The Tribunal found that the conversion from a partnership firm to a private limited company was a mere change in ownership and did not constitute a new business or reconstruction. The STPI's letter validating the change of name supported the continuity of the business, entitling the assessee to the exemption. The issue regarding Section 80HHE was deemed academic and not separately addressed.