2025 (11) TMI 1315 - HC - Income Tax

Revenue appeal dismissed; new STP unit qualifies for s.10A(2) deduction, not formed by business reconstruction

HC dismissed Revenue's appeal, holding that the assessee's STP unit was not formed by splitting up or reconstruction of an existing business for purposes ... Deduction u/s 10A - assessee’s undertaking-STP Unit was formed by splitting up/reconstruction of business already in existence - Whether new undertaking did not fulfill the second condition laid down in Section 10A(2)? - CIT (Appeals) came to the conclusion that the present case did not fall within the words “splitting up, or the reconstruction of a business already in existence” appearing in Section 10A(2)(ii) also confirmed by ITAT - HELD THAT:- When one looks at the observations of the CIT (Appeals) as well as that of the ITAT, we are clearly of the view that the findings that have been rendered therein are wholly fact based. In fact, in our view, the CIT (Appeals) after analyzing the facts has correctly applied the ratio of the Hon’ble Supreme Court in the case of Textile Machinery Corporation Ltd [1977 (1) TMI 3 - SUPREME COURT] Judgment in Textile Machinery Corporation Ltd [supra] was considered by this Court in the case of Finolex Cables Limited [2012 (10) TMI 198 - BOMBAY HIGH COURT] Though this Court was considering the provisions of Section 80-I(2)(i) in the said judgment, the said Section provided that the deduction under 80-I(2)(i) would be available only to an industrial undertaking which is inter alia not formed by splitting up, or the reconstruction of a business already in existence. What is important to note in this decision is that this Court noted that in Indian Aluminum Company Limited (1977 (1) TMI 5 - SUPREME COUR) was a case where the claim of the assessee was upheld on the basis that substantial investments were made by the assessee, resulting in a significant increase in the capacity of production, though the new unit was involved in the production of the same goods. Once this is the case, we find that the question of law as projected by the Revenue does not give rise to any substantial question of law requiring an answer by this Court. As mentioned earlier, we say this because not only because the findings given are purely factual in nature, but we find that the law has been correctly applied by the CIT (Appeals) and confirmed by the ITAT in the impugned order. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee's STP unit, set up after execution of a comprehensive contract, was formed by 'splitting up' or 'reconstruction of a business already in existence' within the meaning of the provision denying deduction to such undertakings, thereby disentitling the assessee from deduction under the relevant exemption provision. 2. Whether the factual findings of the appellate authorities that the STP unit constituted a new and separate undertaking (having regard to investment, infrastructure, personnel, scale and nature of work) were correctly reached and whether those findings raise any substantial question of law for this Court. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of the 'splitting up/reconstruction' exclusion to denial of deduction Legal framework: The statutory exclusion provides that deduction is not available where a new undertaking is formed by splitting up or reconstruction of a business already in existence. The provision requires an examination of whether the new unit is essentially a continuation of pre-existing business rather than a fresh, distinct undertaking. Precedent treatment: The Court and the Tribunal applied the tests and ratio developed in earlier Supreme Court authority, which articulates both negative and positive strands: negatively, an undertaking formed by splitting up or reconstruction (or transfer of pre-existing plant and machinery) is excluded; positively, a new undertaking must produce results, assessed by several tests (investment of substantial fresh capital, employment of requisite labour, manufacture/production attributable to new outlay, profits attributable to new undertaking, and a separate and distinct identity). The High Court's prior exposition (in a related bench decision) distilled these principles and applied them to analogous statutory language in another deduction provision; that exposition and the Supreme Court authorities were followed (not overruled or distinguished) by the authorities below and by this Court. Interpretation and reasoning: The Tribunal and Commissioner (Appeals) analysed evidentiary material to determine whether the post-registration STP unit was merely a continuation of prior small-scale jobs or a new integrated undertaking. Key factual considerations relied upon: (a) termination and supersession of an earlier purchase order by a Comprehensive Engineering Services Agreement, (b) the pilot nature and relatively small value of the initial purchase order (˜Rs.9.3 Crores) vis-à-vis the subsequent revenues earned by the STP unit (˜Rs.42.74 Crores), (c) acquisition of substantial new premises and fresh fixed assets (˜Rs.7 Crores), (d) installation of new sophisticated infrastructure and software systems, (e) significant increase in personnel (to 192 by December 2006) and deployment of new skill sets, and (f) commencement of high-end jobs not undertaken earlier. These facts were held to show substantial fresh investment, separate identity and integrated operational capacity of the new unit, and that the STP unit entered a new domain in terms of range, scale and skills. Ratio vs. Obiter: The core ratio adopted is that a unit will not be treated as formed by splitting up or reconstruction where there is substantial fresh capital outlay, new infrastructure, new personnel and a separate and distinct identity of the unit-applying the multi-factor test from the Supreme Court authority. Observations about the pilot project being an interim arrangement and about the relative magnitudes of contract values constitute factual findings that underpin the ratio (ratio). Remarks summarising the authorities and principles are explanatory (obiter to the extent they restate precedent), but the legal proposition that the statutory exclusion is a question of fact dependent on application of those tests is part of the operative ratio. Conclusions: The authorities below correctly applied the legal tests to the facts and concluded that the STP unit was not formed by splitting up or reconstruction; therefore the statutory exclusion did not apply and deduction under the provision was allowable. The Court found no error in law in that conclusion. Issue 2 - Whether the factual findings of the appellate authorities raise a substantial question of law Legal framework: Appellate intervention on questions of law requires a substantial question of law; findings that are purely factual or conclusions that correctly apply established legal tests to facts do not ordinarily raise such a question. Precedent treatment: The Court relied upon the settled principle that factual determinations by the Tribunal and Commissioner (Appeals) which are supported by evidence and proper application of judicial tests do not give rise to substantial questions of law warranting interference by this Court. The Supreme Court and this Court's earlier decisions interpreting the 'new undertaking' tests were applied as binding guideposts. Interpretation and reasoning: The Court examined the record of factual findings by the CIT(A) and ITAT-specifically the detailed analysis in the CIT(A) order regarding scope of work, termination of the earlier purchase order, scale of subsequent contracts, fresh investment in premises and fixed assets, infrastructural enhancements, and manpower augmentation. The Court concluded these findings are fact-based, supported by evidence and in consonance with the legal tests laid down by higher authority. Consequently the purported question of law framed by the Revenue was held to be without substance because it sought reappraisal of facts rather than raising any point of law incorrectly decided. Ratio vs. Obiter: The binding point is that an appellate court will not convert findings of fact, supported by evidence and correctly applying law, into a substantial question of law (ratio). Any ancillary comments about specific documentary inferences (e.g., the nature of the pilot purchase order) are factual reasoning supporting the ratio (not obiter). Conclusions: The Court held that no substantial question of law arose; the Revenue's appeal was dismissed. The Court found the law correctly applied by the lower authorities and the findings to be purely factual and supported by the record. No costs were awarded in the circumstances. Cross-references 1. The application of the multi-factor test (fresh capital, employment, production/profit attributable to new capital, separate identity, new plant and machinery) is the common thread connecting the resolution of both issues; see Issue 1 (tests) and Issue 2 (application of those tests precludes a substantial question of law). 2. The assessment of whether an earlier arrangement constituted only a 'pilot project' and was superseded by a comprehensive agreement is a factual nexus that affected both the characterization of the undertaking (Issue 1) and whether the matter presented any substantial question of law (Issue 2).