TaxTMI 
TaxTMI 
2012 (10) TMI 612
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.... deduction under section 10A of the Income Tax Act, 1961 (herein after referred to as 'the Act') in respect of the income of the STPI unit for and from Assessment Year 2002-03 onwards. 2.2 The assessee filed its return of income for Assessment Year 2005-06 on 31.10.2005 declaring income of Rs. 2,12,73,211 after claiming deduction of Rs. 1,16,68,627 under section 10A of the Act being the income attributable to the export turnover of the STPI unit from 1.4.2004 to 30.9.2004 i.e. the date of the demerger. The Assessing Officer disallowed the assessee's claim for deduction under section 10A of the Act in the order of assessment passed under section 143(3) of the Act on 30.11.2007 for the following reasons : i) That it is clear from the record that the STPI unit was started only by splitting up of existing infrastructure and the undertaking formed by splitting up of business already in existence, as had been held in the course of assessment proceedings for the Assessment Year 2002-03 and therefore the assessee's STPI unit is not eligible for deduction under section 10A of the Act. ii) In view of the fact that the STPI unit was demerged and transferred to M/s. L & T Valdel E....
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....ime of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 7. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above." 4. The grounds raised at S.Nos.1, 6 and 7 are general in nature and therefore no adjudication is called for thereon. 5.1 The grounds raised at S.Nos.2 to 5, are relevant to the issues of dispute in this appeal which need to be addressed. 5.2 The learned Departmental Representative's arguments mainly relied on the order of assessment. The learned Departmental Representative conceded that the order of the ITAT in assessee's own case for Assessment Years 2003-04 and 2004-05 in ITA Nos.616 to 618/BANG/2008 dt.10.11.2010 squarely apply to the issues raised in the grounds of appeal raised at S.Nos.2 and 3. He, however, argued that the learned CIT(Appeals) erred in granting relief in respect of the issues raised in grounds at S.Nos.4 and 5 by not considering the fact that the assessee is just not entitled to the deduction under section 10A of the Act for this impugned Assessment Year 2005-06 in terms of the pr....
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....ary to this proposition the following situations would emerge : i) The income of the STPI unit, arising out of export of computer software from 1.4.2004 to 30.9.2004 will be allowed as a deduction in the hands of the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. and not in the hands of the demerged company i.e. M/s. Valdel Engineers & Constructors Pvt. Ltd. ii) More importantly, in the eyes of law, for the purposes of income tax, the entire undertaking i.e. STPI unit, which has carried out the export activity, shall be treated as one belonging to the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. for the entire relevant period 1.4.2004 to 31.3.2005 in which such demerger taken place and not as a unit belonging to the demerged company i.e. M/s. Valdel Engineers & Constructors Pvt. Ltd. even for the period 1.4.2004 to 30.9.2004. In effect, this would mean that the turnover of the STPI undertaking for the entire previous year ought to be treated as turnover of the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. and no part of it should be treated as turnover of the demerged company i.e. the assessee company. Consequently the income aris....
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....joys the benefit of deduction under section 10A is demerged during the course of a financial year. i) The demerged company will not get any deduction under section 10A for the Assessment Year in which the demerger takes place, in respect of the said undertaking which stands demerged; ii) The resulting company shall be entitled to avail the deduction under section 10A for the Assessment Year during which the demerger takes place, in respect of the said undertaking which stands demerged; iii) The demerged company shall not be entitled to carry forward the business losses and unabsorbed depreciation relatable to the said undertaking for and from the assessment year during which the demerger takes place; iv) The resulting company shall be entitled to carry forward the business loss and unabsorbed depreciation relatable to the said undertaking for and from the assessment year in which the demerger takes place; v) The entire activities and operation of the said undertaking pertaining to the entire financial year during which the demerger takes place and the resultant profits / losses arising therefrom shall be assessable to tax in the hands of the resulting company for the asse....
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....is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger,- (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place." 8.2 From a reading of section 10A(7A), it is clear that its provisions apply to a situation where an undertaking whose income is deductible under section 10A is transferred in a scheme of amalgamation or demerger before the end of the specified 10 years. In the present case the STPI undertaking of the assessee stands transferred in a scheme of demerger before the completion of the specified period and therefore provisions of section 10A(7A) of the Act apply. Further, clause (a) of section 10A(7A) specifically mandates that no deduction shall be admissible in the hands of the demerg....
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....the demerged company; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become share-holders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. Explanation 1.-For the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2.-For the purposes of this clause, the liabilities referred to in subclause (ii), shall include- (a) the liabilities which arise out of the activities or o....
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....ing is transferred to the resulting company as a Going Concern, it is the resulting company that is going to enjoy the profits or losses of the STPI unit as on 31.3.2005. 10. It is also necessary to refer to the provisions of section 72A(4) of the Act which deals with the carry forward and set off of business losses and unabsorbed depreciation in case of demerger, etc and therefore the relevant provision is extracted here below : " 72A(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall- (a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting co....
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....t. This leads to what the Hon'ble Apex Court termed as an absurdity, or unjust result or mischief, keeping in view the object, intent and purpose of legislating section 10A of the I.T. Act, 1961. 11.4 In order to avoid this absurdity or unjust result or mischief, it is necessary that the income of the undertaking for the entire year from 1.4.2004 to 31.3.2005 is deemed to be the income of the resulting company and no part of it be deemed to belong to the assessee. This finding of ours is also in consonance with the decision of the Hon'ble Apex Court in the case of Ashokbhai Chimanbhai (supra) relied on by the assessee. Further, as submitted by the learned counsel for the assessee, Schedule 9 forming part of the application made before the Hon'ble High Court demonstrates that the resulting company is the destination for the surplus of the STPI undertaking for the period 1.4.2004 to 30.9.2004 and this fact is also in line with the proposition laid down by the Hon'ble Apex Court in the said case. 11.5 It would also be only proper for us to set right the anomalies, if any, and ensure that the correct taxable income be assessed inspite of the fact that the assessee may....