TaxTMI 
TaxTMI 
2014 (7) TMI 810
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Consultancy Services (P) Ltd. (HICS, for short). The said acquisition was made by the respondent-assessee from HICS in the period relevant to the assessment year 2002-03. 3. The Assessing Officer disallowed the claim for deduction under Section 10B observing that the assessee does not satisfy the requirement of sub-section (2) to Section 10B i.e. it was not formed by splitting up or reconstruction of business already in existence. Clause (iii) to Section 10B(2) was also relied upon to disallow the claim on the ground that the respondent assessee had not undertaken any new business and did not satisfy the requirement that the plant should not be used previously for any purpose. It was held that the respondent assessee had acquired computers from HICS, who had also claimed depreciation on the said asset before they were transferred to the respondent assessee. The assessment order mentions that for similar reasons, disallowance was made in the assessment years 2002-03 and 2003-04. 4. Commissioner of Income Tax (Appeals) reversed the opinion of the Assessing Officer, following the first appellate order for the assessment year 2002-03. He observed that the undertaking eligible fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years : [Provided [further] that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:] Provided also that no deduction under this section sha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egative covenant, which stipulates that undertaking should not be formed by transferring old plant and machinery i.e. plant and machinery, which is previously, used to a new business, i.e., the undertaking which is formed. The said embargo or prohibition relates to the initial formation or setting up of the undertaking. Thus, the undertaking should not be formed by transfer of plant and machinery, which was previously used for any purpose. Explanation to sub-section (2) makes explanation (1) and (2) to sub-section (2) to Section 80I applicable to clause (iii). Explanation 1 to Section 80I(2) deals with plant and machinery, which was used outside India and the same is not to be regarded as plant and machinery previously used for any purpose, subject to stipulations. Explanation 2 to Section 80I (2) states that the total value of the old plant and machinery or the parts should not exceed 20% of the total value of the plant and machinery for the purpose of clause (ii) to Section 80I(2). The said stipulation will equally govern and is applicable to Section 10B. [For the purpose of present appeal, we need not decide the question whether the stipulation in explanation 2 to Section 80I(2)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fulfilled the requirements of the said clauses, as it was not formed by splitting up or reconstruction of a business already in existence. It was a new undertaking and there is no factual finding that at the time or establishment or formation of the undertaking, business already in existence was splitted or reconstructed. It is accepted that the plant and machinery procured at the time of formation was new. 12. The next question, which arises for consideration, is whether there is any bar or prohibition in Section 10B on transfer or sale of the undertaking by the assessee, who has formed or established the same, to another assessee and whether the purchaser/acquirer assessee can be denied benefit under Section 10B of the Act. Before we answer this question, one clarification is required. Sub-section (1) to Section 10B stipulates the tax holiday period as 10 years, which should be continuous/consecutive and begins from the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles, things or computer software. Thus, the period of 10 years is with reference to the undertaking and transfer or change of undertaking will not alte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er 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 resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place." 16. Omission/deletion of sub-section (9) with effect from 1st April, 2004 has made important and significant change. It altered and the negative stipulation on transfer was withdrawn. The said sub-section was a part of the section originally enacted by the Finance Act, 2000. Sub-section 9 stipulated that where ownership or beneficial interest in the undertaking was transferred by any means, the deduction under sub-section (1) would not be allowed to the assessee in the assessment year relevant to the said previous year i.e. the year of transfer and subsequent years. In other words, if there was change of ownershi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, which may not be covered by sub-section (7A). If the reading of the Revenue is accepted, then by incorporating sub-section (7A) and omitting (9A), the Legislature had withdrawn the benefit under the latter section. This was obviously not the purpose or intent behind omission of sub-sections 9 and 9A. Sub-section (7A) as stated above is only an enabling provision and not a disabling provision. The present case is not a case of transfer by way of amalgamation or demerger. 18. The ratio and the view which we have taken finds support from the judgment of the Madras High Court in Commissioner of Income Tax-I, Coimbatore Vs. Heartland KG Information Ltd. [2013] 359 ITR 1 (Madras) and of Bombay High Court in Commissioner of Income Tax Vs. Sonata Software Ltd. [2012] 21 TAXMAN 23 (Bom.) 19. Heartland KG Information Ltd.(supra) is a case of sister concern of the respondent-assessee and the facts are almost identical. The assessee in the said case was entitled to benefit under Section 10A and it was held that the transfer did not attract the pari materia restriction and negative covenant under clauses (ii) and (iii) to Section 10A(2) as it was not a case of splitting up or reconstru....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d rejected the claim of exemption under Section 15C on the ground that the assessee was formed by the reconstruction of the business already in existence. The Appellate Commissioner took a different view which was affirmed by the Tribunal. The Division Bench of this Court held that the reconstruction of a business connotes that the original business is not to cease functioning and the undertaking must continue to carry on the same business in an altered form. On the other hand if the ownership of a business or an undertaking is transfered that would not constitute a reconstruction. The Division Bench held as follows: "...The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be - and this is brought out by the section itself - of a "business already in existence". There must be a conti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rved that in order to be entitled to the benefit of Section 15C the following facts would have to be established by the assessee: "(1) investment of substantial fresh capital in the industrial undertaking set up; (2) employment of requisite labour therein; (3) manufacture or production of articles in the said undertaking; (4) earning of profits clearly attributable to the said new undertaking and (5) above all, a separate and distinct identity of the industrial unit set up." 10. The Supreme Court was of the view that the new undertaking must not be substantially the same old existing business. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will not be available. From this perspective the Court held that a substantial investment of new capital is imperative. 11. The Tribunal in the present case has come to the conclusion that where a running business is transferred lock, stock and barrel by one assessee to another assessee the principle of reconstruction, splitting up and transfer of plant and machinery cannot be applied. According to the Tribun....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... present case, the entire business of the software undertaking was transferred to the Assessee. The undertaking of the Assessee was not formed by the splitting up of the business." 22. The aforesaid judgment refers and interprets the term "reconstruction". The said term has been explained by the Delhi High Court in Commissioner of Income Tax versus Ganga Sagar Corporation Limited, (1973) 92 ITR 173 (Delhi). Ratio of the said decision was approved by the Supreme Court in Textile Machinery Corporation Limited (supra). 23. However, for the reasons and the ratio expounded above with reference to the word/term "formed", we would like to place reliance and emphasis on the reasoning elucidated and explained by the Supreme Court in Bajaj Tempo Limited, Bombay versus Commissioner of Income Tax, Bombay City-III, Bombay (1992) 3 SCC 78. In the said decision the word "formed" as used in Section 15C of the Income Tax Act, 1922, which also had a similar negative covenant that the industrial undertaking should not be formed by splitting up or reconstruction of business already in existence or transfer of a new building, machinery of plant, previously used in business, was set up for conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... according to the dictionary has different meanings. In the context in which it has been used it was intended to connote that the body of the company or its shape did not come up in consequence of transfer of building, machinery or plant used previously for business purpose. Use of the negative before word "formed' further strengthens it. In other words building, machinery or plant used previously in other business should not result in the undertaking being formed by it. The transfer to take out the new undertaking out of purview of sub-section (1) must be such that but for transfer the new undertaking could not have come into being. In our opinion, on facts found by the tribunal, the part played by taking the building on lease was not dominant in formation of the company. The High Court was therefore not justified in answering the question in favour of the revenue." (emphasis supplied) 24. For the purpose of the present statute, i.e., Income Tax Act, 1961 difference between an undertaking, and the owner thereof, i.e., the assessee is well recognised and too apparent to be ignored and, therefore, when the Legislature in sub-section (1) and other sub-sections used the term "un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case of Private Ltd. companies becoming companies in which public are substantially interested as also disinvestment of equity shares by venture capital companies or funds. It was also clarified that cases of change in shareholding pattern in the case of public limited companies will also not affect the deduction. 19.9 The Finance Act, 2002 has introduced sub-section (9A) to provide that in case of genuine reorganization of business whereby a proprietary concern or a partnership is succeeded by a company, the prohibition of sub-section (9) will not apply if the beneficial ownership of not less than 51% continues to be held by the original promoters. Since, undertakings can be owned by body corporate also, it is clarified that this will hold good even if the proprietor happens to be a body corporate. 19.10 This is however, subject to the condition that, the aggregate of the shareholding in the company of the partners of the firm, or of the sole proprietor in case of a proprietorship concern, is not less than fifty-one per cent of the total voting power in the company and their shareholding continues to be as such for the period for which the deduction under this section is....