Deduction under section 10B availed subject to condition of 10 years from the date of first availment

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘H’ NEW DELHI)

BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER

AND

SHRI T.S. KAPOOR, ACCOUNTANT MEMBER

I.T.A. No.6056,234,235&5233/Del/2011

Assessment year: 2005-06,06-07,07-08 & 2008-09

Woco Motherson Elastomer

Ltd., 2nd floor, Block-B-1,

Mohan Cooperative Indl. Estate,

Mathura Road, New Delhi. .

(Appelant)

Vs.

DCIT,

Circle-18 (1),

New Delhi.

                                                               (Respondent)

AND

Stay Application No.70/Del/2013

In I.T.A. No.6056,234,235&5233/Del/2011

Assessment year: 2005-06, 06-07,07-08 & 2008-09

Woco Motherson Elastomer Ltd.,

2nd floor, Block-B-1,

Mohan Cooperative Indl. Estate,

Mathura Road, New Delhi.

(Appelant)

Vs

DCIT,

Circle-18 (1),

New Delhi.

 (Respondent)

PAN /GIR/No.AAACW-5183-B

Appellant by: Shri Pawan Kumar, C.A. & Shri Ashwani Taneja, Advocate.

Respondent by: Shri A.K. Mishra, CIT-DR.

ORDER

PER TS KAPOOR, AM:

The above said appeals were heard together. Therefore, for the sake of convenience a common order is being passed. These are appeals filed by the assessee against the order of Ld CIT(A) / DRP (Dispute Resolution Panel) dated 30.11.2010 and 6.12.2010 respectively in respect of assessment year 2005-06 & 2006-07. The assessee has taken number of grounds in all these appeals. However, the crux of grounds of appeal is regarding grievance due to rejection of claim of deduction u/s 10B of the Income Tax Act, 1961 .

2. The brief facts of the case are that assessee company has purchased an existing unit being run by M/s Motherson Sumy Systems Limited (for short MSSL). A part of the business of M/s MSSL comprising of an undertaking which was engaged in manufacturing metal and plastic from rubber was split from the rest of the business of M/s MSSL and was sold to a newly incorporated company by the name of M/s Woco Motherson Elastomer Limited (for short WMEL) which is assessee in the present case. The new company i.e. the assessee was incorporated on 16.3.2004 and was given a certificate of commencement of business by Registrar of Companies w.e.f. 30.4.2004. The assessee company took over the business of said undertaking sold by M/s MSSL on slump sale basis. The said undertaking was already registered as 100% Export Oriented Unit (EOU) was eligible for benefit u/s 10B of the Act and even was availing benefit of deduction u/s 10B of the Act. The assessee while filing the returns of income for the years under consideration continued to claim benefit of section 10B as in its opinion the assessee was eligible for benefit u/s 10B of the Act as the whole undertaking which was eligible for such benefit was taken over.

3. The Assessing Officer however held that deduction u/s 10B(1) was allowable only to a newly established 100% EOU whereas in his opinion the business was set up by splitting the existing business of M<SSL. Moreover, the Assessing Officer held that the assessee had made domestic sales of articles or things and therefore it was not 100% EOU. The Assessing Officer also held that plant and machinery being used by the assessee consisted mainly of plant machinery transferred from the original company i.e. M/s MSSL and therefore the pre-used machinery transferred to the assessee company far exceeded the allowable limit of 20% of total value of plant & machinery used in the business of undertaking. In nutshell, the Assessing Officer disallowed on account of the following:-

i) That the assessee company comprising the undertaking had been formed by splitting up of an existing business being run by M/s Motherson Sumy Systems Ltd. in violation of the provisions of section 10B(2)(ii).

ii) The assessee company derived domestic turnover from articles or things produced by the undertaking and therefore it is not a 100% EOU despite having been registered as such in violation of the provisions of section 10B(1).

iii) The business of the assessee is an entirely new business and the pre-used machinery received by the assessee from M/s Motherson Sumy Systems Ltd. far exceeds the allowable limit of 20% of the total value of the plant and machinery used in the business of undertaking in violation of the provisions of section 10B(2)(iii).

4. Dissatisfied with the order, the assessee carried the matter in respect of assessment year 2005-06 and 2006-07 before Ld CIT(A) but was not successful. However, in respect of assessment year 2007-08 and 2008-09 the appeals were not routed through CIT(A) as the assessment was done u/s 143(3) read with 144C.

5. Aggrieved with the order of Ld CIT(A) in respect of assessment year 2005-06 & 2006-07 and with order of Assessing Officer passed u/s 143(3) read with 144C in respect of assessment year 2007-08 & 2008-09 the assessee filed appeal before this Tribunal.

6. At the outset, the Ld AR submitted that assessee acquired 100% EOU which was part of the existing company and the unit purchased by the assessee was enjoying benefit u/s 10B of the Act. He further argued that it was not splitting of business rather the whole undertaking eligible for benefit u/s 10B was taken over by the assessee. Continuing his arguments, the Ld AR submitted that there is a Board Circular No.178/84 of 2012 dated 17.1.2013 in which para

2(iv) clarifies that tax benefit u/s 10B would continue to be available in case of slump sale of a unit/undertaking. Our attention was invited to pages 17 to 20 of paper book wherein at page 19 in para (iv) such directions were mentioned. It was also submitted that assessee was not a software unit but was eligible for deduction u/s 10B of the Act. Continuing his arguments the Ld AR submitted that other than change in ownership, there was no change in the structure of the undertaking.

He invited our attention to sub section (9) of section 10B which provided that where during any previous year the ownership or beneficial interest in the undertaking is transferred by any means, the deduction under sub section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent year. Highlighting the above said section, the Ld AR submitted that before 1.4.2004 such provision was applicable which has been omitted by Finance Act, 2003 w.e.f. 1.4.2004. Therefore, in view of the fact that before 1.4.2004, there was a special sub section (9) which disentitled the deduction u/s 10B of the Act in case of transfer of beneficial ownership, the Ld AR argued that legislature intention was made clear with the omission of sub section that after 1.4.2004 no such deduction will be disallowed even in the case of change of ownership of the undertaking. Reliance in this respect was placed on the case law of Samsung India Software Pvt. Ltd. v. ACIT, Bangalore decided by ITAT ‘A’ Bench Bangalore in I.T.A./ No.399/Bang./2012. Our attention was also invited to para 14 of the said order placed at paper book page 35. In view of findings of Hon'ble ITAT it was argued that the facts of the case of the assessee are similar

to the above said case and therefore, the assessee was eligible for deduction u/s 10B of the Act. Our attention was also invited to the case of Heartland Delhi Transcription & Services Pvt. Ltd. This case was decided by the ITAT Delhi Bench ‘C’ in I.T.A. Nos. 1551 to 1553/Del/2008. Our attention was also invited to page 24 of the paper book wherein the findings of the Hon'ble Tribunal were placed in this respect.

7. The Ld DR, on the other hand, submitted that it was a pure case of splitting of business and assessee had taken over plant & machinery from old company and the whole business had not devolved on to the assessee. Therefore, the Assessing Officer had rightly made the addition and was rightly upheld by Ld CIT(A). Reliance in this respect was placed on the following case laws:-

1. CIT v. Hindustan General Industries Ltd. 137 ITR 851.

2. Kanhiyalal Rameshwar Das v. CIT 156 ITR 463 (Raj.).

3. Phagoo Mal Sant Ram v. CIT 74 ITR 734 (P&H).

8. We have heard the rival submissions of both the parties and have gone through the material available on record. We find that the main objection of the Assessing Officer is regarding splitting of the business. The Assessing Officer held that assessee company has been formed and has taken over the assets of the existing business by splitting the business of M/s MSSL. While holding such a finding, the Assessing Officer has ignored the fact that it was not a case where a part of plant & machinery or other assets belonging to an undertaking were transferred. The whole undertaking consisting of all assets and liabilities as a going concern was acquired by the assessee company. It cannot be said that the undertaking has been formed by splitting or reconstruction of business already in existence. Rather it was an undertaking already in existence on which the deduction u/s 10B of the Act was claimed and was allowed also. Since it is a case of transfer of whole undertaking, therefore, it cannot be said that the assessee company carried the business with transferred machinery or plant previously used by another person. It is pertinent to mention here that in view of the eligibility of the undertaking as a 100% EOU M/s MSSL claimed deduction on the profit earned by the same in the assessment year 2004-05 which was assessed u/s 143(3) vide order 22^nd December, 2006 and a copy of which is placed at pages 105 to 111 of paper book dated 10.3.2011. Under similar circumstances, the ITAT Delhi Bench in the case of ITO v. Heartland Delhi Transcription & Services Pvt. Ltd. in I.T.A. Nos. 1551 to 1553/Del/2008 had dealt with the same situation. In that case the dispute were for assessment year 2002-03 to 2004-05. The Hon'ble Tribunbal relying upon the provisions of sub section (9) which existed up to 31.3.2004 did not allow the claim of assessee u/s 10B whereas for assessment year 2004-05, it allowed the same as sub clause (9) was deleted w.e.f. 1.4.2004. The findings of the Tribunal are summarized below:-

“We have considered the facts of the case and submissions made before us. The facts are that the STPI set up an undertaking on the basis of the letter of intent issued by ISTP in financial year 1998-99. The business of the undertaking is to digitize medical prescription and export it. This business has been transferred to the assessee in financial year 2000-01. The HICS set up the business with new machinery and it fulfilled all the conditions mentioned in sub section (2) of sec.10B. The case of the assessee is that deduction u/s 10B(1) is granted to an undertaking and if the ownership of the undertaking changes for reason whatsoever, the benefit continues to be given to the undertaking for the unexpired period and the new owner continues to get this deduction from its total income for such unexpired period. On the other hand, the case of the revenue is that the benefit is given to an assessee as the deduction is made from its gross total income. Therefore, if there is change in ownership the benefit is not available to the new owner. In the alternative, the argument is that such deduction is not available with the assessee for assessment year 2002-03 and 2003-04 in view of the provisions contained in sub sec. (9) of sec. 10B. On prima facie perusal of these provisions, it is seen that the profits and gains derived by a 100 per cent export oriented undertaking from inter alia export of computer software for a period of 10 years shall be allowed as deduction from the total income of the assessee. Therefore, in the first instance, the profits derived by the undertaking from the export of software are to be computed and thereafter such profits are to be deducted from the total income of the assessee. The emphasis is on the undertaking, whose profits are to be computed which thereafter have to be deducted from the total income of the assessee. The words “the assessee” means any assessee as the article “the” is an indefinite article. The deduction is admissible in respect of profits and gains of an undertaking which inter alia satisfies the condition that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. This provision also uses the words “any undertaking” and not “the assessee”. Therefore, this provision also lay emphasis on the undertaking and not the assessee. The words ‘new business’ also imply that the emphasis is on the business and not the assessee. Sub Sec. (9) deals with a situation where

ownership or the beneficial interest in the undertaking is transferred by any means. The words “any means” are of wide import and take within their ambit the transfer of the undertaking either by sale of individual assets or as a going concern by way of slump sale. This provision is attracted to the facts of this case for assessment year 2002-03 and 2003-04.”

9. In the same order while deciding the same issue for assessment year 2004-05, the Hon'ble Tribunal held as under:-

“Coming to the facts of this case, there is no impediment in giving the finding that for assessment year 2004-05, the assessee is entitled to deduct the profits and gains of the undertaking from its total income. The decision in the case of Heartland KG Information Ltd. (supra) supports the case of the assessee. This decision pertain to assessment year 2004-05 for which the provision contained in sec. 10B(9) does not exist on the statute book. Therefore, following this decision, it is held that the assessee is entitled to the deduction u/s 10B for this year.

10. Similarly, in the case of Samsung Software India Pvt. Ltd (supra) the issue was decided by ‘A’ Bench of the Bangalore Bench in I.T.A. No.399/Bang/2012 wherein the Hon'ble Tribunal held as under:-

“We have considered the submissions of both the parties and carefully gone through the material available on record. It is noticed that a similar issue having identical facts has been decided by the ITAT Bench ‘B’ Bangalore in ITA No.623 & 847/Bang/2010 for the ssessment years 2004-05 & 2005-06 respectively in the case of DCIT v. M/s. LG Soft India Pvt. Ltd., order dated 19.05.2010 wherein vide para 10 it has been held as under:-

We have considered the rival contentions and the facts of the case reflected in the orders passed by the lower authorities. As rightly pointed out by the CIT(A), the assessee’s undertaking existed in the same place, form and substance and did carry on the same business before and after the change in the legal character of the form of organization. Formerly, it was a branch establishment of non-resident company/foreign company but later on, it was converted into a subsidiary company. But for the above change of the organizational status, the same unit continued to function throughout the time. Therefore, it is quite fruitless to argue that the organizational change has caused conversion of the existing unit to a new unit. There is no such splitting up or reconstruction of an existing business in the case of a branch establishment becoming a subsidiary establishment. The assessee’s unit satisfied all the conditions stipulated in the Act and was entitled for the benefit. Therefore, as rightly held by

the CIT(A), a mere organizational change is not a ground to hold that the assessee has violated the conditions stated in 10A(2)(ii). It is a case of only change in the name and style. It is clearly possible to state that there was no violation of the conditions laid down in sec. 10A(2)(iii) as well.”

11. In the present case also, the undertaking existed in the same place, form and substance and did carry on the same business before and after the change in the legal character and form of the organization. Formerly, it was a part of MSSL and presently it is an independent assessee. However, with the above change in organizational status, the same unit continued to function. 12. As regards objection of the Assessing Officer that the unit had not exported 100% of its turnover, It is observed that clause (iv) of Explanation 2 to section 10B defines the expression 100% EOU so as to mean an undertaking which has been approved as 100% export oriented unit by the Board appointed in this behalf by the Central Govt. in exercise of the power conferred under section 14 of the Development Regulation Act, 1951 and rules made under that Act and in the present case the representation was made to the authorities and after verifying the documents and after being satisfied a certificate was granted of being 100% EOU to the undertaking under the name & style of M/s MSSL and subsequently when the unit was transferred to assessee the same was transferred in the name of the assessee. The relevant documents are placed at paper book dated 10.3.2011 at pages 27 & 28. Therefore, the objection of the Assessing Officer that some part of sale was affected in domestic area does not disentitle the assessee for claiming deduction u/s 10B of the Act unless the undertaking is deleted from the category of 100% EOU by the said Department.

13. As regards objection of Assessing Officer regarding transfer of assets which exceeded 20% of total value of plant & machinery, we have already held that part assets were not transferred but the whole undertaking was transferred and there is no question of comparison of assets transferred with the total transfer of the assessee as it is a case of transfer of whole undertaking.

14. As regards the case law relied upon by the Ld DR we have observed that all the case laws relate to transfer of assets to an assessee and these cases do not relate to transfer of an undertaking in full. Therefore, the facts and circumstances of the case laws relied upon by the Ld Dr are distinguishable from the facts and circumstances of the present case. Therefore, we are in agreement with the arguments of Ld AR that assessee was entitled to the benefit of section u/s 10B for the years under consideration provided these years fall within 10 years from the date of availment of first deduction u/s 10B of the Act.

15. As regards the stay application, in view of the disposal of appeals, the said stay application has become infructuous and hence it is dismissed.

16. In the result, all the appeals of the assessee are allowed.

17. Order pronounced in the open court on 17th day of May, 2013.

Sd/- Sd/-

(R.P.TOLANI) (T.S. KAPOOR)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dt.17.5.2013.

HMS

Copy forwarded to:-

1. The appellant

2. The respondent

3. The CIT

4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.

True copy.

(ITAT, New Delhi).

Date of hearing 26.02.2013

Date of Dictation 09.05.2013

Date of Typing 10.05.2013

Date of order signed by both the Members & pronouncement 17.5.2013.

Date of order uploaded on net & sent to the Bench concerned 17.5.2013.