Section 80JJAA Deduction Rejected as Amalgamation Amounted to Business Reorganisation

DCIT Vs Facets Gems Polishing Works Pvt. Ltd. (ITAT Surat)

ITAT Denies Section 80IA Deduction Because Amalgamated Company Acquired Undertaking After 31 March 2007; ITAT Allows Revenue Appeal Because Amalgamation Barred Deductions Under Sections 80IA and 80JJAA; Windmill Tax Benefit Under Section 80IA Not Available Because Undertaking Was Transferred in Amalgamation; ITAT Holds Amalgamation Scheme Cannot Override Specific Restrictions Under Income Tax Act.

The Income Tax Appellate Tribunal (ITAT), Surat Bench, considered the Revenue’s appeal against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2017-18 concerning deductions claimed by the assessee under Sections 80IA and 80JJAA of the Income-tax Act. The assessee-company was engaged in diamond processing and manufacturing on job work basis and generation of power through windmill. The Assessing Officer completed assessment under Section 143(3) by disallowing deduction of Rs.96,32,553 under Section 80IA and Rs.87,05,437 under Section 80JJAA, primarily on the ground that the assessee had undergone amalgamation in financial year 2011-12.

The Assessing Officer held that Section 80IA(12A) barred deduction under Section 80IA where an undertaking was transferred pursuant to amalgamation after 31.03.2007. The Revenue also relied upon CBDT Circular No.3/2008 dated 12.03.2008, which stated that tax benefits under Section 80IA were intended for entities undertaking initial investment and entrepreneurial risk and would not be available to undertakings transferred in amalgamation or demerger after 31.03.2007. The Assessing Officer further disallowed deduction under Section 80JJAA on the ground that the business had been reconstructed through amalgamation.

The Commissioner (Appeals) reversed both disallowances. In relation to Section 80IA, the CIT(A) observed that the amalgamation took place in FY 2011-12 and that no deduction had been claimed by the amalgamating company prior to amalgamation. The assessee, as amalgamated company, started claiming deduction only from Assessment Year 2013-14 and had fulfilled all statutory conditions including filing Form 10CCB. The CIT(A) held that Sections 80IA(12) and 80IA(12A) had been misapplied because no deduction was being transferred. The CIT(A) also relied upon the Delhi High Court decision in CIT v. Tata Communications Internet Services Ltd., which held that eligibility for deduction under Section 80IA, once accepted in the initial year, could not be disturbed in subsequent years unless facts changed. The CIT(A) additionally referred to the Gujarat High Court order approving the assessee’s amalgamation scheme, which stated that all statutory benefits available under the Income Tax Act would stand transferred to the transferee company.

The Tribunal examined the provisions of Section 80IA, Finance Act, 2007, and CBDT Circular No.3/2008. It noted that Section 80IA(12A) specifically excluded applicability of Section 80IA(12) to undertakings transferred under schemes of amalgamation or demerger after 31.03.2007. The Tribunal further observed that the explanatory notes and circular had not been declared unconstitutional or ultra vires. According to the Tribunal, the legislative intention behind insertion of Section 80IA(12A) was to deny continuation of deduction benefits to amalgamated entities that had not undertaken the original entrepreneurial risk or investment. The Tribunal held that the amalgamated company was therefore not eligible for deduction under Section 80IA. Consequently, Revenue’s appeal on this issue was allowed.

Regarding Section 80JJAA, the CIT(A) had held that deduction was allowable because the assessee satisfied all statutory conditions relating to employment of additional employees, payment of emoluments through banking channels, and filing of Form 10DA. The CIT(A) also observed that there was no evidence showing that employees had merely been transferred from amalgamating entities.

However, the Tribunal examined Section 80JJAA(2)(b), which prohibits deduction where business is acquired through transfer from another person or as a result of business reorganisation. The Tribunal observed that the assessee-company was the resultant company of amalgamation involving transfer of assets, liabilities, and shareholders from the amalgamating companies. It held that such amalgamation constituted acquisition of business through transfer and business reorganisation within the meaning of Section 80JJAA(2)(b). The Tribunal further held that the scheme of amalgamation could not override express provisions of the Income-tax Act. Accordingly, the Tribunal reversed the CIT(A)’s findings and allowed the Revenue’s appeal on this issue as well.

As a result, the Revenue’s appeal was allowed in entirety by the ITAT Surat Bench.

FULL TEXT OF THE ORDER OF ITAT SURAT

This appeal has been filed by the Revenue against the order dated 31.01.2025 passed by the Ld. Commissioner of Income-tax (Appeals)-4, Surat (hereinafter referred to as the “Ld. CIT(A)” for short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as “the Act” for short) for Assessment Year 2017-18.

2. The Revenue has raised following grounds of appeal :-

“1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in allowing the deduction of Rs.96,32,553/- u/s 80IA of the Act disallowed by the AO in contravention to the provisions of section 8O-IA(12A) and in clear violation of the CBDT’s Circular No. 3 of 2008 dated 12/03/2008 (explanatory notes to the provisions of the Finance Act 2007) where it has been explicitly mentioned that tax benefit u/s 80 IA is not available to undertaking/enterprise of Indian companies undergoing amalgamation or demerger after 31/03/2007.

2. In addition to the ground no.1 above, on the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in allowing the deduction of Rs. 96,32,553/- u/s 80IA of the Act disallowed by the AO even though the companies under consideration have undergone amalgamation after 31/03/2007 and the Assessee Company has not undertaken initial investment and the entrepreneur risk as described in CBDT’s Circular No. 3 of 2008 dated 12/03/2008.

3. In addition to the ground no.1 & 2 above, on the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in allowing the deduction of Rs. 96,32,553/- u/s 80IA of the Act disallowed by the AO relying upon the decisions of Hon’ble Delhi High Court in the case of CIT Vs Tata Communication Internet service Ltd. Despite the fact that in that case the issue of provisions of section 80-IA(12A) was not involved.

4. In addition to the ground no.1 above on the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in allowing the deduction of Rs. 96,32,553/- u/s 80IA of the Act disallowed by the AO relying upon the decisions of Hon’ble Gujarat High Court dated 23.03.2012 in the case of the assessee regarding the scheme of amalgamation in which it is mentioned that ‘all other benefits availed and available under the I.T. Act’ shall stand transferred to and available to the transferee Company despite the fact that as per the direct provisions of section 80IA (12A) of the I.T. Act the benefits of section 80IA of the I.T. Act are not available to the assessee and the Hon’ble Gujarat High Court has allowed for benefits available under the I.T. Act.

5. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in allowing the deduction of Rs.87,05,437/- u/s 80 JJAA of the Act disallowed by the AO on the ground that the business of the assessee Company was reconstructed by virtue of amalgamation with M/s Tirupati Organisers Pvt. Ltd. in contravention to the provisions of section 80JJAA(2)(a) of the I.T. Act.

6. In addition to the ground no.4 above on the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in allowing the deduction of Rs.87,05,437/- u/s 80 JJAA of the Act disallowed by the AO even though the Assessee has not put forth any specific explanation or submission before the Assessing Officer in reference to show-cause notice issued by the Assessing Officer in course of the assessment proceedings.”

3. The briefly stated facts of the case are that the assessee-company is engaged in the business of diamond processing & manufacturing on job work basis and generation of power through windmill. The return of income of the assessee was filed on 30.09.2017, declaring total income at Rs.2,65,98,800/-, which was revised on 27.12.20217, declaring total income at Rs.2,65,98,760/-. Assessment u/s 143(3) was completed determining total income at Rs.4,49,36,750/- after making following disallowances:-

i. Rs. 96,32,553/- u/s 80IA of the Act

ii. Rs. 87,05,437/- u/s 80JJAA of the Act

3.1 The disallowances were primarily made on the ground that the assessee had undergone amalgamation in F.Y. 2011–12 and hence provisions of section 80IA(12A) and section 80JJAA(2) were attracted.

4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A), who, after considering the detailed submissions made by the assessee and judicial precedents, allowed both deductions.

5. Aggrieved by the order of the Ld. CIT(A) allowing the deductions, the Revenue is now in appeal before the Tribunal.

6. We have heard the rival contentions and perused the material available on record. The ground-wise adjudication is as under:-

Ground No. 1 to 4 – Disallowance of deduction u/s 80IA of the Act.

7. The Assessing Officer disallowed the deduction u/s 80IA on the ground that the assessee had undergone amalgamation in FY 2011–12 and, in view of section 80IA(12A), the benefit was not available if an undertaking is transferred in a scheme of amalgamation on or after 01.04.2007. The amalgamation in this case occurred in 2012 hence, the Assessing Officer made the disallowance.

7.1 Aggrieved by the order of the Assessing Officer, the Assessee filed appeal before the Ld. CIT(A) who reversed the order of the Assessing Officer.

7.2 The Ld. CIT(A) observed that the amalgamation had taken place in FY 2011–12 and the amalgamating company had not claimed any deduction prior to amalgamation. Ld. CIT(A) held that the assessee, as the amalgamated company, began claiming deduction from Assessment Year 2013–14 and all statutory conditions u/s 80IA were fulfilled as per Form 10CCB. The Ld. CIT(A) noted that Section 80IA(12) and 80IA(12A) were misapplied since no deduction was being transferred. The relevant observation of the Ld. CIT(A) is as under in this regard:-

7.2 In appellant’s case, deduction u/s. 80IA is taken not in year of amalgamation which is A.Y. 2012-13 but from A.Y. A.Y. 2013-14. Hence, in my view AO has not considered this aspect at all. Further, it is seen that the appellant has fulfilled specified conditions in section 80IA. Form 10CCB has been furnished and instant year is 5th year of claim of deduction. It is also noted that this section intends to give benefits for a long period of 15 years plus and it is upto the claimant to choose when to star and it is given for 10 consecutive years.

7.3 The AO has relied on Circular No. 3/2008 dated 12.03.2008. Appellant’s submission in para 3.2.8 to 3.2.12 is quoted below:

3.2.8 While referring to section 80IA sub-section (12A) along with circular number 3/2008, dated 12.03.2008, it is clear that the main intention of legislature in providing benefit under section 80-IA is to provide incentive to those who had taken initial investment and entrepreneur risk. Hence, it was felt that there was no justification for passing on the benefit to someone who had not taken these risks at all and had only acquired the eligible undertaking much later when the risks had reduced. Incentives of this nature have been traditionally linked to a unit/undertaking/investment and not to an entity because the objective is to incentivize an investment regardless of which entity houses that investment. The benefits of this section, rightly, covers a long span of 15/20 years as infrastructure projects by nature take a long time to give economic returns corresponding to their risks. In such a long span of time, the dynamic and ever changing market place, especially in a growing economy like India, will necessitate a company to undergo many changes (amalgamation or demerger being some of these) in order to continue to operate efficiently. Hence considering the intent of the Act, if the said deduction u/s. 80IA is disallowed it will defeat the original purpose of the Act ie., encouraging infrastructure projects.

3.2.9 Further, as far as intent of incentivizing those who have taken entrepreneur risk is concerned, it is to be noted that, although the investment in windmill power plant was made by Amalgamating Company (transferor), the risk concerned with the plant still remains with the same entrepreneurs making the investment originally, as the shareholders who were beneficial owners in the Amalgamating Company (transferor) continues to be the beneficial shareholders in the appellant company even after amalgamation. By piercing the corporate veil, it is clear that the Ultimate Beneficial Owners are as per old company.

3.2.10 Without prejudice to the above, It is also worth mentioning that Amalgamating Company (transferor) was a profitable unit and self-sufficient to claim 80IA deduction even if amalgamation had not taken place. Even as separate entities, the amalgamating company had enough profits in the year under scrutiny to claim the deduction u/s. 80IA and hence, amalgamation has not resulted in any undue benefit in form of excess claim or lower taxes forthe appellant or its amalgamating unit.

3.2.11 The details of profit of the Group Company/amalgamating company from Assessment Years 2006-07 to 2012-13 with the calculation of deduction u/s.80IA for the Assessment Year 2013-14, if the amalgamation had not been taken place is given as under.

Financial Year	Facets Polishing Works Private Limited (Amount in Rs.)
	Profit Before Tax	Profit After Tax
2006-07	1,09,07,009	71,34,202
2007-08	12,58,113	5,68,419
2008-09	48,26,171	33,16,589
2009-10	50,72,579	49,05,388
2010-11	87,84,447	77,64,992
2011-12	1,29,99,217	1,23,36,785

Sir, from the above table it is clearly seen that Amalgamating Company (transferor) was a profitable unit and self sufficient to claim 80IA deduction even if amalgamation had not taken place.

Hence, the amalgamation was not done with the intention to just claim the deduction u/s 80IA of the Act in the amalgamated company to save taxes.

3.2.12 In below table, the appellant has tabulated the figures of Profit and deduction of 80IA of the appellant and the Group Company had the amalgamation not taken place.

Particulars AY2013-14 (FY 2012-13)	Group Company Facets	Assessee- Formerly Tirupati	Amalgamated
PGBP	2,74,25,874	1,05,15,673	3,92,02,137
Less BFL		(1,05,15,673)	(2,81,00,786)
Other Income	12,91,217	–	12,91,217
GTI	2,87,17,091	–	1,23,92,568
800IA deduction	85,55,698	–	85,55,698
Total Income	2,01,61,393	–	38,36,870
Normal Tax	65,41,363	–	11,85,593
MAT	42,41,396	22,03,347	64,44,743

Sir, from the above table it is clearly evident that even if the entity had not been amalgamated, the amalgamating company has earned enough profit against which deduction of 80IA would be claimed and thus intent of assessee was not to take undue advantage of laws.

Also, Sir, as evident from the above given table, it can be clearly seen that investment in Windmill was made by Amalgamating Company (transferor) and profit of the entity as a whole is also earned by Amalgamating Company (transferor) who has made investment in windmill and taken risk and thus assessee has not entered into amalgamation for taking undue advantage of Section 801A and thus assessee satisfies criteria of legislature intent.

7.4 From the above, it is clear that investment in windmill was made by amalgamating company (transferor) and profit too is earned by it and therefore, assessee has not entered into amalgamation solely for purpose of taking undue advantage of section 80IA of the Act. Further, appellant has relied on Hon’ble Delhi High Court order in CIT vs. Tata Communication Internet Services Ltd (204 taxman 606) where it was held that eligibility of deduction u/s. 80IA can be examined only in 1st year, and in subsequent years, it cannot be disturbed unless there is change in facts of the case. This is directly applicable to assessee company and 80IA having been given for 5 years cannot suddenly be denied.

7.5 Finally, I come to the Hon’ble High Court of Gujarat order dated 23.03.2012 in the case of assessee regarding its scheme of amalgamation. Para 9 of the order is quoted below:

“9. with effect from the Appointed Date, all the Statutory benefits inclusive of Stamp Duty paid, Modvat Benefits, Service Tax, Income Tax payments with Brough Forward Tax Benefits and Credits for Taxes paid and all other benefits availed and available under the Income Tax Act or any other legislation and instruments of every description of the Transferor Company shall stand transferred to and be available to the Transferee Company.

The key words are ‘and all other benefits availed and available under the Income Tax Act’. In such circumstances, order is directly applicable to assessee company and benefits available under Income Tax Act includes deduction u/s. 80IA.

7.6 Decision of the ITAT Bombay in the case of Ultratech Cement Ltd vs. DCIT, Central Circle 1(4) vide ITA No. 1412, 1413, 2461 & 2462/Mum/2018 was also relied on where ITAT Bombay allowed deduction u/s. 80IA to the appellant. CIT vs. Tata Communications Internet Services Ltd. 251 CTR 290 Delhi High Court (2012) and Madras Machine Tools Manufacturers Ltd. Vs. CIT (1975) 98 ITR 119 Madras HC order were also relied on by Hon’ble Bombay ITAT.

7.7 In view of above factual matrix and legal decisions of Hon’ble Gujarat High Court in appellant’s own case scheme of amalgamation (para 9), Hon’ble Delhi High Court decision in CIT vs Tata Communication Internet Services Ltd, and also ITAT Bombay in Ultratech Cement Ltd decision referred above, and considering that this is 5t^h year of deduction claimed, AO is directed to allow deduction of Rs.96,32,553/- for A.Y. 2017-18.

7.3 Aggrieved by the order of the Ld. CIT(A), the Revenue is now in appeal before the Tribunal.

7.4 Heard the arguments of both the parties and perused the material available on record.

We observe that the Ld. CIT(A) has relied on the Hon’ble Delhi High Court judgment in Tata Communications Internet Services Ltd., where eligibility for section 80IA deduction, once accepted, cannot be disturbed in subsequent years unless there is a change in facts. The Ld. CIT(A) has also placed reliance on the decision of ITAT Mumbai in UltraTech Cement Ltd. and also the Gujarat High Court order approving the scheme of amalgamation in the assessee’s own case, confirming transfer of statutory benefits.

7.5 The relevant facts and the position of law are as under:-

Scheme of amalgamation – 2012

Amalgamating company – M/s. Facets Polishing Works Pvt. Ltd.

Amalgamated company – M/s. Facets Gems Polishing Works Pvt. Ltd.

An amalgamating company (transferor) is the entity merging its business, assets, and liabilities into another, leading to its dissolution without winding up. The resultant company (often called the amalgamated/transferee company) is the existing or new entity that absorbs the amalgamating company’s undertaking and issues shares to its shareholders.

Key aspects of these entities include:

• Amalgamating Company (Transferor): Ceases to exist after the merger. Its business, assets, and liabilities become part of the amalgamated company.
• Resultant/Amalgamated Company (Transferee): Takes over all assets and liabilities of the amalgamating company. Shareholders holding at least 75% in value of shares in the amalgamating company become shareholders of the amalgamated company.

7.6 We have gone through the Finance Bill, 2007 and the relevant provisions of the same are as under:-

FINANCE BILL, 2007 PROVISIONS RELATING TO DIRECT TAXES

Tax benefit under section 80-IA not available to undertakings/enterprises of Indian companies undergoing amalgamation or demerger after 31.3.2007 The existing provisions of section 80-IA provide for 100% deduction for ten years in respect of profits and gains of certain undertakings or enterprises engaged in the business of development, operation and maintenance of infrastructure facility, industrial parks and special economic zones or generation, distribution or transmission of power, and similiar benefit is proposed for laying and operating a cross-country natural gas distribution network, including gas pipelines and storage facilities being an integral part of the network, etc.

Sub-section (12) of the said section 80-IA, inter-alia, provides that where any undertaking of an Indian company which is entitled to the deduction under the said section is transferred before the expiry of the period specified therein, to another Indian company in a scheme of amalgamation or demerger, the provisions of the said section 80-IA shall 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. It is proposed to insert a new sub-section (12A) in section 80-IA so as to provide that the provisions of sub-section (12) shall not apply to any undertaking or enterprise which is transferred in a scheme of amalgamation or demerger after 31.3.2007. This amendment will take effect from 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-2009 and subsequent years. [Clause 22]

7.7 Further, we have gone through the provisions of the Act with regard to deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc., which are as under:-

“80-IA.(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.

2. The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or develops a special economic zone referred to in clause (iii) of sub-section (4) or generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution lines :

Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (a) or clause (b) or clause (c) of the Explanation to clause (i) of sub­section (4), the provisions of this sub-section shall have effect as if for the words “fifteen years”, the words “twenty years” had been substituted.

(2A) Notwithstanding anything contained in sub-section (1) or sub-section

(2), the deduction in computing the total income of an undertaking providing telecommunication services, specified in clause (ii) of sub-section (4), shall be hundred per cent of the profits and gains of the eligible business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and thereafter, thirty per cent of such profits and gains for further five assessment years.

3. This section applies to an undertaking referred to in clause (ii) or clause (iv) of sub-section (4) which fulfils all the following conditions, namely :—

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose:

Provided that nothing contained in this sub-section shall apply in the case of transfer, either in whole or in part, of machinery or plant previously used by a State Electricity Board referred to in clause (7) of section 2 of the Electricity Act, 2003 (36 of 2003), whether or not such transfer is in pursuance of the splitting up or reconstruction or reorganisation of the Board under Part XIII of that Act.

Explanation 1.—For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :—

a. such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

b. such machinery or plant is imported into India from any country outside India; and

c. no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the assessee.

Explanation 2.—Where in the case of an undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.

(4) This section applies to—

(i) any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility which fulfils all the following conditions, namely :—

a. it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act;

b. it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i)developing or (ii)operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;

c. it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995:

Provided that where an infrastructure facility is transferred on or after the 1st day of April, 1999 by an enterprise which developed such infrastructure facility (hereafter referred to in this section as the transferor enterprise) to another enterprise (hereafter in this section referred to as the transferee enterprise) for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the agreement with the Central Government, State Government, local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken place:

[Provided further that nothing contained in this section shall apply to any enterprise which starts the development or operation and maintenance of the infrastructure facility on or after the 1st day of April, 2017.]

Explanation.—For the purposes of this clause, “infrastructure facility” means—

a. a road including toll road, a bridge or a rail system;

b. a highway project including housing or other activities being an integral part of the highway project;

c. a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;

d. a port, airport, inland waterway, inland port or navigational channel in the sea;

ii. any undertaking which has started or starts providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services on or after the 1st day of April, 1995, but on or before the 31st day of March, 2005.

Explanation.—For the purposes of this clause, “domestic satellite” means a satellite owned and operated by an Indian company for providing telecommunication service;

iii. any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zonenotified by the Central Government in accordance with the scheme framed and notified by that Government for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2006:

Provided that in a case where an undertaking develops an industrial park on or after the 1st day of April, 1999 or a special economic zone on or after the 1st day of April, 2001 and transfers the operation and maintenance of such industrial park or such special economic zone, as the case may be, to another undertaking (hereafter in this section referred to as the transferee undertaking), the deduction under sub­section (1) shall be allowed to such transferee undertaking for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee undertaking :

Provided further that in the case of any undertaking which develops, develops and operates or maintains and operates an industrial park, the provisions of this clause shall have effect as if for the figures, letters and words “31st day of March, 2006”, the figures, letters and words “31st day of March, 2011” had been substituted;

iv. an undertaking which,—

a. is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2017;

b. starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st day of April, 1999 and ending on the 31st day of March, 2017:

Provided that the deduction under this section to an undertaking under sub-clause (b) shall be allowed only in relation to the profits derived from laying of such network of new lines for transmission or distribution;

(c) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on the 1st day of April, 2004 and ending on the 31st day of March, 2017.

Explanation.—For the purposes of this sub-clause, “substantial renovation and modernisation” means an increase in the plant and machinery in the network of transmission or distribution lines by at least fifty per cent of the book value of such plant and machinery as on the 1st day of April, 2004;

(v) an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant, if—

a. such Indian company is formed before the 30th day of November, 2005 with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and such Indian company is notified before the 31st day of December, 2005 by the Central Government for the purposes of this clause;

b. such undertaking begins to generate or transmit or distribute power before the 31st day of March, 2011;

(vi) [***]

(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub­section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.

6. Notwithstanding anything contained in sub-section (4), where housing or other activities are an integral part of the highway project and the profits of which are computed on such basis and manner as may be prescribed, such profit shall not be liable to tax where the profit has been transferred to a special reserve account and the same is actually utilised for the highway project excluding housing and other activities before the expiry of three years following the year in which such amount was transferred to the reserve account; and the amount remaining unutilised shall be chargeable to tax as income of the year in which such transfer to reserve account took place.

7. The deduction under sub-section (1) from profits and gains derived from an undertaking shall not be admissible unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.

8. Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date :

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means—

i. the price that such goods or services would ordinarily fetch in the open market; or

ii. the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.

9. Where any amount of profits and gains of an undertakingor of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading “C.—Deductions in respect of certain incomes”, and shall in no case exceed the profits and gains of such eligible business of undertakingor enterprise, as the case may be.

10. Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F.

11. The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertaking or enterprise with effect from such date as it may specify in the notification.

12. Where any undertaking of an Indian company which 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.

(12A) Nothing contained in sub-section (12) shall apply to any enterprise or undertaking which is transferred in a scheme of amalgamation or demerger on or after the 1st day of April, 2007.

7.8 We have also gone through the Explanatory Notes on provision of Section 80-IA of the Act, which are as under:-

Finance Act, 2007 –

Explanatory Notes on provisions relating to Direct Taxes

Circular No. 03 /2008, Dated 12t^h March, 2008

35. Tax benefit under section 80-IA not available to undertaking/enterprise of Indian companies undergoing amalgamation or demerger after 31.3.2007.

35.1 Sub-section (12) of section 80-IA provides that where any undertaking of an Indian company which is entitled to the deduction under the said section is transferred before the expiry of the period specified therein, to another Indian company in a scheme of amalgamation or demerger, the provisions of the said section 80-IA shall 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. The main intention in providing benefit under section 80-IA had been to provide incentive to those who had taken initial investment and entrepreneur risk. Hence, it was felt that there was no justification for passing on the benefit to someone who had not taken these risks and had only acquired the eligible undertaking much later when the risks had reduced. Hence, a new sub-section (12A) has been inserted in section 80-IA so as to provide that the provisions of sub-section (12) shall not apply to any undertaking or enterprise which is transferred in a scheme of amalgamation or demerger after 31.3.2007. Thus, if an undertaking or an enterprise is transferred in a scheme of amalgamation or demerger after 31.3.2007, the benefit of deduction under section 80-IA will not be available to the amalgamated or demerged undertaking or enterprise.

The above explanatory notes on provisions relating to Direct Taxes and the Circular No.3/2008 have not been declared unconstitutional or ultra vires. The circular was never considered as null and void on the grounds that it violated the foundational constitution or the legislative intent. Hence, keeping in view established legal stance, principles, or current interpretation governing this specific issue, we hold that the amalgamated company is not eligible for deduction u/s. 80-IA of the Act.

Appeal of the Revenue on this ground is allowed.

Ground No. 5 – Disallowance of deduction u/s 80JJAA of the Act.

8. The Assessing Officer disallowed Rs.87,05,437/- u/s 80JJAA of the Act on the ground that the business was formed by reconstruction pursuant to amalgamation. The Ld. CIT(A) examined submissions and documents submitted by the assessee and noted that the amalgamation occurred in 2012. Ld. CIT(A) held that the deduction was claimed for additional employees employed in the relevant previous year. Ld. CIT(A) held that there was no evidence that employees were merely transferred from the amalgamated entity. The Ld. CIT(A) recorded the findings that all conditions were satisfied. The relevant observations of the Ld. CIT(A) in this regard is reproduced hereunder:-

“8. Ground No. 3 is related to deduction of Rs.87,05,437/- u/s. 80JJAA of the Act being disallowed. I have while deciding deduction u/s. 80IA in favour of the appellant referred to Hon’ble High Court of Gujarat Scheme of Amalgamation order para 9 where it has been laid down that all benefits available under Income Tax Act can be availed. This includes deduction under 80JJAA subject to conditions being met.

8.1 I find from para 3.3.7 to 3.3.9 of submission that conditions of 80JJAA are met. The submission is quoted below

3.3.7 We further humbly submit that appellant has established the deduction of Rs.87,05,437/- being 30% of the additional employee costs have been claimed in the income tax return of the captioned year based on the fact and circumstances that:

f. there is employment of new employees.

g. the employment has the effect of increasing the total number of the employees as on the last day of the preceding year

h. the new employees qualify as per the definition of the ‘additional employee’ of this section

i. The total emoluments paid to the additional employees employed during the previous year have been paid by an account payee cheque/ through proper banking channel.

j. The form 10DA has been furnished along with the income tax return.

3.3.8 The total number of the employees in reconciliation with the Form 10DA whose cost has been considered for the computation of deduction are tabulated herewith below:

Assessment Year	No. of employees on first day of year	No. of employees newly joined	No. of employees who left	No. of employees on the last day of the year	Change in then number of employees on last day eligible for 80JJAA
2017-18	2030	1653	848	2835	297

3.3.9 Moreover, during the course of assessment, the appellant has submitted the salary register, form 10DA, statement of details of the additional employee cost (name of the employee, date of joining, salary, PF and the no. of days in service). The total emoluments have been paid through proper banking channel. Thus, the appellant has complied with all the conditions specified u/s. 80JJAA of the Act.

8.2 In view of the above and respectfully relying on para 9 of Hon’ble High Court scheme of amalgamation order, deduction u/s. 80JJA is directed to be allowed”

8.1 Aggrieved by the order of the Ld. CIT(A), the Revenue filed appeal before the Tribunal.

8.2 Before us, the Ld. DR supported the order of the Assessing Officer. The Ld. AR relied on the order of the Ld. CIT(A).

8.3 Heard the arguments of both the parties and perused the material available on record.

The provisions of Section 80JJAA of the Act read as under:-“Deduction in respect of employment of new employees.

80JJAA. (1) Where the gross total income of an assessee to whom section  44AB applies, includes any profits and gains derived from business, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent of additional employee cost incurred in the course of such business in the previous year, for three assessment years including the assessment year relevant to the previous year in which such employment is provided.

(2) No deduction under sub-section (1) shall be allowed,—

a. if the business is formed by splitting up, or the reconstruction, of an existing business:

Provided that nothing contained in this clause shall apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B;

b. if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation;

(c) unless the assessee furnishes alongwith the return of income the report of the accountant, as defined in the Explanation to section 288 giving such particulars in the report as may be prescribed.

Explanation.—For the purposes of this section,—

(i) “additional employee cost” means the total emoluments paid or payable to additional employees employed during the previous year:

Provided that in the case of an existing business, the additional employee cost shall be nil, if—

a. there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year;

b. emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account:

Provided further that in the first year of a new business, emoluments paid or payable to employees employed during that previous year shall be deemed to be the additional employee cost;

(ii) “additional employee” means an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year, but does not include—

a. an employee whose total emoluments are more than twenty-five thousand rupees per month; or

b. an employee for whom the entire contribution is paid by the Government under the Employees’ Pension Scheme notified in accordance with the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952); or

c. an employee employed for a period of less than two hundred and forty days during the previous year; or

d. an employee who does not participate in the recognised provident fund: Provided that in the case of an assessee who is engaged in the business of manufacturing of apparel [or footwear or leather products], the provisions of sub-clause (c) shall have effect as if for the words “two hundred and forty days”, the words “one hundred and fifty days” had been substituted;

Following second proviso shall be inserted after the existing proviso to clause (ii) of Explanation to section 80JJAA by the Finance Act, 2018, w.e.f. 1-4-2019 :

Provided further that where an employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of two hundred and forty days or one hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly; (iii) “emoluments” means any sum paid or payable to an employee in lieu of his employment by whatever name called, but does not include—

a. any contribution paid or payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee under any law for the time being in force; and

b. any lump-sum payment paid or payable to an employee at the time of termination of his service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and the like.

(3) The provisions of this section, as they stood immediately prior to their amendment by the Finance Act, 2016, shall apply to an assessee eligible to claim any deduction for any assessment year commencing on or before the 1st day of April, 2016.”

8.4 Section 80JJAA(2)(b) is applicable in this case, which reads as under:-

(2) No deduction under sub-section (1) shall be allowed,—

(b) if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganisation;

In this case, the company is the resultant company of the process of amalgamation. Here, the assessee “Facets Gems Polishing Works Private Limited” is the resultant company of amalgamation process of “Facets Polishing Works Pvt. Ltd.” and “M/s Tirupati Organisers Pvt. Ltd.” These two companies blend into the existing assessee-company. The process involves transfer of all assets, liabilities and shareholders of the earlier existing companies to the resultant company.

Thus, it can be said that the business is acquired by way of transfer from any other person or as a result of any business reorganization as held in the provisions of the Act. Since the provision of Section 80JJAA(2)(b) is applicable to the facts of the present case, we hereby hold that the Ld. CIT(A) has fallen into error in holding that the scheme of amalgamation overrides the consequent application of the exact provisions of the Income-tax Act.

The appeal of the Revenue on this ground is thus allowed.

9. In the result, the appeal of the Revenue is allowed.

The order is pronounced in the open Court on 07.04.2026