Case Law Details
DCIT Vs Ebix Software India Pvt. Ltd. (ITAT Delhi)
The Assessing Officer has held that the cost of the purchase consideration over the tangible assets is to be treated as payment for the non-compete fees as there was no goodwill with the seller and creation of the goodwill is misleading. The aforesaid finding is based on the complete misconception of facts and circumstances and the evidence placed on the record. It is reiterated that the fact that valuation report provides for a valuation of the business acquired by the company as on going concern at a higher sum than the book value and such value represents goodwill of the business. It is submitted that even the method of valuation as adopted in the valuation report is a discounted cash flow method of the revenue for the succeeding years which itself establish the submission of the appellant that amount has been paid for the goodwill of the assessee and not for a non-compete fee. It is to be highlighted that non compete fee clause is for a period of two years i.e. for the period from 1.5.2012 to 30.4.2014 whereas revenue as per valuation report is for the financial year 2012-13 to financial year March 2017. Thus it itself shows that the money paid and determined as consideration based on the valuation report and accepted in the agreement with M/s. Planet Online India Pvt. Ltd. are in respect of “goodwill” and not in respect of non-compete fees, it is reiterated that non-compete fee was an incidental obligation on M/s. Planet Online India Pvt. Ltd. and there was no separate consideration paid towards non-compete fees. It is submitted that judicially, it has been consistently recognized and held that any sum paid over and above the book value is to be held as exclusive until there is an agreement to the contrary and thus, in absence of any agreement to the contrary, in any manner, holding that the sum is paid towards non compete fees, is absolutely contrary to the actual facts. The Assessing Officer has referred to the judgment of the Hon’ble Delhi High Court in the case of Sharp Business System v. CIT reported in 254 CTR 233. This judgment has no application to the facts of the case of the appellant. In the said case, expenditure of Rs. 3 crores has been incurred towards non compete fee and the same was claimed as revenue expenditure which on the facts of the case was held to be capital expenditure. However, no such expenditure has been claimed by the appellant company, in any case, a close reading of the judgment would show that in the said case, non compete fee has been paid for a period of seven years which was held to be enduring benefit and therefore, such expenditure has been held to be capital expenditure. It is submitted that in the said case, the appellant thereafter, made an alternative contention that the expenditure be held to be intangible assets, eligible for depreciation under section 32 of the Act. The Hon’ble Apex Court after considering the judgment in the case of Techno Shares and Stock Brokers (P) Ltd. (supra) and the judgment in the case of Hindustan Cola Beverages (supra) held that there is no acquisition of non competition agreement, it is restricted one and ‘therefore, such a sum is not eligible for the capital assets under section 32(1) of the Act. It was held that expression ‘similar business of commercial rights’ has to be necessarily result in an intangible asset against the entire world to be eligible for the deprecation. The said judgment has no application on the facts of the instant case more particularly when there is no independent agreement and there is no specified consideration for non-compete fee having been paid by the company. It is well settled law that an agreement is to be read as such. Reliance is placed on the following judgments:
a) 288 ITR 408 (SC) of Ishikawajima-Harima Heavy Industries ltd. s BIT
b) 341 ITR 1 (SC) Vodafone International Holdings B.V. v UOI
c) 173 ITR 479 (SC) C1T v Arvind Narottam
The Hon’ble Delhi High Court in the case of CIT vs. Eicher Ltd. reported in 302 ITR 249 while examining the nature of non-compete fee laid the stress on the length of period of restriction. The Hon’ble Court referring to Hon’ble Supreme Court’s judgment in Coat Shipment’s case reported in 82 ITR 902 (SC) has observed that payment made to ward off the competition in a business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time, it was held that, “How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case.” The Hon’ble Court also observed that, “to decide whether an expenditure of this nature is a capital expenditure or not would depend on the facts of the case. However, it is necessary to know whether the advantage derived by the prayer is of an enduring nature, and for this one of the considerations is the length of time for which the non-compete agreement would operate although that is not decisive. While the length of time for which computation is eliminated may not strictly be decisive in all cases, yet, at the same time, it should not be so brief as to virtually be transitory. The Court finally held that, “the assessee did not acquire any capital asset by making the payment of non-compete fee of 4 crores. It merely eliminated completion in the two wheeler business, for a definite period of time.” Therefore, the expenditure was held to be revenue in nature.
In view thereof, claim of non-compete fee without payment of any consideration is though a part and parcel of the agreement and provided on account of commercial expediency and business necessity, yet the same cannot be made a basis to hold that excess of consideration paid over, the book value assets is not goodwill, but payment for non compete fee as claimed by the Assessing Officer. The judgment relied by the Assessing Officer to deny the eligible deduction of depreciation on the goodwill has been given in the different context and has no connection with the facts of the given case In view of the above, the Assessing Officer is directed to allow the depreciation of Rs.8,40,26,029/- and modify the order of assessment accordingly
During the course of the assessment proceedings, the Assessing Officer had disallowed depreciation claimed by the Assessee on goodwill recorded pursuant to a business transfer agreement.
FULL TEXT OF THE ITAT JUDGEMENT
The above two appeals filed by the Revenue are directed against the separate orders dated 30th May, 2017 of the CIT(A)-3, New Delhi relating to assessment years 2013-14 and 2014-15, respectively.
2. Since common issues are involved in both these appeals, therefore, these were heard together and are being disposed of by this common order.
3. Facts of the case, in brief, are that the assessee is a wholly owned subsidiary of Ebix Singapore Pvt. Ltd. and is engaged in the business of rendering information technology/information technology enabled services (IT/ITES). It filed its return of income on 30.11.2013 declaring nil income after claiming deduction of Rs.226,98,41,758/- under section 10AA of the IT Act. However, the assessee has paid tax u/s 115JB on book profit of Rs.205,06,58,504/-. Since the assessee had entered into certain international transaction, the AO referred the matter to the TPO for determination of the ALP of the international transaction. However, the TPO did not draw any adverse inference in respect of such international transaction undertaken by the assessee. So far as the other issues are concerned, the AO, after considering the various replies given by the assessee, rejected the claim of deduction u/s 10AA of the Act made by the assessee in respect of income from six SEZ units and made addition of Rs.226,98,41,758/-. Similarly, the AO made addition of Rs.82,88,099/- on account of other income from four SEZ units. The AO further made addition of Rs.8,40,46,029/- by rejecting the claim of depreciation on goodwill. Thus, the AO determined the total income of the assessee at Rs.212,44,62,496/-.
4. In appeal, the ld.CIT(A) deleted the additions made by the AO.
5. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
6. Ground of appeal No.1 by the Revenue reads as under:-
“1. Ld. Commissioner of Income Tax (Appeals) erred on law and on the facts of the case in deleting the addition of Rs. 2,26,98,41,758/- made by the AO on account of business income from 6 units.”
6.1 So far as ground No.1 is concerned, the facts of the case, in brief, are that the assessee has claimed deduction of Rs.226,98,41,758/- u/s 10AA of the Act in respect of four eligible business undertakings, i.e., Noida SEZ, Nagpur SEZ, Coimbatore SEZ and Hyderabad SEZ, the details of which are as under:-
| Sr. No | Name of undertaking | Amount |
| 1 | Noida SEZ | 209,44,51,574 |
| 2 | Nagpur SEZ (89-90) | 4,88,88,288 |
| 3 | Coimbatore SEZ | 4,42,95,190 |
| 4 | Hyderabad SEZ | 8,25,79,324 |
| Total | 227,02,14,376 |
7. However, the deduction claimed was restricted to the total income of Rs.226,98,41,758/- as against the total profit of Rs.227,02,14,376/-. The unitwise break-up of deduction claimed by the assessee company as exempt u/s 10AA for SEZ units is as under:-
8. The AO asked the assessee to explain the allowability of deduction u/s 10AA of the Act to which the assessee furnished the following submissions.
“Also attached is the consolidated and unit wise computation of income containing working of all income tax adjustment of revenue and expenses of each taxable and non-taxable unit. As can be seen from the Computation of Income that the inadmissible expenses of Non-SEZ unit Chennai have been added back and there is no loss to the Revenue as the Assessee has paid taxes under the provisions of MAT since tax payable as per MAT is more than the tax payable as per normal provisions of the Act, Expenses of Hyderabad unit were not added in the light of the CBDT circular dated 16.07.2013 wherein Assessee can set off losses of ineligible units against the profits of eligible units. Copy of the circular is attached herewith for your reference as Annexure B, without prejudice to the above, even if expenses of Hyderabad unit are added back there would be no revenue loss as tax payable as per the MAT provisions would be more than the tax payable as per normal provisions…….. .” Furthermore, all the employees which were forming part of these two units in preceding assessment year continued to remain employees of these two units during the subject year under assessment, except for routine hiring and exit of employees in the normal course of business operations. Further, there has been no transfer of employees by the Assessee from any other business units to these two business units during the subject year under assessment. During the subject year under assessment, these two units were continuing business operations carried forward from the previous year, and there has been no splitting or reconstruction of these business units during the previous year under assessment………. ”
“ .Both, Coimbatore and Hyderabad SEZ units were initially set-up by Planet in the F. Y. 2010-11 and F.Y. 2011-12 respectively and commenced business operations in respective years of set-up. Assessee acquired business Operations from Planet on a going concern business in F.Y. 2012- 13, and has accordingly claimed deduction ids I0AA in respect of two units in its tax return for the subject year assessment. These two business units are engaged in export of services i.e. provision of IT (software development support) to Ebix group outside India, which is permitted business activity under SEZ and fur claim of tax holiday u/s 10AA of the Act. ”
9. However, the AO was not satisfied with the arguments advanced by the assessee. He observed that the claim of the assessee that expenses of non-SEZ units of Chennai has been added back is incorrect. According to him, the total added back is Rs.22,14,995/- (i.e., Rs.19,14,995/- in Noida unit and Rs.3 lakhs in Coimbatore Unit). Thus, the entire expenses have not been added back and this is a clear admission on the part of the assessee that resources of non-SEZ units have been used for the earning of revenue in SEZ units. According to the AO, the claim of expenses of Hyderabad non-SEZ unit can be set off against the eligible profits of SEZ unit is also not verifiable from the computation. The AO analysed the reply of the assessee furnished in the simultaneous proceedings for A.Y. 2014-15 wherein the following depreciation chart was furnished:-
(i) NOIDA DTA 25,04,762
(ii) NOIDA SEZ 2,15,25,021
(iii) Nagpur SEZ 13,56,105
(iv) Chennai DTA 10,05,546
(v) Begumpet DTA 3,23,00,959
(vi) Coimbatore SEZ 2,11,70,027 (including Depreciation of Rs.1,91,76,128/- on Goodwill)
(vii) Uppal SEZ 1,74,89,944 (including Depreciation of Rs.1,71,07,849/-on Goodwill)
10. He observed that the assessee company has registered office at 311-B-4A, Pariyattan Vihar, Vasundhara Enclave, New Delhi and there is separate workplace at Noida DTA. He observed that the expenses related to these offices are not eligible for being considered with any SEZ units. According to the AO, these expenses have not been claimed separately and, therefore, they have been clubbed with the expenses of Noida, SEZ. This according to him, is not allowable for deduction u/s 10AA of the Act as it amounts to splitting up of/reconstruction of a business already in existence. From the reply furnished by the assessee on 20th December, 2016, he noted that the assessee has included other income of Rs.82,88,099/- in computation of profits on four SEZ undertakings as under:
11. He noted that Note No.23 of P & L Account of the company indicates that other income includes Interest on Bank Deposits and Other Income. According to the AO, this income of Rs.82,88,099/- cannot be considered as Profits & Gains derived from the Export of Article/Things/ from Services as necessitated in Section 10AA. He, therefore, held that this income is to be excluded from the Profits of the Undertakings for Computation of eligible Profits of the eligible Undertakings. He further noted that the report in the Form 56F are also faulty to this extent.
12. The AO further noted that during assessment year, the assessee company has purchased one undertaking from M/s Planet Online Ltd. On being asked by the AO to submit assessment history of M/s Planet Online Ltd. for the last three years in respect of the allowability of deduction claimed by such purchase unit, the assessee failed to demonstrate as to how the new SEZ unit so acquired is not formed by splitting up or reconstruction of a business already in existence and the SEZ unit has not been formed by the transfer of previously used plant and machinery. He noted from the letter of transfer dated 29th October, 2012 that the Development Commissioner has also mentioned that tax liability may arise out of the changes that had to be fulfilled by the respective companies. He further noted that in the consolidated computation, the section 10AA exemption is Rs.226,98,41,758/- whereas in the unitwise computation, the deduction u/s 10AA has been claimed at Rs.227,02,14,376/-. Further, in the form No.3CD of audit report u/s 44AB of the Act for A.Y. 2013-14, the admissible deduction u/s 10AA has not been specified by the auditor and the difference in the claim has not been explained by the assessee.
13. The AO noted that in the consolidated computation, inadmissible expenses of Rs.3,01,30,343/- for Chennai Non-SEZ unit and Rs.21,85,82,287/- for Hyderabad DTA unit has been added back. However, in the unit-wise computation, Rs.19,14,995/- has been considered inadmissible expenses of Non-SEZ unit and added back to the Business Income of NOIDA SEZ unit. Similarly, for the Computation of Business Income of Coimbatore Unit inadmissible expenses of Rs.2,04,54,537/- has been added back. The details of these varying figures of inadmissible expenses has not been furnished by the assessee. It also remain unexplained as to why there is a difference in the consolidated computation and unit- wise computation.
14. The AO noted that the Chennai and Hyderabad Non-SEZ units have incurred losses of Rs.3,16,90,329/- and Rs.l ,95,89,28,585/- respectively. He noted that Chennai unit has not even shown any Revenue against the claim of losses which is prima facie indicator of fictitious arrangement in which the entire resources of Chennai unit have been utilized in earning the tax free income of SEZ units. Similarly, the claim of expenses of Rs.21,86,67,174/- (including Rs. 15.00,35,220/- for Employee Benefit Expenses) as against revenue of Rs.2.27,74,589/- is not justifiable.
15. The AO observed that in the NOIDA SEZ, the assessee has earned Revenue from operations of Rs.221.57 Crores as against Employee Benefit Expense of Rs. 18.28 Crore, whereas, in the Non-SEZ units this ratio of Revenue to Employee Benefit Expense is very high. This-again indicates that the Resources of Non-SEZ units have been utilized for the tax free income of SEZ units. The AO analysed the Employee Benefit Expenses as compared to Revenue from Operations of each unit which is as under:~
| Name of the Unit | Revenue from Operations | Employee Benefit Expenses (EBE) | % of EBE to Revenue from Operations |
| NOIDA SEZ (Ebix SEZ) | 221.57 | 18.28 | 8.25% |
| NAGPUR SEZ (Ebix SEZ) | 1.0,00 | 4.64 | 46.4% |
| fO-MBATORh SEZ (Planet Online) | 14.1 1 | 5.34 | 37.84% |
| Uppal SEZ (Planet Online) | 16.72 | 5.05 | 30.20% |
| Chennai Non SEZ | NIL | 1.88 | Infinite |
| Hyderabad Non SEZ (Planet Online) | 2.27 | 15.00 | 660.79% |
16. From the above table, he observed that the Employee Benefit Expenses of SEZ Unit’s range from 8.25% to 46.4% as against the 660.79% and Infinite % in the case of Hyderabad and Chennai Non-SEZ Units. This unusually high Employee Benefit Expense according to him indicates that these expenses were incurred for the earning of revenue in 10AA claiming SEZ Units. Since, the Employees have earned revenue for SEZ Units, they have also utilized other resources of Non-SEZ Units in doing so. This will tantamount to use of resources of non-eligible already existing unit for earning revenue for SEZ units. Such arrangement according to the AO is colorable and are merely to avail benefits of deduction u/s 10AA.
17. The AO analysed the provisions of Section 10AA according to which the undertaking which is formed by splitting up or the reconstruction of business already in existence shall not be eligible for deduction under 10AA. He noted that there were expenses of Non-SEZ units which were used for earning income of SEZ units is admitted by the assessee itself in the form of Computation of Income submitted by it. Further, the assessee failed to submit satisfactory details and justification in respect of each unit that has claimed deduction u/s 10A. In view of the above, the AO rejected the claim of deduction u/s 10AA made by the assessee.
18. Before the CIT(A), the assessee made elaborate submissions on various issues which were considered by the CIT(A). The AO was also present during the proceedings was heard on the issue of disallowance of deduction u/s 10AA of the Act. The relevant submission of the assessee justifying the claim of deduction u/s 10AA before CIT(A) reads as under:-
“3.1 The company is a subsidiary of M/s Ebix Singapore Pte. Ltd and is engaged in the business of rendering information technology/ information technology enabled services (IT/ITES). The company has been voluntarily filing returns of income and, has been assessed to tax thereon since incorporation. A chart tabulating the status of the returns filed for assessment year’s 2007-08 to 2011-12 is tabulated hereunder:
| AY | Date of filing of return |
Income declared after claiming exemption u/s 10B of the Act | income assessed after claiming exemption u/s 10B of the Act | Date of order |
Assessment u/s
(pages of Paper Book) |
| 2007-08 | 31/10/200
7 |
50,42,087 | 50,42,087 | 12.11,2010 | 143(3} |
| 2008-09 | 28/09/200
8 |
75,67,921 | 75,67,921 | 28.09.2008 | 143(1) |
| 2009-10 | 30/09/200
9 |
5,25,000 | 5,25,000 | 05.03.2013 | 143(3) |
| 2010-11 | 30/09/201 0 |
NIL | NIL | 20.02.2014 | 143(3)
(262-266) |
| 2011-12 | 30/09/201 1 |
38,13,116 | 38,13,116 | 20.02.2015 | 143(3)
(267-271) |
3,2 That w.e.f. 1.4,2011, M/s. Ebix Software India SEZ Pvt. Ltd. (hereinafter referred to as ‘Ebix SEZ’), another company incorporated under the Companies Act,1956 was merged and amalgamated with the appellant company under an order dated 30,4.2012 of the Hon’ble High Court of Delhi sanctioning the composite scheme of arrangement under section 394 of the Companies Act, 1956.
3.3 That pursuant to the aforesaid order, two units eligible for deduction under section 10AA of the Act set up by M/s. Ebix SEZ stood merged and amalgamated with the appellant company. The details of the two units are as under:
| Sr. No. |
Particulars | Assessment year in which unit was set up by M/s Ebix SEZ |
| i) | Noida SEZ | 2010-11 |
| ii) | Nagpur SEZ | 2011-12 |
Apart from the above, business activity of Ebix SEZ in domestic tariff area (hereinafter referred to as “DTA”) in Chennai (referred to as non-eligible unit namely ‘Chennai non-SEZ’) was also amalgamated with the appellant company. Moreover, under the scheme of composite arrangement, there was a de-merger of the undertaking eligible for deduction u/s 10B of the Act of the company at Noida engaged in providing BPO and support services to M/s. Premier Ebix Exchange Software Pvt. Ltd. However, as a result, certain specified assets were retained by the company, on which depreciation has been claimed in the instant year and, referred to as ‘Noida DTA’.
3.4 That accordingly, during the assessment year 2012-13, company had three undertakings namely Noida SEZ, Nagpur SEZ and Chennai non-SEZ. It is stated that the company had claimed deduction under section 10AA of the Act for both the undertakings, namely Noida SEZ for an amount of Rs 144,89,55,520/- and Nagpur SEZ for an amount of Rs 6,23,98,396/- . Infact, in assessment year 2012-13, in respect of the assets retained by the company and classified under the head ‘Noida DTA;, depreciation of Rs. 1,20,87,945/- was claimed by the company which was allowed as such in assessment framed under section 143(3) of the Act. The details of deduction claimed and, allowed for assessment year 2012-13 are as under:-
| Date of filing of return | Income declared after claiming exemption u/s 10AA of the Act | Income assessed after claiming exemption u/s 10AA of the Act | Date of order u/s 143(3) of the Act |
| 28.11.2012
|
NIL
(pages 230 235 of Paper Book and 272- 328 of Paper Book)) |
NIL
|
29.1.2016 (pages 224 – 229 of Paper Book)
|
That subsequently on 1.6.2012, the company entered into a business transfer agreement (copy placed at pages 106-116 of Paper Book) with M/s. Planet Online (P) Ltd. to purchase the business undertakings for a consideration of Rs.38,53,50,000/- (USD 7 miilion) as on going concern on slump sale basis. The business undertakings comprised of assets, transferred employees, liabilities, licenses, contracts and receivables. –
3.5 As a result of the above, two eligible units at Coimbatore and Uppal stood owned by the company and another non eligible unit at Hyderabad also stood acquired by the company.
3.6 In the nutshell, as a result of the aforesaid, the company owned four eligible units and two non eligible units during the assessment years 2013-14 and 2014-15. The details of the eligible units are as under:
| Sr. No. |
Unit | Acquired from | Acquired during the assessment year | Assessment year of setting up of Unit |
| i) | Noida SEZ | Ebix SEZ | 2012-13 | 2010-11 |
| ii) | Nagpur SEZ | Ebix SEZ | 2012-13 | 2011-12 |
| iii) | Coimbatore SEZ | Planet Online (P) Ltd. | 2013-14 | 2011-12 |
| iv) | Uppal SEZ | Planet Online (P) Ld. | 2013-14 | 2012-13 |
Likewise, the status of non-eligible units was as under:
| Sr. No. |
Particulars of unit | Acquired from | Acquired during the assessment year |
| i) | Chennai non-SEZ | Ebix SEZ | 2012-13 |
| ii) | Hyderabad non- SEZ | Planet Online (P) Ltd. | 2013-14 |
Apart from the above, the appellant had also certain assets as stated above out of 10B Units which were retained by the company and classified as Noida DTA, It is also clarified that during the instant year, expenditure claimed on depreciation in respect of the said Noida DTA assets is of Rs. 52,74,157/-. A copy of the chart of depreciation of assets of Noida DTA is placed at page 152 of the Paper Book.
At this juncture, it is stated that deduction has been claimed under section 10AA of the Act in respect of the four units eligible for the deduction and details of the set up of the units and the status thereof is tabulated as under:
| AY | Deduction claimed (in Rs.) (page of PB) | Entity in which, deduction claimed | Disallowance if any | Date of order u/s 143(3) of the Act (Pages of PB) |
| 2010-11 | 65,27,64,881
(384-386) |
Ebix SEZ | Nil | 20.2.2014 (393-397) |
| 2011-12 | 142,07,41,308
(462-464) |
Ebix SEZ | Nil | 17.2.2015 (481-483) |
| 2012-13 | 144,89,55,520
(231) |
Appellant company | Nil | 29.1.2016 (224—229) |
II Nagpur SEZ
| AY | Deduction claimed (in Rs.) (page of PB) | Entity in which, deduction claimed | Disallowance if any | Date of order u/s 143(3) of the Act (Pages of PB) |
| 2011-12 | 31,23,74,139 (462,465-466) | Ebix SEZ | Nil | 17.2.2015 (481-483) |
| 2012-13 | 6,29,98,996 (232) | Appellant company | Nil | 29,1.2016 (224-229) |
III Coimbatore SEZ
| AY | Deduction claimed (Rs.) |
Entity in which, deduction claimed | Disallowance, if any |
| 2011-12 | 61,644 (532-533) | Planet Online (P) Ltd. | Nil |
| 2012-13 | 49,62,722 (586,588) | Planet Online (P) Ltd. | Nil |
IV Uppal SEZ
| AY | Deduction claimed (Rs.) |
Entity in which, deduction claimed | Disallowance, if any |
| 2012-13 | 84,24,989 (586-587) | Planet Online (P) Ltd. | Nil |
19. It was reiterated that the disallowance was made by the AO based on fundamental misconception of facts and circumstances. It was argued that the assessee has maintained complete books of account which were duly audited and have been accepted. In other words, the AO has not rejected the books of account by invoking the provisions of section 145(3) of the Act and the profit declared has been accepted. It was submitted that when the AO has accepted separate books of account maintained by the assessee company in each of the unit which are supported by audit report and, therefore, the AO cannot allege that any expenditure of the revenue has been diverted to other unit. It was submitted that even as per assessment order, the AO has computed business income of each of undertaking separately, the details of which are as under:-
| Sr No. |
Unit | Amount of business income as per Assessing officer |
| i) | Noida SEZ | 2,08,44,45,787 |
| ii) | Nagpur | 4,86,90,981 |
| ii) | Coimbatore | 4,39,95,190 |
| iii) | Uppal | 8,25,79,324 |
| Total | 225,97,11,282 |
20. It was argued that the taxable business income of the undertaking has been computed independently and only thereafter taxable business income of the company has been computed. Relying on various decisions, it was argued that the AO is not justified in rejecting the claim of deduction. It was further argued that the eligible undertaking of Noida and Nagpur stood amalgamated with the assessee company during the assessment year 2012-13 and deduction claimed thereon stood allowed as such and, therefore, there was no justification for the AO to hold that such undertakings were not eligible for the deduction in the A.Y. 2013-14. Referring to various decisions including the decision of the Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd., 358 ITR 295 and in the case of CIT vs. JK Charitable Trust, 308 ITR 161, it was argued that following the rule of consistency alone the AO should not have rejected the claim of deduction in respect of Noida and Nagpur units.
21. It was argued that all the four undertakings, i.e., Noida, Nagpur, Coimbatore and Uppal were eligible for the deduction having been set up in the preceding assessment years wherein deduction claimed stood duly allowed and, therefore, there could have been no valid reason or justification to deny claim of deduction in respect of these undertakings in the instant assessment year. Relying on various decisions, it was argued that the amalgamation of the undertaking could neither in law nor on facts be made a basis to deny the legitimate claim of deduction and does not amount to splitting up or reconstruction of business already in existence. The provisions of section 10AA(5) were brought to the notice of the CIT(A) and it was argued that the above provision of the Act is an enabling provision to enable the claim of deduction so as to transfer all the eligible unit to another unit in a scheme of amalgamation or demerger. Relying on various decisions, it was argued that acquisition of an undertaking on slump sale could neither in law nor on the facts be made a basis to deny the legitimate claim of deduction. It was argued that the change in ownership either by way of slump sale, merger or otherwise cannot be made the basis to disallow the claim of deduction. It was argued that fulfillment of the conditions as provided in sub-section (1) r.w. section 4 of section 10AA of the Act has to be seen in the year of formation and since in the year of formation of the SEZ units, units were eligible for the deduction, it cannot be said that such units are not eligible for deduction u/s 10AA. Relying on the decision of the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT, 196 ITR 188, it was argued that the conditions as prescribed in section 10AA(1) of the Act r.w. sub-section (4) have to be seen in the year of formation of the unit and not subsequently. The following details were furnished before the CIT(A) regarding the assessment particulars and it was argued that the table given by the AO at page 2, para 1 of the assessment order contains factually incorrect observations:-
| “Sr. No. | Unit reference | Year of commen- cement of business | Eligibility of unit for Claiming deduction u/s 10AA of the IT Act as claimed by the assessee during the AY 2013-14 | No. of years completed in A.Y. 2013-14 since commencement of business |
| | 1 | NOIDA SEZ (Ebix SEZ) |
2009-10 | Yes | |4*(first year ‘ with assessee) |
| 2 | NAGPUR SEZ (Ebix SEZ) | 2010-11 | Yes | 3*(first year with assessee) ‘ |
| 3 | COIMBATORE SEZ (Planet Online) | 2012-13 | Yes | 3*(first year with assessee) |
| 4 | Uppal SEZ (Planet Online) | 2012-13 | Yes | 2 * (first year with assessee) |
| 5. | Chennai Non SEZ | n.a. | No | NA |
| 6. | Hyderabad Non SEZ (Planet Online) | n.a | No | (Acquired by assessee in A.Y. 2013 -14) |
*Correct position in second year with assessee
22. It was submitted that the Assessing Officer at page 3 of the order of assessment in para 1 has incorrectly noted that in financial year 2012-13, there was major change in undertaking owned by the company. He has incorrectly noted that prior to this period, the assessee was only having business undertaking at Noida and it is also only after composite scheme of arrangement and business transfer agreement during the assessment year, the assessee company owned six undertakings/units. The Assessing Officer has factually erred in holding that the units of Noida and Nagpur came to be owned by the company in the instant year. It is submitted that this finding is contrary to his own observation at page 3 in para 3 of the order of assessment.
23. Various inconsistencies and incorrect facts recorded by the AO were brought to the notice of the CIT(A). It was submitted that the assessee while computing the consolidated income has not only reduced the depreciation of SEZ units, but also reduced the depreciation of non-SEZ units and while computing the aggregate income the assessee reduced the entire claim of depreciation the break-up of which is as under:-
| Sr No. |
Unit | Eligible Unit {Rs.) | Non-eligible unit (Rs.) | Total (Rs.) |
| 1. | Noida | 2,41,23,252 | —- | 2,41,23,252 |
| 2.. | Nagpur | 7,50,756 | —- | 7,50,756 |
| 3. | Coimbatore | 2,92,84,982 | —- | 2,92,84,982 |
| 4. | Uppal | 2,37,11,606 | —- | 2,37,11,606 |
| 5. | Chennai | 9,01,810 | 9,01,810 | |
| 6. | Hyderabad | 4,73,47,487 | 4,73,47,487j | |
| 7. | Noida DTA | 52,74,157 ) | 52,74,157 | |
| Total | 7,78,70,596 | 5,35,23,454 | 13,13,94,050 |
24. It was argued that while computing the aggregate income, the assessee reduced the entire claim of depreciation both in respect of non-SEZ units and SEZ units and computed the income at Rs. 226,98,41,758/- and as such, restricted its claim of deduction to Rs.226,98,41,758/- as against eligible claim of Rs.227,02,14,376/- pertaining to all the four units. In other words, the entire expenditure has been reduced while computing the income of the appellant company and no deduction has been claimed in excess to the gross income declared by the company. It was stated that the de-merger of the undertaking had taken place in assessment year 2012-13 and the appellant had claimed depreciation on Noida DTA of Rs. 1,20,87,945/- which has been allowed as such and likewise deduction was claimed of Rs. 144,89,55,220/- under section 10AA of the Act in respect of Noida SEZ and same stood allowed under section 143(3) of the Act. Thus, even otherwise, having accepted the demerger of the BPO unit and having allowed depreciation in the preceding assessment year and deduction under section 10AA of the Act, there was no justification on the part of the Assessing Officer to make any departure and that too without any material in the instant year.
25. So far as the allegation of the AO that resources of non-SEZ units have been used for earning the revenue in SEZ units is concerned, it was argued that the same is factually incorrect. It was submitted that the sum of Rs.19,14,995/- and Rs.3 lakhs respectively represent expenditure incurred on the guest house which has been added back to avoid any possible dispute though there is no material to suggest that the expenses have any bearing on the non-SEZ units. It was argued that merely because the above sums have been added back by using the narration as explained pertaining to non-SEZ units available made a basis to assume that resources of non-SEZ units have been utilized for earning the revenue in SEZ units. So far as the allegation of the AO that deduction u/s 10AA is not allowable as there is splitting up/reconstruction of business already in existence and since the expenses relating to the registered office at Vasundhara Enclave, New Delhi and Noida DTA have been clubbed with the Noida SEZ is concerned, it was submitted that the above observation is factually incorrect and there is no expenditure incurred and claimed in respect of the registered office of the company. So far as the Noida DTA is concerned, it was submitted that there is only expenses on account of depreciation at Rs.52,74,157/- which has been claimed in the consolidated computation of income and not as part of the unitwise computation of income. Referring to the details furnished before him, it was submitted that in the unitwise computation of income the depreciation claimed for the Noida SEZ is for Rs.2,41,23,252/- which has been separately claimed as part of the consolidated computation in addition to the depreciation of Rs.52,74,157/- in respect of Noida unit. Thus, no expenditure has been claimed either in respect of Noida DTA or in respect of registered office while computing profits of Noida SEZ. Referring to various other inconsistencies and observations in the assessment order and relying on various decisions, it was argued that the company has correctly made the claim of deduction u/s 10AA.
26. Based on the arguments advanced by the assessee, the ld.CIT(A) allowed the deduction of Rs.226,98,41,758 u/s 10AA of the Act in respect of profit of eligible business undertaking. While doing so, he noted that once separate books of account are accepted as such, no disallowance can be validly made. According to him, the disallowance is contrary to the principle of consistency and deduction granted in initial year cannot be withdrawn. According to him, mere amalgamation of the undertaking could neither in law nor on facts be made a basis to deny legitimate claim of deduction of the assessee company and does not amount to splitting up or reconstruction of business already in existence. Likewise, mere acquisition of undertaking on slump sale could neither in law nor on facts be made a basis to deny legitimate claim of deduction of the assessee company. According to him, mere change in ownership either by way of slump sale, merger or otherwise cannot be made a basis to disallow the claim of deduction and also assume that there is splitting up and reconstruction of business. According to the ld.CIT(A), fulfillment of the conditions as provided in sub-section (1) r.w. subsection (4) of section 10AA has to be seen in the year of formation and since in the year of formation of the SEZ units, units were eligible units, it cannot be said that such units are not eligible units for deduction u/s 10AA in the instant year. According to him, as per the provisions of section 10AA(4), eligibility of the unit is determined and not of the assessee. So far as the various allegations/observations of the AO are concerned, the ld.CIT(A) held that those are factually incorrect. Relying on various decisions, the ld.CIT(A) deleted the disallowance of Rs.226,98,41,758/- made by the AO u/s 10AA of the Act.
27. Aggrieved with such order of the CIT(A), the Revenue is in appeal before us.
28. The ld. DR strongly supported the order of the AO. He submitted that the ld.CIT(A) has simply reproduced and relied on the submissions made by the assessee during the appeal proceedings and has deleted the addition made by the AO without appreciating the various facts brought on record by the AO and without providing any proper opportunity to the AO. He submitted that the ld.CIT(A) while holding that figure of Rs.19,14,995 and Rs.3 lakhs represent expenses incurred on guest house and, therefore, were added back, did not appreciate that such an explanation was never given before the AO and, on the contrary, in the unitwise computation of income it was mentioned that these are in the nature of inadmissible expenses of non-SEZ unit. He submitted that the Hon’ble Delhi High Court has approved the composite scheme of arrangement for merger and demerger on 30th April, 2012 relating to A.Y. 2013-14. Therefore, such an order will be effective from A.Y. 2013-14 and not from A.Y. 2012-13. He submitted that in the Form No.3CD of audit report u/s 44AB of the Act for A.Y. 2013-14, the inadmissible deduction u/s 10AA of the Act has not been specified by the auditor. He submitted that the AO has correctly held that the A.Y. 2013-14 was the first year in respect of these units and as such, the claim of the assessee was required to be examined and the specific queries raised by the AO during the assessment proceedings were not answered by the CIT(A), who simply accepted the submissions made by the assessee. He accordingly submitted that the order of the CIT(A) being not in accordance with law, should be reversed and that of the AO be restored on this issue.
29. The ld. Counsel for the assessee, on the other hand, heavily relied on the order of the CIT(A). He submitted that in the grounds raised by the Revenue, they have not challenged the deletion of addition u/s 10AA of the Act and there is no reference to deduction under the said provision. On the contrary, the ground raised by the Revenue is restricted to deletion of addition on account of business income from six units. He submitted that the income from six units has been assessed by the AO as business income which is evident from the computation portion of the assessment order. Therefore, the ground raised that the CIT(A) has erred in deleting the addition on account of business income of six unit is fundamentally misconceived and misplaced. Since the Revenue has not challenged the deletion on account of deduction u/s 10AA, therefore, the argument of the ld.CIT, DR to extend the scope of appeal to claim of deduction u/s 10AA is not tenable being not in accordance with the law.
30. Without prejudice to the above, he submitted that even independently examining the claim, the ld. CIT, DR has not in any manner, factually and legally rebutted the findings given by the ld.CIT(A) while allowing the claim of deduction u/s 10AA of the Act. He submitted that the argument of the ld.CIT, DR that the deduction u/s 10AA was claimed for the first time in A.Y. 2013-14 and, therefore, the AO was justified in denying the claim of deduction in the instant year is not correct. He submitted that this presumption on the part of the CIT, DR is based on hypothesis that the order of the Hon’ble Delhi High Court is dated 30th April, 2012 and, therefore, this claim became effective in F.Y. 2012-13 relevant to A.Y. 201314. Referring to the copy of the assessment order, he submitted that the effective date of scheme was w.e.f. 01.04.2011 which is evident from para 3, page 3 of the assessment order. Therefore, the basis of the argument of the ld. CIT, DR is misconceived, misplaced and intangible. He submitted that the first year of claim of deduction was A.Y. 2012-13 and not A.Y. 2013-14. Further, the AO, in the order passed for A.Y. 2012-13 has allowed the claim of deduction u/s 10AA. Further, all these units were set up much prior to the instant year where too deduction has been allowed as such and, therefore, having regard to the settled position of law, claim has to be examined in the year in which the unit was set up and, therefore, denial of deduction u/s 10AA in the instant year is contrary to the provisions of law.
31. The ld. Counsel for the assessee submitted that the assessee in the instant case has maintained complete books of account which were duly audited and have been accepted as such. The AO has not invoked the provisions of section 145(3) of the Act and has not rejected the book results and the profit declared stands accepted as such. He submitted that the taxable business income of the undertaking has been computed independently and thereafter taxable business income of the assessee company has been computed. Referring to the following decisions, the ld. Counsel for the assessee submitted that once separate books of account are accepted as such, no disallowance can be validly made:-
i) CIT vs. Quest Informatics (P) Ltd., 372 ITR 526 (Kar);
ii) Larsen & Toubro Infotech Ltd. vs. DCIT, 19 ITR (T) 361 (Mumbai);
iii) CIT vs. Translam Ltd., 231 Taxman 901 (All);
iv) Cadila Healthcare Ltd. vs. Addl. CIT, 67 SOT 110 (Ahd);
v) Shiva Exports vs. ITO, 28 SOT 512 (Chd.) and
vi) DCIT vs. Delhi Press Samachar Patra (P) Ltd., 101 ITD 283 (Del).
32. Referring to the decision of the Hyderabad Bench of the Tribunal in the case of DCIT vs. A.P. Industrial Infrastructure Corporation Ltd., 156 ITD 410, he submitted that the Tribunal has held that even if the assessee failed to maintain separate books of account for eligible units, the AO shall compute deduction on reasonable basis.
33. The ld. Counsel for the assessee, referring to the following decisions, submitted that the disallowance is contrary to the principle of consistency since the eligible undertaking of Noida and Nagpur stood amalgamated with the assessee company during A.Y. 2012-13 and the deduction claimed thereon stood allowed as such and, therefore, there was no justification for the AO to have held that such undertakings were not eligible undertakings for the A.Y. 2013-14:-
i) CIT vs. Excel Industries Ltd., 358 ITR 295 (SC);
ii) CIT vs. J.K. Charitable Trust, 308 ITR 161 (SC); and
iii) Moolchand Khairati Ram Trust vs. DIT(E), 377 ITR 650 (Del).
34. The ld. Counsel for the assessee submitted that all the four undertakings, i.e., Noida SEZ, Nagpur SEZ, Coimbatore SEZ and Uppal SEZ were eligible undertakings wherein deduction claimed stood duly allowed and, therefore, once the deduction was granted in the initial year, the same cannot be withdrawn. For the above proposition, he relied on the following decisions:-
i) 355 ITR 14 (Del) CIT v Delhi Press Patra Prakashan Ltd.
ii) 251 CTR 290 (Del) CIT v Tata Communication Internet Services Ltd.
iii) 214 CTR 227 (Del) CIT vs. Jagson International Ltd.
iv) 216 ITR 548 (Bom) CIT vs. Paul Brothers.
v) 349 ITR 309 (Bom) CIT vs. Western Outdoor Interactive (P) Ltd.
vi) 349 ITR 150 (Bom) Direct Information (P) Ltd. Vs. ITO
vii) 123 ITR 669 (Guj) C.I.T. v Saurashtra Cement and Chemicals.
viii) 267 ITR 774 (AP) G.B. Bros and Konda Rajagopala Chetty vs. ITO
ix) 133 ITR 687 (MP) CIT vs. Bhilai Enginering Corporation
x) ITA No. 477/2013 dated 28.7.2014 (Kar) M/s Ace Multi Axes Systems Ltd. Vs. DCIT
xi) 244 Taxman 217 (SC) CIT v. Defree Engineering (P) Ltd.
xii) 209 Taxman 76 (Mad)(Mag) Sterilite Industries (India) Ltd. v. ACIT
xiii) 243 Taxman 408 (Mad) CIT v. P.S. Velusamy
35. The ld. Counsel for the assessee submitted that mere amalgamation of the undertaking could neither in law nor on fact be made a basis to deny a legitimate claim of deduction of the assessee company and does not amount to splitting up or reconstruction of business already in existence. Referring to the provisions of section 10AA(5), he submitted that the same is an enabling provision to enable claim of deduction despite transfer of the eligible unit to another unit in a scheme of amalgamation or demerger. Referring to the decision of the Kolkata Bench of the Tribunal in the case of ITO vs. M/s Last Peak Data Pvt. Ltd., ITA No.154 & 155/Kol/2013, he submitted that under somewhat identical circumstances the deduction claimed u/s 10AA was allowed.
36. Referring to the following decisions, the ld. Counsel for the assessee submitted that mere acquisition of an undertaking on slump sale could neither in law and nor on facts be made a basis to deny legitimate claim of deduction u/s 10AA to the assessee company:-
i) CIT v. Hearland Delhi Transcription, ITA No.300/2011 (Del) dated 18.07.2014;
ii) NDS Services Pay-TV Technology (P) Ltd., 33 com 414 (Bang);
iii) DCIT v. LG Soft India (P) Ltd., ITA Nos.623 & 847/B/2010, dated 19.5.2020;
iv) M/s Samsung India Software Operations (P) Ltd. vs. Addl. CIT, ITA No.399/Bang/2012
37. Referring to the following decisions, the ld. Counsel for the assessee submitted that mere change in ownership either by way of slump sale, merger or otherwise cannot be made a basis to disallow the claim of deduction and also assume that there is splitting up or reconstruction of business:-
i) 106 TTJ 484 (Chennai) Kumaran Systems (P) Ltd. ACIT
ii) ITA Nos 623 & 847/B/2010 dated 19.5.2010 DCIT v. M/s L.G. Soft India (P) Ltd.
iii) 100 ITD 125 Tech Book Electronic Services (P) Ltd v ACIT
iv) 82 TTJ 174 ACIT v IIS Infotech Ltd
v) IT (TP) A No. 1444 (Bang) 2012 GXS India Technology Centre (P) Ltd vs. ITO
38. The ld. Counsel for the assessee, referring to the provisions of section 10AA of the Act submitted that fulfillment of the conditions as provided in sub-section (1) r.w. sub-section (4) of section 10AA of the Act has to be seen in the year of formation and since in the year of formation of the SEZ units, units were eligible units, it cannot be said that such units are not eligible units for deduction u/s 10AA of the Act in the instant year. For the above proposition, the ld. Counsel relied on the following decisions:-
i) 181 ITR 518 (Kar.) CIT vs. Nippon Electronics (India) Pvt. Ltd.
ii) 59 ITD 563 (Pune) Vintage Cards and Creations vs. ACIT
iii) 108 TTJ 905 (Pune) Ghodavat Pan Masala India (P) Ltd. Vs. JCIT
iv) 14 SOT 303 (Mum) ITO vs. Laxmi Packers
39. The ld. Counsel for the assessee submitted that as per the provisions of section 10AA, the emphasis is on the unit whose profits are to be computed and, which, thereafter have to be deducted from the total income of the assessee. Referring to the Circular issued by the CBDT, vide F. No.15/5/63-IT(A-I), dated 13th December, 1963, he submitted that the CBDT is of the view that the relief would be available for the successor. Referring to the following decisions, he submitted that following the aforesaid Circular, relief u/s 80J of the Act was granted:-
i) 87 Taxman 101 (Cal) CIT v. P. K. Engineering and Forging (P) Ltd.
ii) 233 ITR 207 (Mad) AGS Timber & Chemical Industries Pvt. Ltd. v. CIT
iii) 98 ITR 119 (Mad) Madras Machine Tools Manufacturers Ltd. v. CIT
iv) 205 ITR 19 (Ker) Kerala State Cashew Dev. Corpn. v. CIT
v) 213 ITR 660 (Bom) CIT v. Tyresoles Concessionaries Pvt. Ltd.
vi) 212 ITR 1 (Bom) CIT v. Dandeli Ferro Alloy (P) Ltd.
vii) 160 ITD 540 (Asr) Aggarwal & Co. v. DCIT 29
viii) 391 ITR 274 (SC) CIT v. Yokogawa India Ltd. (pages 443-444 of Paper Book)
ix) 129 TTJ 273 (Chennai) Scientific Atlanta India Technology (P) Ltd. v. ACIT
40. So far as the various allegations/observations made by the AO are concerned, the ld. Counsel strongly challenged the same. So far as the observation that it is the first year that claim of deduction in respect of Noida SEZ and Nagpur SEZ is concerned, the ld. Counsel drew the attention of the Bench to the following table and submitted that the observation of the AO is factually incorrect:-
| Sr. No. | Unit reference | Year of commencement of business | Eligibility of unit for claiming deduction u/s 10AA of the IT Act as claimed by the assessee during the AY 2013-14 | No. of years completed in A.Y. 2013-14 since commencement of business | Correct Position |
| 1 | NOIDA SEZ (Ebix SEZ) | 2009-10 | Yes | 4* (first year with assessee) | Second year with Assesse (please refer table at point no. 3.3 herein above) |
| 2 | NAGPUR SEZ (Ebix SEZ) | 2010-11 | Yes | 3* (first year with assessee) | Second year with Assesse (please refer table at point no. 3.3 herein above) |
| 3. | COIMBATORE SEZ (Planet Online) | 2012-13 | Yes | 3* (first year with assessee) | |
| 4. | Uppal SEZ (Planet Online) | 2012-13 | Yes | 2* (first year with assessee) | |
| 5. | Chennai Non SEZ | n.a. | No | NA | |
| 6.
|
Hyderabad Non SEZ (Planet Online)
|
n.a.
|
No
|
(Acquired by assessee in A.Y. 2013-14) |
41. So far as the observation of the AO that the assessee was only having business undertaking at Noida and it is also only after composite scheme of arrangement and business transfer agreement during the assessment year the assessee owned six undertakings/units is concerned, the ld. Counsel submitted that the same has incorrectly been noted by the AO that in F.Y. 2012-13 there was major change in the undertaking owned by the assessee company. He submitted that the AO has factually erred in holding that the units of Noida and Nagpur came to be owned by the assessee company in the instant year whereas the same was acquired by the assessee during A.Y. 2012-13 and, therefore, the period under consideration is second year of claiming exemption u/s 10AA of the Act by the assessee.
42. Referring to page 3, para 3 of the assessment order, he submitted that the AO himself has admitted that the scheme of amalgamation of Ebix Software India Pvt. Ltd. with the assessee company is w.e.f. 01.04.2011 and, therefore, units of both Noida and Nagpur hereon owned by the amalgamating company, namely, M/s Ebix Software India Pvt. Ltd. now stood owned by the assessee company as an amalgamated company from A.Y. 2012-13. He submitted that the deduction claimed by the assessee company of both the eligible units, namely, Noida and Nagpur stood allowed as such in the immediately preceding assessment year, i.e., A.Y. 2012-13 in the orders passed u/s 143(3). Therefore, the findig that the issue of claim of deduction has to be examined for the first time in the case of the assessee for A.Y. 2013-14 is factually incorrect. Since deduction u/s 10AA of the Act was already examined in the case of the assessee so far as Noida and Nagpur for the first time in A.Y. 2012-13 and the same stands allowed as such, therefore, there is no question of re-visiting the same during this year.
43. The ld. Counsel submitted that the units of Coimbatore and Uppal has been purchased on slump sale basis under business transfer agreement from M/s Planet Online Pvt. Ltd. in the instant year and, therefore, so far as the claim of deduction u/s 10AA vis-à-vis Coimbatore and Uppal unit, they have to be examined for the first time in the instant year.
44. So far as the allegation of the AO that the assessee has not shown any domestic revenue from Noida DTA, but the resources and infrastructure of Noida DTA has been used for earning revenue in Noida SEZ is concerned, he submitted that there is no basis or evidence to support the above assumption made by the AO on the basis of surmises and presumptions. He submitted that the computation of income of the assessee company for the instant assessment year, copy of which is placed at page 30 and 31 of the paper book, shows that separate Profit & Loss Account of Noida SEZ was duly furnished during the assessment proceedings. He submitted that a perusal of page 31 r.w. page No.105 of the paper book show that the assessee had claimed deduction of depreciation under the Companies Act for the Noida SEZ of Rs.2,41,23,252/- the working of which is at page 153 of the paper book and as a result thereof the deduction claimed was of Rs.2,09,44,51,574/- u/s 10AA of the Act. He submitted that while computing the consolidated income of the assessee company, the assessee has not only reduced the depreciation of SEZ unit, but, also has reduced the depreciation of non-SEZ units while computing the income of the assessee company. He submitted that the assessee has restricted its claim of deduction to Rs.226,98,41,758/- as against eligible claim of Rs.227,02,14,376/-.
45. So far as the allegation of the AO that there is variation in the profits of SEZ undertaking whereas on the contrary, there are losses in the non-SEZ undertakings is concerned, the ld. Counsel for the assessee submitted that mere fact that there are variation in the profits of SEZ undertaking and there are losses in non-SEZ units cannot be a ground to draw any adverse inference against claim made by the assessee company. He submitted that when the assessee company maintains separate books of account for each of the undertakings i.e., eligible undertakings or non-eligible undertakings owned by the assessee company and the audit report in the prescribed form u/s 10AA had been placed on record in the instant assessment proceedings, and no defects were found or pointed out in respect of books of account or the P & L Account of either the eligible undertakings or non-eligible undertakings, any adverse observation on account of variation of profits or losses is absolutely misconceived and thereby the claim of deduction u/s 10AA cannot be denied. Referring to the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Cincom Systems India (P) Ltd., 103 taxmann.com 161 (Delhi), the ld. Counsel submitted that the Hon’ble High Court in the said decision has held that separate and selected accounts cannot be rejected on the ground that profit margin of the STPI unit was higher than the profit margin of the non-STPI unit without pointing out any discrepancy error or mistake in the accounts.
46. The ld. Counsel for the assessee submitted that the explanation furnished during the course of assessment proceedings in no manner whatsoever has been rebutted and, therefore, in absence of rejection of the explanation tendered by the assessee company in the order of assessment any adverse observation made by the AO is fully untenable. He submitted that the observation of the AO with respect to differential figures of inadmissible expense of non-SEZ units in consolidated computation of income and individual computation of income is incorrect. So far as the unitwise computation is concerned, he submitted that the same pertains to the computation of claim of deduction u/s 10AA of the Act in respect of unitwise and on the basis of unitwise profit & loss account, books of account maintained by the assessee. He submitted that out of the four eligible units, only in respect of Noida SEZ and Coimbatore SEZ, the assessee has added back expenses of Rs.19,14,995/- and Rs.3 lakhs, respectively which represents expenses incurred on guest house and, therefore, it had added back to avoid possible dispute while computing unitwise computation for determining profit eligible for deduction u/s 10AA of the Act. He submitted that in the consolidated computation of income, the assessee has added back expenses of Chennai unit and Hyderabad unit of Rs.21,85,82,287/- and Rs.3,01,30,343/-, respectively. He submitted that had this expenditure been claimed, then, gross income of the assessee would have been Rs.2,02,11,29,128/- and not Rs.226,98,41,758/- and consequently, the deduction u/s 10A would have been restricted to Rs.202,11,29,128/-. Therefore, the observation of the AO of adding back has no basis to determine the claim of deduction u/s 10AA of the Act. In any case, he submitted that the above figure of Rs.22,14,995/- pertains to the expenditure incurred by the eligible units and guest house whereas the figure of Rs.24,87,12,630/- pertains to non-eligible units and also incurred by non-eligible units which has not been claimed while computing income of the assessee company. Therefore, the observation of the AO with respect to differential figures of inadmissible expenses of non-SEZ units in consolidated computation of income and individual computation of income is incorrect.
47. So far as the observation of the AO that resources of non-SEZ units have been used for earning of revenue in SEZ units is concerned, he submitted that this is also factually incorrect. So far as the observation of the AO that expenses of Noida DTA have been clubbed with the expenses of Noida SEZ is concerned, he submitted that the same is also incorrect since no expenditure has been incurred and claim in respect of the registered office of the assessee company except depreciation of Rs.52,74,157/-. He submitted that unsubstantiated observation does not meet the rule of law and, therefore, cannot be relied upon to draw any adverse inference against the assessee. Referring to the decision of the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT, reported in 196 ITR 188(SC), he submitted that the claim of deduction should be examined only in the year of formulation and not subsequently.
48. So far as the allegation of the AO that units have been acquired on slump sale basis is concerned, he submitted that the same could not be a ground to deny the claim of deduction in the instant year. He submitted that the above observation of the AO is factually incorrect and legally misconceived. He submitted that the assessee has established that it purchased undertaking on going concern basis, namely, Coimbatore SEZ and Uppal SEZ from M/s Planet Online Pvt. Ltd. who were eligible undertaking u/s 10AA of the Act. Once the units are eligible undertakings there was no justification for the AO to allege that the assessee has not been able to demonstrate how these units are not being formed by split up or reconstruction of business already in existence or by transfer of previously used plant & machinery. He submitted that the AO has not brought any adverse material to rebut the above reply of the assessee.
49. So far as the allegation of the AO that disproportionate expenses against the revenue show fictitious arrangement in which the entire resources of Chennai unit or Hyderabad unit have been utilized for earning tax free income of SEZ units is concerned, he submitted that the same is also factually incorrect. Referring to para 13 on page 8 and 9 of the assessment order, he submitted that it was computation of results of non-SEZ units and has noted that during the instant year the assessee has declared losses of Rs.3,16,90,329/- and Rs.19,58,92,585/- in respect of Chennai and Hyderabad non-eligible undertakings of the assessee company. He has noted that there are no revenue declared of the Chennai unit and likewise there is only revenue of Rs.2,27,74,588/- in respect of Hyderabad unit and, accordingly alleged that disproportionate expenses against revenue show fictitious arrangement in which the entire resources of Chennai unit or Hyderabad units have been utilized for earning tax free income of SEZ units. The ld. Counsel, drew the attention of the Bench to the following table and submitted that the assessee has not even claimed the losses of Hyderabad and Chennai units while computing the income of the assessee:-
| Sr. No. | Particulars | Chennai- Non SEZ (Rs.) | Hyderabad- Non SEZ (Rs.) | Total (Rs.) |
| I | Revenue from operations |
2,27,74,589 | 2,27,74,589 | |
| II | Other income | — | — | — |
| III | Total Revenue (l+II) | — | 2,27,74,589 | 2,27,74,589 |
| IV | Expenses | |||
| Employee benefit expenses | 1,88,46,542 | 15,00,35,220 | 16,88,81,762 | |
| Financial Costs | 80 | – | 80 | |
| Deprecation and amortization expenses Other expenses | 14,15,441 1,14,28,266 | 3,50,65,473 3,35,66,482 | 3,64,80,914 4,49,94,748 | |
| Foreign Exchange gain and loss | — | — | — | |
| Total Expenses (IV) | 3,16,90,329 | 21,86,67,175 | 25,03,57,504 | |
| V | Profit before exceptional and extraordinary items (V) = (III-IV) | (3,16,90,329) | (19,58,92,586) | (22,75,82,915) |
| VI | Add Back: | |||
| Depreciation and Amortization expenses | 14,15,441 | 3,50,65,473 | 3,64.80,914 | |
| Other expenses/employee | 3,01,30,343 | 21,85,82,287 | 24,87,12,630 | |
| Total Add Back (VI) | 3,15,45,784 | 25,36,47,760 | 28,51,93,544 | |
| VII | Net profit/(Loss) (VII) = (V-VI) | (144,545) | 5,77,55,174 | 5,76,10,629 |
| VIII | Less: Deprecation as per Income Tax Act | 9,01,810 | 4,73,47,487 | 4,82,49.297 |
| IX | Income | (10,46,355) | 1,04,07,687 | 93,61,332 |
| X | Add back: Late Payment | 4,04,654 | ||
| XI | Income assessable | 97,65,986 |
50. Therefore, the observation of the AO has no valid justification and in any
case cannot be a ground to deny claim of deduction u/s 10AA. Relying on the following decisions, the ld. Counsel for the assessee submitted that mere suspicion, surmises and conjectures cannot be a ground to hold to the contrary:-
| a) | 37 | ITR 271 | (SC) Uma Charan Shaw & Bros. Co. v. CIT |
| b) | 37 | ITR 151 | (SC) Omar Salay Mohammad Sait v. CIT |
| c) | 26 | ITR 736 | (SC) Dhirajlal Girdharilal v, CIT |
| d) | 26 | ITR 775 | (SC) Dhakeshwari Cottom Mills Ltd. v. CIT |
| e) | 37 | ITR 288 | (SC) Lal Chand Bhagat Ambica Ram v. CIT |
| f) | 91 ITR 8 (SC) CIT v Calcutta Discount Company Ltd. | ||
51. The ld. Counsel accordingly submitted that the order of the CIT(A) being in accordance with the law should be upheld and the ground raised by the Revenue should be dismissed.
52. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, disallowed the claim of deduction of Rs.226,98,41,758/- on account of business income from six units which was claimed by the assessee as exempt u/s 10AA of the Act. Although the Revenue has challenged the order of the CIT(A) in deleting the same, a perusal of the same shows that the Revenue has not made any reference to the deduction u/s 10AA of the Act. Be that as it may, the reason for denial of deduction u/s 10AA of the Act by the AO may be summarized as under:-
i) That it is the first year of claim of deduction in respect of Noida SEZ and Nagpur SEZ;
ii) The assessee was only having business undertaking at Noida and it is also only after composite scheme of arrangement and business transfer agreement during the assessment year, the assessee company owns six undertakings/units;
iii) The assessee has not shown any domestic revenue from Noida DTA and the resources and infrastructure of Noida DTA has been used for earning revenue in Noida SEZ;
iii) There is variation in the profits of SEZ undertakings.
iv) There are differential figures of inadmissible expenses of non-SEZ units in consolidated computation of income and individual computation of income;
v) Resources of non-SEZ units have been used for earning of revenue in SEZ units;
vi) Expenses of Noida DTA have been clubbed up with the expenses of Noida SEZ;
vii) Units have been acquired on slum sale basis;
viii) Disproportionate expenses against revenue show fictitious arrangement in which the entire resources of Chennai unit or Hyderabad unit have been utilized for earning tax free income of SEZ units;
ix) The ratio of employee expenses to revenue under each of the unit show that the deduction claimed by the assessee company in respect of eligible units is not in accordance with the law.
x) We find, the ld.CIT(A) allowed the claim of the assessee on the ground that the various observations so made by the AO are factually incorrect or not in accordance with the law.
53. While holding so, he further held that once separate books of account are accepted as such, no disallowance can be validly made. Further, deduction granted in the initial year cannot be withdrawn and the disallowance is contrary to the principles of consistency. According to the ld.CIT(A), mere amalgamation of the undertaking could neither in law and nor on fact be made a basis to deny legitimate claim of deduction of the assessee company and does not amount to splitting up or reconstruction of business already in existence. Likewise, mere acquisition of undertaking on slump sale could neither in law and nor on fact be made a basis to deny legitimate claim of deduction of the assessee company. He further held that mere change in ownership either by way of slump sale, merger or otherwise cannot be made a basis to disallow the claim of deduction and also assume that there is splitting up or reconstruction of business. He further held that fulfillment of the conditions as provided in sub-section (1) read with sub-section (4) of section 10AA has to be seen in the year of formation and since in the year of formation of the SEZ units, which were eligible units, it cannot be said that such units are not eligible units for deduction u/s 10AA in the subsequent year. According to him, the reading of the provisions of sub-section (4) of section 10AA that eligibility of the unit is determined and not of the assessee.
54. We do not find any infirmity in the order of the CIT(A) in deleting the disallowance made by the AO u/s 10AA of the Act. From the various details furnished by the assessee in the paper book as well as in the written synopsis, it is an undisputed fact that the assessee has six undertakings out of which four undertakings have been claimed to be eligible u/s 10AA of the Act. The amount of deduction claimed in respect of four undertakings u/s 10AA are as under:-
| Sr. | Name of undertaking | Amount |
| 1 | Noida SEZ | 209,44,51,574 |
| 2 | Nagpur SEZ | 4,88,88,288 |
| 3 | Coimbatore SEZ | 4,42,95,190 |
| 4 | Hyderabad SEZ | 8,25,79,324 |
| Total | 227,02,14,376 |
55. From the various details furnished by the assessee, we find the historical position in respect of the deduction in respect of the aforesaid four undertakings are as under:-
| AY | Entity in which, deduction claimed | Deduction claimed (in Rs.) (page of PB) | Disallowance if any | Date of order u/ s 143(3 of the Act (Pages of PB) |
| 2010-11 | Ebix SEZ (236-293) | 65,27,64,881 (285-287) | Nil | 20 7 Ni l4 (289-293) |
| 2011-12 | Ebix SEZ (294-339) | 142,07,41,308 (332-334) | Nil | 17.2.2015 (337-339) |
| 2012-13 | Assessee company(224-235) |
144,89,55,520 (231, 235) | Nil | 29.1.2016 (224—229) |
II Nagpur SEZ
| AY | Entity in which, deduction claimed | Deduction claimed (in Rs.) (page of PB) | Disallowance if any | Date of order u/s 143(3) of the Act (Pages of PB) |
| 2011-12 | Ebix SEZ (294-339) | 31,23,74,139 (335-336) | Nil | 17.2.2015 (337-339) |
| 2012-13 | Assessee company (224-235) |
6,29,98,996 (232, 235) | Nil | 29.1.2016 (224-229) |
III Coimbatore SEZ
| AY | Entity in which, deduction claimed | Deduction claimed (Rs.) | Disallowance, if any |
| 2011-12 | Planet Online (P) Ltd. (340- 363) | 61,644 (341, 363) | Nil |
| 2012-13 | Planet Online (P) Ltd. (364- 398) | 49,62,722 (398) | Nil |
IV Uppal S EZ
| AY | Entity in which, deduction claimed | Deduction claimed (Rs.) |
Disallowance, if any |
| 2012-13 | Planet Online (P). Ltd. (364- 398) | 84,24,989 (397) | Nil |
56. From the above, we find that in each of the undertakings, deduction as claimed by the assessee has been allowed by the Revenue both in the preceding year and succeeding assessment years. Neither the AO nor the CIT, DR, has at all in any manner rebutted the aforesaid factual position and, therefore, following the rule of consistency itself, we are of the view that the claim of the assessee is maintainable and cannot be denied.
57. We find, the Hon’ble Supreme Court in the case of CIT vs. M/s Excel Industries, 358 ITR 295 has observed as under:-
“29. In Radhasoami Satsang Saomi Bagh v. Commissioner of Income Tax, [1992] 193 ITR 321 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same “fundamental aspect” permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoystead v. Commissioner of Taxation, 1926 AC 155 (PC) wherein it was said: “Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.”
30. Reference was also made to Parashuram Pottery Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC) and then it was held: “We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. “On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter – and if there was no change it was in support of the assessee -we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken.”
31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it.”
58. We further find that Noida SEZ unit was set up in assessment year 2010-11 and, therefore, in the instant year, this is fourth year of deduction. Similarly, Nagpur SEZ was set up in A.Y. 2011-12 and this is third year of deduction. We find, the Coimbatore SEZ was set up in A.Y. 2011-12 and is the third year of deduction. Finally, Uppal SEZ was set up in A.Y. 2012-13 and is the second year of deduction. It is the settled proposition of law that eligibility of claim of deduction u/s 10AA has to be examined in the year of setting up of the unit and once the deduction has been allowed in the year of formation of the unit, then, the AO is not entitled to re-examine the eligibility of claim of deduction in the succeeding year.
59. We find, the Hon’ble Delhi High Court in the case of CIT vs. Delhi Press Samachar Patra (P) Ltd, 355 ITR 14 has observed as under:
“74. In the present case, the claim of the assessee under section 80-I of the Act was examined and allowed by the Assessing officer for three years preceding the assessment year 1991-1992. It is relevant to note that assessments in the earlier years i.e relating to assessment years 1988-89, 1989-1990 and 19901991 has not been disturbed by the Assessing Officer and there has been no change that could justify the Assessing officer adopting a different view in the assessment years 1991-92 and thereafter. As stated hereinbefore, in certain cases where the issues involved have attained finality on account of the subject matter of dispute having been finally adjudicated, the question of reopening and revisiting the same issue again in subsequent years would not arise. This is based on the principle that there should be finality in all legal proceedings. The Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. ITO: [1977] 106 ITR 1 had held as under:-
“that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.”
75. In the facts of the present case, where although the Assessing officer has allowed the assessee deduction under section 80-I of the Act in the preceding years, one may still have certain reservations as to whether the issue of eligibility of Unit nos. 2 and 3 fulfilling the conditions has been finally settled, since the question has not been a subject matter of any appellate proceedings in the years preceding the assessment year 1991-92. However, there is yet another aspect which needs to be considered. By virtue of section 80-I(5) of the Act, deduction under section 80-I of the Act is available to an assessee in respect of the assessment year (referred to as the initial assessment year) relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning or the company commences work by way of repairs to oceangoing vessels or other powered craft. Such deduction is also available for the seven assessment years immediately succeeding the initial assessment year. Surely in cases where an assessee is held to be eligible for deduction in the initial assessment year, the same cannot be denied in the subsequent assessment years on the ground of ineligibility since the set of facts which enable an assessee to claim to be eligible for deduction under section 80-I of the Act occur in the previous year relevant to the initial assessment year and have to be examined in the initial assessment year. In such cases, where the facts on the basis of which the deductions are claimed are subject matter of an earlier assessment year and do not arise in the current assessment year, it would not be possible for an Assessing Officer to take a different view in the current assessment year without altering or reopening the assessment proceedings in which the eligibility to claim the deduction has been established.
In cases where deduction is granted under Section 80-I of the Act, the applicability of the Section is determined in the year in which the new industrial undertaking is established. The qualification as to whether any industrial undertaking fulfills the condition as specified under Section 80-I of the Act has to be determined in the year in which the new industrial undertaking is established. Although the deduction under Section 80-I of the Act is available for the assessment years succeeding the initial assessment year, the conditions for availing the benefit are inextricably linked with the previous year relevant to the assessment year in which the new undertaking was formed. In such circumstances, it would not be possible for an Assessing Officer to reject the claim of an assessee for deduction under Section 80-I of the Act on the ground that the industrial undertaking in respect of which deduction is claimed did not fulfill the conditions as specified in Section 80I(2) of the Act, without undermining the basis on which the deduction was granted to the assessee in the initial assessment year. This in our view would not be permissible unless the past assessments are also disturbed.
60. Similarly, the Hon’ble Bombay High Court in the case of CIT vs. Western Outdoor Interactive (P) Ltd., 349 ITR 309 (Bom) has observed as under:-
“5. On the other hand, Mr. Percy Pardiwalla, Senior Counsel appearing on behalf of the respondent-assessee submitted that in view of the decision of this court in the matter of Commissioner of Income Tax v. Paul Brothers reported in 216 ITR 548 and M/s.Direct Information Private Ltd. v. ITO dated 29/9/2011 in Writ Petition No.1479/2011 (Reported in 2011 (12) LJSOFT 320), the issue is no longer open to debate. In the above case, it is held that once a benefit of deduction was extended in respect of a provision for a particular number of years then unless the benefit is withdrawn for the first year it cannot be withdrawn for subsequent years, particularly, when there is no change in the facts. Therefore, he states that once a benefit of Section 10A was extended to the respondent-assessee for the assessment year 2000-01 and 2001-02 in respect of its claim for exemption under Section-10A of the Act and the same not having been withdrawn for those years it cannot be denied in the subsequent assessment years. This is for the reason that the benefit under Section 10A of the Act is available inter alia if the unit has not been formed by splitting up or reconstruction of business already in existence. This aspect of the matter was examined while completing assessment under Section 143(3) for the assessment year 2000-01 and 2001-02 and the benefit was extended after reaching a conclusion that the same was not formed by splitting up or reconstruction of the business already in existence. Further, the benefit which is given to the respondent-assessee under Section-10A is for the period of 10 consecutive assessment years beginning with the assessment year in which the undertaking begins to export computer software. Besides the above, he submitted that both Commissioner of Income Tax (Appeals) and the Tribunal have concluded on examination of evidence that SEEPZ unit was an independent unit not formed by splitting up of the Fort unit. Therefore, this Court should not interfere with this finding of fact.
6. We have considered the submissions. We find that the submissions made by Mr. Pardiwalla on the basis of the decision of this Court in the matter of Paul Brothers (supra) and Director of Information Pvt. Ltd. (supra) merits acceptance. Therefore, in this case, it is not necessary for us to decide whether SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income Tax officer cannot withdraw the relief for subsequent years. More particularly so, when the revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years. In this case for the assessment years 2000-01 and 2001-02 the relief granted under Section 10A of the Act to SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis a vis the claim to exemption under section 10A of the Act. Therefore, it is not open to the department to deny the benefit of Section 10A for subsequent assessment years i. e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Tribunal have recorded a finding of fact that the SEEPZ unit is not formed by splitting up of the first unit.”
61. So far as the question as to whether amalgamation of the Noida SEZ and Nagpur SEZ with the assessee company can be a ground to suggest that the same amounts to splitting up or reconstruction of business already in existence is concerned, we find the provisions of section 10AA(5) read as under:-
“(5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,—
(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place.
62. A perusal of the above provision show that this is an enabling provision to enable an assessee to claim deduction despite transfer of the eligible unit in a scheme of amalgamation of demerger. We find, identical issue had come up before the Kolkata Bench of the Tribunal in the case of ITO vs. M/s Last Peak Data Pvt. Ltd. (supra) where the Tribunal has observed as under:
“29. The third & fourth reason given by the AO was that the Assessee does not fulfil the following conditions laid down in Sec.10AA(4)(ii) & (iii) of the Act which reads thus:
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.
30. The AO referred to the amalgamation of M/S. Last Peak BPO Pvt. Ltd., with the Assessee during the previous year. M/S. Last Peak BPO Pvt. Ltd., was in all respects an STP unit and was similarly placed as that of the Assessee in terms of approval and being eligible for deduction u/s.10A of the Act, etc. The amalgamation was effective 23.4.2008. The Assessee had a license dated 17.6.2005 from the Asst. Commissioner of Customs 100% EOU/STP for private bonded warehouse cum manufacturing in its name. Pursuant to the amalgamation of the M/S. Last Peak BPO Pvt. Ltd., the Assessee applied for recognizing M/S. Last Peak BPO Pvt. Ltd., also as covered by the erstwhile license for private bonded warehousing cum manufacturing. The endorsement was done by the Asst.Commissioner of Customs on 11.2.2010. According to the AO there was no approval of M/S. deduction u/s. 10AA of the Act could not be granted. Further the AO also expressed opinion that the Assessee was formed by transfer to a new business, of machinery or plant previously used by M/S. Last Peak BPO Pvt. Ltd. and therefore there was violation of Sec.10AA(4)(iii) of the Act.
31. The CIT(A) did not decide on this issue at all. We have considered the order of the AO and are of the view that the reason given by the AO, to say the least, is frivolous. It is undisputed position that M/S. Last Peak BPO Pvt. Ltd. was enjoying STP unit status as it was in ITES. Therefore there was no question of the Assessee having been formed by splitting up or reconstruction of a unit already in existence. The Assessee is already an existing unit. The deduction u/s. 10AA of the Act is claimed for the period within 10 years contemplated by Sec. 10AA of the Act even after considering the exemption already availed by the Assessee. Even M/S. Last Peak BPO Pvt. Ltd. had not availed Sec. 10A deduction for period beyond 10 years before amalgamation with the Assessee. In such circumstances, the very basis of application of Sec. 10AA(4)(ii) & (iii) of the Act is flawed. We are of the view that the objection of the AO in this regard is without any merit.”
63. Similarly the Bangalore Bench of the Tribunal in the case of M/s Samsung India Software Operations (P) Ltd. vs. Addl. CIT (supra) has observed as under:-
“5. The facts of the case in brief are that the assessee filed return of income electronically declaring Nil income on 29.10.2007. The return was processed u/s. 143(1) of the Income-tax Act, 1961 [hereinafter referred to as “the Act” in short”] on 27.08.2008, later on the case was selected for scrutiny. The assessee company is entirely held by M/s. Samsung Electronics Company Ltd., South Korea (SECL) and was engaged in the business of software development for its parent company. During the course of assessment proceedings, the Assessing Officer noticed that the assessee claimed a deduction of Rs.23,17,32,627 u/s. 10A of the Act stating that it was profit of STPI undertaking of the assessee, to substantiate the said claim the assessee had filed report of the auditor in Form 56F which revealed that the undertaking was situated at Bagmane Lake View, Block B, Bagmane Tech Park, Bangalore, the date of initial registration as STPI undertaking was mentioned as 01.09.97 and this was the second year of assessee’s claim. It was also mentioned in the auditor’s report that SECL being the sole owner of its branch office entered into a business transfer agreement with the assessee company on 5.9.05 for transfer of business of the branch office by way of slump sale as a going concern together with all its rights, properties and assets of the business. It was also stated that deduction u/s. 10A had been claimed by the branch office for the A.Ys. 1999-2000 to 2006-07 (upto Nov. 2005) and after its transfer, the STPI had given its no objection for the transfer of the unit from the branch office to the assessee company w.e.f. 1.12.2005. In view of the slump sale, the STPI unit now transferred to the assessee is claimed to be eligible for benefit of deduction u/s. 10A of the Act.
6. The AO asked the assessee to explain specific provisions in section 10A of the Act under which it was eligible for deduction in respect of an undertaking stated to be purchased on a slump sale basis. …..
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14. 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 assessment 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:-
“10. We 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.”
15. In the present case also, the assessee 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 the organization. Formerly it was a branch establishment of a nonresident company/foreign company, but later on it was converted into a subsidiary company. However, for the above change of organization status, same unit continued to function throughout the time and even Software Technology Parks of India (STPI) authority vide letter dated 05.12.2005 gave the approval for transfer of STP activities of M/s. SECL to the assessee w.e.f. 01.12.2005. Therefore a mere organizational change was not a ground for the AO to hold that the assessee was not entitled for deduction u/s. 10A of the Act within the meaning of section 10A(2) of the Act.
Thus, in view of the above and respectfully following the aforesaid referred to earlier order of the coordinate Bench, we set aside the impugned order passed by the ld. CIT(A) and direct the AO to allow the claim of the assessee for deduction u/s. 10A of the Act.
16. For the aforesaid view, we are also fortified by the decision of this Bench of the Tribunal in the case of ITO v. M/s. GXS Technology Centre (Pvt.) Ltd. in ITA No.616/Bang/2009 for the A.Y. 2004-05, order dated 10.08.2010 reported in wherein the relevant finding is given in para 4 & 5 which read as under:-
“4. The learned departmental representative strongly supported the order of the AO while the learned counsel for assessee supported the order of the CIT(A) and also placed reliance upon the decision of the ‘B’ Bench of this Tribunal in the case of Dy.CIT v. M/s. L.G. Soft India Pvt. Ltd. in ITA Nos.623 & 847/Bang/2010 dated 19-5-2010 wherein it has been held that where an 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, the assessee is eligible for deduction u/s. 10A of the Act. He also placed reliance upon the decision of the Calcutta High Court in the case of CIT vs. P.K. Engg. & Forging (P) Ltd., reported in 87 Taxman 101 wherein, while considering the assessee’s claim for deduction u/s. 80J, it was held that where the industrial undertaking run by a firm which had been allowed deduction u/s 80-J for a period of 5 years, it would be entitled to benefit of residuary period. He also placed reliance upon the decision of the Delhi Bench of the Tribunal in the case of Tech Books Electronics Services (P) Ltd. vs. Addl. CIT wherein it was held that merely because of change in ownership the exemption cannot be denied. Another decision relied upon by him is in the case of Kumaran Systems (P) Ltd. vs. ACIT wherein it was held that where a firm is converted into a company and there was change only in the composition of ownership and not the undertaking and business, the exemption allowed to the firm u/s 10A of the Act could not be denied to the company merely because it had been separately granted recognition.
5. Having heard both the sides and having considered the rival submissions, we find that the issue is squarely covered by the decisions relied upon by the learned counsel for assessee. The distinctions sought to be brought out by the learned Departmental Representative, in our opinion, are not relevant to the facts of the case before us. In view of the same, the appeal of the revenue is dismissed.”
17. In view of the above, this issue is decided in favour of the assessee.”
64. Even independently examining the issue, it will be seen that the fulfillment of the conditions as provided in sub-section (1) r.w. sub-section (4) of section 10AA has to be seen in the year of formation and since in the year of formation of the SEZ units, six units were eligible units, it cannot be said that such units are not eligible units for deduction u/s 10AA in the instant year. A plain reading of the provisions as contained in sub-section (1) of section 10AA of the Act would show that it provides for deduction of profits and gains derived from the export of article or things or from services of a unit located in a Special Economic Zone on satisfaction of the following conditions:-
a) the assessee should be an “entrepreneur” as per section 2(j) of Special Economic Zones Act, 2005, i.e., such persons should have been granted a letter of approval by the Development Commissioner u/s 15(9) of Special Economic Zone Act, 2005;
b) the “unit” should be a unit as defined in clause (zc) of section 2 of Special Economic Zone Act, 2005;
c) The “unit” should begin to manufacture or produce articles or things or provide any service during the F.Y. relevant to A.Y. commencing on or after 01.04.2006; and
d) The “unit” should export things or service by any mode, physical or otherwise.
However, the aforesaid deduction is subject to condition provided in subsection (4) of section 10AA.
65. In view of the above, it is evident that any eligible unit seeking to claim deduction u/s 10AA(1) of the Act should necessarily fulfill the conditions as specified in sub-section (4) of section 10AA which reads as under:-
“(4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:—
(i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, 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;
(iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose.
Explanation.—The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.
66. We find, the Hon’ble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (supra) has observed as under:-
“The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be farmed by such transfer. This is the key to interpretation. The formation should not be by such transfer, The emphasis is on formation not on use. ‘Therefore it is not transfer of building or material but the one which can be held to have resulted in formation of the undertaking. In Textile Machinery Corporation Ltd. v. CIT this Court while interpreting section 15-C observed:
“The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15-C or not. In order
that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist onits own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved.”
Even though this decision was concerned with clause dealing with reconstruction of an existing business, the expression “not formed” was construed to mean that the undertaking should not be a continuation of the old but emergence of a new unit. Therefore, even if the undertaking is established by transfer of building, plant or machinery, but it is not formed as a result of such transfer, the assessee could not be denied the benefit.
67. Similarly, the Hon’ble Apex Court in the case of CIT v. Yokogawa India Ltd. (supra) has observed as under:-
“17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (IA) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression “total income of the assessee” in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee’ in Section 10A as ‘total income of the undertaking’.
68. We find, the CBDT in respect of similar relief u/s 84 of the Act has taken the view that the relief would be available for successors in F. No.15/5/63-IT(A-I), dated 13th December, 1963. Following the above instruction, the courts have allowed the deduction u/s 80J in the following cases:-
69. In view of the above and in view of the detailed reasoning given by the ld.CIT(A), we do not find any infirmity in his order allowing the claim of deduction u/s 10AA.
70. So far as the argument of the ld. CIT, DR that the order of the Hon’ble Delhi High Court in approving the composite scheme of arrangement for merger and demerger is dated 30th April, 2012 and, therefore, it is applicable for A.Y. 2013-14 (onwards and not for A.Y. 2012-13 is concerned) which the ld.CIT(A) has not answered is concerned, the same, in our opinion, is devoid of any merit and contrary to settled position of law and even facts on record. The Hon’ble Supreme Court in the case of Marshal Sons & Co.(India) Ltd. vs. ITO, 223 ITR 809, has held that the effective date for amalgamation would be date of investment under the scheme. The relevant observation of the Hon’ble Supreme Court from para 14 onwards read as under:-
“Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein does so provide viz., January 1, 1982. It is true that while sanctioning the scheme, it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in the facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it – as has happened in this case – it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as “the transfer date”. It cannot be otherwise. It must be remembered that before applying to the Court under Section 391(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the court may take some time; indeed, they are bound to take some time because several steps provided by Sections 391 to 394-A and the relevant Rules have to be followed and complied with. During the period the proceedings are pending before the Court, both the amalgamating units, i.e., the Transferor Company and the Transferee Company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, clause 6(b) does expressly provide that with affect from the transfer date, the Transferor Company (Subsidiary Company) shall be deemed to have carried on the business for and on behalf of the Transferee Company (Holding Company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued by the Income Tax Officer (impugned in the writ petition) were not warranted in law. The business carried on by the Transferor Company (Subsidiary Company) should be deemed to have been carried on for and on behalf of the Transferee Company. This is the necessary and the logical consequence of the court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the court before the Registrar of Companies, the allotment or shares etc. may have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be January 1, 1982. This is also the ratio of the decision of the Privy Council in Raghubar Dayal v. The Bank of Upper India Ltd. [A.I.R.1919 P.C.9].
Counsel for the Revenue contended that if the aforesaid view is adopted when several complications will ensue in case the Court refuses to sanction the scheme of amalgamation. We do not see any basis for this apprehension. Firstly, an assessment can always be made and is supposed to be made on the Transferee Company taking into account the income of both the Transferor and Transferee Company. Secondly, and probably the more advisable course from the point of view of the Revenue would be to make one assessment on the Transferee Company taking into account the income of both of Transferor or Transferee Companies and also to make separate protective assessments on both the Transferor and Transferee Companies separately. There may be a certain practical difficulty in adopting this course inasmuch as separate balance-sheets may not be available for the Transferor and Transferee Companies. But that may not be an insuperable problem inasmuch as assessment can always be made, on the available material, even without a balance- sheet. In certain cases, best-judgment assessment may also be resorted to. Be that as it may, we need not purpose this line of enquiry because it does not arise for consideration in these cases directly.”
71. Similarly, the Hon’ble Supreme Court in the case of Saraswati Industrial Syndicate, 186 ITR 278, has observed as under:-
“……. The High Court was in error in holding that even after amalgamation of two companies, the transferor company did not become non-existent instead it continued its entity in a blended form with the appellant company. The High Court’s view that on amalgamation ‘there is no complete destruction of corporate personality of the transferor company instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law. The true effect and character of the amalgamation largely depends on the terms of the scheme of merger. But there cannot be any doubt that when two compa- nies amalgamate and merge into one the transferor company loses its entity as it ceases to have its business. However, their respective rights of liabilities are determined under scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective.”
72. Thus, since, admittedly and undisputably, the effective date of the scheme was 01.04.2011 under the scheme of amalgamation of Noida SEZ unit and Nagpur SEZ units which amalgamated with the assessee company in A.Y. 2012-13 against which the claim of deduction u/s 10AA was allowed by the AO in the order passed u/s 143(3) for A.Y. 2012-13, therefore, we are of the opinion that the issue cannot be examined in the instant year. In any case, we have otherwise held that the eligibility of units has to be seen in the year of formation of unit and once eligibility in the year of formation has not been denied or disputed, the claim is valid claim particularly when such claim has also been allowed in preceding/succeeding years.
73. So far as the argument relating to quantum of deduction on the ground that there is variation in the ratio of employee expenses to revenue under each of the unit is concerned, we are of the considered opinion that once the AO has accepted separate audited books of account maintained by the assessee company for each of the unit which are also supported by audit report, the quantum of deduction can never be separately disputed. We find the assessee itself has computed the business income for each of the unit independently the details of which are already given in the preceding para. Once separate books of accounts maintained have been accepted, the quantum of the claim cannot be tinkered on surmises and conjectures by alleging in a vague manner that expenditure or revenue has been diverted to another unit.
74. We find, the Hon’ble Karnataka High Court in the case of Quest Informatics (P) Ltd. (supra) has observed as under:-
“3. The assessee is an Indian company engaged in the business of computer software development and business processing out source. During the financial year 2005-06, the assessee was running its business from a non-STPI unit under a rented premises. In this period the party has applied for permission to set up the STPI unit at the ground floor of the said premises. The STPI authorities granted approval for setting up of the STPI unit for development of computer service/IT enabled services (TIES) on February 31, 2006. The assessee started the business in the newly set up unit during the financial year 2006-07. The assessee also continued to carry out its business from the non-STPI unit also. Separate books of account were maintained by the assessee for the STPI unit and the non-STPI unit. In respect of the STPI unit the claim for deduction under section 10A made by the assessee was rejected on the ground that the STPI unit is found by splitting of the existing unit. In appeal, on appreciation of the material on record, the said order was set aside and the benefit under section 10A was extended to the STPI unit and the Revenue preferred an appeal before the Tribunal which has confirmed the same.
4. This court had an occasion to consider the similar question in the case of CIT v. Wipro GE Medical System Ltd. reported in [2015] 4 ITR-OL 288 (Karn) : [2014] 226 Taxman 156 (Karn), and in the case of CIT v. Maxim India Integrated Circuit Design (P.) Ltd. reported in [2011] 202 Taxman 365 (Karn) and CIT Vs. Expert Outsource (P) Ltd., [2013] 358 ITR 518 [2012] 20 taxmann.com 481 (Kar.).
5. The law laid down in the aforesaid cases squarely applies to the facts of this case. Therefore, the findings recorded by both the appellate authorities are in accordance with law. Thus, the substantial question of law raised in these appeals is answered in favour of the assessee and against the Revenue and the appeals are dismissed.
75. Similarly, the Delhi Bench of the Tribunal in the case of Addl. CIT vs. Delhi Press Samachar Patra (P) Ltd., 103 TTJ 578, has held as under:-
“5. We have heard the arguments of both the sides and also perused the relevant material on record. As has been pointed out on behalf of the assessee-company before the authorities below as well as before us, unit 1 was its publishing house whereas units 3 and 4 were its printing houses. The nature of business of unit 1 and unit 4 of the assessee, thus, was entirely different and there was no justifiable reason to compare the profit margin of the said units. Moreover, separate books of account were maintained by the assessee-company in respect of unit 4 and no material or specific defects were pointed out by the AO in the said books, which were duly produced before him for verification during the course of assessment proceedings. As noted in the order of the AO as well as in the order of the learned CIT(A), the printing work was being done by unit 4 of the assessee-company for unit 1 at fixed rates and the claim of the assessee that the said rates were even lower than the market rates was not rebutted/refuted by the AO by bringing any material on record. As rightly contended by the learned Counsel for the assessee before us, the expenditure on marketing and distribution of the publications was entirely required to be done for the business of publishing house i.e. unit No. 1 and the same was not connected with the printing business of unit 4, It appears that all these material and relevant aspects, however, (were) simply brushed aside by the AO and he proceeded to reject the book results of unit 4 shown by the assessee merely on the basis that the profit margin shown by the assessee in respect of the said unit was higher at 62 per cent as against profit margin of 10 per cent shown in respect of other units of the assessee. In our opinion, this action of the AO was not sustainable in law in the facts and circumstances of the present case including especially the fact that no material or specific defects were pointed out by him in the books of account maintained by the assessee in respect of unit 4 and there was nothing brought on record by him to show that the profit margin of 62 per cent shown in the said books was actually lower. On the other hand, such higher profit margin in respect of unit 4 was satisfactorily explained by the assessee-company and having satisfied with such explanation, the AO was directed by the learned CIT(A) to allow the deduction claimed by the assessee under Section 80-IA of the Act on the book results of unit 4. As such, considering all the facts and circumstances of the case, we are of the view that the relief allowed by the learned CIT(A) on this issue to the assessee was fully justified and there being no infirmity in the impugned orders of the learned CIT(A) allowing such relief, we uphold the same.”
76. We find, the assessee, in its reply dated 21.11.2016 addressed to the AO has stated as under:-
77. Similarly the assessee in its reply dated 21st November, 2016 has stated as under:-
77. The above submissions before the AO by the assessee has neither been challenged nor rebutted before us and, therefore, we are of the considered opinion that the observations of the AO cannot be made a basis to restrict the claim of deduction under section 10AA of the Act. So far as the contention of the ld. DR that the CIT(A) has erred in para 3.20 of his order to state that the figures of Rs.19,14,995/- and Rs.3 lakhs represents expenses incurred on guest house and, therefore, were added back has never come before AO, and, on the contrary, in the unit-wise computation of income it is mentioned that these are in the nature of inadmissible expenses of non-SEZ unit is concerned, we find the assessee has furnished unit-wise computation of deduction under section 10AA out of the four eligible units, only in respect of Noida SEZ and Coimbatore SEZ, the assessee has added back expenses of Rs.19,14,995/- and Rs.3 lakhs respectively. The above figure represents expenses which were added back while computing the unit-wise computation for determining the profit eligible for deduction under section 10AA of the Act. Therefore, once the expenditure has been added back which claim has also been accepted by the AO in the order of assessment, then, this, in our opinion, becomes a non-issue. In our opinion, the allegation of the AO that the entire expenses have not been added back and it is a clear admission on the part of the assessee that resources of non-SEZ units have been used for earning of revenue in SEZ units is concerned, this also, in our opinion, is a vague finding without any basis. Mere add back of certain expenses from eligible profits of eligible unit which is accepted in the order of assessment cannot be a basis to assume that the resources of non-SEZ units have been used for earning the revenue in SEZ units. So far as the allegation of the ld. CIT, DR that the assessee has failed to submit specific details to specific queries during the course of assessment proceedings is concerned, we find from the paper book that the assessee has in fact filed detailed reply before the AO to the queries raised point-wise. Therefore, this allegation of the ld. CIT, DR in our opinion is without any basis.
78. We further find that during the instant year the assessee has declared losses of Rs.3,16,90,321/- and Rs.19,58,92,585/- in respect of Chennai and Hyderabad non-eligible undertaking of the assessee company. Further, there are no revenue declared by the Chennai unit and, likewise only revenue of Rs.2,27,74,588/-for Hyderabad unit has been declared. The assessee has not claimed the loss of Hyderabad and Chennai unit while computing the income. In our opinion, once separate books of account have been maintained for each of the undertakings, there is no basis for the AO to allege that any of the expenses of non-SEZ units pertained to revenue of eligible units. Once such expenses has also not been claimed, the same is of no consequences. At best the AO could have reduced the net expenditure claimed from the deduction under section 10AA of the Act and nothing more but the same could not be a reason for the AO to deny the claim of deduction under section 10AA. Therefore, to suggest that there is fictitious arrangement and the entire resources of Chennai unit or Hyderabad unit have been utilised for earning tax free income of SEZ unit is not justified. Suspicion, surmises and conjectures however strong may be cannot be a basis for disallowing a claim of detection. In view of the above discussion, we do not find any infirmity in the order of the CIT(A) in deleting the disallowance of deduction claimed under section 10AA. Accordingly the ground raised by the revenue is dismissed.
79. Ground of appeal No. 2 by the Revenue reads as under:-
“2. Ld. Commissioner of Income Tax (Appeals) erred on law and on the facts of the case in deleting the addition of Rs. 82,88,099/- made by the AO on account of other income from 4 SEZ units.”
80. Facts of the case, in brief, are that the AO during the course of assessment proceedings observed from the reply dated 20th December 2016 as per annexure-A that the assessee has included ‘other income’ of Rs.82,88,099/- in the computation of profit of four SEZ undertakings which are as under:-
| NOIDA SEZ | Nagpur SEZ | Total |
| 80,90,791 | 1,97,308 | 82,88,099 |
81. He observed from Note No.23 of the P&L account that the ‘other income’ includes interest on bank deposit and ‘other income.’ According to the AO this income of Rs.82,88,099/- cannot be considered as profits and gains derived from export of article/things from services as necessitated in section 10AA. He, therefore, excluded this income from the profits of undertakings for computation of eligible profits of the eligible undertakings and made addition of the same to the total income of the assessee.
82. Before the CIT(A) it was submitted that identical deduction under section 10AA of the Act was claimed on the interest of Rs.1,40,67,685/- in the assessment year 2012-13 and the same was allowed by the AO in the assessment order framed under section 143(3) of the Act. Therefore, following the rule of consistency itself, no disallowance is called for. The decision of the Hon’ble Supreme Court in the case of CIT vs Excel industries Ltd., 358 ITR 295 was brought to the notice of the CIT(A). Various decisions were also brought to the notice of the CIT(A) to the proposition that the assessee is entitled to deduction under section 10AA of the Act to the extent of Rs. 82,88,099/-.
83. Based on the arguments advanced by the assessee, the ld.CIT(A) deleted the addition of Rs.82,88,099/- made by the AO.
84. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
85. The Ld. DR strongly supported the order of the AO and submitted that since the interest income is not derived from the export of article or things or from services as necessitated under section 10AA of the Act, therefore, the CIT(A) was not justified in considering the same as business income eligible for deduction under section 10AA of the Act.
86. The ld. Counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). He submitted that identical deduction under section 10AA of the Act was claimed on interest of Rs.2,40,67,685/- in assessment year 2012-13 and the same was allowed in the assessment order framed under section 143(3) of the Act. Therefore, once identical interest has been held to be eligible for deduction under section 10AA of the Act in assessment year 2012-13, there remains no justification for the AO to deny the claim of deduction in the instant the year and, as such, is contrary to principles of natural justice which has been upheld by the Hon’ble apex court in the case of CIT vs. Excel industries Ltd., 358 ITR 295. Referring to the decision of the Hon’ble Karnataka High Court in the case of ACIT vs Motorola India Electronics (P) Ltd., 265 CTR 94. He submitted that the Hon’ble High Court has upheld the decision of the Tribunal wherein the Tribunal has held that the interest received and the consideration received by sale of import entitlements has to be construed as income of the business of the undertaking. It was held that there is direct nexus between this income and the income of the business undertaking. Referring to the following decisions, he submitted that in all these decisions it has been held that interest income on account of the deposits made from funds received from business are incidental to the business:-
i) CIT vs. Paramount Premises (P) Ltd.;
ii) CIT vs. Hindustan Gem & Chemicals Ltd., 72 com 90 (Cal);
iii) CIT vs. Chinna Nachimuthu Constructions,297 ITR 70 (Kar);
iv) Satishchandra & Co. vs. CIT, 234 ITR 70 (Kar): and
v) M/s Green Agro Pack P. Ltd. vs. CIT, ITA No.3112 of 2010 (Kar.).
87. Referring to the decision of the Hon’ble Calcutta High Court in the case of CIT vs Tirupati Woolen Mills Ltd., 193 ITR 252, he submitted that the Hon’ble High Court has held that interest earned on deposits made with banks is taxable as business income and not under the head ‘other sources’ as investments are made by utilisation of commercial assets of the assesseee. For the proposition that interest income from FD for obtaining credit facility falls under the head ‘profits and gains of business and profession’ and is eligible for deduction under section 10AA of the Act, the ld. counsel relied on the following judicial precedents:-
i) Livingstones Jewellery Pvt. Ltd. vs. DCIT, 31 SOT 323 (Mum);
ii) M/s Rajesh Exports Ltd. vs. ACIT, 2008-TIOL-457, ITAT Bangalore;
iii) Discover India Tours (P) Ltd. vs. AO, 9 SOT 665.
88. He also relied on the following decisions:-
i) 48 com 153 (Ahd) Zaveri & Co. (P) Ltd. v. CCIT
ii) ITA No. 1650/Mum/2015 M/s Ossian Exports Ltd.
iii) 23 SOT 143 (Kol) Hindustan Gum and Chemicals Ltd. v. ITO
iv) ITA No.651/Bang/94 (AY 1990-91) Wipro Information Technology Ltd. v. DCIT.
v) ITA No. 51/Bang/2008, A.Y. 2004-05 dated 14.8.2008 Rajesh Exports Ltd. vs. ACIT
vi) ITA No. 2010/Kol/2006 dated 25.6.2007and ITA Nos 1296 and 1490/Kol/2007 dated 30.10.2007 Cheviot Co. Ltd.
vii) 17 SOT 54 (Mum) Mercator Lines Ltd. v. DCIT
viii) 17 DTR 496 (Del) DCIT v. Sudhir Genset Ltd.
89. He accordingly submitted that the order of the CIT(A) being in accordance with the law should be upheld.
90. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only question to be decided in the impugned ground is regarding the allowability of deduction under section 10AA of the Act of the ‘other income’ of Rs.82,88,009/-being the interest income on short term deposits with banks and other income. We find identical deduction was claimed by the assessee in the immediately preceding assessment year and the AO in the order passed under section 143(3) has allowed such claim under section 10AA to the extent of Rs.1,40,67,685/-. We, therefore, find merit in the submission of the ld. counsel that once identical interest income has been held to be eligible for deduction under section 10AA of the Act in assessment year 2012-13, there remains no justification for the AO to deny the claim of deduction in the impugned assessment year. We find Hon’ble Karnataka High Court in the case CIT vs Motorola India Electronics Private Limited, 265 CTR 94 while deciding an identical issue has observed as under:-
“In s. 801A, the term “profits and gains from the business has been used. Similar terminology has been used m many other sections such as s. 80JJ or 80JJA, etc., whereas under s- 801 and other sections the terminology used is “profits and gains derived from industrial undertaking”. The term “from the business of’ is much wider than the term “derived from industrial undertaking.’ Keeping this distinction in mind, we have to necessarily hold that the entire profits derived from the business of undertaking should be taken into consideration, while computing the eligible deduction under s.10B/10A of the Act, by applying the mandatory formula.”
“The issue becomes further clear when we look into the provisions of 80HHC which are similar, as far as the education (sic) of deduction is concerned. As the legislature wanted to specifically exclude receipts by way of brokerage, commission, rent, charges or any other receipt of similar nature, from “the profits of the business, in s. 80HHC, it has specifically inserted Expln. (baa). If the legislature intended to exclude interest from the term ‘profit of business of undertakings’ under s. 10A/10B, a similar provision as in the case of Expln, (baa) would have been inserted. No such Explanation has been introduced in s. 10A/10B.”
91. We find, following the above decision the ld. CIT (A) has held that in the absence of the use of the term ‘derived from’ in section 10AA (7) of the Act, no nexus is required for the computation of deduction between the profits in question and the undertaking. It is sufficient if the profits relate to the business of the undertaking. We find the Bangalore Bench of the Tribunal in the case of Wipro Information Technology vs DCIT, ITA No.651/Bang/94 for assessment year 199091 after discussing the difference between the provisions of 10A and 80HHC distinguished the decision of the Hon’ble Supreme Court in the case of Sterling foods and has observed as under:-
“The word ‘derived’ is not defined in the Act. Hence we resort to the dictionary meaning of the same. The Oxford illustrated Dictionary defines the word ‘derived’ as ‘get, obtain from a source, have one’s or it’s origin from, be descended or have one’s.’ In the case of a 100% export oriented unit, the origin or source of export benefits in the form of import entitlement is the business of export only. The scheme of the Govt, is only an enabling factor. The judgment of Hon’bie Supreme Court in the case of Sterling Foods (supra) is, therefore, distinguishable, since the present issue is u/s. 10A and not u/s. 80HH as in the said case of Sterling Foods (supra)”
Further, the decision in Menon Impex and other decisions following it are no longer an authority. This is for the reason that the decision in Menon Impex was rendered in the context of section 10A, and pertained to the assessment year 1985-86. The law itself has undergone a change with the substitution of section 10A with effect from 01.04.2001. On this ground in ACIT v. Motorola India Electronics (P) Ltd., reported in 112 TTJ 562 (Bang), the tribunal held that the decisions in Menon Impex and those relying on Menon Impex have no application to substituted section 10A and similar provisions.
The use of the words “profits of the business of the undertaking” in section 10AA(7) is very broad. This due to the fact that the two over lapping terms “business” and “business of the undertaking” forming part of the above expression are very broad in themselves.
The term ‘business’ has been understood in a very broad sense by the Supreme Court in Continental Construction Ltd v. C1T, reported in 195 ITR 81 (SC) so as to include all activities, obligations and commitments which are incidental or ancillary to the operating part of the business. In the context of section 80HHB, the Supreme Court observed:
“The expressions “business of execution of a foreign project” or work forming part of it or the ‘profits derived’ from the business, take in all aspects of a business involving the activities referred to in Sub-section (2) (b) of Section 80-HHB together with all activities, commitments and obligations ancillary and incidental thereto and the profits flowing therefrom.”
The act of securing a letter of credit facility for imports with fixed deposits will be an activity incidental and connected with export business of assessee. Any income there from, including interest income will constitute profits of the business of the undertaking.”
92. We find Ahmedabad Bench of the Tribunal in the case of Zaveri & Co. (P) Ltd. vs. CCIT, 48 taxmann.com 153 (Ahd) has observed as under:-
“41. The other connected issue is that as per the view of the Commissioner of Income Tax, the interest income in question being derived by the assessee from Indian Bank, the same is to be excluded while computing profits derived from the export of articles or things or services for the purpose of section 10AA of the Act. Sub-section (7) of section 10AA provides the manner in which the profits derived from “export of articles or things or services” is to be computed for the purposes of section 10AA of the Act. Therefore, in view of the above specific provision in the section itself, “profits derived from the export of articles or things or services” cannot be computed in any other manner. Sub-section (7) of Section 1GAA reads as under:
“For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit:, the same proportion as turnover of the business carried on [by the undertaking]:
[Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2.) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.]”
93. We find Mumbai Bench of the Tribunal in the case of M/s Ossian Exports Ltd., vide ITA No.1650/Mum/2015, has observed as under:-
“7.3.3 We are of the considered opinion that the said interest receipts earned by the assessee out of FDs kept with banks by way of margin money made for the purposes of the assessee’s business of import/export trading in diamonds, constitutes business receipts/income and is therefore eligible for deduction u/s 10AA of the Act. We hold and direct accordingly. Consequently assessee’s appeal on grounds 1 to 3 is allowed.”
94. We find following the above decisions and various other decisions the ld. CIT(A) has allowed the claim of deduction under section 10AA of the Act on the interest income and ‘other income.’ The ld. CIT-DR could not distinguish the various decisions relied on by the ld. CIT(A). In view of the above discussion and in view of the detailed reasoning given by the CIT(A), while allowing the claim of the assessee for deduction under section 10AA & interest income and other income, we do not find any infirmity in the same. Accordingly, the same is upheld and the ground raised by the revenue is dismissed.
95. Ground of appeal No. 3 by the Revenue reads as under:-
“3. Ld. Commissioner of Income Tax (Appeals) erred on law and on the facts of the case in deleting the addition of Rs.8,40,46,029/- made by the AO on account of Depreciation claimed on goodwill.”
96. Facts of the case, in brief, are that the AO, during the course of assessment proceedings observed that the assessee company has purchased the business of M/s Planet Online Pvt. Ltd., through business transfer agreement dated 01.06.2012 and created goodwill of Rs.33,61,84,116/- in financial year 2012-13 and claimed depreciation there on of Rs.8,40,46,029/-. He observed that para 14 of the notes to accounts read as under:-
“The Company acquired business of Planet Soft India Pvt. Limited for a consideration of Rs. 385 Millions (USD 7 Million). TRC Corporate Consulting Pvt. Ltd. has conducted the Fair Value of the business of Planet Soft at Rs. 409 Millions. It will provide Ebix entry into fast growing Insurance Industry in India. Along with the business, it took over essential tangible assets and liablities which were essential and related to the ongoing concern business. The net fair value of these assets is determined by TRC Corporate Consulting Pvt. Ltd. at Rs. 11.29 Millions. The Company had recognized in its books Goodwill on this acquisition at Rs.374,052,401 Millions being the excess of purchase consideration over the tangible assets of the business. Besides, the tangible block it also took over the entire workforce (key drive of the business) of the business which comprise of over 400 qualified personnel’s.
The company has reinstated the acquired specified fixed assets of above name company on the original value as stated in financial statements as on 31.05.2012. The resultant effect due to this reinstatement amounted to Rs. 1,97,31,672/- has been adjusted in goodwill account.
The goodwill shall be written off over a period of 5 years in equal instalments.”
97. He observed that Article IX of the Business Transfer Agreement reads as under:-
‘Non-Compete: – In consideration for the purchase of Business, including the goodwill connected therewith, by the Purchaser. Seller agrees for a period of two years from the Transfer Date, motto directly or through an associate/Agent carry on or cause to carry on any business which is in competition with the Business.”
98. The AO noted that M/s Planet Software India Pvt. Ltd. had total Assets of Rs. 57.27 Millions as on 31.03.2012 and the net asset value was Rs. 31.03 Millions. The assets represented tangible assets and there were no intangible assets. The valuation report has valued Planet Online on the basis of DCF Method as Rs. 409.93 Millions, which include value of Perpetuity Value of Rs. 343.03 Millions. He held that in view of above Article IX, it can be concluded that the amount of Rs.374,052,401 Millions being the excess of purchase consideration over the tangible assets of the business is in fact to be treated as Payment for Non-Compete fee, as there was no Goodwill with the Seller and the creation of Goodwill in the books is misleading.
99. According to the AO the business of Planet Online Private Limited was to engage in the development of enterprise solution for insurance companies to do their new business software developed using Java/J2EE language and database which the assessee company was already engaged in. Further, the assessee company has not purchased any trade mark or new business technologies which could have made any additional value in the hands of the assessee company. Further, the assessee was having set chain of the supply of insurance for specified software for the insurance industry which the assessee has purchased from Planet Online Private Limited. Therefore, he held that the depreciation on goodwill is actually construed as depreciation of non-compete fee in the light of the given facts and circumstances of the case. Therefore, relying on various decisions the AO disallowed the claim of depreciation of Rs.8,40,46,029/-.
100. Before the CIT(A) it was submitted that the addition was made by the AO based on fundamental misconception of facts and law. The finding of the AO that excess of purchase money over tangible assets of the business is in fact the payment of non- compete fee as there was no goodwill with the seller and the creation of goodwill in the books is misleading was factually incorrect and based on incorrect facts on record. The decision of the Hon’ble Supreme Court in the case of CIT vs Smifs Securities Ltd., 348 ITR 302 was brought to the notice of the CIT(A) wherein the Hon’ble Supreme Court has held that excess consideration paid by the assessee over the value of the net assets acquired of amalgamating company and considered as goodwill arising on amalgamation was in fact paid towards reputation which the amalgamating company was enjoying in order to retain its existing clientele. It was, thus, held that such goodwill is an eligible intangible asset for depreciation. Various other decisions were also brought to the notice of the CIT(A).
101. Based on the arguments advanced by the assessee, the ld CIT(A) directed the AO to allow depreciation of Rs.8,40,46,029/-. The relevant observation of the CIT(A) read as under:-
“The Assessing Officer has held that the cost of the purchase consideration over the tangible assets is to be treated as payment for the non-compete fees as there was no goodwill with the seller and creation of the goodwill is misleading. The aforesaid finding is based on the complete misconception of facts and circumstances and the evidence placed on the record. It is reiterated that the fact that valuation report provides for a valuation of the business acquired by the company as on going concern at a higher sum than the book value and such value represents goodwill of the business. It is submitted that even the method of valuation as adopted in the valuation report is a discounted cash flow method of the revenue for the succeeding years which itself establish the submission of the appellant that amount has been paid for the goodwill of the assessee and not for a non-compete fee. It is to be highlighted that non compete fee clause is for a period of two years i.e. for the period from 1.5.2012 to 30.4.2014 whereas revenue as per valuation report is for the financial year 2012-13 to financial year March 2017. Thus it itself shows that the money paid and determined as consideration based on the valuation report and accepted in the agreement with M/s. Planet Online India Pvt. Ltd. are in respect of “goodwill” and not in respect of non-compete fees, it is reiterated that non-compete fee was an incidental obligation on M/s. Planet Online India Pvt. Ltd. and there was no separate consideration paid towards non-compete fees. It is submitted that judicially, it has been consistently recognized and held that any sum paid over and above the book value is to be held as exclusive until there is an agreement to the contrary and thus, in absence of any agreement to the contrary, in any manner, holding that the sum is paid towards non compete fees, is absolutely contrary to the actual facts. The Assessing Officer has referred to the judgment of the Hon’ble Delhi High Court in the case of Sharp Business System v. CIT reported in 254 CTR 233. This judgment has no application to the facts of the case of the appellant. In the said case, expenditure of Rs. 3 crores has been incurred towards non compete fee and the same was claimed as revenue expenditure which on the facts of the case was held to be capital expenditure. However, no such expenditure has been claimed by the appellant company, in any case, a close reading of the judgment would show that in the said case, non compete fee has been paid for a period of seven years which was held to be enduring benefit and therefore, such expenditure has been held to be capital expenditure. It is submitted that in the said case, the appellant thereafter, made an alternative contention that the expenditure be held to be intangible assets, eligible for depreciation under section 32 of the Act. The Hon’ble Apex Court after considering the judgment in the case of Techno Shares and Stock Brokers (P) Ltd. (supra) and the judgment in the case of Hindustan Cola Beverages (supra) held that there is no acquisition of non competition agreement, it is restricted one and ‘therefore, such a sum is not eligible for the capital assets under section 32(1) of the Act. It was held that expression ‘similar business of commercial rights’ has to be necessarily result in an intangible asset against the entire world to be eligible for the deprecation. The said judgment has no application on the facts of the instant case more particularly when there is no independent agreement and there is no specified consideration for non-compete fee having been paid by the company. It is well settled law that an agreement is to be read as such. Reliance is placed on the following judgments:
a) 288 ITR 408 (SC) of Ishikawajima-Harima Heavy Industries ltd. s BIT
b) 341 ITR 1 (SC) Vodafone International Holdings B.V. v UOI
c) 173 ITR 479 (SC) C1T v Arvind Narottam
The Hon’ble Delhi High Court in the case of CIT vs. Eicher Ltd. reported in 302 ITR 249 while examining the nature of non-compete fee laid the stress on the length of period of restriction. The Hon’ble Court referring to Hon’ble Supreme Court’s judgment in Coat Shipment’s case reported in 82 ITR 902 (SC) has observed that payment made to ward off the competition in a business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time, it was held that, “How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case.” The Hon’ble Court also observed that, “to decide whether an expenditure of this nature is a capital expenditure or not would depend on the facts of the case. However, it is necessary to know whether the advantage derived by the prayer is of an enduring nature, and for this one of the considerations is the length of time for which the non-compete agreement would operate although that is not decisive. While the length of time for which computation is eliminated may not strictly be decisive in all cases, yet, at the same time, it should not be so brief as to virtually be transitory. The Court finally held that, “the assessee did not acquire any capital asset by making the payment of non-compete fee of 4 crores. It merely eliminated completion in the two wheeler business, for a definite period of time.” Therefore, the expenditure was held to be revenue in nature.
5.3 In view thereof, claim of non-compete fee without payment of any consideration is though a part and parcel of the agreement and provided on account of commercial expediency and business necessity, yet the same cannot be made a basis to hold that excess of consideration paid over, the book value assets is not goodwill, but payment for non compete fee as claimed by the Assessing Officer. The judgment relied by the Assessing Officer to deny the eligible deduction of depreciation on the goodwill has been given in the different context and has no connection with the facts of the given case In view of the above, the Assessing Officer is directed to allow the depreciation of Rs.8,40,26,029/- and modify the order of assessment accordingly”
102. Aggrieved with such order of the CIT(A) the revenue is in appeal before us.
103. The Ld. DR strongly supported the order of the AO and submitted that the findings of the CIT(A) is perfunctory and does not distinguish the decision in the case of Sharp Business System, ITA no. 492/2012 and CM Appeal 14836/2012 and CIT vs Hindustan Coco Cola Beverages (P) Ltd.,331 ITR 192 (Delhi). He submitted that the decision of the Hon’ble Supreme Court in the case of Smifs Securities Ltd. (supra) which has been relied on by the assessee is not applicable to the facts of the present case since, in that case, the agreement specifically contains an article of non-compete fee. Thus, the assessee cannot take the stand that the purchase consideration in excess of tangible assets of the business of the business was on account of goodwill and the stand of the assessee was completely erroneous and contrary to the facts as per the agreement. He accordingly submitted that the order of the CIT(A) be reversed and that of the AO be restored.
104. The ld. counsel for the assessee, on the other hand, heavily relied on the order of the CIT(A) and submitted that the claim of the assessee is covered by the business transfer agreement of Planet Online Private Limited and valuation report. Referring to the decision of the Hon’ble Supreme Court in the case of CIT vs Smifs Securities Ltd. (supra), he submitted that the Hon’ble apex court has held that excess consideration paid by the assessee over the value of net assets acquired of amalgamating company and considered as goodwill arising on amalgamation was, in fact, paid towards the reputation which the amalgamating company was enjoying in order to retain its existing clientele. It was, thus, held that such goodwill is eligible intangible asset for depreciation. Referring to the decision of the Delhi Bench of the Tribunal in the case of Triune Energy Services (P) Limited vs DCIT, 237 Taxman 230 (Del), he submitted that the Tribunal following the above decision of the Hon’ble Supreme court under identical circumstances has deleted the disallowance. Relying on various other decisions, he submitted that the CIT(A) is fully justified in deleting the depreciation on goodwill.
105. The ld. counsel submitted that the valuation report provides for the valuation of the business acquired by the assessee company on a going concern basis at a higher sum than the peak value it ought to have been held as the goodwill of the business. He submitted that even the method of valuation as adopted in valuation report is discounted cash flow method of the revenue for the succeeding years which itself established submission of the assessee that the amount has been paid for the goodwill of the assessee and not for a non-compete fee. He submitted that the non- compete fee clause is for a period of two years i.e., for the period from 01.06.2012 i.e., the transfer date to 31.05.2014 whereas revenue as per valuation report is for financial year 2012-13 to financial year March, 2017. This, according to the ld. counsel shows that the money paid and determined as consideration based on the valuation report and accepted in the agreement with M/s Planet Online Private Ltd. are in respect of goodwill and not in respect of non-compete fee. He submitted that non-compete fee was an incidental obligation of M/s Planet Online Pvt. Ltd. and there was no separate consideration paid towards non-compete fees. He submitted that as per various judicial precedents it has been consistently recognised and held that any sum paid over and above the book value is to be held as exclusive unless there is an agreement to the contrary and, thus, in absence of an agreement to the contrary in any manner holding that the sum is paid towards non-compete fee is absolutely misplaced and untenable.
106. So far as the decision relied on by the AO in the case of Sharp Business System vs. CIT, 254 CTR 233 is concerned the Ld. counsel submitted that this decision has no application to the facts of the case of the assessee. In the said case, the expenditure had been incurred of Rs.3 lacs towards non-compete fee and the same was claimed as revenue expenditure and under the facts of that case it was held to be a capital expenditure. However, no such expenditure has been claimed by the assessee company. Further, in that case, non- compete fee had been paid for a period of 7 years which was held to be enduring benefit and, therefore, such expenditure has been held to be capital expenditure. He submitted that in the said case, the assessee thereafter made an alternate contention that the expenditure be held to be intangible asset eligible for depreciation under Section 32. The Hon’ble Court after considering the judgement of the apex court in the case of Techno Shares and Stock Brokers (P) Ltd. and the judgement in the case of Hindustan Coca-Cola Beverages (supra) held that there is no acquisition of non-competition agreement, it is restricted one and, therefore, such sum is not eligible capital asset u/s 32(1) of the Act. It was held that expression ‘similar business of commercial rights’ has to necessarily result in an intangible asset against the entire world to be eligible for depreciation. He submitted that the said judgement has no application on the facts of the instant case when there is no independent agreement and there is no specified consideration for non-compete fees having been paid by the assessee company. Referring to the following decisions he submitted that agreement is to be read as such:-
a) 288 ITR 408 (SC) of Ishikawajima-Harima Heavy Industries Ltd. vs. DIT
b) 341 ITR 1 (SC) Vodafone International Holdings B.V. v UOI
c) 173 ITR 479 (SC) CIT v Arvind Narottam
107. He submitted that claim of non-compete fee without payment of any consideration is though a part and parcel of the agreement and provided on account of commercial expediency and business necessity, yet, the same cannot be made a basis to hold that excess of consideration paid over the book value of assets is not goodwill, but payment for non-compete fees as held by the AO. He accordingly submitted that the action of the AO in denying depreciation on goodwill is based on fundamental misconception of facts and law and erroneous interpretation of section 32(1)(ii) r.w. agreement, copy of which is placed on the paper book. He accordingly submitted that the order of the CIT(A) be upheld and the ground raised by the Revenue be dismissed.
108. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. A perusal of the copy of the business transfer agreement shows that the preamble of the agreement read as under:-
“BUSINESS TRANSFER AGREEMENT
This BUSINESS TRANSFER AGREEMENT (“Agreement”) dated 1 st June 2012 is made by and between Ebix Software India Private Limited. (“Purchaser”) with its Registered Office at 311, B 4 A Pariytan Vihar, Vasundhara Enclave Delhi 110096, and PlanetOnline Private Limited with its Registered Office at 604 / 605, 6th floor, Ashoka Bhoopal Chambers, SP Road,, Secunderabad, 500 003 (“Seller”, which expression includes its Subsidiaries).
Recitals
A. Seller is an software provider registered in India which is inter alia, engaged in offering software services/solutions to business to business (B2B), e-commerce and website development for the insurance industry worldwide.
B. Purchaser is a company, having a wide repertoire of information technology services including but not limited to computer programming, software/development/ customization/ installation/maintenance with expertise in the provision of insurance software.
C. Purchaser desires to acquire from Seller and Seller desires to sell and transfer to the Purchaser, the Business as an undertaking, together with all specified tangible and intangible assets, liabilities and receivables relating thereto including licenses, contracts, personnel and other assets, together with Seller’s intellectual’prqperty rights pertaining thereto on and subject to the terms and conditions contained in this Agreement.
NOW THEREFORE, in consideration of the recitals above, and the mutual covenants contained in this Agreement, and intending to be legally bound, Purchaser and Seller agree as follows:
ARTICLE I
General Provisions
1.1 Definitions. Appendix A to this Agreement sets forth the definitions of certain terms used in this Agreement.
1.2 Other Definitions and Meanings: Interpretation. For purposes of this Agreement, the term “Party” means (except where the context otherwise requires) Purchaser or Seller; the term “Parties” means (except where the context otherwise requires) Purchaser and Seller together; the term “person” includes any natural person, firm, association,- partnership, corporation, governmental agency, or other entity other than the parties; and the words “hereof’, “herein”, “hereby” and other words of similar import refer to this greement as a whole. The headings of the Articles and Sections of this Agreement have been included for convenience of reference only and shall not be deemed to affect the meaning of the operative provisions of this Agreement.
ARTICLE II
Purchase and Sale
2.1 Transaction. On and subject to the terms and conditions of this Agreement, with effect from June 1, 2012 (“Transfer Date”), Seller sells, conveys, transfers, assigns, grants and delivers to the Purchaser and Purchaser purchases, acquires and receives from Seller its business undertakings as a going concern, as a slump sale, that is to say, all of the, Assets, Transferred Employees, Liabilities, Licenses, Contracts and Receivables, as defined in Definitions Schedule relating to the Business, free and clear of all liens, mortgages, pledges, security interests, restrictions, prior assignments, encumbrances and claims of every kind, nature or character (hereafter referred to as‘the business undertaking’.
2.2 Purchase Price. As sole and entire consideration for the purchase of the business undertaking, Purchaser shall pay to the Seller a purchase price of Rupee Equivalent of USD 7.0 million on and subject to the terms of Article III herein below.
2.3 Assets. The term “Assets” means all tangible and intangible assets, properties, and rights used by the Seller to carry out the Business as specifically reflected in the list of Assets as set out in Exhibit 1 hereto.
Seller shall deliver to the Purchaser such bills of sale, assignments, endorsements, and other recordable conveyance, in respect of the above Assets, in form and substance reasonably satisfactory to Purchaser and its counsel, as shall be effective to vest in the Purchaser all of the right, title and interest of Seller in and to the Assets free and clear of all Liens.
2.4 Liabilities. The term “Liabilities” means all liabilities and obligations of the Seller as of the Transfer Date arising out of the Business. Without limiting the generality of the foregoing, it is expressly understood that the Liabilities shall exclude the following liabilities and obligations;
(a) All liabilities and obligations incurred by the Seller in connection with the conduct of its businesses other than the Business;
(b) All liabilities as of Transfer Date, in excess of Rs. 1,00,000/- (Rupees One Lakh only), reasonably known to the Seller and not disclosed to the Purchaser relating to the Business. However, it is clarified that any liability not known to Seller and discovered after Transfer Date by either party shall be bome by the Purchaser. The Seller warrants that all known liabilities as on the Transfer date have been disclosed to the Purchaser.
2.5 Contracts. The term “Contracts” means all contracts, agreements, subcontracts, memoranda, letter-agreements and other agreements and obligations of a similar nature arising out of or pertaining to the Business and which are to be assigned to the Purchaser pursuant to this Agreement. Seller shall provide to the Purchaser, prior to the Transfer Date, a status report of all performed and pending obligations and under each such Contract.
2.6 Receivables. The term, “Receivables” means all account Receivables which is outstanding for less than 181 days as of Transfer Date, associated with the Business.
ARTICLE III
Purchase Price
3.1 Purchase Price. For purposes hereof, the term “Purchase Price” means Rupee Equivalent of USD 7.0 million which has been arrived at based on the valuation report commissioned by the Purchaser.
3.2 Payment Schedule. The Purchase Price shall be paid by way of a bank wire, in favour of the Seller, immediately on execution of this agreement. The Seller shall upon execution of this agreement, prior to the payment, take all actions for completion of all transfer formalities i.e. (a) Transfer of control over Assets (b) Transfer of Employees (c) Transfer of Customers (d) Transfer of Suppliers.
3.3 Adjustment. The Purchase Price shall be adjusted by such amount of the Receivable that have been transferred to the Purchaser but are realized by the Seller and such amount of payables as are transferred to the Purchaser and paid by the Seller.
3.4 It is clearly understood between the Parties that any amounts collected by Seller on or after payment of full consideration, from the Receivables transferred, shall be promptly transferred by Seller in favor of Purchaser.”
Similarly, article 9 of the agreement read as under:-
“ARTICLE IX
9.1 Non Compete. In consideration for the purchase of Business, including the goodwill connected therewith, by the Purchaser, Seller agrees for a period of two years from the Transfer Date, not to directly or through an associate/Agent carry on or cause to carry on any business which is in competition with the Business.
109. From the above it is seen that Planet Online Private Limited has transferred to the purchaser, i.e., the assessee company its business undertaking as a going concern, as a slump sale that is to say, of all the assets, transferred employees, liabilities, licenses, contracts and receivables as defined in definition schedule relating to the business, free and clear of all liens, mortgages, pledges, security interests, restrictions, prior assignments, encumbrances and claims of every kind, nature or character. It has further been stated that as sole and entire consideration for the purchase of a business undertaking, purchaser shall pay to the seller purchase price equivalent to US dollars 7 million on and subject to the terms of Article III hereinabove. The expression assets, liabilities, contracts, receivables have been separately defined. Thus, apparently from the reading of both Article II and III it is seen that there is no reference of payment of purchase price being paid for non-compete fees. On the contrary, the entire purchase price has been paid for purchase of the business undertaking and undertaking has been defined to include assets, liabilities, contracts and receivables and not in connection with a non-compete fees. There is no consideration paid by the assessee for non-complete fee. A perusal of the valuation report, copy of which is placed at pages 117 to 139 of the paper book, shows that it has determined the valuation of the business and does not refer in any manner to non-compete fees. Even the method of valuation as adopted in the valuation report is a discounted cash flow method of the revenue for the succeeding years which itself which itself establishes the submission of the ld. counsel that amount has been paid for the goodwill of the assessee and not for non-compete fees. Further the non-compete clause is for a period of 2 years, i.e., for the period from 01.05.2012 to 30th April 2014 whereas the revenue as per the valuation report is for financial year 2012-13 to financial year ended March, 2007. The clause of non-compete fee without payment of any consideration is a part and parcel of the agreement provided on account of commercial expediency and business necessity. Such clause, in our opinion, cannot be made the basis to hold that the excess consideration paid over the book value of assets is not goodwill, but for payment of non-compete fee. As alleged in the order of assessment, no material has been brought on record or any enquiries have been conducted to allege that the consideration paid is for non-compete fee. There is no dispute between the assessee and the Revenue that the sum paid as goodwill by the assessee represents the difference between the purchase price of the business and the net value of assets acquired on slump sale. The only dispute between the assessee and the Revenue is that according to the Revenue the amount of difference between the purchase price and the value of the assets should be allocated to non-compete fee in view of article IX of the agreement. However, in the light of the clear provision of Article II and III of the agreement, we do not find any merit in the aforesaid argument of the Revenue.
110. We find the Hon’ble Supreme Court in the case of CIT vs. Smifs Securities (supra) has held that excess consideration paid by the assessee over the value of net assets acquired by amalgamating company should be considered as goodwill arising on amalgamation and such goodwill is eligible asset for depreciation. The relevant observation of the Hon’ble Supreme Court reads as under:-
“1. None appears for the respondent, though served. Heard learned counsel for the Department. Leave granted. This civil appeal concerns the Assessment Year 2003-2004. Three questions arise for determination by this Court. They are as follows:
Question No.[a]: “Whether Stock Exchange Membership Cards are assets eligible for depreciation under Section 32 of the Income Tax Act, 1961? Whether, on the facts and in the circumstances of the case, deletion of Rs. 53,84,766/- has been made correctly?”
Answer: Learned Additional Solicitor General fairly concedes that the said question is covered by the decision of this Court in the case of Techno Shares and Stocks Limited vs. Commissioner of Income Tax, reported in [2010] 327 I.T.R. 323, in favour of the assessee.
Question No.[b]: “Whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, 1961, and whether depreciation on ‘goodwill’ is allowable under the said Section?”
Answer: In the present case, the assessee had claimed deduction of Rs. 54.85,430/- as depreciation on goodwill. In the course of hearing, the explanation regarding origin of such goodwill was given as under:
“In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company.”
2. It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.
3. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 [‘Act’, for short]. We quote hereinbelow Explanation 3 to Section 32(1) of the Act: “Explanation 3.– For the purposes of this sub-section, the expressions ‘assets’ and ‘block of assets’ shall mean— [a] tangible assets, being buildings, machinery, plant or furniture;
[b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.”
4. Explanation 3 states that the expression ‘asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading the words ‘any other business or commercial rights of similar nature’ in clause (b) of Explanation 3 indicates that goodwill would fall under the expression ‘any other business or commercial right of a similar nature’. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
5. In the circumstances, we are of the view that ‘Goodwill’ is an asset under Explanation 3(b) to Section 32( 1) of the Act.
6. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on account of goodwill. This is a factual finding. The Commissioner of Income Tax (Appeals) ‘(CIT(A)’, for short has come to the conclusion that the authorised representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies: that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by Income Tax Appellate Tribunal ‘ITAT’, for short. We see no reason to interfere with the factual finding.
7. One more aspect which needs to be mentioned is that, against the decision of 1TAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under Section 32 of the Act. In the circumstances, before the High Court, the Revenue did not file an appeal on the finding of fact referred to hereinabove.
8. For the afore-stated reasons, we answer Question No.[b] also in favour of the assessee.”
111. We find the Hon’ble Delhi High Court in the case of Triune Energy Services (P) Ltd. vs. DCIT,237 Taxman 230 has decided identical issue and following the above decision of Hon’ble apex court has allowed depreciation on goodwill by observing as under:-
“19. In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill.
20. In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at Rs.40,58,75,529.40/-. As indicated hereinbefore Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted.
21. In view of the aforesaid, the question framed is answered in the negative, that is, in favour of the ITA No.1744/Del/2015 Assessee and against the Revenue. The Assessee’s appeal (ITA No. 40/2015) is, accordingly, allowed.”
112. The various other decisions relied on by Ld. counsel also support his case that the excess consideration paid by the assessee over the value of net assets acquired of amalgamating company should be considered as goodwill arising of amalgamation and depreciation is allowable on such goodwill.
113. So far as the decision of Hon’ble Delhi High Court in the case of Sharp Business Systems vs CIT, reported in 254 CTR 233 and relied on by the ld. DR is concerned the same, in our opinion, is not applicable to the facts of the present case. In that case, expenditure had been incurred of Rs.3 crores towards non-compete fee and the same was claimed as revenue expenditure which on the facts of that case was held to be capital expenditure. In that case, the assessee also made an alternate contention that the expenditure be held to be intangible assets, eligible for depreciation under Section 32 of the IT Act. The Hon’ble High Court after considering the judgement of the Hon’ble Supreme Court in the case of Techno Shares and Stocks Ltd. vs.CIT, 327 ITR 323 and the judgement in the case of Hindustan Coca-Cola Beverages Ltd. 331 ITR 192 held that non-compete fee is not eligible Capital Asset under Section 32(1) of the Act. However, since no expenditure has been incurred by the assessee company as non-compete fee, this decision is not applicable to the facts of the present case and distinguishable. In this view of the matter and in view of the detailed reasoning given by the ld. CIT(A) on this issue, we do not find any infirmity in the order of the CIT(A). Accordingly, the ground raised by the Revenue is dismissed.
ITA No.5275/Del/2017 (A.Y. 2014-15)
114. Ground of appeal No.1 by the Revenue reads as under:-
“1. Ld. Commissioner of Income Tax (Appeals) erred on law and on the facts of the case in deleting the addition of Rs. 2,26,98,41,758/- made by the AO on account of business income from 6 units.
115. After hearing both the sides we find the above ground is identical to Ground of appeal No.1 in ITA No.5274/Del/2017. We have already decided this issue and the ground raised by the Revenue has been dismissed. Following similar reasonings this ground raised by the Revenue is dismissed.
116. Ground of appeal No.2 by the Revenue reads as under:-
2. Ld. Commissioner of Income Tax (Appeals) erred on law and on the facts of the case in deleting the addition of Rs. 82,88,099/- made by the AO on account of other income from 4 SEZ units.
117. After hearing both the sides we find the above ground is identical to Ground of appeal No.2 in ITA No.5274/Del/2017. We have already decided this issue and the ground raised by the Revenue has been dismissed. Following similar reasonings this ground raised by the Revenue is dismissed.
118. Ground of appeal No.3 by the Revenue reads as under:-
3. Ld. Commissioner of Income Tax (Appeals) erred on law and on the facts of the case in deleting the addition of Rs. 8,40,46,029/- made by the AO on account of Depreciation claimed on goodwill.
119. After hearing both the sides we find the above ground is identical to Ground of appeal No.3 in ITA No.5274/Del/2017. We have already decided this issue and the ground raised by the Revenue has been dismissed. Following similar reasonings this ground raised by the Revenue is dismissed.
120. In the result, both the appeals filed by the Revenue are dismissed. The decision was pronounced in the open court on 30.09.2020.
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