Deduction U/s. 10AA cannot be denied in in 3rd year by examining factors which were required to be seen in first year

Macquarie Global Services Vs DCIT (ITAT Delhi)

Once the claim of deduction u/s 10AA has been accepted in the first year of the operations and also in the second year, then in the third year same cannot be withdrawn by examining the factors which were required to be seen in the first year of the claim. Thus, on this ground alone, we hold that the AO cannot deny the claim of deduction u/s 10AA with the assessee in this year and hence is directed to allow the same.

Even on the merits, we find that none of the allegation which has been made by the AO appears to be correct, because if he see the expansion and growth of revenue of EOU unit and the revenue of the SEZ unit, as incorporated above, we find that there has been substantial increase in the revenue in the EOU unit also from the financial year 2011-12 to financial year 2016-17. Thus, it cannot be held that after the sun set period the revenue of the EOU has gone down. The chart as submitted by the Ld. Counsel clearly vitiates the observation and the finding of the AO; and hence on the point that there is a less growth of revenue in EOU unit and therefore, presumption can be drawn for splitting up or reconstruction of EOU unit is incorrect and cannot be upheld. Further we find that the assessee continued to make addition to the fixed assets in the SEZ unit independently and there is no iota of any material to show that the additions to the fixed assets has been by way of transfer from EOU units. Likewise from the perusal of the list of technical man power, we find that except for two or three employees out of 30 employees are newly hired and therefore, it is not a case where the old employees of EOU unit have been entirely shifted to SEZ unit which seems to be the allegation of the AO. Thus, all the issues raised by the AO does not hold ground on the facts and material placed before us and hence on factual matrix also we hold that assessee has not violated any of the conditions prescribed in section 10AA and therefore, it is entitled for claim of deduction u/s 10AA in this year. 

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The aforesaid appeal has been filed by the assessee against final assessment order dated 27.9.2017 passed u/s 143(3) read with section 144C(5) in pursuance of directions given by the Dispute Resolution Panel (DRP) vide order dated 7.9.2017. In various grounds of appeal the assessee has mainly challenged the disallowance of deduction u/s 10AA amounting to Rs. 10,43,46,127/- relating to profits derived by SEZ unit of the assessee from the export of IT-enabled services. For the sake of ready reference the relevant ground on this issue reads as under:-

2.1 The Ld. AO/ DRP erred in denying the deduction claimed by the Appellant under section 10AA of the Act amounting to Rs.10,43,46,127 relating to profits derived by eligible SEZ unit of the Appellant from the export of IT-enabled services.

2.2. That, without prejudice, the Ld. AO/ DRP erred in not appreciating that the relevant conditions of section 10AA of the Act are to be examined in the year of formation of SEZ unit and that the deduction was allowed to the Appellant in the year of formation and in the subsequent year.

2.3. The Ld. AO/ DRP erred in holding that the SEZ unit has failed to comply with the requirements of Section 10AA (4) of the Act.

2.4 The Ld. AO/DRP erred in not appreciating that the principle of consistency is applicable on the facts of the present case.

2.5. The Ld. AO/ DRP erred in holding that the SEZ unit has been formed by splitting up and diversion of the existing business in the EOU unit considering the revenue and employee growth in SEZ unit vis-a-vis EOU unit. The addition is based on mere  surmises and conjectures and without any material on record.

2.6. The Ld. AOI DRP erred in not appreciating that during the year under consideration, all conditions of Section 10AA are satisfied and hence Appellant is entitled to the benefit thereof.

2.7. The Ld. AO/ DRP erred in ignoring the fact that the Appellant has complied with the conditions mentioned in Circular 14/2014 dated 08 October 2014 in relation to hiring of new employees and the Learned AO erred in not following Instruction 17/2013 dated 17 January 2013.

2. Brief facts and background of the case are that the assessee company is a wholly owned subsidiary of ‘Macquarie Global Services (Mauritius) Limited’ and was set up in India in March, 2007. It is a captive contract service provider, engaged in the business of provision of back office support services to its associated enterprises (AE). For rendering such services, assessee is remunerated on a cost plus mark up basis. During the relevant financial year the assessee company was operating from two separate units’ i.e., ‘CN61D (EOU)’ unit and ‘SEZ unit’. The operations from the said SEZ unit had commenced during the financial year 2010-11; and accordingly, had claimed deduction u/s 10AA in the assessment year 2011-12 and also in assessment year 2012-13. During the year under consideration which was its third year of operation, the assessee had claimed deduction of Rs. 10,43,46,127/- u/s 10AA. The said claim was duly supported by audit report in Form No. 56F. During the course of the assessment proceedings the AO noted that assessee has been claiming deduction u/s 10B/ 10A in the earlier years from its EOU Unit and the last year of deduction was assessment year 2011-12, from which period onwards deduction was not allowable due to sun set period of EOU unit. In order to verify the claim for deduction u/s 10AA for the SEZ unit, the Ld. AO issued show cause notice which has been incorporated at page 4 to 5 of the impugned order. In sum and substance his observations in the show cause notice was as under:-

i) The assessee was asked to justify whether there is any splitting up or reconstruction of the existing business.

ii) Whether the new customer in the business of 10AA unit was added by the assessee without compromising the business of the existing business as overall growth in the business was 18% in financial year 2012-13 and 97% in the financial year 2009-10; and in the financial year 201112 and 2012-13 the overall growth was only 3% and 7%; whereas growth in SEZ business for these years was 1166% and 33% respectively from which he deduced that there is a splitting and diversion of the existing business.

iii)The assessee was asked to submit total number of the employees of the company and the employees hired for the new business and existing units and to submit year wise details of old and new employees from the date of set-up of new unit. The details of which have been incorporated in the said show cause notice itself. He required the assessee to submit, whether the employees added by the assessee are without compromising the existing business of the EOU Unit as there was an overall growth in the employee in hiring of SEZ business in financial year 2012-13 which was at 12%; and in the financial year 2009-10, it was at 112%, whereas employee hiring of SEZ business was 370% and 21% in these years.

iv) Lastly, the assessee was required to submit year wise revenue billed to the customers.

In response, the assessee filed detail submissions, which has been dealt by the AO in the following manner:-

“4.3 The assessee vide reply dated 23.12.2016 has submitted the reply and which was placed on records. The assessee has submitted that MGSL set up a new unit under the SEZ legislation with projected employment of 225 people and projected investment of INR 1,005 lakhs. For the purpose of new SEZ unit, additional area of 28,008 square feet was taken on lease. The Assessee commenced operations from the SEZ unit during FY 2010-11 and accordingly claimed deduction u/s 10AA of the Act for eligible profits. Hence, the first year of tax holiday claimed under section 10AA of the Act is AY 2011-12. The assessee has submitted that the conditions prescribed above need to be fulfilled at the time “formation of SEZ unit” i.e. during the first year of commencement of operations. The SEZ unit commenced operations in FY 2010-11 and accordingly, relevant year for examination of formative conditions is AY 2011-12. In that year there is no dispute on satisfaction of formative conditions.

4.4 The assessee has further submitted that MGSPL has met all the conditions for claiming the deduction u/s 10AA of the Act. As alleged in the show cause on allowbility of deduction under section 10AA of the Act that it has begun or beings to manufacturing 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. It was submitted that the Assessee, during FY 2010-11, has set up an SEZ unit for providing ITES services duly approved by SEZ Authority vide letter of approval dated 21 June 2010. Further, the Assessee duly commenced commercial operations in nature of export of IT /ITES services from the SEZ Unit with effect from 1 January 2011. Accordingly, it is submitted that the Assessee has begun to provide services from its SEZ unit after 01 April 2006. It was submitted by the assessee that it is not formed by the splitting up, or the reconstruction, of a business already in existence. In respect of the SEZ unit it is submitted by the assessee:-

4.5 The SEZ unit has contributed to the growth of revenue from MGSPL over the years keeping in view the growth of 39%, accordingly, there is no splitting up or reconstruction of revenue/ employee. Hence, it cannot be held that the SEZ unit is formed as a result of splitting up of business and no revenue was transferred from EOU to SEZ unit. In respect of the employees transfer the assessee has submitted the Instruction No. 17/2013 dated 17 January 2013 which provides that the Assessing Officer have to follow clarifications issued by CBDT by way of Circulars”

3. The Ld. AO rejected the assessee’s contention and after analysing the issue in detail had observed as under:-

“2. A specific question was asked from the assessee which is that to provide detail of existing business whether it was transferred or not. It is important to note the condition given in the section 10A/ 10B itself that no deduction under these sections shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years. This only was the reason the assessee company was formed SEZ unit on 21.06.2010 and commences its operation on 01.0 1.2011 nearing to the date of ending of deduction u/s 10A/ 10B of thee Act in order to taking the benefit of deduction u/s 10AA of the Act. In this case, the intention of the assessee is subject matter of question because the SEZ unit was formed by the assessee with intention of shifting of business of EOU unit to SEZ unit as soon as the group company of the assessee has reached to sun set clause of 10A and it had started to shift the business to the new unit. Slowly and gradually the assessee had started to shift new business growth in this company by entering into new contract with its customer which are only its AEs and such shifting of business in SEZ unit where deduction u/s 10AA is available which is against sprit of the law laid down in the regard. The facts patterns of the assessee business units are given below:-

Table of employee growth –

4.6 The assessee has intentionally tried to submit reply on the main issue that how new customers in the business of 10AA units was added by the assessee without compromising the business of taxable unit’s business. The assessee failed to give customer wise business in both of the units and comparison. The assessee has also failed to give copies of agreement with the customers how agreement in both units are different in terms of the nature of business and content of the agreement. On perusal of the above table it is clear that the overall growth in the case of business is 18% in FY 2012-13 and 97% in FY 2009-10. The growth in the taxable business is -3% and 7% in FY 2011-12 and 2012-13 respectively against overall growth in SEZ business is 1166% and 33% respectively.’ It is beyond any imagination that how miserly the assessee has tried to defraud the provision of the Act. It is already substantiated the claim deduction u/s 10AA of the Act that business is done after splitting of the existing business which is taxable unit. Accordingly important condition of section-10AA has not been complied with by the assessee and there is splitting and diversion of the existing business.

4.7 Second test is employees of the assessee where the assessee has submitted reply the main issue for examination in this case is deduction u/s 10AA of the Act that employees which are alike assets for IT companies. That instruction No. 17/2013 dated 17th January 2013 which provides that the Assessing Officer have to follow clarifications issued by CBDT by way of Circulars. The assessee is failed to give detail of employees and their skill set which were acquired by the assessee for new unit and thereafter hiring growth in taxable unit at the .same pace as with new SEZ unit. On perusal of the above table of the employee it is clear that the overall growth in the case of employee hiring is 12% in FY 2012-13 and 112% in FY 2009-10. The growth in the employee hiring of taxable business is -16% and 5% in FY 2011-12 and 2012-13 respectively against overall growth in employee hiring of SEZ business is 370% and 21 % respectively. It is clear to substantiate the claim deduction u/s 10AA of the Act that is done after splitting of the existing business which is taxable unit.

4.8 Accordingly important conditions are cumulative and have to be satisfied cumulatively which is sprit of section-10AA and same has not been compiled by the assessee and there is splitting and diversion of the existing business. The assessee also failed to submit detail of new and old employee’s ratio. The contents of tables clearly shows that the assessee company has been set up with specific motive of shifting the business from taxable zone to SEZ Zone in the newly set up SEZ unit by splitting of existing business in non-taxable area just to cheat the provisions of the section 10AA of the It Act. The assessee company which is evident from the facts that the SEZ unit of the assessee company have absorbing the growth of the business from taxable undertaking to SEZ unit which has increased drastically from normative business growth.

4.9 The assessee company as the assessee has failed to demonstrate that how many employees were recruited by the assessee for EOU UNITs which is taxable in subsequent years to the formation of SEZ UNIT. The constitution bench decision of the Supreme Court in McDowell and Co. Ltd. v. Commercial Tax Officer (154 ITR 148) is equally relevant. In the said decision, Supreme Court took a serious view of tax avoidance devices, and held that such devices will not stand the scrutiny of law if the object is only tax avoidance. It sought the aid of emerging techniques of interpretation in trying to relate such tax avoidance devices to existing legislation. It chose to rely on the famous British ruling in Ramsey’s case, in order to expose the devices for what they really are, and to refuse to give judicial benediction. In this case it is clearly visible that the new unit is formed by splitting or reconstruction of a business already in existence as. The assessee has relied upon many judgements without distinguishing the facts of the case. There are several judgment that in the scheme of the deduction or exemption provisions the intention of the Industrial policy and deductions provision made there under is to create new business and new emplacement and new foreign exchange reserve throughout the period of scheme and that each year is an independent assessment unit and requirements of incentive sections need to be examined every year during the tax holiday period without any failure and -breaking of continuity. The units were incorporated on 21.06.2010 which was nearby date of last year of 10B to gain the deduction u/s 10AA of the Act.

4.10 Now it is also important to counter the argument of the assessee company.

4.10.1 The assessee has set up a new unit under the SEZ legislation located at 15th Floor, Building No. 14, Tower-B, Cyber City, DLF Phase Ill, Gurgaon-122002, Haryana with projected employment of 225 people and projected investment of INR 1,005 lakhs. For the purpose of new SEZ unit, additional area of 28,008 square feet was taken on lease. The Assessee commenced operations from the SEZ unit during FY 2010-11 and accordingly claimed deduction u/s 10AA of the Act for eligible profits. Hence, the first year of tax holiday claimed under section 10AA of the Act is AY 2011-12. In this connection it is worthwhile to note that the intention of the Industrial policy and deductions provision made there under is to create new business and new emplacement and new foreign exchange reserve throughout the period of scheme and that each year is an independent assessment unit and requirements of incentive sections need to be examined every year during the tax holiday period without any failure and breaking of continuity.

4.10.2 The MGSPL has met all the conditions for claiming the deduction u/s 10AA of the Act so these conditions has to be satisfied in each year and contention of the Assessee that unit was set up during FY 2010-11 duly approved by NSEZ Authority is not relevant as SEZ authority is only to give approval of Unit and determination of the deduction u/s 10AA is subject matter of provision of the Act.

4.10.3 That the SEZ unit is a distinct identifiable unit which has operated independently and has contributes to the growth of revenue from MGSPL over the years keeping In view the growth of 39%, accordingly, there is no splitting up or reconstruction of revenue/ employee. The assessee is failed to substantiate the growth in the business of the EOU form the date of set up of new unit till FY 2015- 16. Based on limited information given in the table by the assessee, the contention of the assessee is supported by the facts and growth in the business in taxable business is far low as compare to SEZ business.

4.10.4 That instruction No. 17/2013 dated 17 January 2013 which provides that the Assessing Officer have to follow clarifications issued by CBDT by way of Circulars. The assessee is failed to give detail of employees and their skill set which were acquired by the assessee for new unit and thereafter hiring growth in taxable unit at the same pace as with new SEZ unit.

4.10.5 In substance the assessee has given selective detail in its favour and failed to pass the test of growth in the business of the old unit at the cost of new business.

4.11 In view of the above benefit of 10AA of Rs. 10,43,46,127/- is liable to be added to the income of the assessee.

4. The sum and substance of AO’s contention was that, firstly, the only reason for assessee company to form ‘SEZ Unit’ on 21.6.2010 and came into operation on 1.1.2011 was on the background that deduction u/s 10A and 10B of the EOU unit would be no longer available due to sun set clause and therefore, assessee started to shift new business in the form of SEZ unit; secondly, he has taken note of the revenue growth of the EOU unit which according to him had declined since financial year 2010-11, whereas in the case of SEZ unit revenue had increased marginally; thirdly, the growth of employees has been reduced in the EOU unit, whereas in the SEZ unit there was a significant growth of hiring of employees; and lastly, assessee has failed to give details of employees and the skill test which was required by the assessee for the new unit and it had also failed to submit details of new and old employees ratio.

5. Before us, the Ld. Counsel for the assessee Shri Salil Kapoor after explaining the entire facts and background of the case, submitted that, admittedly here in this case it was neither the first year of operations of SEZ unit nor the deduction was claimed for the first time. Albeit this was the third year of the claim of deduction and in the earlier two assessment years, i.e., assessment years 2011-12 and 2012-13, the deduction u/s 10AA for the SEZ unit has already been allowed by the AO in the scrutiny proceedings in orders passed u/s 143(3). The issue whether the new unit has been created by splitting up or restructuring of a business already in existence can only be examined in the first year of claim and not in the third year. The assessee’s case for the assessment years 2011-12 and 2012-13 was selected for scrutiny and on the basis of report in Form No. 56F, the claim of deduction u/ s. 10AA had been duly allowed by the AO. Whence the claim of deduction has been accepted in the year of formation of SEZ unit, then Ld. DRP as well the AO have grossly erred in disallowing the claim in this year which is the third year of operations and claim. In support of this proposition, he strongly relied upon following judgments:-

i) CIT vs. Western Outdoor Interactive (P) Ltd. (Bombay HC (349 ITR 309;

ii) CIT vs. Tata Communication Internet Services Ltd. (Bombay HC) (232 Taxman 406);

iii) CIT vs. Heartland Delhi Transcription Services (P.) Ltd. (Delhi HC) (270 CTR 373).

6. Mr Kapoor’s second limb of argument was that, the expansion of business through a new and integrated undertaking does not tantamount to splitting or reconstruction of the existing business. He submitted that it is now well settled proposition by various judicial precedents that a new undertaking which satisfies the following conditions then it cannot be said to have been formed by splitting up or reconstruction of the existing business:-

– Separate and distinct identity of the new undertaking;

– Fresh investment in the undertaking;

– Employment of requisite manpower therein;

– Manufacture of articles or rendering of services from such undertaking; and

– Earning of profits clearly attributable to said undertaking.

7. He pointed out that SEZ unit was established with the investment of Rs. 10 crores after seeking approval from Noida SEZ Authority and had its own assets and employees. He further pointed out that in fact there has been a consistent growth in the revenue of the assessee as well as in the revenue of EOU unit since the inception of SEZ unit and in support he submitted the following chart:-

8. So far as marginal decline of revenue of EOU in financial year 2011-12, Ld. Counsel submitted that this was on account of cost plus model followed by the assessee for recognising its business income and there was a decline in travel cost which resulted into lower revenue due to lower cost base. He further pointed out that new manpower had been employed by the SEZ unit and otherwise also CBDT circular No. 14 of 2014 prescribed that any of the following conditions should be satisfied in respect of manpower hire/ transfer from existing unit to SEZ unit to be eligible for deduction u/s 10AA. Firstly, transfer of redeployment of manpower from existing unit to the new unit in the first year, to the extent of 50% of the total technical manpower actually engaged in the new unit, would not be construed as splitting up or reconstruction of existing business; OR secondly, if the assessee is able to demonstrate that the net addition of the new technical manpower in all units of assessee is at least equal of 50% of the total technical manpower of the new unit, then also benefit of 10A/10AA would be available.

9. Here the assessee duly met the aforesaid conditions in the year of formation i.e., assessment year 2011-12 and in support he gave the following facts:-

10. Lastly, he submitted that there is no splitting up of the existing business in the instant case and in support of all his proposition as argued by him above, he relied upon the following judgments:-

• Textile Machinery Corporation Ltd vs CIT (SC) (107 ITR 195))
• CIT vs Wipro GE Medical System Ltd (Kar HC) (391/392 – 2008)
• ACIT vs Leo Fasteners (ITA No. 533 to 538 of 2010) (MadrasHC)
• CIT vs Ganga Sugar Corporation Ltd (Delhi HC) (92 ITR 173)
• CIT vs Mahaan Foods Ltd (Delhi HC) (216 CTR 148)

11. During the course of the hearing, this bench required the Ld. Counsel to submit details of investment made in SEZ unit since inception; expansion and growth of revenue for EOU and SEZ unit; and list of technical manpower with their designation and technical qualification employed in the first year of formation and whether it was a new hiring or inter-unit transaction. In compliance thereof, the Ld. Counsel had submitted following details:-

i) Details of investment:-

Total Investment: Rs. 20,83,02,719

ii) Details of expansion and growth of revenue:-

iii. List of technical manpower:-

12. On the other hand, Ld. CIT(DR) referred to the various observations made by the DRP as well as by the AO and submitted that the assessee has failed to give the details of the employees as required by the AO including the skill test of the employees and the most important fact was that the SEZ unit has been established when the EOU unit had reached to sun set period and only with a view to continue to enjoy 100% deduction, the assessee has started its new business and therefore, the AO has rightly observed that the said unit has been established after splitting up and reconstruction of existing business. He thus, strongly relied upon the order of the AO and DRP. As regards the Ld. Counsel’s plea that the issue of deduction has already been allowed in the earlier two years, he submitted that the though the assessments have been completed under scrutiny proceedings, however AO has not dealt with this issue or examine this aspect in the assessment orders and therefore, it cannot be held that there was an independent application of mind by the AO while allowing the deduction on the contrary in this year AO has duly examined this issue and hence the plea taken by the assessee cannot be accepted.

13. We have heard the rival submissions, perused the relevant material referred to at the time of hearing and also the relevant finding given in the impugned order. The assessee in the year 2007 had set up an Export Oriented Unit for which it was eligible for deduction u/s 10A / 10B. In the financial year 2010-11 another ‘SEZ unit’ was set up which started its operation in the assessment year 2011-12. It is an undisputed fact that in the first year of operation the assessee has claimed the deduction u/s 10AA which was duly supported by an audit report in Form 56F and such a claim has been allowed by the AO in scrutiny proceedings after completing the assessment u/s 143(3). Not only that, in the subsequent assessment year also, i.e., in the assessment year 2012-13, similar claim for deduction u/s 10AA has been allowed by the AO in the order passed u/s 143(3). All these details of the assessment order as well as Form 56F has been duly submitted before us in the paper book. Now in the third year of the operations, Ld. AO seeks to disturb the said eligibility of claim of deduction on the ground that there is some kind of splitting up or reconstruction of the old business in terms of clause (ii) of sub section (4) section 10AA. The conditions laid down in section 10AA (4) has to be seen on the date of formation, whether the undertaking has violated any conditions prescribed therein or not. If the conditions stipulated in the section has been accepted, that is, once the eligibility of deduction u/s 10A or 10B or 10AA has been accepted in the initial assessment year, then it cannot be withdrawn in the subsequent years for a breach of certain conditions which are required to be seen or examined in the first year of claim. Now it is a well settled propositions laid down in various judgments of the Hon’ble High Courts including that of the Jurisdictional High Courts as referred by the Ld. Counsel. The Hon’ble Bombay High Court in the case of CIT vs. Western Outdoor Interactive Pvt. Ltd. (supra) has held that whether a benefit of deduction is available for a particular number of years on satisfaction of certain conditions and under the provision of Act, then without withdrawing or setting aside the relief granted for the first assessment year in which claim was made and accepted, the AO cannot withdraw the relief for subsequent assessment years. This ratio was laid down in the context of section 10A. Once there is no change in the facts and circumstances of the case from the earlier years from the initial year when the claim has been accepted, then ostensibly deduction cannot be disallowed or denied in the subsequent years of claim This principle has been reiterated again in the case of CIT vs. Arts & Crafts Exports (Bombay) (supra); and CIT vs. Macbrout Engineering (P) Ltd. (supra) by the Hon’ble Bombay High Court. Hon’ble Jurisdictional High Court in the case of CIT vs. Tata Communication Internet Services Ltd. (supra) in the context of 80IA(3), concluded that bar as provided u/s 80IA(3) is to be considered only for the first year of claim for deduction u/s 80IA and not in the subsequent years. Here also in the case before the Hon’ble High Court, the AO has raked up the issue of splitting up or reconstruction of already existing business in the subsequent year, when in the first year of claim this issue was not disturbed. Lastly, in the case of CIT vs. Heartland Delhi Transcription Services (P.) Ltd. (Delhi HC) (270 CTR 373), the Hon’ble Delhi High Court in the context of section 10B had laid down the similar proposition. Relevant observation of the Hon’ble High Court reads as under:-

“10. Sub-section (1) refers to deduction of profit and gains of an undertaking. The deduction is to be allowed for a period of 10 years from the year in which undertaking begins to manufacture, produce etc. articles, things or computer software. The beginning and end points for claiming the deduction are stipulated. These have reference to the eligible undertaking. Sub-clause (ii) to Section 10B(2) incorporates a negative condition and states that the undertaking must not be formed by splitting up or reconstruction of business already in existence. Clause (ii) refers to the date on which the undertaking mentioned in sub-section (1) is created or formed. On the date of formation, the undertaking should not violate the condition stipulated in clause (ii) i.e. that it should not be created by splitting up or reconstruction of a business already in existence. Clause (ii) does not have any reference to the period of 10 years stipulated in sub- section (1) to Section 10B, after an undertaking is formed or created without violation of clause (ii) to Section 10B(2). Clause (ii) to Section 10B(2) does not apply to the period, post formation of the undertaking, covered under sub- section (1), when the undertaking which at the time of formation meets the requirements of clause (ii) to Section 10B(2). The undertaking, of course meet the requirements and fulfil the condition that it manufactures or produces articles, things or computer software during the assessment year. The proviso equally supports the said interpretation as it also refers to the date of formation of the undertaking, for seeking benefit under Section 10B(I). The requirements under clauses (ii) and (iii) in this manner do not relate to the subsequent period, i.e. post or after formation.

11. We have already noted the factual position. It is an accepted and admitted fact that the undertaking was formed or created by HICS and there is no allegation or finding by the Assessing Officer that on the date of formation of the undertaking, there was violation of clause (ii) and (iii) to Section 10B(2). The undertaking, when it was formed, satisfied and duly fulfilled the requirements of the said clauses, as it was not formed by splitting up or reconstruction of a business already in existence. It was a new undertaking and there is no factual finding that at the time or establishment or formation of the undertaking, business already in existence was splitted or reconstructed. It is accepted that the plant and machinery procured at the time of formation was new.”

15. Following the aforesaid proposition and the ratio laid down by the Hon’ble High Courts including that of jurisdictional High Court, we hold that, once the claim of deduction u/s 10AA has been accepted in the first year of the operations and also in the second year, then in the third year same cannot be withdrawn by examining the factors which were required to be seen in the first year of the claim. Thus, on this ground alone, we hold that the AO cannot deny the claim of deduction u/s 10AA with the assessee in this year and hence is directed to allow the same.

16. Even on the merits, we find that none of the allegation which has been made by the AO appears to be correct, because if he see the expansion and growth of revenue of EOU unit and the revenue of the SEZ unit, as incorporated above, we find that there has been substantial increase in the revenue in the EOU unit also from the financial year 2011-12 to financial year 2016-17. Thus, it cannot be held that after the sun set period the revenue of the EOU has gone down. The chart as submitted by the Ld. Counsel clearly vitiates the observation and the finding of the AO; and hence on the point that there is a less growth of revenue in EOU unit and therefore, presumption can be drawn for splitting up or reconstruction of EOU unit is incorrect and cannot be upheld. Further we find that the assessee continued to make addition to the fixed assets in the SEZ unit independently and there is no iota of any material to show that the additions to the fixed assets has been by way of transfer from EOU units. Likewise from the perusal of the list of technical man power, we find that except for two or three employees out of 30 employees are newly hired and therefore, it is not a case where the old employees of EOU unit have been entirely shifted to SEZ unit which seems to be the allegation of the AO. Thus, all the issues raised by the AO does not hold ground on the facts and material placed before us and hence on factual matrix also we hold that assessee has not violated any of the conditions prescribed in section 10AA and therefore, it is entitled for claim of deduction u/s 10AA in this year.

17. Lastly, so far as ground relating to section 234B as raised vides ground No. 3 is concerned, the same is consequential and hence no adjudication is required and ground No. 4 relating to initiation of penalty proceedings is premature and the same is dismissed.

18. In the result the appeal of the assessee is allowed.

Order pronounced in the open court on 23rd January, 2018.