Case Law Details
IN THE ITAT BANGALORE BENCH ‘B’
Joint Commissioner of Income-tax (OSD), Circle-12(5), Bangalore
Versus
Valdel Engineers & Constructors (P.) Ltd.
IT Appeal No. 1370 (Bang.) of 2011
[Assessment year 2005-06]
September 28, 2012
ORDER
Jason P. Boaz, Accountant Member
This appeal by Revenue is directed against the order of Commissioner of Income Tax (Appeals)-V, Bangalore dt.21.10.2011 for Assessment Year 2005-06.
2. The facts of the case, in brief, are as under :
2.1 The assessee company, set up an approved STPI in the period relevant to Assessment Year 2002-03. In the course of the period relevant to the impugned Assessment Year 2005-06, the STPI undertaking was demerged and transferred to M/s. L & T Valdel Engineering Pvt Ltd. (i.e. the ‘Resulting Company’) in a scheme of demerger after due approval by the Hon’ble High Court of Karnataka vide its order in Co. P. No. 12/2005 dt.23.2.2005. In terms of the said court order, the ‘Appointed Date’ of demerger was 1.10.2004. The assessee i.e. the demerged company has been claiming deduction under section 10A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) in respect of the income of the STPI unit for and from Assessment Year 2002-03 onwards.
2.2 The assessee filed its return of income for Assessment Year 2005-06 on 31.10.2005 declaring income of Rs.2,12,73,211 after claiming deduction of Rs.1,16,68,627 under section 10A of the Act being the income attributable to the export turnover of the STPI unit from 1.4.2004 to 30.9.2004 i.e. the date of the demerger. The Assessing Officer disallowed the assessee’s claim for deduction under section 10A of the Act in the order of assessment passed under section 143(3) of the Act on 30.11.2007 for the following reasons :
(i) That it is clear from the record that the STPI unit was started only by splitting up of existing infrastructure and the undertaking formed by splitting up of business already in existence, as had been held in the course of assessment proceedings for the Assessment Year 2002-03 and therefore the assessee’s STPI unit is not eligible for deduction under section 10A of the Act.
(ii) In view of the fact that the STPI unit was demerged and transferred to M/s. L & T Valdel Engineering (P) Ltd. (Resulting Company) during the relevant period w.e.f. 1.10.2004, in accordance with the provisions of section 2 (19AA) of the Act, the provisions of section 10A (7A) become applicable and accordingly the assessee company is not eligible to claim deduction under section 10A of the Act for Assessment Year 2005-06.
2.3 Aggrieved by the order of assessment dt.30.11.2007, the assessee went in appeal before the CIT(A) challenging the denial of deduction under section 10A of the Act. The deduction under section 10A of the Act was allowed by the learned CIT(A) in his order dt.21.10.2011 following the decision of the co-ordinate bench of this Tribunal in assessee’s own case for Assessment Year 2003-04 and 2004-05 in ITA Nos.616 to 618/Bang/2008 dt.10.11.2010.
3. Revenue is now in appeal before us against the order of the learned CIT(A) dt.21.10.2011. The grounds of appeal raised by revenue are as under :
“1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.
2. The learned CIT (Appeals) erred in allowing the relief without appreciating that no new unit was set up by the assessee company and the undertaking was formed only by splitting the existing business and therefore, the assessee is not eligible to claim deduction under section 10A of the IT Act, 1961.
3. The learned CIT (Appeals) erred in allowing the relief, relying on the decision of the Tribunal in the assessee’s own case for earlier years, which has not been accepted by the department and appeals have been filed before the High Court under section 260A of the IT Act, 1961 against the decision of the ITAT.
4. The learned CIT (Appeals) erred in allowing the relief, relying on the order of CIT (Appeals) in the case of L & Tribunal Valdel Engineering Pvt. Ltd which has not been accepted by the department and an appeal has been filed before Tribunal against the CIT (Appeals)’s order.
5. The learned CIT (Appeals) erred in allowing the relief to the assessee without considering the provisions of section 10A(7A) which lay down that where any undertaking of an Indian Company is transferred to another Indian Company in a scheme of amalgamation or demerger, no deduction shall be admissible to the amalgamating or demerged company for the previous year in which the amalgamation or demerger took place.
6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
7. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.”
4. The grounds raised at S.Nos.1, 6 and 7 are general in nature and therefore no adjudication is called for thereon.
5.1 The grounds raised at S.Nos.2 to 5, are relevant to the issues of dispute in this appeal which need to be addressed.
5.2 The learned Departmental Representative’s arguments mainly relied on the order of assessment. The learned Departmental Representative conceded that the order of the ITAT in assessee’s own case for Assessment Years 2003-04 and 2004-05 in ITA Nos.616 to 618/BANG/2008 dt.10.11.2010 squarely apply to the issues raised in the grounds of appeal raised at S.Nos.2 and 3. He, however, argued that the learned CIT(Appeals) erred in granting relief in respect of the issues raised in grounds at S.Nos.4 and 5 by not considering the fact that the assessee is just not entitled to the deduction under section 10A of the Act for this impugned Assessment Year 2005-06 in terms of the provisions of section 10A(7A) of the Act which were introduced w.e.f. 1.4.2004 and hence applicable for the relevant period. The learned Departmental Representative took us through the provisions of section 10A(7A) and stated that it was amply clear from the provisions that under no circumstances was this assessee entitled to deduction under section 10A of the Act for Assessment Year 2005-06 in respect of income attributable to the STPI unit which stood demerged w.e.f. 1.0.2004 and thereby ceased to belong to the assessee w.e.f. 1.10.2004.
5.3.1 Per contra, the learned counsel for the assessee argued that the provisions of section 10A(1) of the Act state that a deduction of such profits and gains as are derived by an undertaking from the export of article or things or computer software shall be allowed under section 10A of the Act to the assessee in whose income, the income of the undertaking which is entitled to deduction under section 10A, is included and no part of such income shall be taxed for a period of ten years. In the instant case, it is the assessee who has shown the income of the undertaking for the period 1.4.2004 to 30.9.2004 as its income and has claimed the deduction under section 10A of the Act on such income which was correctly allowed by the learned CIT(Appeals), in as much as the same was not claimed or allowed as a deduction in the hands of the resulting company viz. M/s. L & T Valdel Engineering (P) Ltd.
5.3.2 The learned counsel for the assessee further stated that the provisions of section 10A(7A) are not in conformity with those of section 10A(1) of the Act. Whereas, section 10A(1) states that the deduction is to be allowed to the assessee who has included the income of the undertaking in its return of income vis-à-vis section 10A(7A) which states that it is the resulting company which is eligible for deduction under section 10A and not the demerged company. In the present case, it is the assessee, the demerged company, which has included the income for the period 1.4.2004 to 30.9.2004 in its return of income and not the resulting company.
5.3.3 The learned counsel for the assessee further reiterated the contention taken before the learned CIT(Appeals), that if it were to be held that the provisions of section 10A(7A) override the provisions of section 10A(1) and is applicable in the present instance, then as a natural corollary to this proposition the following situations would emerge :
(i) The income of the STPI unit, arising out of export of computer software from 1.4.2004 to 30.9.2004 will be allowed as a deduction in the hands of the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. and not in the hands of the demerged company i.e. M/s. Valdel Engineers & Constructors Pvt. Ltd.
(ii) More importantly, in the eyes of law, for the purposes of income tax, the entire undertaking i.e. STPI unit, which has carried out the export activity, shall be treated as one belonging to the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. for the entire relevant period 1.4.2004 to 31.3.2005 in which such demerger taken place and not as a unit belonging to the demerged company i.e. M/s. Valdel Engineers & Constructors Pvt. Ltd. even for the period 1.4.2004 to 30.9.2004. In effect, this would mean that the turnover of the STPI undertaking for the entire previous year ought to be treated as turnover of the resultant company i.e. M/s. L & T Valdel Engineering (P) Ltd. and no part of it should be treated as turnover of the demerged company i.e. the assessee company. Consequently the income arising from the export turnover of the STPI unit for the period 1.4.2004 to 30.9.2004 should be excluded from the total income of the assessee and be included as income of the resulting company i.e. M/s. L & T Valdel Engineering (P) Ltd. for the year ended 31.3.2005 relevant to Assessment Year 2005-06 and therefore the deduction under section 10A of the Act ought to be allowed in the hands of the resulting company i.e. M/s. L & T. Valdel Engineering (P) Ltd.
5.3.4 The learned counsel for the assessee placed reliance on the decision of the Hon’ble Apex Court in the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 in support of the contention that the income of the STPI unit for the entire year accrues only at the end of the year on 31.3.2005 and accrues to its owner on the said date i.e. the resulting company. The fact that in terms of the demerger the STPI unit was transferred to the resulting company as a going concern with all its assets and liabilities as on the date of transfer and without consideration only demonstrates that the resulting company is entitled to enjoy all the assets on the date of transfer and also be responsible for all the liabilities as on the said date irrespective of the fact whether the asset was acquired or the liability was contracted by the demerged company. The learned counsel for the assessee drew our attention to the petition filed before the Hon’ble High Court seeking permission for demerger and stated that the schedule contains assets and liabilities as on 30.9.2004 which stand transferred to the resulting company which includes the income of the STPI undertaking for this period amounting to Rs.1,16,68,627. The learned counsel for the assessee submitted that this transfer of income to the resulting company demonstrates that this income should therefore not be treated as income of the assessee.
5.3.5 The learned counsel for the assessee also argued that a harmonious reading of section 2(19AA) (which defines demerger) with section 72A(4) (which deals with the provisions relating to carry forward and set off of business losses and unabsorbed depreciation of an undertaking in the event of demerger) and section 10A(7A) (which states that only the resulting company is entitled to the benefits of section 10A for the year in which the demerger takes place) leads us to the following conclusions when an undertaking which enjoys the benefit of deduction under section 10A is demerged during the course of a financial year.
(i) The demerged company will not get any deduction under section 10A for the Assessment Year in which the demerger takes place, in respect of the said undertaking which stands demerged;
(ii) The resulting company shall be entitled to avail the deduction under section 10A for the Assessment Year during which the demerger takes place, in respect of the said undertaking which stands demerged;
(iii) The demerged company shall not be entitled to carry forward the business losses and unabsorbed depreciation relatable to the said undertaking for and from the assessment year during which the demerger takes place;
(iv) The resulting company shall be entitled to carry forward the business loss and unabsorbed depreciation relatable to the said undertaking for and from the assessment year in which the demerger takes place;
(v) The entire activities and operation of the said undertaking pertaining to the entire financial year during which the demerger takes place and the resultant profits / losses arising therefrom shall be assessable to tax in the hands of the resulting company for the assessment year during which the demerger takes place and not in the hands of the demerged company.
5.3.6 The learned counsel for the assessee has also filed written submissions, a paper book and the company petition filed before the Hon’ble High Court seeking permission for demerger.
6. We have heard both parties and carefully perused the material on record and proceed to decide the issues as under :
6.1 The grounds at S.Nos.2 & 3 : On the issue raised by Revenue in these grounds challenging the learned CIT(Appeals)’s action in granting of deduction under section 10A of the Act to the assessee, we find that the co-ordinate bench of this Tribunal in its order in ITA Nos.616 to 618/Bang/2008 dt.10.11.2010 has dealt with the very same issue therein in the assessee’s own case for earlier years and have held in favour of the assessee. We, therefore confirm the learned CIT(Appeals)’s order on this point as covered and consequently dismiss these two grounds raised by Revenue.
7. The grounds at S.No.4 : As regards the grounds of appeal raised by Revenue at S.No.4, we find that there is a factually incorrect statement in as much as it is claimed that the learned CIT(Appeals) has given relief to the assessee only based on the fact that the resulting company’s appeal, as regards its eligibility to be entitled to deduction under section 10A of the Act, was allowed by the jurisdictional CIT(Appeals). We find from a perusal of the impugned order of the learned CIT(Appeals) that he clearly states in para 6 thereof that respectfully following the decision of the ITAT, he allows the assessee’s deduction of Rs.1,16,68,627 under section 10A of the Act. We, therefore, dismiss the ground No.4 as factually incorrect.
8. The ground No.5 : In this ground Revenue submits that the learned CIT(Appeals) erred in allowing relief to the assessee without considering the provisions of section 10A(7A) of the Act which mandates that where any undertaking of an Indian company is transferred to another Indian company in a scheme of amalgamation or demerger, no deduction shall be admissible to the amalgamating or demerged company for the previous year in which the amalgamation or demerger took place. In order to see whether the provisions of section 10A(7A) apply to the facts of the case, its provisions are extracted hereunder :
“(7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger,-
(a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place.”
8.2 From a reading of section 10A(7A), it is clear that its provisions apply to a situation where an undertaking whose income is deductible under section 10A is transferred in a scheme of amalgamation or demerger before the end of the specified 10 years. In the present case the STPI undertaking of the assessee stands transferred in a scheme of demerger before the completion of the specified period and therefore provisions of section 10A(7A) of the Act apply. Further, clause (a) of section 10A(7A) specifically mandates that no deduction shall be admissible in the hands of the demerged company for the previous year in which the demerger takes place. In the instant case, the assessee is the demerged company and is to be denied deduction. 10A for the previous year 2004-05 relevant to Assessment Year 2005-06 as the demerger took place in the course of this period. It is clear from the aforesaid provisions that the assessee is not entitled to deduction under section 10A by virtue of the provisions of section 10A(7A) for Assessment Year 2005-06. We, therefore, allow the ground raised by revenue at S.No.5 to the extent of holding that the assessee is not entitled to any deduction under section 10A of the Act for Assessment Year 2005-06 in view of the provisions of section 10A(7A) of the Act.
9.1 Having held as above regarding ground No.5, we examine the alternate contention of the assessee, that no part of the income of the STPI undertaking which got demerged from the assessee and came to be merged with the resulting company on and from 1.10.2004, be assessed in the hands of the assessee for Assessment Year 2005-06 as the same is to be assessed only in the hands of the resulting company i.e. M/s. L & T Valdel Engineering (P) Ltd. In this regard, the provisions of section 2(19AA) which define demerger and deal with the consequences thereof are extracted here below :
“(19AA) “demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that –
(i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;
(iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company;
(v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become share-holders of the resulting company or companies by virtue of the demerger,
otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf.
Explanation 1.- For the purposes of this clause, “undertaking” shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Explanation 2. – For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall include –
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger.
Explanation 3.- For determining the value of the property referred to in sub-clause (iii), any change in the value of assets consequent to their revaluation shall be ignored.
Explanation 4.- For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils such conditions as may be notified in the Official Gazette, by the Central Government.”
9.2 It is clear from the above definition that an STPI unit is seen as a distinct and separate business entity by the Income Tax Act which mandates that separate set of books of accounts be maintained in respect of the STPI undertaking and the income of the STPI unit be determined from the books of accounts so maintained. The I.T. Act also does not regard the demerger as a sale. It is only because of this reason that the Act does not consider the transfer of an undertaking upon demerger as amounting to a sale or splitting up of an existing unit and allows the resulting company to continue to enjoy the benefits bestowed under section 10A of the Act. In fact from the scheme of amalgamation as referred to in para 16 of the Hon’ble High Court order (filed before us as part paper book) approving the demerger, it is stated that all liabilities, dues and obligations of the demerged undertaking including accretions and appurtenances thereto be transferred and vested in the resulting company as a Going Concern so as to become as and from the appointed date, the estate, assets, rights, claims, titles and interest of the resulting company. By virtue of the fact that the STPI undertaking is transferred to the resulting company as a Going Concern, it is the resulting company that is going to enjoy the profits or losses of the STPI unit as on 31.3.2005.
10. It is also necessary to refer to the provisions of section 72A(4) of the Act which deals with the carry forward and set off of business losses and unabsorbed depreciation in case of demerger, etc and therefore the relevant provision is extracted here below :
“72A(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall-
(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;
(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.”
A perusal of the provisions of section 72A(4) reveal that it considers the undertaking which is demerged as a distinct and separate business entity in as much as once it stands demerged, the carry forward losses and unabsorbed depreciation allowance which are relatable to the said undertaking and available for set off only in the hands of the resulting company and no part of it is allowed to be set off in the hands of the demerged company after the demerger.
11.1 After perusal and consideration of the provision of sections 2(19AA), 10A(1), 10A(7A) and 72A(4) of the Act, it is necessary to arrive at a harmonious construction to assume that the intention of legislature is not frustrated especially in view of the decision of the Hon’ble Apex Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597wherein the Hon’ble Apex Court has ruled that a literal construction of a statute that leads to an absurdity, or unjust result or mischief is to be avoided.
11.2 In the instant case as per the provision of section 10A(1) of the Act, the income of the STPI undertaking for the period relevant to Assessment Year 2005-06 is exempt from tax and in respect of which fact there is no dispute. The assessee (the demerged company) has shown the income of the STPI undertaking for the period 1.4.2004 to 30.9.2004 as its income and the resulting company has shown the income of the STPI undertaking for the period 1.10.2004 to 31.3.2005 as its income. In view of the provisions of section 10A(1) of the Act, the entire income of the STPI undertaking from 1.4.2004 to 31.3.2005 is exempt from tax. In accordance with the provisions of section 10A(7A) of the Act, the assessee (the demerged company) is not entitled to any deduction under section 10A for Assessment Year 2005-06 as it is the resulting company which is entitled to deduction for Assessment Year 2005-06.
11.3 If the income of the STPI undertaking for the period 1.4.2004 to 30.9.2004 were to be assessed in the hands of the assessee, then the income become fully taxable as in accordance with the provision of section 10A(7A), the same is not eligible for deduction in the hands of the assessee and in which event it runs contrary to the provisions of section 10A(1) of the Act. This leads to what the Hon’ble Apex Court termed as an absurdity, or unjust result or mischief, keeping in view the object, intent and purpose of legislating section 10A of the I.T. Act, 1961.
11.4 In order to avoid this absurdity or unjust result or mischief, it is necessary that the income of the undertaking for the entire year from 1.4.2004 to 31.3.2005 is deemed to be the income of the resulting company and no part of it be deemed to belong to the assessee. This finding of ours is also in consonance with the decision of the Hon’ble Apex Court in the case of Ashokbhai Chimanbhai (supra) relied on by the assessee. Further, as submitted by the learned counsel for the assessee, Schedule 9 forming part of the application made before the Hon’ble High Court demonstrates that the resulting company is the destination for the surplus of the STPI undertaking for the period 1.4.2004 to 30.9.2004 and this fact is also in line with the proposition laid down by the Hon’ble Apex Court in the said case.
11.5 It would also be only proper for us to set right the anomalies, if any, and ensure that the correct taxable income be assessed inspite of the fact that the assessee may have returned income not belonging to it. This would be in accordance with the decision of the Hon’ble jurisdictional High Court of Karnataka in the case of Bhandari Metals & Alloys (P) Ltd. v. State of Karnataka [2004] 136 STC 292 as well as other High Courts –
(i) CIT v. Jai Parabolic Springs Ltd. [2008] 306 ITR 42
(ii) Choksi Metal Refinery v. CIT [1977] 107 ITR 63 (Guj.)
(iii) Parekh Bros v. CIT [1994] 150 ITR 105
11.6 The fact that the book entries made by the assessee may not by themselves lead to the conclusion arrived at by us is not material as the book entries at best represent hypothetical income and did not represent the real income which had actually accrued to the assessee during the impugned assessment year 2005-06. This legal proposition also finds support in the decision of the Hon’ble Apex Court in the following cases :
(i) CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC)
(ii) Godhra Electricity Co. v. CIT [1997] 225 ITR 746
11.7 Further, the benefits of section 10A of the Act being a beneficial provision, has to be available completely and no portion of it is to be denied on the ground that the same has not been claimed by the right person. The decision of the Hon’ble Apex Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 highlights the importance of ensuring that the benefits conferred by a beneficial section reached the intended person.
11.8 In the light of the discussions above, with respect to the alternate contention of the assessee w.r.t. the ground raised at S.No.5, we hold that no part of the income of the STPI undertaking for the Assessment Year 2005-06 is to be treated as income of the assessee. The Assessing Officer is directed to delete the income of Rs.1,16,68,627 pertaining to the demerged STPI undertaking from the taxable income of the assessee and pass necessary orders to give effect to the same so that the said income of Rs.1,16,68,627 is treated as income of the resulting company namely M/s. L & T Valdel Engineering (P) Ltd for Assessment Year 2005-06 and be brought to tax accordingly in its hands in accordance with the directions laid down in this order.
12. In the result, this appeal is disposed off as indicated above.
