Merely having same partners or employees doesn’t mean that a new entity is formed by splitting of existing business

The Hon’ble Himachal Pradesh High Court in the case of CIT vs. M/s Yash International Inc. held that the fact that the new firm has almost the same partners and some workers of existing firm shifted to new firm’s unit cannot make the new entity arising as result of splitting up of the existing one. It is because new entity has its own independent existence and its survival does not depend on the existing entity’s future business prospects.

Facts of the case:

• Assessing officer during the course of assessment proceedings disallowed the deduction claimed u/s 80IC on the ground that the new partnership firm was formed by splitting up the existing partnership firm having the same partners which utilizes the infrastructure and employees of the existing firm.
• The assessee filed an appeal before the Commissioner of Income Tax (Appeals) and the same was allowed by CIT (Appeals). ITAT also upheld the order passed by CIT (Appeals).
• Aggrieved by the same, revenue is now appeal before the Hon’ble Himachal Pradesh High Court.

Contention of the Assessee:

• The new firm although have all partners of the existing firm but also one new partner and the new firm has its existence independent of the existing firm. Further, it obtained separate registration under industrial laws and made investment which has resulted in having installed capacity more than that of the existing firm.
• Considering all these factors the new entity could not be said to be formed by splitting up the existing one.

Contention of the Revenue:

• The existing firm M/s Yash Electrical has formed a unit M/S Yash International having same partners as in the case of M/S Yash Electricals with only addition of wife of one of the partner as new one who did not contribute any capital and simply sharing of profit at the end of the year.
• Even the workers working in the industrial unit of the existing firm were shifted to the unit. And most importantly the control and management of the existing and new unit remained the same.

• All these facts indicate that new unit has been formed by splitting up the existing one , and , therefore one of the condition to claim deduction u/s 80IC remain unsatisfied.

Issue before the High Court:

Whether a new partnership firm which has been formed by the same partners of an existing partnership which utilizes the infrastructure and employees of the existing firm, would be entitled to deduction under Section 80 IC of the Income Tax Act?

Held by Hon’ble High Court:

• From the facts of the case it is clear that assessee firm has obtained new PAN No. and other registrations and had made investment in plant & machinery and building.
• The Assessing Officer has erred in law by coming to the conclusion that the new undertaking was formed by splitting up of business, already in existence.
• The Assessing Officer has ignored the quantum of fresh capital, investment in plant and machinery, new building, new registration with HP Industrial Corporation and Small Scale Industry registration and PAN number. The shifting of the employees would also not affect the constitution of the new firm to avail the benefit under Section 80 IC of the I.T. Act.
• The court relied on the decision of Hon’ble Supreme Court in the case of Textile Machinery Corp. Ltd. splitting of existing undertaking if there is new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved.
• Applying the ratio of the same judgment to the facts of present case, the new undertaking has separate and independent existence from the existing one and is viable even without the existing unit