IN THE ITAT CHENNAI BENCH ‘B’
Armstrong Knitting Mills (P.) Ltd.
Deputy Commissioner of Income-tax
IT APPEAL NO. 113 (MAD.) OF 2012
[ASSESSMENT YEAR 2007-08]
Date of Pronouncement – 04.01.2013
S.S. Godara, Judicial Member
This assessee’s appeal arises from the order of the Commissioner of Income Tax (Appeals) II, Coimbatore dated 25.10.2011 in IT Appeal No. 562/09-10 for the assessment year 2007-08, in proceedings under section 143(3) of the Income Tax Act, 1961 [in short the “Act”].
2. The assessee has raised following substantive grounds in the instant appeal:
“1&2.** ** **
3. The learned Assessing Officer has erred in not considering the fact that the sub section 3(ii) of section 80IA of the Income Tax Act, 1961 states that the new industrial undertaking should not be formed by the transfer to a new business of machinery or plant previously used for any purpose. In the order passed by him, Assessing Officer himself has mentioned the assets were originally purchased by the industrial undertaking and hence the subsection 3(ii) of Section 80IA will not apply to the assessee.
4, 5 & 6** ** **
7. The learned Commissioner of Income Tax (Appeals) has erred in not considering the fact that, only the rate at which amount is credited by the Tamilnadu Electricity Board in the assessee’s electricity bill towards the windmill generation of the assessee has been adopted by the assessee as the income of windmill and the assessing officer cannot adopt a notional rate in arriving the total receipts of the assessee in this case. Further, the learned CIT(Appeals) has not considered the decision of ITAT, Chennai in the case of M/s. Velayuthasamy Spinning Mills (P) Ltd. (ITA No. 850 (Mds)/2011) allowing the assessee to consider the buying rate from TNEB as the income of the undertaking.”
3. In support of the grounds raised, the AR has vehemently argued that the CIT(A) has erred in upholding the findings of the Assessing Officer that assessee’s claim of deduction is barred by section 80IA(3) of the “Act”. Therefore, by referring to case law of Hon’ble Delhi High Court titled as CIT v. Tata Communication Internet Services Ltd.  17 taxmann.com 241 he has prayed for acceptance of the appeal.
4. The DR representing the Revenue, on the other hand, has chosen to strongly support the findings of the CIT(A) and prayed for confirming the same.
5. We have heard both parties and perused the orders of the Assessing Officer as well as CIT(A). The case law cited by the assessee has also been gone through. Undisputed facts of the instant case are that the assessee is a company engaged in the business of power generation from windmills. For the impugned assessment year i.e. 2007-08, it had filed its ‘return’ on 19.11.2007 disclosing income of “NIL” under the normal provisions and Rs. 29,72,939/- under section 115JB. In ‘scrutiny’ proceedings, the Assessing Officer noticed that the assessee had earlier purchased the windmills in question and produced 18488 units of power upto 10.02.2003 and upto 31.03.2003, the production was 48600 units. The Assessing Officer was of the opinion that since the windmills were put to use by the assessee for producing wind power and thereafter it had sold the same to its sister concern namely M/s. Armstrong Knitting Mills (Firm) who executed a lease agreement with the assessee for leasing out the windmills in lieu of lease rent along with additional charge of Rs. 0.50 per unit of the energy, the assessee was not eligible for claiming deduction under section 80IA of the “Act”.
6. The assessee’s explanation before the Assessing Officer was that it was entitled for deduction under section 80IA of the Act and the relevant provisions in the said section i.e. 80IA(3)(i) & (ii) do not apply. The Assessing Officer was not convinced. Hence, vide the assessment order dated 24.12.2009, he held that assessee’s claim was hit by section 80IA(3) of the “Act” since the undertaking in question had been formed by transfer to a new business of machinery, plant previously used “for any purpose”. On merits also, the Assessing Officer opined that since there was no profit after setting up of unabsorbed business loss and depreciation under section 80B(5) read with sections 72(2) and 32(2) of the “Act”, the assessee’s case was also not eligible for deduction. He also opined that per section 80IA(8) of the “Act”, profit had to be computed at the sale price per unit charged by the assessee instead of that charged by the TNEB from its consumers. Accordingly, the Assessing Officer computed assessee’s income as Rs. 29,72,938/-.
7. Aggrieved, the assessee carried the matter in appeal. The CIT(A) has also affirmed the findings of the Assessing Officer on maintainability of the claim of deduction in assessee’s case by relying on section 80IA(3) clauses (i) & (ii) of the “Act”.
It is in this backdrop that the assessee is in appeal before us.
8. After perusing the findings of the Assessing Officer and the CIT(A), it is evident to us that the assessee had earlier purchased the windmill in question, generated wind energy, sold the windmill to its sister concern and got the same leased back and raised claim of deduction in hand. The moot question before us is as to whether the said course of action adopted by the assessee is hit by section 80IA(3) or not. At this stage, we deem it appropriate to reproduce the said provision, which reads as under:
(3) This section applies to an undertaking referred to in clause (ii) or clause (iv) or clause (vi) of sub-section (4) which fulfils all the following conditions, namely :-
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose:
A perusal of the above said provision makes it clear that while enacting section 80IA of the “Act” for providing deduction to the undertakings engaged in infrastructure development, the legislature has incorporated the above deduction provision. At the same time, in sub-section (3), the legislature has also stipulated some conditions which are to be satisfied i.e. the undertaking in question should not be formed by splitting or reconstruction of a business already in existence and it should not be formed by the transfer to a new business of machinery or plant previously used “for any purpose”. The assessee, in this case, had earlier purchased the windmill, sold it and later on got it leased back. Meaning thereby that its business stood split up since the assessee’s status as proprietor of the plant changed to that of a lease holder. In our view, the same amounts to splitting up for the purpose of the above said legislative provision. Hence, section 80IA(3)(i) is applicable in the instant case.
Similarly, we are also of the view that assessee’s case is also hit by section 80IA(3)(ii) as the assessee had earlier sold the business the windmill plant stood transferred to its sister concern. The sister concern leased back the windmill to the assessee. It has come on record that the assessee had also produced wind power in the year 2003 (supra). Therefore, as per sub-clause (ii) of section 80IA(3), once the machinery or plant previously used for ‘any purpose’ is transferred to a new business, the concerned undertaking is not entitled for deduction. In the instant case and in view of the circumstances involved herein, we hold that since the plant previously used for generating power stood transferred to a new business of its sister concern, the condition above said would come to play in these circumstances. The legislature in its wisdom has deliberately laid emphasis in using the word “any purpose”, which is of widest possible amplitude being inclusive in nature covering the facts of the instant case. So far as case law (supra) cited by the assessee is concerned, we are of the view that the same is not applicable qua the peculiar facts and circumstances of the case. In the said case, the assessee’s claim of deduction had satisfied the condition enshrined in section 80IA(3) of the “Act”. In view of the said factual position, their Lordships have upheld the concerned assessee’s claim. We also deem it appropriate to reproduce the relevant portion herein below:
“10. There is no dispute with regard to the fact that Clause (ii) of the Section 80IA (4) was inserted in Section 80IA(3) by the Finance Act II of 2004 with effect from 1.4.2005 and that this was not with retrospective effect. It became applicable only after its insertion with effect from 1.4.2005. The Circular issued by DBDT explaining the provisions of Finance Act II of 2004 testifies the fact that this insertion took effect from 1.4.2005 and is to apply in relation to the assessment year 2005-06 and subsequent years. The first claim of the assessee for deduction under Section 80IA indisputably was for assessment year 2004-05. The Tribunal has rightly recorded that the business of fax and email has been started by the assessee in 1997 and the business of providing internet services during the year 2000 being from 17.10.2000, the relevant assessment year 2001-02. The question for consideration would be as to whether there was any violation of provisions in the claim of deduction under Section 80IA(4)(ii) of the Act for assessment year 2001-02 or at the maximum for the first year of deduction under Section 80IA being the assessment year 2004-05. Admittedly, the assessee was granted deduction under Section 80IA for the assessment year 2004-05. The Tribunal was right in holding that the revenue could not pick up the assessment year granting claim holding that there was violation of provisions of Section 80IA(3) on the ground that the business was formed by splitting up and reconstruction of business already in existence or that it was formed by transfer of plants and machinery to the new business. The bar as provided under Section 80IA(3) is to be considered only for the first year of claim for deduction under Section 80IA. Once the assessee is able to show that it has used new plants and machinery which has not been previously used for any purpose and the new undertaking is not formed by splitting up or reconstruction of business already in existence, it is entitled to the deduction under Section 80IA for subsequent years. Since the assessee had been granted claim of deduction right from the assessment year 2004-05 under Section 80IA, consequently it cannot be denied deduction for the subsequent years inasmuch as restrain of Section 80IA(3) cannot be considered for every year of claim of deduction, but can be considered only in the year of formation of the business.
11. Be that as it may, Clause (ii) of Section 4 of Section 80IA was inserted in sub clause 3 of Section 80IA with effect from 1.4.2005 and the business of the assessee had been formed and started much prior to that. The restriction placed by Section 80IA(3) to the provisions of 80IA(4)(ii) would not bar the assessee for continuing its claim of deduction under Section 80IA. Since the provisions of 80IA(3) are not applicable to the present assessee, it having commenced its business much prior to 1.4.2005, Section 80IA(3) would not disentitle it from claiming deduction under Section 80IA on its income from internet services and internet telephony services.
12. In our view, the Tribunal was right in holding that the assessee could not be said to have been formed by splitting up or reconstruction of the business already in existence as its business had commenced after 1.4.1995 and before 31.3.2005 and the assessee had started its business of fax and email services right from the financial year 2003 and 2005 and it continued to carry on the business of internet telephony.
13. Insofar as the objection of the revenue that there had been change in the name of pattern of shareholding it does not make any difference as it is a well settled rule of law that benefit under Section 80IA of the Act is available to an undertaking and not to the assessee since the undertaking continues to carrying on its business without any reconstruction of business already in existence.
14. Even otherwise, on merits the conditions under Section 80IA(3) of the Act are seen to be fully met by the assessee and on this ground also the assessee is entitled for deduction under Section 80IA of the Act. The first contention is that section 80IA(3) of the Act provides that the eligible business is not formed by splitting up or reconstruction of the business already in existence. It may be noticed that the assessee started its new business in the existing company and the said business could not be said to have been formed either by splitting up or reconstruction of the existing business. It is to be noted herein that the business of providing internet services was awarded by the government to the assessee in the year 1999. The second contention of applicability of section 80IA(3) regarding use of old plants and machinery is also not relevant in the case of the present assessee as the business of assessee had not come into existence or formed by transfer of any old plants and machinery. The license was granted to the assessee on 5.1.1999 and it purchased new plants and machinery worth Rs. 5.65 crore during the financial year 2000-01 for this telecommunication business.”
A perusal of the above said extract of the judgment clarifies that since the assessee had been able to get its claim of deduction by satisfying conditions enumerated by sub-section (3) of section 80IA, the Hon’ble High Court had rejected the contention of the Revenue. Whereas, in the instant case, the facts are otherwise, wherein the present assessee has failed to satisfy the above said condition. Hence, while affirming the findings of the CIT(A), we also hold that assessee’s claim of deduction under section 80IA is not liable to be accepted being violative section 80IA(3) of the “Act”. Therefore, the order of the CIT(A) is confirmed.
9. Coming to ground 7 of the assessee’s appeal. Since we have disagreed with assessee’s claim regarding maintainability of the claim, we also hold that this ground is also liable to fail as the same is only of academic significance.
10. In the result, the appeal of the assessee is dismissed.