Case Law Details
Brief of the Case
ITAT Lucknow held in the case of DCIT vs. M/s E-Soft Technologies Ltd. that as per the CBDT Circular No. 01 of 2013 and as per the Tribunal decision of the Pune Bench in the case of ACIT Vs Symantec Software India P. Ltd in ITA No. 787/PN/09, dated 30th November 2011, it was held that physical demarcation is not a criteria to decide the eligibility of deduction under section 10A so long as the new unit is independent of the old existing unit. Physical independence of the two units is not envisaged in section 10A (2) (ii) and 10A (2) (iii) read with explanation 2 to section 80I. Also as per explanation 2 to section 80I which prohibits transfer of more than 20% of old total plant & machinery to new unit, CIT (A) has given a clear finding that the total assets purchased in new unit is separately shown at Rs.29,20,233/- and therefore, this confusion of the Assessing Officer regarding transfer of more than 20% of the total plant & machinery of old unit to new unit is not correct. Hence deduction u/s 10A cannot be denied.
Facts of the Case
The assessee company is in existence since 1999 and during the year under consideration, it set up a unit for 100% export of computer software. For the said purpose approval was obtained by it from Software Technologies Park of India (STPI) and was allowed such approval with effect from 16.10.2008. The AO examined the claim of deduction under section 10A and found that- On reference to the application submitted to the STPI it was noticed that the assessee was using point to point leased lines and internet leased lines of the existing unit. Separate books of accounts were not maintained in respect of the new unit. The report of the Income Tax Inspectors who carried on spot inquiries reported that there was no demarcation to show that the new unit was separate from the existing unit. On examination of fixed assets schedule, the AO concluded that old assets were more than 20% of the total assets. Based on above observations the AO concluded that the new unit was formed by splitting up and reconstruction of old unit and there was transfer from old unit to new unit. After examination the AO found the assessee in violation of provisions and disallowed deduction of Rs. 59,44,003/- under section 10A.
Contention of the Assessee
The ld counsel of the assessee supported the order of CIT (A). He also placed reliance on the judgment of Hon’ble Karnataka High Court rendered in the case of CIT vs. Expert Outsource (P) Ltd. [2013] 358 ITR 518 (Kar). He submitted that in this case, the STP unit was registered on 04/08/2004 and the assessee started business operations from 29/12/2003 and under these facts, the Assessing Officer disallowed the claim of the assessee for deduction u/s 10A on the basis that the assessee has used the machinery previously used, which is more than 20% of the total plant & machinery and under these facts, the claim of the assessee was allowed by CIT (A) in that case and the order of CIT(A) was approved by the Tribunal and when the Revenue carried the matter in appeal before Hon’ble Karnataka High Court, Hon’ble Karnataka High Court has upheld the Tribunal order. He also submitted that in the present case, the facts are similar and therefore, the issue is covered in favour of the assessee by this judgment of Hon’ble Karnataka High Court.
Held by CIT (A)
CIT (A) held that the first issue is the observations of the AO that separate books of accounts have not been maintained, the relevant circular clearly draws out the conclusion that there is no requirement in Section 10A of the Act to maintain separate books of accounts. The issue was also examined by the Bangalore Bench of Hon’ble ITAT in I.T.A No.1151Bang/2009 in the case of IBM India P. Ltd. v. Deputy Commissioner of Income Tax.
Further AO referred to the application made by the appellant to STPI to conclude from the submissions made in the column relating to communication requirements that the new unit was using the point to point leased lines and internet leased lines of the existing unit. I find that the conclusion has been drawn by the AO without providing opportunity to the appellant to explain the issue. I find that the application for the approval of STPI was made on 25.07.2008 and application for installation of leased lines and internet leased circuits was made to Sify Technologies Limited on 24.07.2008. The bills of Sify Technologies Limited show the customers reference date as 24.07.2008. The facts show that the new unit is using separate communication lines for internet usage.
Further reliance of the AO on the report of the Income Tax Inspectors (ITI) is not justifiable as the report was not confronted to the appellant. Moreover, the Ill’s conducted their spot inquiries on 26.12.2011 whereas the unit claiming deduction under section 10A was functional only till 31.03.2011. In other words on the date on which the inquiries were conducted, the unit in respect of which the inquiries were conducted was not in operation. Nevertheless, the report of the ITI outlines that the new unit was operating at the same place and there was no demarcation between the old unit and new unit. I am of the considered view that physical demarcation is not a criterion to decide the eligibility of deduction under section 10A of the Act so long as the new unit is independent of the old existing unit. Physical independence of the two units is not envisaged in section 10A (2) (ii) and 10A (2)(iii) read with explanation 2 to section 80I.
Further the AO concluded that the percentage of old plant and machinery was more than 20% of the total plant and machinery, we find that The provisions of section 10A (2)(ii) and 10A(2)(iii) read with explanation 2 to section 80I of the Act prohibit splitting up or reconstruction of an existing business or transfer of old plant and machinery of more than 20% to the new unit for claiming deduction under section 10A of the Act. In the instant case the appellant has made substantial investment of Rs. 20,19,323/- in assets for the new business for which approval was granted by the STPI. In order to hold that a business was formed by splitting up of a business already in existence, there must be some material to hold that either some assets of the existing business are diverted and another, new business is set up from such splitting up of assets or that the two businesses were same and the one formed was an integral part of the earlier one. However, if the alterations or changes are substantial, there would be little scope of describing what emerges as a reconstruction of business.
Held by ITAT
ITAT held that objection of the Assessing Officer that the assessee has not maintained separate books of account, CIT (A) has referred to a Tribunal order of Bangalore Bench of I.T.A.T. in the case of IBM India P. Ltd. v. Deputy Commissioner of Income Tax I.T.A No.1151Bang/2009 along with CBDT Circular No. 01 of 2013 dated 17/01/2013 and held that there is no requirement of maintaining separate books of account u/s 10A and non maintenance of separate books of account cannot be basis for disallowing the claim of deduction u/s 10A. On this aspect, we do not find any infirmity in the order of learned CIT (A).
Regarding the second objection of the Assessing Officer that the new unit was using the point to point leased lines and the internet leased lines of the existing unit, CIT (A) has given clear finding that the payment of internet charges of Rs.3,12,876/- has been shown to have been made by the assessee and therefore, it is seen that the new unit is using separate communication line for internet usage. He has also noted that the Assessing Officer has relied upon the report of Income Tax Inspector but it is not justifiable because the report was not confronted to the assessee. He has also noted that the Income Tax Inspector has conducted enquiry on 26/06/2011 whereas the unit is claiming deduction u/s 10A only till 31/03/2011 and therefore, on the date on which the enquiry was conducted, the unit in respect of which the enquiry was conducted, was not in operation.
CIT (A) has also observed that the report of the Income Tax Inspector outlines that the new unit was operated on the same place and there was no demarcation between new unit and old unit but as per the CBDT Circular No. 01 of 2013 and as per the Tribunal decision of the Pune Bench in the case of ACIT Vs Symantec Software India P. Ltd in ITA No. 787/PN/09 for assessment year 2004-05), dated 30th November 2011, it was held that physical demarcation is not a criteria to decide the eligibility of deduction under section 10A of the Act so long as the new unit is independent of the old existing unit. Hence, in our considered opinion, on this aspect also, there is no infirmity in the order of CIT (A).
Regarding this objection of the Assessing Officer that the percentage of old plant & machinery used by new unit was more than 20%, a clear finding is given by the learned CIT(A) that the Assessing Officer has not correctly appreciated the facts. He has also given a finding that the provision of explanation 2 to section 80I of the Act prohibits transfer of more than 20% of old total plant & machinery to new unit but in the present case, there is no transfer of plant & machinery from old unit to new unit. He has also given a finding that the total assets purchased is separately shown at Rs.29,20,233/- and therefore, this confusion of the Assessing Officer regarding transfer of more than 20% of the total plant & machinery of old unit to new unit is not correct.
These findings of CIT (A) could not be controverted by Learned D.R. of the Revenue and hence, we do not find any reason to interfere in the order of CIT (A) in both the years because in assessment year 2010 – 11, the order of Assessing Officer and CIT (A) are in line with the respective orders in earlier year. Hence, we decline to interfere in the orders of CIT (A) in both the years.
Accordingly appeals of the revenue dismissed.
