1. Taxation Laws (Amendment) Act, 2019 inserted new section 115BAA in the Income Tax Act, 1961 (‘Act’) which provides as under:
Section 115BAB of Income-tax Act, 1961- Tax on income of new manufacturing domestic companies.
115BAB.(1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAA, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of fifteen per cent, if the conditions contained in sub-section (2) are satisfied:
Provided that where the total income of the person, includes any income, which has neither been derived from nor is incidental to manufacturing or production of an article or thing and in respect of which no specific rate of tax has been provided separately under this Chapter, such income shall be taxed at the rate of twenty-two per cent and no deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income:
Provided further that the income-tax payable in respect of the income of the person deemed so under second proviso to sub-section (6) shall be computed at the rate of thirty per cent:
Provided also that the income-tax payable in respect of income being short term capital gains derived from transfer of a capital asset on which no depreciation is allowable under the Act shall be computed at the rate of twenty-two per cent:
Provided also that where the person fails to satisfy the conditions contained in sub-section (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and subsequent assessment years and other provisions of the Act shall apply to the person as if the option had not been exercised for the assessment year relevant to that previous year and subsequent assessment years.
(2) For the purposes of sub-section (1), the following conditions shall apply, namely:—
(a) the company has been set-up and registered on or after the 1st day of October, 2019, and has commenced manufacturing or production of an article or thing on or before the 31st day of March, 2023 and,—
(i) the business 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 a company, business of which is formed as a result of the re-establishment, reconstruction or revival by the person of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in the said section;
(ii) does not use any machinery or plant previously used for any purpose.
Explanation 1.—For the purposes of sub-clause (ii), any machinery or plant which was used outside India by any other person shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:—
(A) such machinery or plant was not, at any time previous to the date of the installation used in India;
(B) such machinery or plant is imported into India from any country outside India; and
(C) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the person.
Explanation 2.—Where in the case of a person, any machinery or plant or any part thereof previously used for any purpose is put to use by the company and the total value of such machinery or plant or part thereof does not exceed twenty per cent of the total value of the machinery or plant used by the company, then, for the purposes of sub-clause (ii) of this clause, the condition specified therein shall be deemed to have been complied with;
(iii) does not use any building previously used as a hotel or a convention centre, as the case may be, in respect of which deduction under section 80-ID has been claimed and allowed.
Explanation.—For the purposes of this sub-clause, the expressions “hotel” and “convention centre” shall have the meanings respectively assigned to them in clause (a) and clause (b) of sub-section (6) of section 80-ID;
(b) the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it.
Explanation.—For the removal of doubts, it is hereby clarified that the business of manufacture or production of any article or thing referred to in clause (b) shall not include business of,—
(i) development of computer software in any form or in any media;
(ii) mining;
(iii) conversion of marble blocks or similar items into slabs;
(iv) bottling of gas into cylinder;
(v) printing of books or production of cinematograph film; or
(vi) any other business as may be notified by the Central Government in this behalf; and
(c) the total income of the company has been computed,—
(i) without any deduction under the provisions of section 10AA or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) or sub-section (2AB) of section 35 or section 35AD or section 35CCC or section 35CCD or under any provisions of 79[Chapter VI-A under the heading “C.—Deductions in respect of certain incomes” other than the provisions of section 80JJAA];
(ii) without set-off of any loss or allowance for unabsorbed depreciation deemed so under section 72A where such loss or depreciation is attributable to any of the deductions referred to in sub-clause (i).
Explanation.—For the removal of doubts, it is hereby clarified that in case of an amalgamation, the option under sub-section (7) shall remain valid in case of the amalgamated company only and if the conditions contained in sub-section (2) are continued to be satisfied by such company; and
(iii) by claiming the depreciation under the provision of section 32, except clause
(iia) of sub-section (1) of the said section, determined in such manner as may be prescribed.
Explanation.—For the purposes of clause (b), the “business of manufacture or production of any article or thing” shall include the business of generation of electricity.
(3) The loss referred to in sub-clause (ii) of clause (c) of sub-section (2) shall be deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.
(4) If any difficulty arises regarding fulfilment of the conditions contained in sub-clause (ii) or sub-clause (iii) of clause (a) of sub-section (2) or clause (b) of said sub-section, as the case may be, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty and to promote manufacturing or production of article or thing using new plant and machinery.
(5) Every guideline issued by the Board under sub-section (4) shall be laid before each House of Parliament, and shall be binding on the person, and the income-tax authorities subordinate to it.
(6) Where it appears to the Assessing Officer that, owing to the close connection between the person to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the person more than the ordinary profits which might be expected to arise in such business, the Assessing Officer shall, in computing the profits and gains of such business for the purposes of this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:
Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F:
Provided further that the amount, being profits in excess of the amount of the profits determined by the Assessing Officer, shall be deemed to be the income of the person.
(7) Nothing contained in this section shall apply unless the option is exercised by the person in the prescribed manner on or before the due date specified under sub-section (1) of section 139 for furnishing the first of the returns of income for any previous year relevant to the assessment year commencing on or after 1st day of April, 2020 and such option once exercised shall apply to subsequent assessment years:
Provided that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.
Explanation.—For the purposes of section 115BAA and this section, the expression “unabsorbed depreciation” shall have the meaning assigned to it in clause (b) of sub-section (7) of section 72A.
2. Section 115BAB provides for concessional rate of income @15% subject to fulfilment of following stipulated conditions:
- That the new company must be incorporated after 1st October, 2019 and commences manufacturing activities before 31st March, 2023
- That it is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it
- That the business is not formed by splitting up, or the reconstruction, of a business already in existence
- That it does not use any machinery or plant previously used for any purpose. In case of used imported machine, such machine should not have been used in India earlier at any point of time. In case previously used machine is put to use, then it should not constitute more than 20% of the total plant and machinery used by the company.
- That it does not use any building previously used as a hotel or a convention centre, as the case may be, in respect of which deduction under section 80-IDhas been claimed and allowed
3. Many companies are intending to make use of this golden opportunity by shifting their manufacturing businesses to a new newly incorporated company either by hiving off a part of existing manufacturing process or setting up a new manufacturing capacity. The biggest challenge that can arise in such situations is that the new company be said to have been formed by splitting up or reconstruction of the business already in existence.
4. It is pertinent to state that the words ‘Splitting’ or ‘Reconstruction’ has not been defined anywhere in the Act. Therefore reference has to be drawn from the various judicial pronouncements defining the meaning of Splitting up or Reconstruction. Some of the most prominent rulings in this regard are as under:
- Hon’ble Supreme court in the matter of Textile Machinery Corporation Ltd. v. CIT (107 ITR 195), whiling explaining the word reconstruction held as under:
“14. We endorse the above views with regard to reconstruction of business.
Reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business. It is stated on behalf of the Revenue that the same company in the instant case continues to do the same business of heavy engineering—no matter certain spare parts necessary as components to completion of the end-product are now manufactured in the business itself. The fact that the assessee is carrying on the general business of heavy engineering will not prevent him from setting up new industrial undertakings and from claiming benefit under s. 15C if that section is otherwise applicable. However, in order to be entitled to the benefit under s. 15C, the following facts have to be established by the assessee, subject always to time-schedule in the section :
(1) investment of substantial fresh capital in the industrial undertaking set up,
(2) employment of requisite labour therein,
(3) manufacture or production of articles in the said undertaking,
(4) earning of profits clearly attributable to the said new undertaking, and
(5) above all, a separate and distinct identity of the industrial unit set up.
We may add that there is no bar to an assessee carrying on a particular business to set up a new industrial undertaking on account of which exemption of tax under s. 15C may be claimed.
- Further Hon’ble Supreme court in the matter of CIT v. Green Fire Exports (106 taxmann.com 33) dismissed the department appeal and upheld the ruling of the Hon’ble Rajasthan High Court in the matter of Pr. CIT v. Green Fire Exports (105 taxmann.com 32). Further Hon’ble Rajasthan while passing the order followed its own order in Pr. CIT v. Green Fire Exports (ITA No. 10/2016) wherein it was held as under:
“7. Mr. Pathak has also taken us to the order of the Tribunal in paras 4.7 & 4.8 which reads as under:
“4.7 The Hon’ble Apex Court in the case of Textile Machinery Corporation Ltd. (supra) has also approved the observations of the Hon’ble Bombay High Court in the case of CIT v. Gaekwar Foam. And rubber company Ltd. 35 ITR 662 The Hon’ble Bombay High court has held that reconstruction of business or industrial undertaking must necessarily involve the concept that the original business or undertaking do not cease functioning and its identity is not to be lost or abandoned. The underlying idea of a reconstruction is of a “business already in existence” – there must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to do same business though in some altered or varied form. In the instant case the earlier industrial undertaking was owned by Smt. Kamlesh Dangayach while the present undertaking is owned by the firm. The firm is separate entity under the income tax Act and the earlier industrial undertaking of the assessee must cease to the function. The deduction u/s. 10 AA is undertaking specific. The Hon’ble Allahabad High Court in the case of CIT v. Modi Spinning and Manufacturing 125 ITR 361 had occasion to consider to the allowability of deduction u/s. 15C of IT. Act 1922. The revenue argued that the assessee has expended the business and therefore the undertaking should be considered to have been formed as the result of reconstruction. The tribunal in this case observed that the unit was bigger then the unit which the assess has already there and there were new features in the new unit. The Hon’ble Allahabad High Court observed that every new creation in business is some kind of expansion and advancement. If the undertaking is new and identitiable undertaking, separate and distinct, foom the existing business then it will not be reconstruction of business already in existence…..
- Further the Apex court in the matter of CIT v. Orient Paper Mills Ltd. (176 ITR 110) held as under:
Reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business. If any undertakings is not formed by reconstruction of the old business, that undertaking will not be denied the benefit of section 15C of the 1922 Act [correspondent to section 80J of the 1961 Act] simply because it goes to expand the general business of the assessee in some directions. Where the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without complete absorption and losing their identity in the old business, they are not to be treated as business formed by reconstruction of the old business. Use by the assessee of the articles produced in its existing business or the concept of expansion are not decisive tests. Sub-section (2) of section 15C has a negative as well as a positive aspect. Negatively, the new industrial undertaking of the assessee should not be found—
(1) by the splitting of the business already in existence,
(2) by the reconstruction of business already in existence, or
(3) by the transfer to a new business of building, machinery or plant used in a business which was being carried on before 1-4-1948.
It is not possible to exclude any new industrial undertaking other than the three categories mentioned above.
Positively, the new industrial undertaking must produce result, that is to say, it has to manufacture or produce articles at any time within a period of 13 years from 1-4-1948……
- Further Hon’ble High Court of Himachal Pradesh in the matter of CIT v. Yash International Inc. (53 taxmann.com 143) held as under:
The new undertaking has different customers. 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. For all intents and purposes, the assessee-firm is a new Unit. The Assessing Officer has ignored the quantum of fresh capital, investment in plant and machinery, new building, new registration number and PAN number. The new unit cannot be even presumed as reconstruction of the old existing business, much less the formation of the undertaking by splitting up the existing undertaking. The shifting of the employees would not affect the constitution of the new firm to avail the benefit under Section 80-IC of the I.T. Act. The learned Assessing Officer has not correctly appreciated the ratio of the judgment rendered by the Hon’ble Supreme Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 (SC). In the instant case also, the new unit has emerged. It is physically separate industrial unit….
- Also Hon’ble Delhi High Court in the matter of CIT Gedore Tools India (P.) Ltd. (126 ITR 673) held as under:
‘Applying these principles to the present case, it is clear that the new unit has not been formed by the splitting up or reconstruction of the existing business. The second unit has not derived anything from the old unit either by way of equipment or by way of factory buildings. No assets of the old unit have been transferred to the new unit nor has the identity of the first unit been impaired in any way. The mere fact that the second unit manufactures some of the items which were manufactured by the first unit, does not make it an integral part of the first unit. It would survive independently of the first unit. In the words of the Tribunal, the new factory is a viable unit, can run by itself, and has “a separate and distinct personality”.
5. From the aforesaid rulings it can be inferred that in order to justify that the new company is not formed by splitting or reconstruction, following conditions should be fulfilled:
- Fresh capital should be introduced in the company for setting up the business
- Separate and new infrastructure should be established conspicuously identifiable from the existing unit
- New plant and machinery should be used for setting up the manufacturing unit. Further transfer of previously used machine, if any, from the existing company to new company should be avoided. Also value of previously used plant and machinery can be only 20% of the total investment in plant and machinery.
- Products manufactured in the new company should be separately identifiable and marketable
- Separate registrations/licenses should be obtained for carrying out the manufacturing activities
6. Also in case of transactions with the related parties or entities having close connection with the new company are entered into, proper justification and comparables should be maintained in order to prove the genuineness of profit of arising in the new company.
7. Further a declaration is to be filed in form 10-ID before the due date of filing of first income tax return for the previous year relevant to the assessment year commencing on or after 1st April, 2020.
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Does a restaurant be opened under Section 115 BAB