DCIT Vs Pool Thevar Marimuthu (ITAT Chennai)
The Assessing Officer alleged that assessee has used old plant and machinery previously used in the unit of M/s. Arun Plasto Moulders Private Ltd at Rs.31 ,20,023/- out of total plant and machinery installed at new unit of Rs.59,81,123/- and the said used plant and machinery is more than 50% of total machinery installed in new unit, which is beyond the prescribed limit of 20% in Explanation 2 of section 80(IA)(3) r.w.s. 80IC of the Act. The assessee has filed various details to prove that computation of percentage of used machinery by the Assessing Officer is incorrect. We find that the learned CIT(A) has recorded categorical finding that the Assessing Officer has inadvertently adopted total plant and machinery installed at Haridwar unit at Rs.59,81,123/- as against total plant and machinery installed at Rs.2,05,36,114/- . If the total value of plant and machinery installed at new unit is taken into consideration for computing old plant and machinery, then it works to 15.19%. We further noted that the Assessing Officer has reproduced the plant and machinery installed at new unit at Haridwar, as per which as on 31.03.2012, the assessee has installed total plant and machinery worth Rs.2,05,36,1 14/-, out of which used plant and machinery taken from APMPL is at Rs.31,20,023/-. If the amount of Rs. 31 ,20,023/- being value of old plant and machinery as mentioned by the Assessing Officer is compared to total plant and machinery installed at new unit at Rs.2,05,36,114/-, the same would be worked out to 15.19% only, as against more than 50% as observed by the Assessing Officer in her assessment order. Further, the learned DR has vehemently argued the issue of transfer of used plant and machinery on the ground that learned CIT(A) has wrongly adopted total plant and machinery installed as on 31 .03.2012 instead of plant and machinery as on 31.03.2011. The learned DR further submitted that of plant and machinery should be considered when the unit was first claimed deduction u/s.80IC of the Act. In this case, the assessee has claimed deduction for the first time in the financial year 2010-11 relevant to the assessment year 2011-12 and hence, total plant and machinery installed at the end of financial year 2010-11 needs to be considered.
Even if, the plant and machinery installed at new unit is considered as on 31.03.2011, then also assessee has invested a sum of Rs.1,82,32,810/- as on 31.03.2011 and if amount of used plant and machinery at Rs.31,20,023/-, is considered to total investment in plant and machinery as on 31.03.2011 at Rs.1,82,32,810/-, the percentage works out to Rs.17.11%, which is well within the percentage specified in Explanation 2 of section 80(IA)(3) rws 80IC of the Act. Therefore, we are of the considered view that on this count also reason given by the Assessing Officer to deny deduction claimed u/s.80IC of the Act fails.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
These two appeals filed by the Revenue are directed against the order of the learned CIT(A)-4, Chennai dated 09.10.2019 and pertains to assessment year 2012-13 & 2013- 14. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off by this consolidated order.
2. The Revenue has more or less raised common grounds of appeal for both assessment years, therefore, for the sake of brevity, grounds of appeal filed for the assessment year 2012- 13 in ITA No.3399/Chny/2019 are reproduced as under:-
“1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case.
2. The ld CIT(A) erred in holding that the formation of M/s Arun Enterprises is not spitting up or reconstruction of the existing business of M/s Arun Plasto Moulders Private Ltd (APMPL) by only relying on the fact stated by the assessee that the M/s Arun Enterprises has diversified products and new product line cater to the business of M/s Unilever Asia Pvt Ltd (UAPL) as well as third party clients without any restriction imposed by UAPL.
3. The ld. CIT(A) failed to appreciate the formation of M/s Arun Enterprises is nothing but splitting up or reconstruction of the business, already existed, of M/s Arun Plasto Moulders Private Ltd(APMPL) in view of the facts that-(i) The assessee is the proprietor of M/s Arun Enterprises as well as major stake holder along with his family in APMPL,(II) M/s Arun Enterprises was formed by transfer of machinery (more than 20% limit from APMPL, (III) M/s Arun Enterprises having huge and significant amount of related party transaction with APMPL in form of sale of raw material, finished goods, Moulds and spares, labour service charge, Purchase of raw material etc, hence catering directly to the needs of business already existed of APMPL and indirectly to UAPL as APMPL is a personal care unit of UAPL.
4. The ld. CIT(A) erred in holding that the formation of M/s Arun Enterprises was not an occurrence of Transfer of machinery to the tune of more than the specified limit of 20% from business, already existed, of APMPL, by wrongly comparing machinery available as on 31/3/2012 to the transferred in machinery in F Y 2010-11(First year of 801C claim), on the contrary transferred in machinery in F Y in F Y 2010-11(First year of 80IC claim) has to be compared with machinery available in F Y 2010-11(First year of 80lC claim) for checking specified limit of 20% transferred in machinery at the time of formation of 80IC eligible unit, as AO has done and correctly disallowed 80IC claim of the assessee, as this transferred in machinery was more than 50% of total plant &machinery at the time of formation of 801C eligible unit i.e the First year of 80IC claim.
5. The ld. CIT(A) failed to appreciate that if any undertaking has not qualified any one or both of the two conditions specified u/s 80IC(4) regarding formation of undertaking by splitting up or reconstruction and use of transferred in machinery from a business already existed, its claim of 80IC deduction has to be disallowed and in this present case, the undertaking of the assessee has not complied with both of the condition, hence AO has rightly disallowed the claim of the assessee u/s 80IC.
6. The ld CIT(A) erred in holding the directors of STPI as competent authority for granting approval u/s l0B by relying on the Hon’ble Jurisdictional High Court Decision in the case of M/s live Connections software Solutions Pvt Ltd [2014] 51 taxmann.com 454, whereas, the relied upon case, the assessee for claiming deduction/s 10B, was not having registration with STPI for the assessment year involved and Jurisdictional High Court held that having registration with STPI is a pre-condition for claiming deduction u/s 10B, hence, the Jurisdictional High Court in the relied upon case has not decided anything regarding – whether, without any delegation of power from the Board of Approval for EOU scheme for sec 10B, Directors of STPI is a competent authority for granting approval u/s 10B or not, as the question was never before the Jurisdictional High Court.
7. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”
3. Brief facts of the case are that the assesse, an individual and proprietor of M/s. Arun Enterprises, is engaged in manufacturing of ancillary equipments catering to plastic, paper, rubber, confectionery, food and medical industries. During the financial year relevant to the assessment year 2011-12, the assessee has started a unit at Hardwar for manufacturing of plastic components using injection moulding process and supplied to M/s. Hindustan Unilever Ltd. for manufacturing of water purifiers. The assessee has filed his return of income for the assessment year 2012-13 on 23.09.2012 declaring total income of Rs. 13,08,240/-, after claiming deduction towards profit derived from undertaking situated at Haridwar u/s.80IC of the Act, amounting to Rs.13,42,87,644/-. The case was taken up for scrutiny and during the course of assessment proceedings , the Assessing Officer has denied deduction claimed u/s.80IC of the Act, in respect of profit derived from unit situated at Haridwar for manufacturing of plastic components using injection moulding process for the following reasons:-
(i) Till the Asst year 2010-11, the assessee was engaged in the manufacturing of ancillary equipments catering to the plastic, paper, rubber, confectionary, food and medical industries During the Financial year 2010 11, the company has started a unit in Haridwar, for manufacturing and supplying of plastic components using the injection moulding process and supplied to Hindustan Unilever Limited.
(ii) The assessee and his family members are the share holders and Directors of the Company in the name and style of “Arun Plasto Moulders P Ltd (APMPL)”. The APMPL is engaged in the business of making plastic components using the process of injection moulding and supplies major part of its production to Hindustan Unilever Limited. The said company started 80IC undertaking in Haridwar, for manufacturing the plastic components. The claim of 80IC by the Company was disallowed on the ground of splitting up of business from the ÀY 2009-10, the first year of claim.
(iii) When the companies claim u/s 80IC was disallowed, the assessee as a proprietary concern started the unit in Haridwar for manufacturing of the plastic components using injection moulding process for supplying to Hindustan Unilever Limited. It is pertinent to note that the assessee was not engaged in the business of manufacturing of plastic components till such time.
(iv) During the Financial year 2010-11 (Asst. Year 2011-12), the first year of 80IC claim by the assessee, the fixed asset schedule reveals that out of total Plant and Machinery to the worth of Rs.5981123/- installed in the Haridwar unit, Plant and Machinery to the worth of Rs.3120023/- was transferred from APMPL. This transfer of Machinery was more than 50% of the total Plant & machinery employed in the Haridwar unit. Though the assessee and the company, APMPL, are different person and the company was a corporate entity, the lifting of the Corporate veil reveals that the assessee along with his family members control the business of the company and the order placed by the Hindustan Unilever Limited is to their group. As the assessee controls the affairs of the company, he has decided to split up the business of the company and divert some of the orders of Hindustan Unilever Limited to his proprietary concern especially to his Haridwar unit, The assessee’s action is also further justified by transferring the Plant & Machinery i.e. injection moulding machine from APMPL to the worth of Rs.3120023/-.”
4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has filed written submissions, which has been reproduced in para 6 on page 5 to 12 of the learned CIT(A) order. The sum and substance of arguments of the assessee before the learned CIT(A) are that denial of deduction claimed u/s. 80IC of the Act by the Assessing Officer is factually incorrect for simple reason that there is no splitting of existing business as alleged by the Assessing Officer, which is evident from the fact that new unit started at Haridwar is manufacturing new product for exclusive use of M/s. Hindustan Unilever Ltd. for manufacturing of water purifiers. The assessee has also negated the observations made by the Assessing Officer in light of denial of deduction claimed u/s. 80IC to sister concern of the assesse, M/s. Arun Plasto Moulders Pvt. Ltd. (APMPL) with facts and argued that the Assessing Officer has alleged that the assessee has started new unit, because of denial of deduction to sister concern on the ground of splitting up of existing business, but fact remains that the assessee has started new unit in the year 2009 well before the Assessing Officer has denied deduction to the sister concern for the assessment year 2010- 11 vide his order dated 28.12.2011. Therefore, observations of the Assessing Officer that because deduction was denied to M/s. Arun Plasto Moulders Pvt. Ltd, the assessee has started new unit is not correct. The assessee has also negated another observation of the Assessing Officer in light of Explanation 2 of section 80(IA)(3) rws 80IC of the Act that the assessee has used more than 20% of used machinery from the existing unit with facts and figures, as per which percentage of used machinery installed in the new unit is only 15.19%, when compared to total amount of plant and machinery installed at new unit at Rs.2,05,36,114/-.
5. The learned CIT(A), after considering relevant submissions of the assessee and also by relied upon plethora of judicial precedents, including the decision of Hon’ble Delhi High Court in the case of CIT Vs.Ganga Sugar Corporation Ltd., 92 ITR 173 and a decision in the case of CIT Vs. Hindustan General Industries Ltd. 6 Taxman 360(Del), held that new unit established at Haridwar is a new undertaking, but not established by splitting or reconstructing of existing unit of the assessee at Chennai. The learned CIT(A) further observed that new unit at Haridwar is altogether different from existing unit at Chennai, because it was established to cater the needs of Hindustan Unilever Ltd. for manufacturing of water purifiers and such unit has been set up well before denial of deduction to another sister concern of the assesse M/s. Arun Plasto Moulders Pvt. Ltd.. The learned CIT(A) has also negated observations made by the Assessing Officer in light of transfer of used plant and machinery in excess of prescribed limit and observed that if you take total amount of plant and machinery installed in the new unit, then amount of old plant and machinery transferred from M/s. Arun Plasto Moulders Pvt. Ltd. is only 15.19% of total plant and machinery and which is well within the percentage specified under Explanation 2 of section 80(IA)(3) rws 80IC of the Act. Therefore, he opined that additions made by the Assessing Officer towards disallowance of deduction claimed u/s.80IC of the Act is legally unsustainable in law and accordingly, directed the Assessing Officer to delete additions made towards disallowance of deduction claimed u/s.80IC of the Act for both the assessment years. The relevant findings of the learned CIT(A) are as under:
“8. Now, I have carefully gone through the undisputed/uncontroverted facts marshalled and presented by the AO/AR as reflected, in essence, in the excerpts from the said assessment order and the submissions of the AR quoted supra bolstered by relevant and supporting evidence as also the case laws relied on by the rival parties but on a relative and comparative consideration of the same, I am persuaded by the more substantive and meritorious reasoning/substantiation adduced by the AR on the issue at hand.
8.1 The AO disallowed the claim of deduction u/s 80IC basically for two reasons:
(i) the unit at Haridwar according to her was out of splitting up of business at Chennai unit and
(ii) on account of transfer of plant and machinery from the Chennai unit to Hardwar unit purportedly exceeding the statutory limit of 20% permissible in the said provision.
The contentions of the AO appears misplaced both on facts and in law as could be seen from the aforesaid discussion in so far as the facts that the new unit at Haridwar would be by no logic or reasoning construed to be put up by splitting or reconstruction of the unit already in existence in Chennai since from a perusal of the assessment order and material and documentation on record it is seen that in order to expand the business in new areas by having diversified products in its fold and to cater the new line of business of supplying products to water purifier business of UAPL and also to cater independently to any third party clients without any restriction imposed by UAPL, the appellant had conceived the idea of establishing of a new unit of M/s. Arun Enterprises at Haridwar, Uttarakhand in the FY. 2009-10 and it was common for any business enterprise to expand its business without any restrictions by having diversified products to sustain in the competitive environment. Hence, the appellant’s submission that the AO’s simple and generic observation that the orders of UAPL to M/s. Arun Plasto Moulders Pvt. Ltd. (APMPL) is split-up and given to the appellant’s new unit is not correct for the reason that the products manufactured by both units are different and it was with the above idea, the appellant established a new unit at Haridwar in Uttarkhand State in the F. Y. 2009-10 to involve manufacturing and supply of plastic components using injection moulding process to cater to the new product segment of Water Purifiers and other products independently to third party vendors, and also having a specialised assembly services.
8.2. In this regard, corroboration could be had by way of the fact that the appellant made an application on 21.11.2009 to setup a unit with SIIDCUL (State infrastructure and Industrial Development Corporation of Uttranchal Ltd) at Haridwar in the state of Uttarkand. The said authority vide its letter No. 19784/A GM(H)/SIDCUL/09 dated 24.12.2009 had given an accord and accordingly allotted Plot No.26 in Sector lB at 11E, Haridwar for setting up the new plant of the appellant. In furtherance of the above, the appellant had entered into a lease deed with SIIDCUL and took the possession of the said land on 16.02.2010. The power connection was obtained from Uttarkhand Power Corporation Limited by way of their ceiling certificate dated 05.03.2010. The appellant got its factory registration and license vide letter dated 25.02.2010 from the prescribed Authority. The ESIC registration was obtained on 28.06.2010. The registration with the Commercial Tax for VAT and CST was obtained on 06.02.2010. The registration for Service Tax was also obtained vide Form ST-2 dated 26.03.2010.
The above facts clearly proves that the appellant had initiated the process of setting up a new unit at Haridwar, Uttarkand on 29iL2009 itself (F. Y. 200940) when compared to the date of 28.12.2011, the date on which the claim u/s 80IC of APMPL was disallowed on the ground. that the unit was started by sp1ittingup its existing business from Chennai. Further, the appellant during the F. Y. 2009-10 had also spent an amount of Rs. 1,62,10,320/ towards acquisition of fixed assets being land, plant and machinery and other assets for setting up of the new unit at Hardwar, The said investment in the fixed assets is reflected separately for units at Chennai and Haridwar in the audited financials field.
8.3. In the above background and facts which has not been disputed by the AO specifically and pointedly the detailed rulings in the case of CIT vs. Ganga Sugar Corporation Ltd. 92 ITR 173 Del) & CIT Vs. Hindustan General industries Ltd. 6 Taxmann 360 (Del) apart from the catena of judgements relied on by the AR aforesaid, is instructive and supports the contention of the appellant in the instant case.
CIT vs. Ganga Sugar Corporation Ltd. 92 ITR 173 (Del)
“In the reconstruction of a business, as in the reconstruction of a company, there is an element of transfer of assets and of some change, however partial or restricted it may be, of ownership of the assets. The transfer, however need not to he of all the assets. It is none the less imperative that there should be continuity and preservation of the old undertaking though in an altered from. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit set up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up a company which is already running an industrial unit before the setting up of the new unit The object of Sec. 15C of the 1922 Act is to provide an incentive for the setting up of new industrial unit so as to accelerate the process of industrialization. It does not appear to have been the intention of the Legislature as envisaged by Sec. 15C of the 1922 Act, that the benefit of the said section would be confined to the industrial undertaking of those parties who had not already set up such undertakings in the past but would not be extended to parties who have past experience of running similar undertakings.
If in the context of the total cost involved in the setting up of the new ‘industrial undertaking the value of transferred building, machinery or plant constitute only a small fraction, the new industrial undertaking would not be held to have been formed by the transfer to a new business of building, machinery or plant previously used in another business. As against that, if however the value of the transferred building, machinery or plant is substantial when compared to the total cost involved in the setting up of the new industrial undertaking, the said undertaking would be hit by the concluding words of clause (i) of sub-section 15C of 1922 Act It may be stated that in sub-section (6) of Sec. 80Jof the 1961 Act the Legislature has specified that the total ‘value of the building machinery or plant so transferred should not exceed 20% of the total value of the building, machinery or plant used in the business of a new industrial undertaking. Although no such percentage was fixed in sec. 15C(2)(i) of the Act of 1922, the extent and quantum of value of the transferred building, machinery or plant vis-a-vis the total cost involved in the setting up of the new industrial undertaking was a relevant and. material factor, the importance of which cannot be lost sight of In the light of all the facts of the case, the new industrial undertaking in the instant case could not be said to have been formed by the transfer to new business of building, machinery or plant previously used in any other business. Therefore, the assessee company was entitled to exemption from t on profits or gains derived from the new industrial undertaking u/s 15C of the 1922 Act.
CIT Vs. Hindustan General Industries Ltd. 6 Taxman 360 (Del)
1. “The real test of finding out whether there is reconstruction or not as a result of the setting up of a new industrial undertaking. the assessee had expanded its business in the same or similar articles, but to find out whether the unit which has been set up separately is new in the sense that new plant and machinery are erected and a new independent and viable unit has come into existence for producing either the same commodities or some distinct commodities.
In the instant case, the fact clearly showed that the assessee was manufacturing certain articles at its old factory. Subsequently, as a result the order placed by the Central Government, it had to embark on construction of railway wagons. For the purpose, the existing factory was found to be totally inadequate, Fresh land was acquired, fresh capital was invested, fresh machinery and plant were installed and the new factory came into existence after more than a couple of years. It was no doubt true that in the initial stages, the new factory also turned out article perhaps of the same type as those manufactured in the old factory. But, gradually the new factory started the manufacture of railway wagons. Further the Tribunal had found as a matter of facts that the assessee’s new factory was a new undertaking. There was nothing to show that as a result of setting up of this undertaking the integrity, unit or the continuity of the business transaction in the earlier undertaking were in any manner adversely affected. This was a new, independent and viable unit.
2. The mere fact while setting up of this factory, a small amount of plant and machinery was transferred from the previous business could not lead one to the conclusion that it was a case of reconstruction. Under section 84(2) (ii) , the assessee could be denied exemption only where the assets transferred to the new factory constituted more than 20 percent of the assets used in the new business. This was essentially a question of fact. In the instant case, the Tribunal had looked into the figures of the balance sheets and had correctly come to the conclusion that the assets transferred constituted less than 20 per cent of the total value of the assets of the new business. Hence the assessee satisfied the aforesaid condition.
3. The emphasis is not on business but on undertakings. The exemption is granted to new undertakings and the essence of the exemption is that it is a new industrial unit that is established and that it is not merely a rehash of an already existing unit. Hence, the attempt of the Revenue to classify the assessee’s business at the two factories as one of manufacturing steel structurals did not prevent the assessee from calming that the new factory was a newly established industrial undertaking.
4. The assessee, therefore, satisfied all the conditions laid down in section 84(2) and was entitled to the deduction contemplated in section 84(1),”
Further again in one of its recent decisions in the case of cir V. Premier cotton Mills Ltd 240 ITR 434, the Madras High Court had discussed in more detail the splitting up or reconstruction of an existing business. It was held that there is no requirement in section 80J of Income Tax Act that the article produced in the newly established industrial undertaking should be different from the one produced by the petitioner in its existing undertakings What is material is the bringing into existence by investing fresh capital, an unit which is capable of functioning as an independent unit and Is capable of / being regarded as an industrial undertaking engaged in the / production of articles.
Though the heading of the section 80J refers to newly established industrial undertaking, in the body of the section, there is no requirement that the undertaking should be new or it must be set up as an Independent unit nd the new undertaking is not to be equated with legal entity which may awn such undertaking. A single legal entity may own and operate more than one industrial undertakings When an existing industrial undertaking is substantially expanded and the manner of expansion is such that the newly installed plant, being regarded as an industrial undertaking, the requirements of the section are met Location . of expanded facilities vis-a-vis existing undertaking is not relevant The petitioner added the additional splindlage after securing license and claimed deduction only after completion of expansion. The Madras High court held that the petitioner is entitled to the deduction u/s. 80J of Income Tax Act.
8.4. The case laws referred to above clearly indicate the requirements to claim that an undertaking being newly established undertaking eligible to claim deduction as provided in the section 80IC of the IT Act and such an undertaking is not established by splitting or reconstructing of an existing unit and if these yard sticks are applied to the facts prevailing in the case of the instant assessee it is evident that the Haridwar unit of the assessee is a new undertaking and not established by splitting up or reconstructing the existing unit of the assessee at Chennai 8.5. It is also interesting and pertinent to mention here that as the AO in her assessment order discussed the information about disallowance of claim u/s – 80IC of the Act in its group company APMPL (Arun Plasto Moulders Pvt. Ltd.) for the A. Y. 2009-10 on the ground that there was a splitting-up of business which was in existence at Chennai that the said claim u/s 80IC of APMPL was finally allowed by the same Assessing Officer vide her order of assessment u/s. 143(3) r.w.s. 254 of the Act dated 31.03.2016 whereas in the original assessment of APMPL dated 28.12.2011 the claim u/s 80C was disallowed on the grounds of splitting up of business and which was remanded back to the files of AO and the AO had after investigation and verification of the facts passed the order on 31.03.2016.
The observations/inferences of the AO on the issue of the transferred machinery which was the second ground on which the disallowance of the deduction claimed u/s 80IC was made is factually incorrect on various counts namely:
The AO had just reproduced the Para (iv) from the assessment order for the A.Y. 2012-13 and verbatim adopted the same as Para (iv) in the present assessment order. The correct fact is that the AC during the course of the assessment for the AY 2012-13 had sought details for addition to fixed assets exceeding Rs10,00,000/- during the AY, 2011- 12 and 2012-13 which was furnished by the appellant with description to the tune of Rs.59,81, 123/-. However, the total value of plant and machinery available as on 31.03.2012, being the year end for the AY. 2012-13 stood at Rs.2,05,36, 114/- as detailed herein below. The AO instead of computing the percentage of old transferred machinery of Rs,3 1,20,023/ – with Rs.2,05,36, 114/- inadvertently appears to have adopted the said amount of Rs.59,81, 123/- as the total value of plant and machinery and came to a conclusion that there was a transfer of plant and machinery for more than 50% from a group company and thereby concluded that the appellant has violated the condition laid down u/s 80IC of the Act. The percentage of transfer of old machinery is only 15.19%, if worked out correctly as detailed hereunder:
The total gross plant and machinery as on 31.03.2012 stands at Rs 2,05,36,114/- as against the amount of Rs. 59,81,123/- as mentioned by the AC in the assessment order. The details of plant and machinery available as on 31.03.2012 as per the audited financials which has not been disputed by the AO are as under:
