PR COMMISSIONER OF INCOME TAX CENTRAL vs. M/S GREEN FIRE EXPORTS

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 294 / 2017 Pr. Commissioner of Income Tax-Central, New Central Revenue Building, Statue Circle, Jaipur (Raj.) ----Appellant Versus M/s. Green Fire Exports, H-1, SEZ Phase 1st, Sitapura, Jaipur. ----Respondent D.B. Income Tax Appeal No. 296 / 2017 Pr. Commissioner of Income Tax-Central, New Central Revenue Building, Statue Circle, Jaipur (Raj.) ----Appellant Versus M/s. Green Fire Exports, H-1, SEZ Phase 1st, Sitapura, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sameer Sharma with Mr. Gaurav Gaur for Mr. Anil Mehta _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 20/11/2017 1. An application (39397/2017) has been filed in ITA No.296/2017 for dispensing with filing of the certified copy of the order dt.28.4.2017 on the ground that the same has been filed in ITA No.294/2017. For the reasons mentioned in the application, the same is allowed. Other defects are waived. 2. In both these appeals common question of law and facts are involved hence they are decided by this common judgment.

(2 of 7) [ITA-294/2017] 3. By way of these appeals, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal of the department and confirmed the order of the CIT(A). 4. Counsel for the appellant has framed following substantial questions of law:- Appeal No.294/2017 & 296/2017 “(1) Whether the Hon’ble ITAT is justified in confirming the decision of the CIT(A) in deleting the disallowance of Rs.63,42,433/- made by the assessing officer under Section- 10AA of Income Tax Act, 1961 even though when the assessee does not fulfill the conditions of Section 10AA(4)(ii) of the Income Tax Act, 1961 namely that the undertaking should not be formed by the reconstruction of business already in existence.” 5. The facts of the case are that M/s. Green fire Exports is holding status of a firm which started its business from A.Y. 2007- 08 and is carrying on business of manufacture and export of jewellery. The assessee firm is having two partners viz. Smt. Kamlesh Dangayach and Sh. Atul Dangayach having partnership ratio of 80 & 20% respectively. The assessee firm is claiming 100% deduction u/s 10AA of the IT Act, 1961 being a SEZ unit. 5.1 It is also worth mentioning that one of the partners Smt. Kamlesh Dangayach was having a proprietorship concern in the name of M/s. Green Fire till AY 2006-07 which was assessed by Additional CIT, Range-1 in the relevant year. This concern was also having business of same nature i.e. Manufacturing and Export of gems, stones & jewellery, as per the audit report but closed down

(3 of 7) [ITA-294/2017] its business operations in the subsequent year, as is clear from the assessment records of AY 2007-08 of Smt. Kamlesh Dangayach. 5.2 It has been noticed that during the AY 2007-08, the assessee firm received total capital of Rs.37,00,000/- out of which Rs.27,00,000/- has been received from M/s. Green Fire, proprietorship concern of Smt. Kamlesh Dangayach. From the perusal of last year’s capital account obtained from previous assessment records of M/s. Green Fire, it is clear that there has been a direct intake of capital from it to M/s Green Fire Exports. Thus, it is clear that the new unit in the name of M/s. Green Fire Exports has not been formed out of new funds, but it merely reflects shift of money from the original business i.e. M/s. Green Fire to the new one. 6. Now the issue is squarely covered by the decision of this court in ITA No.10/2016 (Pr. Commissioner of Income Tax vs. M/s. Green Fire Exports) decided on 18.5.2017 in case of same assessee wherein while considering the matter, this court observed as under:- “6. Counsel for the respondent Mr. Pathak has taken us to the order of the CIT(A) which reads as under: “After considering submission of th AR as well as AO and considering various aspects the allowability of deduction u/s 10 AA in the case of appellant is decided taking an over all view. Admittedly the new industrial undertaking is a seprate and independent production unit set up in SEZ area. The plant has not been set up by shifting of machinery of old unit but new machinery worth more than Rs.43 lacs have been purchased. The AO has considered

(4 of 7) [ITA-294/2017] transfer of capital of Smt. Kamlesh Dangayach and employees of the old concern to the new concern s shifting of assets. Smt. Kamlesh Dangayach has diverted her capital from M/s Green fire to the new unit but the amount so shifted was only Rs6737224/- whereas her investment in plant and machinery and land and building of new unit comes to Rs.14626947/-. This clearly shows that substantial new capital was introduced in the new unit. Large number of employees of M/s Green Fire Exports did not shift enmass to the new unit but they left the job and joined the new unit for their better prospects from time to time. In any case the employees, though, important part of business undertakings, cannot be considered as an assets in its commercial sense. So long as the assets appearing in the balance sheet of old concern are not shofted to new unit but lying as it is, it cannot be a case of reconstruction of business. The purchasing or selling may be common but it cannot amount to reconstruction of old business. The Hon’ble S.C. in the case of Textile Machinery Corp. Ltd. vs. CIT(relied upon by the AO) has held that reconstruction of business involves substantially the same person carrying on substantially the same business but at the same time has also held that where the new industrial undertaking is separate and independent production unit and the undertakings can be carried out separately without complete absorption of identity of the old business they are not to be treated as business formed by reconstruction of the old business. The Hon’ble Court has observed that by establishing new undertakings if the assessee expands his existing business then also the assessee cannot be deprived of the benefit. That every new creation in business is some kind of expansion and advancement but as long as a new and identifiable undertaking separate and distinct from the existing business is set up, it cannot be tantamount to reconstruction. As plant and machinery of the old business is lying as it is, it cannot be said that the old business is ceased. The very purpose of bringing the provisions of section 10AA and a-like provision is to encourage new units with new plant and machinery to be set up for manufacturing or production of articles to be exported. The beneficial provisions brought in statute book to encourage the export and to encourage setting up new

(5 of 7) [ITA-294/2017] business units should be interpreted liberally. From the facts of the case it appears that it is not the case of reconstruction of existing business but a totally new undertaking has started functioning. As all other requirements of the Section have been fulfilled, claim of deduction u/s 10AA is justified. The AO is, therefore, directed to allow deduction claimed u/s 10AA on profits and gains derived from Exports. Thus first ground of appeal is decided in favour of the appellant.” 7. Mr. Pathak has also taken us to the order of the Tribunal in para 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/s 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/s Modi Spinning and Manufacturing 125 ITR 361 had occasion to considere to the allowibility of deduction u/s 15C of I.T. 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

(6 of 7) [ITA-294/2017] 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. The Hon’ble Delhi Court in the case of CIT V/s Gedore Tools India (Pvt) Ltd. 126 ITR 673 has held that the fact that the new Unit manufactured some of the items which were manufactured by the old unit will not make it an integral part of old unit, Even if new undertaking manufactures a product which is feeded to the old business even then it will not amount reconstruction of the old business. Establishment of the new unit with new separate plant and machinery by investing substantial funds is essential. If the new unit has not derived any thing foom the old unit by way of equipment or by way of factory building and no assets of the old unit have been transferred to the new unit, the new unit had not been formed by reconstruction. We feel that the ld. AR in his written submission has rightly placed reliance on the followings decisions that the new undertaking is not a formed on reconstruction of the business already in the existence. 1 CIT V/s Ambur Cooperative Sugar Mills Ltd. (Madras) 127 ITR 495. 2 Addl. CIT V/s Hutti Gold mines Company Ltd. 128 ITR 476 (Karnataka) In this case existing plant and conveyer belts and old mill dismanted and the new mill and refinery covering fortunes area of factory was setup. New unit is independent unit and is entitled to deduction and it will not be reconstruction of business. (3) CIT V/s Mahaan foods Ltd. 216 CTR 148 (Delhi) In this case assessee setup industrial undertaking with latest technology and increased capacity with frest investment of Rs.104.88 laks as against investment 20.8 laks in old plant and it cannot be said that the unit was a result a reconstruction of old business. (4) CIT v/s Premier Cotton Mills Ltd. 240 ITR 434 (Madras). (5) CIT V/s Quality Steel Tube Ltd. 280 ITR 254 (Allahabad.) 4.8 Even if for the argument sake, it is considered that substantial persons have

(7 of 7) [ITA-294/2017] started the unit even then it can not be considered as reconstruction of the existing business. There is substantial investment in new plant and machinery. Details of machineries installed are available at page 15 of the paper book. Out or total investment of plant and machinery of Rs.43,99,591/- the machinery purchased from domestic market is only of Rs.31,750/- other machineries installed have been acquired through imports from foreign countries. Purchase vouchers are available in the paperbook. We were informed that the proprietorship concern was not using the imported machinery. There is definitely advancement in the technique of making studded jewellery. Hence the unit even if relate to person having substantial interest in old unit, even then the new unit can not be considered a reconstruction of old business as new unit if independent is not to be considered as reconstruction of business.” 8. We have heard counsel for both the sides. 9. Taking into consideration the conclusion reached by the Tribunal and CIT(A), we are of the opinion that the conclusion reached by the Tribunal after relying upon the decisions of Delhi High Court in the case of CIT vs. Mahaan foods Ltd. 216 CTR 148, the Madras High Court in the case of CIT vs. Premier Cotton Mills Ltd. 240 ITR 434 and the Allahabad High Court in the case of CIT vs. Quality Steel Tube Ltd. 280 ITR 254, is just and proper and no interference in the order of the Tribunal is called for. 7. Hence, no substantial question of law arises. 8. The appeals stand dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 28 & 57.