COMMISSIONER OF INCOME TAX UDAIPUR vs. M/S CHETAK ENTERPRISES PVT. LTD

1 REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 1764 OF 2010 Commissioner of Income Tax, Udaipur … Appellant(s) Versus M/s. Chetak Enterprises Pvt. Ltd.

…Respondent(s) J U D G M E N T A. M. KHANWILKAR, J. 1. This appeal takes exception to the judgment and order dated 5.5.2008 passed by the High Court of Judicature for Rajasthan at Jodhpur (for short, “the High Court”) in Income Tax Appeal No. 71 of 2008. 2. The matter relates to Assessment Year 2002­2003, the relevant Previous/Financial   year   for   which   is   2001­2002   i.e.   1.4.2001   to 31.3.2002. 3. Briefly   stated,   the   erstwhile   partnership   firm   ­   M/s.   Chetak Enterprises   entered   into   an   agreement   with   the   Government   of Digitally signed by DEEPAK SINGH Date: 2020.03.05 16:56:51 IST Reason: Signature Not Verified

2 Rajasthan for construction of road and collection of road/toll tax. The construction of road was completed by the said firm on 27.3.2000 and the same was inaugurated on 1.4.2000.  The firm was converted into a private limited company on 28.3.2000 named as M/s. Chetak Enterprises (P) Ltd. (for short, “the assessee­Company”) under Part IX of the Companies Act, 1956 (for short, “the Companies Act”).   On conversion of the firm into company, an intimation was given to the Chief   Engineer   (Roads),   P.W.D.,   Rajasthan,   Jaipur.     The   said authority noted the change and cancelled the registration of the firm and granted a fresh registration code to the assessee­Company.  As aforesaid, the road was inaugurated on 1.4.2000 and the assessee­ Company  started  collecting   toll tax.     For   the  relevant  assessment year, the assessee­Company claimed deduction under Section 80­IA of the Income Tax Act, 1961 (for short, “the Income Tax Act”). The assessing officer declined that claim of the assessee­Company, which decision was reversed by the Commissioner of Income­Tax (Appeals), Udaipur.   The Income Tax Appellate Tribunal (for short, “the ITAT”) confirmed the decision of the first appellate authority, following its decision1  in the case of the assessee­Company for the Assessment Year 2001­2002.   As a result, the Department preferred an appeal 1 Chetak Enterprises P. Ltd. vs. ACIT, (2005) 95 ITD 1 (Jodh.)

3 before  the   High   Court.     The   High   Court   formulated   the   following question of law: ­ “Whether in the facts and in the circumstances of the case, the assessee­Company was right in finding that   the   assessee   fulfilled   the   condition   of   sub­ Section (4)(i)(b) of Section 80­IA?” Section 80­IA, as applicable to Assessment Year 2002­03 reads thus: ­ “80­IA  (1) Where   the   gross   total   income   of   an   assessee includes any profits and gains derived from any business of an   industrial   undertaking   or   an   enterprise   referred   to   in sub­section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject   to   the   provisions   of   this   section,   be   allowed,   in computing   the   total   income   of   the   assessee,   a   deduction from such profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the   first   five   assessment   years   commencing   at   any   time during   the   periods   as   specified   in   sub­section   (2)   and thereafter, twenty­five per cent of the profits and gains for further five assessment years: Provided  that   where   the   assessee   is   a   company,   the provisions of this sub­section shall have effect as if for the words “twenty­five per cent”, the words “thirty per cent” had been substituted. (2) The deduction specified in sub­section (1) may, at the option   of   the   assessee,   be   claimed   by   him   for   any   ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial   park   or   generates   power   or   commences transmission or distribution of power: Provided  that   where   the   assessee   begins   operating   and maintaining any infrastructure facility referred to in clause (b)   of   Explanation   to   clause   (i)   of   sub­section   (4),   the

4 provisions of this sub­section shall have effect as if for the words   “fifteen  years”,  the  words   “twenty   years”  had  been substituted. (2A) Notwithstanding anything contained in sub­section (1) or   sub­section   (2),   the   deduction   in   computing   the   total income   of   an   undertaking   providing   telecommunication services, specified in clause (ii) of sub­section (4), shall be hundred  per   cent   of   the  profits   and   gains   of  the  eligible business for the first five assessment years commencing at any time during the periods as specified in sub­section (2) and thereafter, thirty per cent of such profits and gains for further five assessment years. (3) This   section   applies   to   an   industrial   undertaking referred to in clause (iv) of sub­section (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 industrial undertaking which is formed as a result of the re­establishment, re­construction or revival by the assessee of the   business   of   any   such   industrial 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. Explanation 1.­For the purposes of clause (ii), any   machinery   or   plant   which   was   used outside India by any person other than the assessee 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   by   the   assessee,   used   in India; (b) such   machinery   or   plant   is   imported into   India   from   any   country   outside India; and

5 (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 assessee. Explanation   2.­Where   in   the   case   of   an industrial   undertaking,   any   machinery   or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant   used   in   the   business,   then,   for   the purposes of clause (ii) of this sub­section, the condition specified therein shall be deemed to have been complied with. (4) This section applies to­ (i) Any enterprise carrying on the business of (i) developing, (ii) maintaining and operating or (iii)   developing,   maintaining   and   operating any infrastructure facility which fulfils all the following conditions, namely: ­ (a) it is owned by a company registered in India   or   by   a   consortium   of   such companies; (b) it has entered into an agreement with the   Central   Government   or   a   State Government or a local authority or any other statutory body for (i) developing, (ii)   maintaining   and   operating   or   (iii) developing, maintaining and operating a new infrastructure facility subject to the condition that such infrastructure facility   shall   be   transferred   to   the Central

Government,

State Government,   local   authority   or   such other statutory body, as the case may be, within the period stipulated in the agreement; (c) it has started or starts operating and maintaining   the   infrastructure   facility on or after the 1st day of April, 1995:

6 Provided  that where an infrastructure facility is transferred on or after the 1st day   of   April,   1999   by   an   enterprise which   developed   such   infrastructure facility   (hereafter   referred   to   in   this section as the transferor enterprise) to another   enterprise   (hereafter   in   this section   referred   to   as   the   transferee enterprise) for the purpose of operating and   maintaining   the   infrastructure facility on its behalf in accordance with the   agreement   with   the   Central Government,   State   Government,   local authority   or   statutory   body,   the provisions of this section shall apply to the transferee enterprise as if it were the   enterprise   to   which   this   clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period   during   which   the   transferor enterprise would have been entitled to the deduction, if the transfer had not taken place. Explanation.­ For the purposes of this clause, “infrastructure facility” means,­ (a) a   road,   bridge,   airport,   port,   inland waterways   and   inland   ports,   rail system or any other public facility of a similar   nature  as  may   be   notified   by the Board in this behalf in the Official Gazette; (b) a highway project including housing or other activities being an integral part of the highway project; and (c) a water supply project, water treatment system,   irrigation   project   sanitation and   sewerage   system   or   solid   waste management system; (ii) any undertaking which has started or starts providing

telecommunication

services whether   basic   or   cellular,   including   radio paging, domestic satellite service, network of turnking,   broadband   network   and   internet services on or after the 1st day of April, 1995, but on or before the 31st day of March, 2003;

7 (iii) any   undertaking   which   develops,   develops and operates or maintains and operates an industrial   park   notified   by   the   Central Government in accordance with the scheme framed and notified by the Government for the period beginning on the 1st  day of April, 1997 and ending on the 31st  day of March, 2006: Provided that   in   a   case   where   an undertaking develops an industrial park on or   after   the   1st  day   of   April,   1999   and transfers the operation and maintenance of such industrial park to another undertaking (hereafter in this section referred to as the transferee undertaking) the deduction under sub­section   (1),   shall   be   allowed   to   such transferee   undertaking   for   the   remaining period   in   the   ten   consecutive   assessment years in a manner as if the operation and maintenance were not so transferred to the transferee undertaking; (iv) an industrial undertaking which,­ (a) is set up in any part of India for the generation

generation

and distribution   of   power   if   it   begins   to generate power at any time during the period beginning on the 1st day of April, 1993   and   ending   on   the   31st  day   of March, 2003; (b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on the 1st  day of April, 1999 and ending on the 31st day of March, 2003: Provided  that the deduction under this section to an   industrial   undertaking   under   sub­clause   (b) shall   be   allowed   only   in   relation   to   the   profits derived from laying of such network of new lines for transmission or distribution. (5) Notwithstanding   anything   contained   in   any   other provision  of  this  Act,  the  profits  and  gains  of  an eligible business to which the provisions of sub­section (1) apply shall,   for   the   purposes   of   determining   the   quantum   of

8 deduction under that sub­section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. (6) Notwithstanding anything contained in sub­section (4), where housing or other activities are an integral part of the highway project and the profits of which are computed on such basis and manner as may be prescribed, such profit shall   not   be   liable   to   tax   where   the   profit   has   been transferred to a special reserve account and the same is actually utilised for the highway project excluding housing and other activities before the expiry of three years following the   year   in   which   such   amount   was   transferred   to   the reserve account; and the amount remaining unutilised shall be chargeable to tax as income of the year in which such transfer to reserve account took place. (7) Where the assessee is a person other than a company or   a   co­operative   society,   the   deduction   under   the   sub­ section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been   audited   by   an   accountant,   as   defined   in   the Explanation below sub­section (2) of section 288, and the assessee   furnishes,   along   with   his   return   of   income,   the report of such audit in the prescribed form duly signed and verified by such accountant. (8) Where any goods held for the purposes of  the eligible business are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any   other   business   carried   on   by   the   assessee   are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the   profits   and   gains   of   such   eligible   business   shall   be computed as if the transfer, in either case, had been made at the market value of such goods as on that date:

9 Provided that where, in the opinion of the Assessing Officer, the   computation   of   the   profits   and   gains   of   the   eligible business   in   the   manner   hereinbefore   specified   presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation. ­For the purposes of this sub­section, “market value”, in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market. (9) Where any amount of profits and gains of an industrial undertaking or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under   the   heading   “C.­Deductions   in   respect   of   certain incomes”, and shall in no case exceed the profits and gains of   such   eligible   business   of   industrial   undertaking   or enterprise, as the case may be. (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies an 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   assessee   more   than   the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the   profits   and   gains   of   such   eligible   business   for   the purposes   of   the   deduction   under   this   section,   take   the amount of profits as may be reasonably deemed to have been derived therefrom. (11) The   Central   Government   may,   after   making   such inquiry   as   it   may   think   fit,   direct,   by   notification   in   the Official Gazette, that the exemption conferred by this section shall not  apply  to any  class of  industrial undertaking  or enterprise with effect from such date as it may specify in the notification. (12) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger­ (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the

10 amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may   be,   apply   to   the   amalgamated   or   the resulting   company   as   they   would   have applied to the amalgamating or the demerged company   if   the   amalgamation   or   demerger had not taken place.” The High Court while upholding the view taken by the first appellate authority and the ITAT, dismissed the appeal and observed thus: ­ ‘‘…..In the present case, so far as the facts are concerned, it is not in dispute, that the work of construction of roads was completed   on   27.3.2000,   and   on   and   with   effect   from 28.3.2000,   the   partnership   firm   was   converted   into   a Company,   by   being   registered   under   Part   IX   of   the Companies Act, and became a private Limited Company. As noticed   above,   the   relevant   previous   year   is   1.4.2000   to 31.3.2001.   Thus,   right   from   the   commencement   of   the relevant financial year, it cannot be disputed, that it was a Company,   and   was   undertaking   the   specified   business. Then, so far as the question, as has been gone into by the Assessing   Officer,   and   the   Excise   Commissioner   that   the assessee Company has not entered into any agreement with the Government, is concerned, in that regard, the learned Tribunal   has   found,   that   the   main   objects   of   the Memorandum   of   Association   of   the   assessee   Company indicates, that it was mentioned as under: ‘‘On conversion of the partnership firm into a company   limited   by   shares   under   these presents to acquire by operation of Law under Part IX of the Companies Act, 1956 as going concern and continue the partnership business now being carried on under the name & style of M/s Chetak Enterprises including all its assets, movables   and   immovables,   rights,   debts   and liabilities in connection therewith.’’ Then, it has also been found by the learned Tribunal, at page 13 of the judgment, that the erstwhile partnership firm, in its first communication to the Chief Engineer on 23.10.1998, while replying to the notice inviting bids, made it categorically clear, that ‘‘the firm will be converted into a limited company under Chapter IX of the Companies Act. As such, you are requested to allow us change in constitution and   accordingly   change   of   name   in   agreement,   after

11 converting firm into company with the existing partners as its   Directors,   and   the   Chief   Engineer   vide   letter   dt. 27.8.1999, took note of this letter, and informed, that their offer was accepted, subject to terms and conditions specified therein.   It   is  thereafter,   that   agreement   was  entered   into between the Government  and the Firm, wherein  the  said letter of the Chief Engineer dt. 27.8.1999, was considered as part   of   the   agreement.   With   this,   the   agreement   also mentions the firm, ‘‘to mean and include its successors and assigns’’. Thus it has been found, that since incorporation of the Firm into a Company, has the effect of statutorily vesting of   liabilities   and   assets   in   the   Firm,   and   the   agreement comprehends successors and assigns, it is clear, that the assessee   fulfils   all   the   conditions.   Then   the   proviso, appended   in   this   sub­section,   has   also   been   considered, which clearly provides for entitlement of the deduction to the transferee, with effect from the date of transfer, therefore also, it was found that the deduction is available. In   our   view,   when   right   from   the   day   one,   i.e.   while replying  to the notice inviting tenders itself, it was made clear by the Firm, that the Firm will be converting into a limited Company under Part IX of the Companies Act, and the Chief Engineer was requested to allow the change in the Constitution,   and   accordingly   change   of   name   in   the agreement, after converting the Firm into the Company, with the existing partners as its Directors, and this request was accepted,   and   that   acceptance   letter   formed   part   of   the agreement,  in  our  view, the Firm  stands in the shoes  of promoter,   and   the   Company   takes   over   all   assets   and liabilities statutorily. In other words, by operation of law, there is statutory transformation of the Firm into the Company, obviously the rights and liabilities of the Company, and the assets, go to the  Company.   It   is  a  different   story  that  even  from   the agreement entered into by the promoter (predecessor in the interest of the Company), as successor of the Firm and the Company is deemed to be a party, and, therefore also, is very much entitled to the benefit of deduction on this ground. Over & above all this, the proviso is a complete answer to the contention of the Revenue, and in favour of the assessee, which rather clearly provides, that even in case of transfer, the transferee will become entitled to deduction of course with effect from the date of transfer. In the present case, the transfer was statutory, and did come   into   effect   since   28.3.2000,   i.e.   much   before   the commencement of the relevant financial year, and as such,

12 considering from any standpoint, the assessee could not be denied benefit of deduction available to it.” 4. Being aggrieved, the Department filed two separate special leave petitions before this Court.  The present civil appeal emanates from SLP(C) No. 6772/2009 and pertains to Assessment Year 2002­2003. As regards Civil Appeal No. 1748/2010 (arising out of SLP(C) No. 3430/2009) pertaining to Assessment Year 2001­2002, the same has been disposed of in terms of order dated 17.10.2019 due to low tax effect leaving question of law open. 5. We   have   heard   Mr.   Rupesh   Kumar,   learned   counsel   for   the appellant and Mr. S. Krishnan, learned counsel for the respondent. 6. It is not in dispute that an agreement was executed between the erstwhile partnership firm and the State Government for construction of road and collection of toll tax.   Before the commencement of the assessment year in question i.e. 2002­2003, the construction of road was completed (on 27.3.2000) and it was inaugurated on 1.4.2000. Before the date of inauguration, the partnership firm was converted into a company on 28.3.2000 under Part IX of the Companies Act. The Memorandum of Association of the assessee­Company reveals the main object as follows: ­

13 “On   conversion   of   the   partnership   firm   into   a company limited by shares under these presents to acquire by operation of law under Part IX of the Companies   Act,   1956   as   going   concern   and continue   the   partnership   business   now   being carried on under the name and style of M/s. Chetak Enterprises including all its assets, movables and immovables,   rights,   debts   and   liabilities   in connection therewith.” As a matter  of   fact,   before the   agreement  was  executed   with  the erstwhile   partnership   firm,   it   was   clearly   understood   that   the partnership firm would in due course be converted into a registered limited company.  That is evident from the communication addressed to the Chief Engineer on 23.10.1998, at the time of replying to the notice   inviting   bids.     An   explicit   request   was   made   to   allow   the partnership firm to change its constitution and consequently change of name in the agreement after converting the firm into a company with the existing partners as its Directors.  The Chief Engineer being the appropriate authority of the State, vide letter dated 27.8.1999, took note of the request made by the erstwhile partnership firm and informed the said firm that its offer was accepted subject to terms and   conditions   specified   in   that   regard.     It   is   only   after   this interaction, an agreement was entered into between the Government

14 of   Rajasthan   and   the   erstwhile   partnership   firm,   in   which   the communication sent by the Chief Engineer, dated 27.8.1999, was made part of the agreement.   Notably, after the conversion of the partnership firm into a company under Part IX of the Companies Act, the State authorities noted the change and provided fresh registration code to the assessee­Company. 7. The question is: what is the effect of conversion of partnership firm into a company under Part IX of the Companies Act?  That can be discerned from Section 575 of the Companies Act, which reads thus: ­ “575. Vesting of property on registration.­ All property, movable   and   immovable   (including   actionable   claims), belonging   to   or   vested   in   a   company   at   the   date   of   its registration   in   pursuance   of   this   Part,   shall,   on   such registration,   pass   to   and   vest   in   the   company   as incorporated under this Act for all the estate and interest of the company therein.” It is manifest that all properties, movable and immovable (including actionable claims) belonging to or vested in a company at the date of its registration would vest in the company as incorporated under the Act.   In other words, the property acquired by a promoter can be claimed by the company after its incorporation without any need for conveyance   on   account   of   statutory   vesting.     On   such   statutory vesting, all the properties of the firm, in law, vest in the company and

15 the firm is succeeded by the company.  The firm ceases to exist and assumes the status of a company after its registration as a company. A   priori,   it   must   follow   that   the   business   is   carried   on   by   the enterprise owned by a company registered in India and the agreement entered into between the erstwhile partnership firm and the State Government,   by   legal   implication,   assumes   the   character   of   an agreement between the company registered in India and the State Government for (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating a new infrastructure facility. 8. For   the   purpose   of   considering   compliance   of   clause   (a)   of Section 80­IA(4)(i), the assessee must be an enterprise carrying on business   of   (i)   developing,   (ii)   maintaining   and   operating   or   (iii) developing,   maintaining   and   operating   any   infrastructure   facility, which enterprise is owned by a company registered in India.   That stipulation is fulfilled in the present case, as the registered firm was converted into a company under Part IX of the Companies Act on 28.3.2000, which is before the commencement of Assessment Year 2002­2003.     For   the   assessment   year   under   consideration,   the activity undertaken by the assessee is only maintaining and operating or developing, maintaining and operating the infrastructure facility, inasmuch   as,   the   construction   of   the   road   was   completed   on

16 27.3.2000 and the same was inaugurated on 1.4.2000, whereafter toll tax was being collected by the assessee­Company. 9. As   regards   clause   (b)   of   Section   80­IA(4)(i),   the   requirement predicated is that the assessee must have entered into an agreement with   the   Central   Government   or   a   State   Government   or   a   local authority   or   any   other   statutory   body   for   (i)   developing,   (ii) maintaining   and   operating   or   (iii)   developing,   maintaining   and operating a new infrastructure facility.   As aforesaid, in the present case,   the   agreement   was   initially   executed   between   the   erstwhile partnership   firm   and   the   State   Government,   but   with   clear understanding that as and when the partnership firm is converted into   a   company,   the   name   of   the   company   in   the   agreement   so executed be recorded recognising the change.  Notably, the agreement itself   mentions   that   M/s.   Chetak   Enterprises   as   party   to   the agreement   was   meant   to   include   its   successors   and   assignee. Further, the State Government had granted sanction to the company and the original agreement entered into with the firm automatically stood converted in favour of the assessee­Company, which came into existence   on   28.3.2000   being   the   successor   of   the   erstwhile partnership firm.  Thus understood, even the stipulation in clause (b) of  Section   80­IA(4)(i)   is   fulfilled   by   the   assessee­Company.     Since

17 these are the only two issues which weighed with the assessing officer to deny deduction to the assessee­Company as claimed under Section 80­IA of the Income Tax Act, the first appellate authority was justified in reversing the view taken by the assessing officer.   For the same reason, the ITAT, as well as, the High Court have justly affirmed the view   taken   by   the   first   appellate   authority,   holding   that   the respondent/assessee­Company   qualified   for   the   deduction   under Section 80­IA being an enterprise carrying on the stated business pertaining   to   infrastructure   facility   and   owned   by   a   Company registered in India on the basis of the agreement executed with the State Government to which the respondent/assessee­Company has succeeded   in   law   after   conversion   of   the   partnership   firm   into   a company. 10. Learned counsel for the appellant has relied on the decision of this Court in  Giridhar G. Yadalam vs. Commissioner of Wealth Tax & Anr.2.     In the said decision, the Court had delineated the contours   regarding   permissibility   of   purposive   interpretation   of taxing/fiscal statutes, particularly in the context of an exemption. This decision is of no avail to doubt the correctness of the view taken 2 (2015) 17 SCC 664

18 by the High Court vide the impugned judgment, in the facts of the present case. 11. In view of the above, the appeal stands dismissed with no order as to costs. ................................., J (A.M. Khanwilkar) ................................., J (Dinesh Maheshwari) New Delhi; March 05, 2020.