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Income Tax Appellate Tribunal, “SMC-A” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA
IN THE INCOME TAX APPELLATE TRIBUNAL “SMC-A” BENCH : BANGALORE
BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER
ITA No.2032/Bang/2017 Assessment Year : 2004-05
M/s. Shell Apparels Pvt. Ltd., No. 10/14-10/16, G T Industrial Complex, The Deputy Commissioner Magadi Main Road, of Income Tax, Vs. Sunkadakatte, Circle 6 (1) (1), Bangalore – 560 091. Bangalore. PAN: AAHCS 2166B APPELLANT RESPONDENT
Appellant by : Shri S. Ramasubramanian, CA Respondent by : Dr. G. Manojkumar, Addl. CIT (DR)
Date of hearing : 08.01.2018 Date of Pronouncement : 19.01.2018
O R D E R Per Shri A.K. Garodia, Accountant Member This appeal is filed by the assessee and this is directed against the order of ld. CIT(A)-6, Bangalore dated 14.07.2017 for Assessment Year 2004-05.
The grounds raised by the assessee are as under. “1. That the order of the learned Commissioner of Income Tax (Appeals) in so far it is prejudicial to the interest of the appellant, is bad and erroneous in law and against the facts and circumstances of the case.
That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the disallowance of deduction u/s 80IB to the extent of Rs.5,03,414 and computing the total income of Rs.15,92,490 as against returned income of Rs.10,89,075.
That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in not allowing the deduction u/s 80IB to the extent of Rs.5,03,414.
ITA No.2032/Bang/2017 Page 2 of 8
That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in in holding that the appellant has been formed by transfer of plant and machinery previously used for any purpose in India and also erred in law and on facts inholding that the appellant had violated conditions specified in 80 IB (2)(i) and (ii) of the Act. Each of the above grounds is without prejudice to one another and the appellant craves leave of the Hon’ble Income Tax Appellate Tribunal, Bangalore, to add, delete or amend or otherwise modify one or more of the above grounds either before or during the hearing of this appeal.”
This appeal was filed by the assessee after a delay of 36 days and the assessee has filed an application seeking condonation of delay along with an affidavit of Shri S. Gopala Krishna, Finance Manager of the assessee- company. In the condonation application, it is stated that Mr. Gopala Krishna, Finance Manager was looking after the income tax matters of the assessee company and he was indisposed and was not attending the office from 20.08.2017 till 10.09.2017 and after joining the duty, Mr. Gopala Krishna was busy with clearing all the arrears of work and also in implementation of new GST regime and hence, there was a delay in filing the appeal before the Tribunal. When he realized this lapse on 10.10.2017, the appeal was filed. Considering these facts, we condone the delay in filing the appeal.
The only issue involved in this appeal is regarding allowability of deduction u/s. 80IB of IT Act. We find that as per the assessment order, M/s. Shell Apparels was a proprietary concern of Smt. Vasuda (Presently Director of the assessee- company). The AO further noted that it was stated before him that in order to meet the conditions of the bankers, the proprietary concern was converted into a private limited company under the name and style of M/s. Shell Apparels Pvt. Ltd. and the assessee company took over the undertaking as a going concern. The AO referred to the provisions of section 80IB of IT Act and mainly clauses (i) and (ii) of sub-section (2) of section 80IB and noted that where the old machinery and plant that has been transferred / used in the business, then this condition is deemed to have been violated. The AO has followed the judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs.
ITA No.2032/Bang/2017 Page 3 of 8 Nippon Electronics India Pvt. Ltd. as reported in 181 ITR 518 and rejected the claim of the assessee for granting deduction u/s. 80IB. The assessee carried the matter in appeal before the CIT(A) but without success. Now the assessee is in further appeal before us.
It was submitted by ld. AR of assessee that the judgment of Hon'ble Karnataka High Court followed by the AO having been rendered in the case of CIT Vs. Nippon Electronics India Pvt. Ltd. (supra) is not applicable in the present case. He placed reliance on a recent judgment of Hon’ble Kerala High Court rendered in the case of Kanan Devan Hills Plantations Company P. Ltd. Vs. ACIT as reported in 400 ITR 43 (Ker). He pointed out that in the judgement of Hon’ble Kerala High Court, Hon’ble High Court has considered a clarificatory note of the Central Board of Direct Taxes dated 13.12.1963 in respect of section 84 of the IT Act (since repealed) and as per the same, it was noted that the benefit of section 84 of the IT Act, 1961 attaches to the undertaking and not to the owner thereof. He also placed reliance on a judgment of Hon’ble Allahabad High Court rendered in the case of CIT vs. Haji Mohd. Ali Mohd. Ishaq as reported in 295 ITR 109 (All) and pointed out that in this case also, Hon’ble Allahabad High Court has considered the same Board Circular dated 13.12.1963 in which it has been clarified by the Board that the benefit of section 84 attaches to the undertaking and not to the owner thereof. It is also noted by Hon’ble Allahabad High Court that section 80J was inserted in the Act in the place of old section 84, which was deleted by Finance (No. 2) Act, 1967. The Hon’ble Allahabad High Court has noted that the Board has clarified that the successor will be entitled to the benefit for the unexpired period of five years, provided the undertaking is taken over as a running concern. The Hon’ble Allahabad High Court also noted that there is not even a transfer of ownership of the undertaking, but there is a mere change of the “constitution of the firm”, which apparently has been accepted by the Department. He submitted that this judgement is also applicable in the present case and therefore, the claim of the assessee should be allowed. The ld. DR of revenue supported the orders of authorities below.
ITA No.2032/Bang/2017 Page 4 of 8 6. I have considered the rival submissions. First of all, I reproduce the relevant Para from page no. 3 of the assessment order which is as under. “On perusal of records it is seen that M/s Shell Apparels was a proprietary concern of Smt. Vasuda (Presently Director of the company). It is stated that in order to meet the condition of the bankers, the proprietary concern was converted into a Private limited Company under the name and style of M/s Shell Apparels Pvt. Ltd. The assessee company took over the above undertaking as a going concern which could not satisfy the conditions of the laid down under the provisions of the section80IB of the Income-tax Act. Reading clauses of (i) and (ii) of sub-section (2) of section 80IB it will be clear that where the old machinery and plant that has been transferred/ used in the business, then this condition is deemed to have been violated. Besides this, that the undertaking must not have formed by transfer to the new business of the machinery and plant previously used for any purpose . As already stated that the undertaking was a proprietary concern and in order to meet the conditions of the Bankers, it was converted in to a Private Ltd. company. In the process, the proprietary concern has transferred all its assets & liabilities and plant & Machinery to Private limited company, thereby violating the requirement of Sec.80IB of the Income Tax Act. The assessee company relying on the Board's letter in F.No.15/563/(A-I) dt. 13.12.1963, wherein it took stand that the company is still eligible to claim deduction u/s.80IB of the Income Tax Act. It may not be out of place to mention here that the provisions of Sec.80IB were introduced only from 01.04.02 and two of the conditions are that it should not have been formed by splitting up or reconstruction of the business already in existence and it should not be formed by the transfer to the new business of machinery or plant previously used for any purpose. When the assessee is not in a position to comply these requirements, it is not eligible to claim deduction u/s.80IB of the Act. In the similar circumstances, it is worth quoting the decision of the Hon’ble High Court of Karnataka in the case of CIT Vs. Nippon Electronics India Pvt. Ltd. 181 ITR 518, it has held:” 7. From the above Para, it is seen that the AO has followed the judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Nippon Electronics India Pvt. Ltd. (supra). In that case, the facts were that in the initial year in which section 80J was claimed, it is noted by the AO that relief u/s. 80J is not allowable because the value of the old machinery or plant that has been transferred exceeded the limit of 20% as stipulated in 80J(4)(2)(ii) of the IT Act. In the present case, the dispute is not regarding the initial year because this is not in dispute that the undertaking was in existence prior to the present year in the form of proprietary concern which was converted into Private Limited
ITA No.2032/Bang/2017 Page 5 of 8 Company in the present year. In the facts of the present case, this judgement is not applicable because in the present case, an undertaking being sole proprietary concern of Smt. Vasuda has been converted into Private limited Company and this is not the case of the AO that the said undertaking was not eligible for deduction u/s 80IB in the initial year.
Now, I examine the applicability of the provisions of clauses (i) & (ii) of sub section (2) of section 80IB because the AO has alleged that these clauses are violated. I reproduce these provisions for ready reference:-
"(2) This section applies to any industrial undertaking 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 re-establishment, 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;"
From the above provisions, it is seen that the conditions applicable are to be examined with reference to the industrial undertaking and not with reference to the assessee and these have to be examined in the year of formation of the industrial undertaking. Even as per the AO, as per the relevant Para of the assessment order reproduced above, the assessee company took over the relevant industrial undertaking as a going concern. This is not the case of the AO that the industrial undertaking so acquired by the assessee was not eligible for deduction u/s 80IB in the initial year or in any year prior to such take over by the present assessee on conversion of the proprietary concern into a company. The objection of the AO is this much only that on conversion of the proprietary concern into a company, the said proprietary concern has transferred all its assets and liabilities including plant & machineries to the private limited company. In fact, the undertaking itself
ITA No.2032/Bang/2017 Page 6 of 8 was taken over as a going concern and not the individual assets. In the case of CIT vs. Haji Mohd. Ali Mohd. Ishaq (Supra) also, the firm was reconstituted and the dispute was this as to whether the reconstituted firm was eligible for the benefits of section 80J and it was held that the reconstituted firm was entitled for the unexpired period of five years, provided the undertaking is taken over as a running concern. Hon'ble Allahabad High Court also held that there is not even a transfer of the undertaking but there is mere change of the constitution of the firm in that case. In the present case also, there is mere conversion of a proprietary concern into a private limited company. At the best, it can be said that in the present case, there is a transfer of the undertaking but definitely, it is not a case of transfer of the assets including plant & machinery. In my considered opinion, this judgment of Hon'ble Allahabad High Court is applicable and respectfully following the same, I hold that the claim of the assessee for deduction u/s 80IB is to be allowed as per law and the provisions of clauses (i) & (ii) of section 80 IB (2) are not violated in the facts of the present case.
Regarding the judgment of Hon'ble Karnataka High court followed by the AO having been rendered in the case of CIT vs. Nippon Electronics India Pvt. Ltd. (Supra), I find that this judgment is not rendering any help to the revenue in the facts of the present case. In that case, the dispute before Hon'ble Karnataka High Court was this that if the required conditions of eligibility for deduction u/s 80J were not satisfied in the initial year i.e. the first year when the industrial undertaking begins the manufacture, whether such deduction can be allowed in a subsequent year if the required conditions are fulfilled in that subsequent year. In that case, in the initial year, i.e. A.Y. 1971 —72, the assessee was not entitled to relief u/s 80J because in that year, the old assets exceeded 20 percent of total assets but in A. Y. 1973 — 74, it was brought down below 20% by making new investment in A. Y. 1973 — 74 but it was held that the eligibility has to be seen in the initial year and if the assessee is not eligible in the initial year, the question of granting exemption in a subsequent year does not arise. In the present case, this is not the case of the AO that in the initial year in which the industrial undertaking began the manufacture, it was not eligible for deduction
ITA No.2032/Bang/2017 Page 7 of 8 u/s 80 IB. Once it is accepted that the industrial undertaking is eligible for deduction u/s 80IB in the initial year, the eligibility in a subsequent year being part of unexpired period of specified no. of years cannot be disputed or doubted and deduction has to be allowed during unexpired period of eligible no. of years at the specified percentage. In fact, this judgment also helps the assessee in the facts of the present case. Hence, I hold that as per this judgment of Hon'ble Karnataka High court rendered in the case of CIT vs. Nippon Electronics India Pvt. Ltd. (Supra) also, the assessee is eligible for the deduction u/s 80IB because this is not the case of AO that the undertaking in question was not eligible for deduction u/s 80 IB in the initial year. Regarding two other aspects i.e. that the present year is a part of unexpired period of specified no. of years or not and whether the claim of the assessee is at an eligible percentage as per the section, necessary facts are not available on record and there is no finding of the lower authorities on these two aspects. Hence, I restore the matter to the AO with the direction that the assessee should be allowed deduction u/s 80IB if the present year is a part of unexpired period of specified no. of years after the initial year at the eligible percentage i.e. 100% or 25/30% as allowable as per law after providing adequate opportunity of being heard to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes in the terms indicated above.
Order pronounced in the open court on the date mentioned on the caption page.
Sd/- (ARUN KUMAR GARODIA) Accountant Member Bangalore, Dated, the 19th January, 2018. /MS/
ITA No.2032/Bang/2017 Page 8 of 8 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order
Senior Private Secretary, Income Tax Appellate Tribunal, Bangalore.