Principal Commissioner of Income Tax vs. Altruist Technologies Pvt Ltd

3 3. The Assessing Officer, vide its order (Annexure P-1), came to the conclusion that the assessee was not entitled to claim any benefit under Section 80-IC of the Act as Unit-III was not a new Unit and it was reconstruction of an existing Unit-II. 4. Aggrieved against the orders passed by the Assessing Officer, assessee filed appeal before the Commissioner of Income-tax (Appeals), Shimla. 5. The Appellate Authority also came to the conclusion that the assessee was not entitled to claim deduction under Section 80-IC of the Act, as the Unit-III did not have an independent existence. The Appellate Authority held that the Assessing Officer had rightly held that the operation of Unit-III was nothing but an extension of operation of Unit-II. 6. Thereafter, assessee preferred appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the “Tribunal” in short) and the Tribunal vide its impugned order dated 02.11.2018 allowed the appeal. Hence, the present appeal by the appellant-Department. 7. At the time of admission of the appeal, following substantial question of law were framed:-

4 “(i) Whether on the facts and in the circumstances of the case, the finding of the Hon’ble ITAT is perverse and contrary to the material on record? (ii) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is right in holding that the assessee has right to get deduction u/s 80IC(4)(i) in respect of the new unit though the same was in fact reconstruction/splitting of old unit?” 8. Mr. Vinay Kuthiala, learned Senior Counsel assisted by Ms. Vandana Kuthiala and Mr. Diwan Singh Negi, Advocates, for the appellant-Department, has submitted that the Tribunal had erred in reversing the findings arrived at by the Assessing Officer as well as the Appellate Authority with regard to the fact that the Unit-III, run by the assessee, was not an independent Unit. In fact, appellant was not entitled to claim benefit under Section 80-IC of the Act. Unit-III was being operated from the registered office of the assessee and no rent was being paid by the assessee. 9. Mr. Vishal Mohan, learned Counsel for the assessee, on the other hand, has opposed the appeal and has submitted that it has been duly noticed by the Tribunal that Unit-II and Unit-III were run by the assessee-company from different buildings. Separate staff had been employed by the assessee for running both the Units. Investment qua both the units had been

5 separately made by the assessee and separate Account Books (which were duly audited), were being maintained by the assessee. There was no inter-lapping between Unit-II and Unit-III. 10. In support of his arguments, the learned counsel for the assessee-company, has placed reliance on a decision rendered by the Hon’ble Supreme Court in case titled “Bajaj Tempo Ltd. versus Commissioner of Income Tax”, reported in (1992) 3 SCC 78, wherein, it was held as under:- “9.Initial exercise, therefore, should be to find out if the undertaking was new. Once this test is satisfied then clause (1) should be applied reasonably and liberally in keeping with spirit of Section 15-C (1) of the Act. While doing so various situations may arise for instance the formation may be without anything to do with any earlier business. That is the undertaking may be formed without splitting up or reconstructing any existing business or without transfer of any building material or plant of any previous business. Such an undertaking undoubtedly would be eligible to benefit without any difficulty. On the other extreme may be an undertaking new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two there may be various other situations. The difficulty arises in such cases. For instance a new company may be formed, as was in

6 this case a fact which could not be disputed, even by the Income Tax Officer. But tools and implements worth Rs.3,500 were transferred to it of previous firm. Technically speaking it was transfer of material used in previous business. One could say as that vehemently urged by the learned counsel for the department that where the language of statute was clear there was no scope for interpretation. If the submission of the learned counsel is accepted then once it is found that the material used in the undertaking was of a previous business there was an end of enquiry and the assessee was precluded from claiming any benefit. Words of a statute are undoubtedly the best guide. But if their meaning gets clouded then the courts required to clear the haze. Sub-section (2) advances the objective of sub-section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to the interpretation. The formation should not be by such transfer. The emphasis is on formation not on use. Therefore it is not every transfer of building or material but the one which can be held to have resulted in formation of the undertaking. In Textile Machinery Corporation Ltd. v. Commissioner of Income Tax, West Bengal,

7 107 [1977] 195 SC, this Court while interpreting Section 15-C observed (SCC p.375, para 18): "The true test, is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under Section 15-C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved." Even though this decision was concerned with the clause dealing with reconstruction of existing business but the expression `not formed' was construed to mean that the undertaking should not be a continuation of the old but emergence of a new unit. Therefore even if the undertaking is established by transfer of building, plant or machinery but it is not formed as a result of

8 such transfer the assessee could not be denied the benefit.” 11. Learned counsel for the assessee-company, has further placed reliance on a decision rendered by the Hon’ble Supreme Court in case titled “Textile Machinery Corporation Ltd., versus Commissioner of Income Tax”, reported in Income Tax Reports Vol.107 (1977) at page No.195, wherein, it was held as under:- “Page 206. …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 section 15C if that section is otherwise applicable. However, in order to be entitled to the benefit under section 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,

9 (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 section 15C may be claimed. The legislature has advisedly refrained from inserting a definition of the word 'reconstruction' in the Act. Indeed, in the infinite variety of instances of restructuring of industry in the course of strides in technology and of other developments, the question has to be left for decision on the peculiar facts of each case. If any undertaking is not formed by reconstruction of the old business that undertaking will not be denied the benefit of section 15C simply because it goes to expand the general business of the assessee on some directions. As in the instant case, once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results

10 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 being formed by reconstruction of the old business.” 12. Before the Tribunal, it had been demonstrated by the assessee that Unit-II & Unit-III were being operated from separate buildings with separate employees, separate clientage, separate sale-tax registration numbers and separate registration with District Industries Center. The said Chart, as reproduced in the order passed by the Tribunal, is as under:- “….. Particulars Unit-II Unit-III Name and address of the Unit Altruist Technologies Pvt. Ltd., Unit-II, Block 24, SDA Commercial Complex, STPI Building Kasumpti, Shimla. Altruist Technologies Pvt. Ltd. Unit-III, 4th Floor, Altruist Mount, Behind Firhill, Shimla. Distance between the two units 7 Kms. Service Tax Registration No. AAFCA3725NST001 Sales Tax Registration No. 9658 14158 Registration with District Industries Centre, Shimla No.02/011/21/00038, dated 30.3.2007 No.02/11/21/00256 effective from 31.12.2009 Date of Commencement of Production 21.09.2005 31.12.2009 Initial A.Y. u/s A.Y. 2006-07 A.Y.2010-11

11 80-IC Accounts Books Separately maintained and duly audited Separately maintained and duly audited Investment in Computers (being primary plant & machinery) in A.Y. 2010-11 45,16,158/- 76,15,962/- (100% new purchases with no transfers form Unit-II) Attributable profits 20,85,23,896/- 1,06,90,722/- No. of employees as of date of formation of Unit-3. 175 employees 27 employees UNIT-II Clients Unit II - invoiced amount (Rs.) Bharti Airtel 173825288 Bharti Airtel - Shimla 1108148 Bharti Airtel - Mohali 5820103 Bharti Airtel - Kolkata 125176 Bharti Airtel - Delhi 1428765 Idea Cellular Ltd 11223942 MTNL-Delhi 3865460 RCIL-Mumbai 121567046 Tata Teleservices Ltd., Mumbai 25859599 Total 34,38,23,527 UNIT-III Clients Unit III - invoiced amount (Rs.) Aircel Lad 1061050 Hungama Debtor 4002574 MTNL-Mumbai 258361 Shotformats Digital Productions Pvt. Ltd. 1469686 AMA India Consultants Income 610786 Federation of All India Aluminum Utensils Manufac 18000 The Tribune Trust 200000

12 Total 17,169,557 .....” 13. It was the case of the assessee before the Tribunal that earlier the Company was giving services in relation of one product, i.e. voice chat to its clients, like Airtell, Reliance, Idea & Tata. Since the business of the company had grown, it found it necessary to start a new Unit with a view to expand its area of service and consequently, a separate Unit was started, giving services to other Non-Telco Companies/Clients in the field of Information, Technology and Software Services. The office building, where Unit-III had been started, was earlier registered office of the company, whereas, Unit-II was being run from another building which was situated at a distance of about 7 kilometers from the registered office. The building where Unit-III was being run had been purchased by the assessee-company on 21.01.2008, but the premises was let-out on rent to some other party. Thereafter, the premises was got vacated and the registered office of the company was shifted to the said premises in assessment year 2009-10. Thereafter, Unit-III was started in the premises after completing necessary formalities. The operation of Unit-III, commenced in the assessment year 2010-11.

13 14. The Assessing Officer was influenced by the fact that since Unit-III was being run by the assessee in its registered office, therefore, activities done in Unit-III were identical in nature to those done by Unit-II. The Assessing Officer had failed to appreciate that the building, where Unit-III had been started, had in fact been given on rent, whereas, Unit-II was being run in a separate building which was at a distance of about 7 kilometers. The building where the registered office was started in the assessment year 2009-10, was got vacated and thereafter Unit-III was started in the said premises in assessment year 2010-11. It was not a case where plant and machinery of Unit-II had been used for Unit-III. The business of the company had grown and with a view to expand its business, the company started a new Unit by making investment as shown in the Chart reproduced above. New employees were recruited by the assessee for Unit- III. Separate account books were maintained by assessee qua Unit-II & Unit-III. 15. In view of the facts and circumstances of the case, the learned Tribunal rightly came to the conclusion that the assessee was entitled to claim benefit under Section 80-IC of the

14 Act by treating Unit-III of the assessee-company as a separate and distinct Unit. 16. In the facts and circumstances of the case, the findings recorded by the Tribunal can neither be said to be perverse or result of misreading of evidence and material on record. The substantial questions of law stand answered accordingly. 17. Consequently, the appeal is dismissed. 18. Pending miscellaneous application(s), if any, shall also stand disposed of. (Tarlok Singh Chauhan)

Judge (Virender Singh) Judge

15th September, 2022. (krt)