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Facts
The assessee, M/s. SJR Enterprises Pvt. Ltd., is in appeal against the order of the NFAC for the assessment year 2009-10. The assessee claimed deduction under Section 80-IB of the Income Tax Act, 1961. The Assessing Officer and CIT(A) denied the deduction on grounds of reconstruction/splitting up of business and violation of area limits for housing units.
Held
The Tribunal held that the conversion of a partnership firm to a company does not constitute reconstruction or splitting up of business. Regarding the area limit, it was held that deduction should be allowed proportionately for units not exceeding 1500 sq. ft., and denied for units exceeding the limit.
Key Issues
Whether the succession of a business by a company from a partnership firm amounts to reconstruction or splitting up, thus disentitling the claim for deduction under Section 80-IB, and whether the area limit of 1500 sq. ft. per housing unit for deduction under Section 80-IB(10) should lead to total denial of deduction.
Sections Cited
80-IB, 234B, 234C, 143(2), 263, 143(3), 80-IA, 10B, 575, 15C, 10A, 80HHE
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Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI PRAKASH CHAND YADAV
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of NFAC for the assessment year 2009-10 dated 18.1.2024 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). The assessee has raised following grounds:
1. The orders passed by the LAO and the Hon. CIT(A) are bad in law and are not in accordance with the provisions of the Act.
2. The Hon. CIT(A) erred in dismissing the Appellant's appeal without providing the Appellant with an opportunity of being heard, especially when the last notice from the Hon. CIT(A) was requesting for copy of the Form 35 filed by the Appellant, together with the statement of facts, grounds of appeal and the assessment order.
3. The Hon. CIT(A) erred in dismissing the Appellant's appeal without applying his mind and without considering the Appellant's submissions as is evident, inter alia, from page 24 of the order which mentions an addition that does not concern the Appellant at all.
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 2 of 26 4. The LAO and the Hon. CIT(A) erred in denying the relief claimed by the Appellant under section 80-1B of the Act.
5. The LAO and the Hon. CIT(A) erred in denying the relief claimed by the Appellant under section 80-1B of the Act without considering the Appellant's submissions that succession of the erstwhile firm by the Appellant-company does not constitute 'splitting up' or 'reconstruction'. The LAO and the Hon. CIT(A) erred in not considering the Appellant's elaborate submissions in this regard explaining the legal purport of this concept and the factual matrix underlying the succession.
6. The LAO and the Hon. CIT(A) erred in denying the relief claimed by the Appellant under section 80-1B(10) of the Act on the basis that certain of the housing units in the project exceed 1,500 sq. ft. The LAO and CIT(A) did not provide any factual basis nor any legal basis for their conclusion. The LAO and the Hon. CIT(A) erred in not considering the Appellant's elaborate submissions in this regard including flat-wise details filed before them.
Without prejudice to the above ground, the LAO erred in not applying the ratio of the ruling of the Hon. Karnataka High Court on similar facts in the Appellant's predecessor's case in CIT v. SJR Builders in of 2010 where the Hon. Karnataka High Court had upheld the claim of proportionate deduction under section 80-1B(10) of the Act to the extent of housing units satisfying the area threshold under the Act.
8. The LAO and the Hon. CIT(A) erred in: (a) denying the relief claimed by the Appellant without any fresh application of mind and; (b) by merely following the broad directive of the Ld. CIT in denying the relief claimed by the Appellant.
9. The CIT(A) erred in concluding that the Appellant not produced sale agreement to substantiate its claim under section 80IB(10) of the Act without appreciating the fact that the Appellant had requested for guidance on manner in which the Appellant can' file the sale deeds of flats due to larger size and without providing opportunity to submit the same.
10. The LAO erred in levying interest under section 234B and section 234C of the Act amounting to Rs. 2,01,26,975/- and Rs. 12,857/-.
Facts of the case are that the assessee is assessed to income tax on the files of the Deputy Commissioner of Income-tax, Circle 6(1)(1) (erstwhile Circle 12(3)), Bangalore, under PAN AAJCS9603B. The Assessee is a company incorporated under the Indian M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 3 of 26 Companies Act, 1956. The Assessee filed the return of income electronically on 25.09.2009 declaring an income of Rs. 2,77,58,450/-. The case was selected under the scrutiny assessment under the CASS and a notice was issued under section 143(2) of the Act. The assessment was taken up by Joint Commissioner of Income Tax (OSD), 0/0 Commissioner of Income- tax-Ill, Bangalore. During the assessment proceeding, various details were called for and the same were submitted. The ld. AO noted that the Assessee had claimed deduction under section 80-IB of the Act. To ascertain whether the project for which the said deduction was claimed complied with the requirements for grant of deduction under section 80-IB, the case was referred to the District Valuation Officer, Bangalore ('DVO'). The DVO submitted a report enclosing the details of measurements of flats under the said project and concluded that there is no deviation from the stipulations contained in the provisions of section 80-IB. Thereafter, the ld. AO completed the assessment by accepting the income returned without any issues and passed the assessment order accordingly. 2.1 Further, notice was issued under section 263 by Commissioner of Income-tax-III ('Ld. CIT') on the basis that: (a) excess depreciation was allowed on the assets transferred by succession; (b) deduction under section 80-IB of the Act was incorrectly allowed. During the course of the proceedings before the Ld. CIT, on the claim of excess depreciation, the Assessee mentioned that it had no objection in withdrawing the depreciation claim to the extent of Rs.5,82,576/-. However, the Assessee requested that as this mistake was apparent on the face of the record and was rectifiable by the O under section 154, the proceedings under section 263 should be dropped on this point. 2.2 As regards the aspect of incorrect allowance of deduction under section 80-IB(10), the Assessee submitted that this aspect M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 4 of 26 was reviewed by the ld. AO. The Assessee mentioned that upon succession, the Assessee had taken over the ongoing housing project, Brooklyn, from SJR Builders, its predecessor. It was also submitted that the LD. AO has considered all aspects of the claim of the Assessee and had not raised any issue with respect to deduction under section 80-IB(10) during the assessment proceedings and as such, it had rightly claimed the deduction under section .
2.3 The ld. CIT (Admn.) while passing the order u/s 263 of the Act disagreed with the above and held as below: a. The Assessee is not eligible for deduction under section 80-IB(10) as the Assessee had violated the conditions prescribed under the said section. The Ld. CIT held that: (a) combining of two flats and selling to the same person; and (b) maximum permissible area of both two flats put together exceeding 1500 sq. ft. violates the conditions prescribed under section 80-IB(1O). The Assessee provided detailed arguments rebutting the contention of the ld. CIT. However, the ld. CIT did not accept the contention of the Assessee and directed the ld. AO to verify the balance flats to identify quantum of violation and to accordingly quantify the deduction undersection 80-IB(10) of the Act. b. The succession of the business by the Assessee from SJR Builders amounts to reconstruction or splitting up of the business, as a consequence of which, the claim under section 80-IB(10) would be invalid. The Assessee provided detailed arguments rebutting the contention of the ld. CIT. However, the ld. CIT concluded that this issue could not be verified in absence of full evidence and directed the ld. AO to examine the same and decide accordingly.
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 5 of 26 2.4 Taking into consideration all the above factors, the Ld. CIT passed the order u/s 263 of the Act and directed the ld. AO to examine the issues based on evidence and decide accordingly. Pursuant to the above directions of the Ld. CIT, the ld. AO issued a notice requesting for certain clarifications and ng for certain information and documents to be filed. The clarifications and details requested for were furnished by the Assessee. The ld. AO then proceeded to conclude the proceedings by passing an order under section 143(3) read with section 263 of the Act by holding that the Assessee is not eligible to claim relief under section 80- IB(I) of the Act, since: a. In the facts of the Assessee, there is reconstruction of business; and b. The total area of the housing units in the project undertaken by the Assessee exceed 1500 sq. ft.
2.5 In holding as above, the ld. AO completely ignored the legal and factual submissions made by the Assessee. The ld. AO also did not provide either any further personal opportunity to be heard or any notice of his proposed action. Pursuant to the above, the ld. AO proceeded to disallow the deduction claimed by the Assessee under section 80-IB(10) of the Act of Rs.8,35,14,758/- and proceeded to determine the tax liability of the Assessee at Rs. 4,93,09,358/.
2.6 Aggrieved, the Assessee filed appeal before the ld. Commissioner of Income-tax, National Faceless Appeal Centre, Delhi /('CIT(A)') against the impugned order passed by the ld. AO on 04.02.2015.
2.7 Detailed submissions were made before the NFAC on a time- to-time basis specifically that:
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 6 of 26 a. By virtue of the succession of the firm by the private limited company, there is no splitting up or reconstruction as contemplated under section 80-IA. Numerous rulings were cited in this regard. b. As regards the area-specific compliance, that is, the flats should not exceed 1500 sq. ft., elaborate submissions were made including a listing of all the flats which demonstrated that this requirement was not violated by the Assessee. In fact, this aspect was examined by the earlier Commissioner of Income-tax (Appeals) who had heard the matter in 2015 and had raised specific questions on only two of the flats, which questions were also clarified. Rulings were also cited. 2.8 The Assessee had also organized the sale deeds for all the flats to clarify this aspect. However, the deeds were voluminous and it was not possible for the Assessee to upload these deeds for the NFAC's perusal given the technology constraint. Hence, in the letter to the NFAC dated 25th October 2023, the Assessee requested the NFAC to provide the Assessee the guidance on the manner in which to submit the sale deeds of the flats, as the data is voluminous.
2.9 Despite the above, and without providing any opportunity for a virtual hearing, the NFAC/CIT(A) dismissed the appeal. 2.10 Aggrieved by the said order of the NFAC/CIT(A), the Assessee is in appeal before this Tribunal by way of above main grounds.
The assessee has raised additional ground of appeal vide application dated 18.7.2024, which is as follows: “The ld. AO erred in applying the conditions of section 80IB(2) of the Act to the assessee’s claim for deduction u/s 80IB(10) OF THE Act without appreciating the fact that nature of deduction u/s 80IB(1) of M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 7 of 26 the Act is independent of the provisions of section 80IB(2)of the Act. The application of section 80IB(2) to the appellant’s claim u/s 80IB(10) for a housing project is untenable.”
We have heard the both the parties on admission of additional ground. In our opinion, all the facts are already on record and there is no necessity of investigation of any fresh facts for the purpose of adjudication of above ground. Accordingly, by placing reliance on the judgement of Hon’ble Supreme Court in the case of NTPC Vs. CIT 229 ITR 383 (SC) we inclined to admit the additional ground for the purpose of adjudication as there was no investigation of any fresh facts otherwise on record and the action of the assessee is bonafide.
5. At the time of hearing, assessee not put any arguments with regard to ground Nos.1 to 3. Accordingly, these grounds are not considered for adjudication.
6. The main grounds Nos.4, 5 and additional ground are akin to each other. We adjudicate these grounds collectively. 7. The ld. A.R. submitted that the LD. AO ought not to have applied the provisions of section 80-IB(2) of the Act to the Assessee’s claim for deduction under section 80-IB(10) of the Act. This is because the provisions of section 80-IB(10) on their own contain formative conditions and formative conditions per section 80-IB(2) would be in addition to that and not per the scheme of the said section. Section 80-IB has several sub-sections which specifically require the assessee claiming deduction thereunder that it should not be formed by re-construction or splitting up of existing business. If sub-section (2) and the conditions mentioned therein are to govern an assessee claiming deduction under the other sub- sections, including sub-section (10), then the legislature would not have provided specifically in some of the sub-sections that the business should not have been formed by the splitting up or re- M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 8 of 26 construction of an existing business or by the transfer on any building or machinery previously used for any purposes. 7.1 He submitted that the illustrations here are sub-sections (7), (7A) and (7B) which relate to deductions in the case of any hotel, multiplex theatre and convention centre respectively. Clause (c)(i), clause (c)(ii), clause (b)(i), clause (b)(ii) and clause (b)(iii) of Sub- sections (7), (7A) and (7B) respectively contain conditions that the deduction is available in respect of hotel or multiplex theatre or convention centre respectively only if the business is not formed by splitting up or re-construction of a business already in existence, etc. Such a condition is not to be found in section 80-IB(10). 7.2 Wherever the legislature deemed it fit, the conditions enumerated in section 80-IB(2) has been specifically made applicable by providing the same in the relevant subsections of section 80-IB. In the absence of such a mandate in section 80- IB(10), it cannot be understood that the conditions prescribed in section 80-IB(2) should be satisfied by the taxpayer to claim deduction under section 80-IB(10) of the Act in relation to developing and building housing projects. 7.3 In this regard, he relied on the following rulings in support of the above proposition: a. Parth Construction v. ITO (23 SOT 368); b. GV Corporation v. ITO (38 SOT 174); c. Nyati Builders Pvt. Ltd v. DCIT (ITA No.619 / PN / 2011).
7.4 Hence, he submitted that the ld. AO and CIT’s contention that section 80-IB(2) applies to the Assessee’s case is incorrect, and the addition made by the ld. AO ought to be deleted. Succession does not constitute ‘reconstruction’ or ‘splitting- up’ 7.5 The ld. A.R. further submitted that the housing project undertaking was taken over by it by way of succession of an M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 9 of 26 existing partnership business called “SJR Builders”. One of the projects taken over by the Assessee was called “Brooklyn”. The project was sanctioned on 24.11.2005 and was completed in FY 2008-09. In this backdrop, the Assessee had submitted that the succession of a partnership firm’s business by a company would not amount to either splitting up of existing business or reconstruction of the existing business. 7.6 He explained that from a perusal of the succession agreement placed at page nos. 201-222 of assessee’s paper book, where there is no ‘splitting up’ of the business in that there is no segmentation of the business carried on and the business is also not thereafter carried on in two or more undertakings. There is no ‘reconstruction’ of the business in that the business does not emerge in any altered form or the identity of the business is not disturbed. 7.7 He further submitted that ‘splitting up’ contemplates a situation where the business carried on is segmented and thereafter carried out in two or more undertakings. In this regard, the Company had discussed the concept of splitting up in light of the ruling of the Karnataka HC in T Satish U Pai v. CIT (119 ITR 877):
In order to hold that there is a splitting up of a business already in existence there must be some materials to hold that either some asset of an existing business is divided and another business is set up from such splitting up of asset or that the two businesses are the same and the one formed was an integral part of the earlier one and it was only a question of breaking up of the same business. In a splitting up, some assets of an existing business is divided 7.8 He submitted that the partnership business of SJR Builders is completely succeeded to by the Assessee and thus there is no splitting up. 7.9 He submitted that succession is also not reconstruction. In a reconstruction, normally the existing business emerges in an altered form and the identity of the existing business is lost to that M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 10 of 26 extent. Reconstruction of a business refers to an undertaking being carried on in an altered form. When the assessee buys assets of the business of another assessee, there is no reconstruction. In the case of a transfer of a business as a whole on a going concern basis from one person to another the transferor ceases to be the owner of the business and would then be owned by the transferee. In such a case it cannot be said that the business owned by the transferee has been formed as a result of the reconstruction of the transferor’s business. Similar principles are upheld by the Delhi HC in CIT v. Arts Beauty Exports (28 taxmann.com 16) and the Delhi ITAT in Tech Books Electronics Services (P.) Ltd. v. Addl. CIT (100 ITD 125). 7.10 He submitted that various rulings support the position that the succession of business does not amount to the reconstruction or splitting up of business. In this regard, he placed reliance on the following rulings: a. Mega Packages v. CIT (TS-529-HC-2011(P & H)). b. Foresee Information Systems (P) Ltd. (TS-87-HC- 2014(KAR)).
8. Now we will adjudicate the additional ground as this ground is akin to the ground No.4 & 5. The ld. AO erred in applying the conditions of section 80IB(2) of the Act to the assessee’s claim for deduction u/s 80IB(10) OF THE Act without appreciating the fact that nature of deduction u/s 80IB(1) of the Act is independent of the provisions of section 80IB(2)of the Act. The application of section 80IB(2) to the appellant’s claim u/s 80IB(10) for a housing project is untenable relating to granting of deduction u/s 80IB(10) of the Act, 9. The ld. A.R. submitted that section 80IB of the Act has several sub-sections, which specifically require the assessee claiming deduction thereunder, it should not be reconstruction or splitting up of existing business. If section 80IB(2) of the Act and the condition mentioned therein ought to be governed an assessee M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 11 of 26 claiming deduction under the other sub-section including 80IB(10) of the Act, then the legislature would not have provided specifically in some of the sub-sections that business should not have formed by splitting up or reconstruction of an existing business or by transfer of any building or machinery previously used for any purpose. According to ld. A.R., wherever the legislature deemed it fit, the condition enumerated in section 80IB(2) of the Act has been specifically made applicable by providing the same in relevant sub- section of section 80IB of the Act. Since there was no such language in sub-section 10 of section 80IB, the assessee claiming the relief u/s 80IB should not be required to also satisfy condition in section 80IB of the Act.
10. Learned Departmental Representative submitted that the AO has discussed the conditions laid down by provision, as per which the assessee is entitled for benefit of section 80IB if it is not formed by the transfer to new business of machinery or plant used for any purpose. The AO in the assessment order has discussed this aspect and he has observed that newly formed company is a reconstruction of old existing business and with old machinery. While arriving at the conclusion he has discussed the mode by which company came in to existence by observing that assessee company was formed after reconstruction of partnership firm which is earlier existing business firms, namely M/s. SJR Builders. Therefore, after discussing the provision in detail, the AO has observed that condition laid down by Section 80IB (2)(ii) has not been fulfilled. The ld. A.R. in his argument contended that assessee company took over the entire business with all assets and liabilities of earlier partnership firm as on 08.05.2008 and that earlier firm entitled for claim u/s. 80IB of the Act. This is finding of fact that this is a reconstruction of the old business. To avail the benefit of Section 80IB it has been laid by the statute that these facilities are not available to the industrial undertaking which is formed by M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 12 of 26 transfer to a new business of machinery or plant specially used for any purpose. In the instant case this is a finding of the fact that assessee company has been formed by conversion of partnership into private limited company. As such, provisions of section 80IB(2) of the Act is applicable.
We have heard the rival submissions and perused the materials available on record. We have observed that Memorandum of Association of Company and succession agreement filed which is kept on record in page Nos.202 to 222 of paper book that it has succeeded to the business of partnership firm SJR Builders in its entirety as a going concern. The partners of the partnership firm became share holder and director of the present assessee SJR Enterprises Pvt. Ltd. Being so, it cannot be said that there was no continuity of the firm. The entire business of the erstwhile partnership firm taken over by the newly formed assessee company. Being so, on that basis, name of assessee u/s 80IB of the Act cannot be denied. 11.1 It is the contention of the assessee that it is a case of conversion of partnership firm into a limited company under Part IX of the Companies Act, 1956 whereas the Department contends that it is a clear case of reconstruction. It is seen from the records that the assessee company was incorporated on 11.5.2006 and the Certificate of Incorporation issued by the Registrar of Companies, Karnataka (Placed at page 223 of the paper book) and the promoter of company are (1) J. Boopesh Reddy (2) J. Vijay Reddy and they are also only two first Directors of the company from the date of incorporation of the company. It is also noted as one of the main object of the company to be pursued by the company on its incorporation is as follows: (1) To take over the business of the existing Partnership firm “SJR BUILDERS” as an ongoing concern basis.
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 13 of 26 11.2 It is to be noted that a partnership firm may be converted into a company by following the provisions of Part IX of the Companies Act, 1956. Sections 565 to 581 of the Companies Act deal with the conversion of firms into a company under the Companies Act, 1956. For the purpose of Part IX, so far as it relates to the registration of a company limited by shares, a joint stock company means a company having a permanent paid up or nominal share capital of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided or held partly in one way and partly in the other, and formed on the principle of having for its members the holders of those shares or that stock, and no other persons. Once the new company is formed, the entire business of the firm along with all its assets and liabilities is transferred to the newly formed company. It is the revenue's contention that for becoming eligible for deduction u/s 80IB of the Income Tax Act, 1961, the business must not be a 'reconstruction' of earlier existing businesses. It was not the case of the Department that in the present case, the erstwhile partners had equal profit/loss sharing ratios whereas the Directors have acquired a different shareholding pattern. Thus, in such a situation, the newly formed company cannot be considered as a reconstruction of existing business with old existing machineries and since sub-section (2) of section 80IB of the Income Tax Act, 1961 states that the business should not be formed by transfer of machinery or plant previously used for any purpose, the assessee company was not entitled to claim deduction u/s 80IB of the Act. 11.3 On facts, it is undisputed that the erstwhile partnership firm M/s. SJR Builders, having 2 partners was converted into a limited company as M/s. SJR Enterprises Pvt. Ltd. and all the partners of the erstwhile firm became the shareholders of the company and the shares were allotted to them. It is also undisputed that on such conversion, all the assets and properties of the firm vested in the M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 14 of 26 company under the Companies Act, 1956. In view of the undisputed facts, it is clear that on conversion from firm to company, there was merely a change in the ownership of the undertaking. There was no change in the business of the undertaking which was already in existence. The issue of reconstruction was discussed at length by the ITAT Delhi 'B' Bench in Tech Books Electronic Services (P) Ltd. vs ACIT, Range-16, 100 ITD 125 (Del) wherein the Bench, adjudicating on the issue of exemption u/s 10B of the Act, observed as under:-
However, we are not concerned with the change in the ownership. Rather we are to enquire as to whether there was any change or reconstitution of the building of the undertaking. On close scrutiny and analysis of the terminology adopted in Clause (ii) of Subsection (2) of Section 10B, it becomes clear that the word splitting up and the word 'reconstruction', are attached to business 'already in existence'. Hence, these words qualify business and not the ownership of the business. Hence, if the business of the undertaking is formed by splitting up or by reconstruction, then the undertaking will not be qualified for claiming exemption. The Assessing Officer as well as the learned CIT (A) have not pointed out as to in what manner there was any change in the business of the undertaking. The business of the undertaking was not formed by splitting up of the old business or by reconstruction of the old business i.e., business already in existence. The departmental authorities have laid much emphasis on the change in the ownership and it appears that they have not properly appreciated the terminology used in the provision referred to above. The intention of the Legislature in using the words is clear and has been expressed in unequivocal terms and nothing can be I.T.A. 2486/Del/2012 Assessment year 2003-04 subtracted or added to the terms or words used in a statutory provision. 10.3-2 As per the doctrine of Noscitur A Sociis, the rule of construction is that the words appearing in a statutory provision in close association, take colour from each other. The rule of construction noscitur a sociis, as explained by Lord MacMillan means, The meaning of a word is to be judged by the company it keeps". As stated by the Privy Council, "it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them". This rule, according to Maxwell, means that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 15 of 26 a sense analogous to a less general. The same rule is thus interpreted in words and phrases. Associated words take their meaning from one another under the doctrine of noscitur a sociis, the philosophy of which is that the meaning of the doubtful word may be ascertained by reference to the meaning of words associated with it; such doctrine is broader than the maxim ejusdem generis. In fact the latter maxim is only an illustration or specific application of the broader maxim noscitur a sociis. 10.3-3 In view of the above maxim of Rule of interpretation, the term 'reconstruction, is to be seen and considered in the light of splitting up Otherwise also, as per the dictionary meaning of 'reconstruction', as given in Judicial Dictionary by K.J. Iyer, Eighth Edition 1980, the word 'reconstruction' is expressed by synonymous 'rebuild'. Thus, if there is change of ownership from one person to another but the business continued to be the same, it cannot be said that the undertaking is formed as a result of reconstruction. 10.3-4 The meaning of the word 'reconstruction' can also be understood in the context in which this word appears. If we consider the scheme of the special provision and go through the provisions of Sections 32, 32A and 33B and I.T.A. 2486/Del/2012 Assessment year 2003-04 examination of the Sub-clauses of Sub-section (2) together then it will be clear that the Legislature intended to disqualify those undertakings which are formed by rearranging the components or equipments of the earlier business and that is the reason that Sub-clause (iii) says in specific terms that the undertaking to be qualified for exemption under Section 10B should not be formed by the transfer to a new business of machinery or plant previously used for any purpose. Thus, the emphasis is on the previous business, business already in existence or old business establishment. However, if the new undertaking has been formed and conditions laid down in various clauses of Sub-section (2) are not applicable, then the exemption cannot be denied to the undertaking merely because at subsequent stage there is change in the ownership of the undertaking. The business structure and continuity of the business activity has to be seen and not the continuity of the same ownership of the undertaking. Thus, there is a difference between the ownership of the undertaking and the business activity of the undertaking and if the latter remains unaffected or unchanged by subsequent change in the ownership then it cannot be said that the business of the undertaking has been reconstructed. 10.3-5 Thus, the undertaking acquired by the assessee- company remained the same and the observation of the Assessing Officer that undertaking acquired by the company is nothing but reconstruction of business already in existence cannot be accepted.
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 16 of 26 10.4 So far as the conversion of firm into company is concerned, again it cannot be said that there was any transfer. On incorporation of company, consequences as per the provisions of Companies Act and other statutory provisions follow ensue. Thus, there is merely statutory vesting. 10.5 In the case of CIT v. Texspin Engg. & Mfg. Works , it was held by the Hon'ble Bombay High Court that when a firm is treated as a company, all the properties of the firm I.T.A. 2486/Del/2012 Assessment year 2003-04 vest in the limited company but that vesting is not consequent or incidental to a transfer. 10.6 In the case of Chetak Enterprises (P.) Ltd. v. Asstt. CIT[2005] 95 ITD 1, the Jodhpur Bench of the ITAT has also taken a similar view. Thus, it cannot be said that EOU owned by the assessee-company is formed as a result of reconstruction of EOU owned by the firm."
11.4 Similarly, "A" Bench of Chennai ITAT has held in Kumaran Systems (P) Ltd. vs ACIT 14 SOT 1(Chennai) that where the assessee was converted from partnership firm to private limited company as per the provisions of section 575 of Companies Act, 1956, exemption u/s 10A of the Income Tax Act, 1961 could not be denied as there was a mere change of name and composition in the ownership of the undertaking and the business of the undertaking had not changed as the same partners had become directors of the company. The Bench held that in such a situation, the business of the assessee was not formed by splitting of the old business or reconstruction. 11.5 In CIT Vs. Gaekwar Foam and Rubber Company Ltd. 35 ITR 652 (Bombay) wherein held that construed the provisions of Section 15C of the Income Tax Act, 1922, Section 15C(2)(i) contained a similar provision that the section would apply to an industrial undertaking which is not formed by the splitting up or the reconstruction of a business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before 1 April 1948. In that case, there was a partnership firm and its assets and goodwill were taken over by the assessee for a stated consideration and against M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 17 of 26 the allotment of shares to the three partners in the assessee company. The Assessing Officer had rejected the claim of exemption under Section 15C on the ground that the assessee was formed by the reconstruction of the business already in existence. The Appellate Commissioner took a different view which was affirmed by the Tribunal. The Division Bench of Hon'ble Bombay High Court held that the reconstruction of a business connotes that the original business is not to cease functioning and the undertaking must continue to carry on the same business in an altered form. On the other hand if the ownership of a business or an undertaking is transferred that would not constitute a reconstruction. The Hon'ble Division Bench held as follows: "...The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be lost or abandoned. The concept essentially rests on changes I.T.A. 2486/Del/2012 Assessment year 2003-04 but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be - and this is brought out by the section itself - 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 carry on the same business though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. Thus for instance if the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively, that would not be reconstruction or if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganization of the business on sounder lines or alterations in the mode or method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of itxal-311-2004 the business which may even be by some changes in the constitution of persons interested in the undertaking would certainly be no more than reconstruction of the business if it is substantially the same business carried on by substantially the same persons."
11.6 Reconstruction, the Division Bench held, means that substantially the same business is carried on and substantially the same persons carry it on. This judgment of the Division Bench of M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 18 of 26 the Bombay High Court in Gaekwar Foam (1959) 35 ITR 662 (Bom) was approved by the Hon'ble Supreme Court in a judgment in Textile Machinery Corporation Ltd. Vs. Commissioner of Income Tax (1977) 107 ITR 195 (S.C.). 11.7 Thus, in the light of the judicial pronouncements discussed hereinabove and on the facts of the present case, we have no hesitation in holding that this is not a case of reconstruction as alleged by the Department. We are unable to concur with the findings of the authorities below and while allowing the grounds of appeal, we direct that the assessee shall be entitled to claim deduction u/s 80IB of the Income Tax Act in the assessment year under consideration. 11.8 Further, in the case of CIT Vs. M/s. Choice Sanitaryware Industries in dated 23.12.2010 wherein this issue was considered and the Tribunal held as under: “The conditions ascribed for claiming deduction u/s 80IB are prescribed in sub section (2) of section 80IB of the Act, which are as follows: (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 xxxxxxxxxxxxxxxxxx (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India: Provided xxxxxxxxxxxxxxxxxxxxxx" Clause (ii) to sub section (2) of section 80IB is very much relevant to decide the issue under consideration. It states that "it is not formed by the transfer to a new business of machinery or plant previously used for any purpose". In the case on hand, the assessee firm was already in existence since 1990 and was availing deduction u/s 80IB since then. Therefore, it cannot be said that "it is not formed by the transfer to a new business of machinery or plant previously used for any purpose". It can also not be said that by acquiring some of the assets on lease for a fixed period, which were used by the sister concerns, the assessee has taken over M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 19 of 26 the business of the assessee's sister concern. As such, the question of maintaining two separate sets of books for production does not arise. In the case of Bajaj Tempo Ltd cited supra, the Hon'ble Apex Court held that the restriction would come into picture to deny the deduction only if the second hand asset results in formation of the undertaking. In the instant case there is no formation of an undertaking. The facts and circumstances in the case of Laxmi Packers (14 SOT 303) dealt by the Mumbai Tribunal are pari material to the case on hand. The Hon'ble co-ordinate bench has held that the prohibition in clause (ii) to sub section (2) of section 80IB is only with regard to purchase and use of any second hand machinery at the time of formation of the industrial undertaking and not purchase and use of machinery after the formation of the industrial undertaking.”
11.9 In yet another decision in the case of Pembril Indl & Engg Co (P) Ltd vs DCIT 30 SOT 340 (Mum) held that though previously used plant and machinery has been used in the new unit, there being no transfer of plant and machinery, the deduction u/s 80-IA / 80-IB cannot be denied. 11.10 Further, Hon’ble Karnataka High Court in the case of CIT Vs. Foresee Information Systems Pvt. Ltd. reported in & 616 & 617/2007 dated 12.2.2014, held as under: “7. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned in the appeals.
The records clearly disclose that the respondent assessee is a partnership Firm engaged in the business of exporting software. It was subsequently converted 1 to a Company and got changed its name as M/S. Foresee Information Systems. Ail the partners in the Firm became the shareholders of the company and all the assets and liabilities of the Firm were transferred 'io the company. The asseesee- Company made an application before the STPI authorities for approval to set up a STP unit. The. STPI authorities accorded approval for setting up a STP unit. The license was granted by the. Customs Authorities in January 2002. Prior to the setting up of STP Unit, the assessee was claiming deduction under Section 80HHE. The assessee is dealing with the US based company M/S. Effone Software Inc., and all exports have been made to the said company only. He filed returns of income claiming deduction under Section 10A of the Act. The Assessing Authority, after scrutinizing the returns filed. by the assessee held that the assessee is not entitled for deduction under Section 10A and rejected the game for the reasons referred to in the earlier part of the order. n an appeal filed by the assessee, the First Appellate Authority considered the matter afresh and held that the assessee is entitled for the benefit under Section 1OA. The said order was confirmed by the Tribunal.
The assessee is a ICO% export oriented unit, enjoying deduction under Section 80HHE of the Act. In the CPDT Circular No.%2005 dated 6-1-2005, it has M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 20 of 26 been stated that existing Domestic Tariff Area (for short ‘DTA’) Units which were approved as 100% EOU units by the Boat-a shall be eligible for deduction under Section 10B of the Act. Further. the scheme of Biotechnology Park framed by the Ministry of Government of India, clause 6.36.1 provides for conversion. Clauses 6.36.1 and 6.36.2 read thus: "6.36.1: Existing DTA units, may also apply for conversion into EOU/EHTP/STP/BTP unit, but no concession in duties and taxes would be available under scheme for the plant, machinery and equipment already installed. On conversion, they would get Income Tax concessions but limited to period of 10 years from original commencement of manufacture or that prescribed under Section 10 of Income Tax Act whichever is earlier. For this purpose, DTA unit may apply to the DC/Designated Officer concerned in same manner as applicable to new units. In case there is an outstanding export ccmmitment under EPCG Scheme/Advance Authorization Scheme, it will follow the procedure laid down in the Appendix.
6.36.2: Existing EHTP/STP/BTP units may also apply for conversion/ merger to EOU unit and vice-versa. In such cases, units will continue to avail permissible exemption in duties and taxes as applicable under relevant scheme. F,HTP/STP/BTP units desiring conversion as an DOU may apply to DC concerned through Officer designated by DoIT/DoBT in same manner as applicable to new units. Likewise, EOU desiring conversion into EHTP/STP/BTP may apply to officer designated by DoIT/DoBT through DC concerned. "
Reading of the above clauses makes it very clear that benefit under Section 10A can be extended even to the existing units, if they have fulfilled the condition under Sections 10A(2)(a)(ii) and IOA(2)(a)(iii) of the Act and as contended by the assessee, the requirement of setting up of a new STP unit does not arise. The Bombay High court in TEXSPIN ENGINEERING AND MANUFACTURING WORKS (supra) has clearly held that the conversion of a Firm into a Company is not a case of distribution of assets or dissolution of the Firm. In the present case. also there is no transfer of business as contemplated under Section 45{1) of the Act and only the partnership firm was converted into a company and all the partners of the firm have become the shareholders of Che company. Further all the assets and liabilities were transferred to the Company. None of the outsiders were inducted as shareholders. In view of the STPI scheme framed by the Government of India, the existing DTÄ units can also be converted into STP units and enjoy the deduction under Section IOA of the Act. The records further disclose that the assessee has not violated any of the conditions prescribed under Section 10A of the Act. Further, Division Bench of this Court also had an occasion to examine the Circular No. 1/2005 issued by the CBDT in CIT vis EXPERT OUTSOURCES PRIVATE LIMITED(supra), wherein the Division Bench of this Court has held that though the circular is in the. context of Section 10B, the ratio of the circular equally M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 21 of 26 applies to Section IOA also. The benefit under Section IOA would also be available even when an existing unit gets converted into STP unit. Hence, it is not open to the Assessing Officer to contend that no new undertaking came into being after approval of STPI. In judgment reported in CIT v/s MAXIM INDIA (supra) in paragraph 5, the Division Bench of this Court has held under:
The material set out amply proves that it is not a case of reconstruction as mistook by the Assessing Authority. The facts disclosed that the assessee commenced production from 01-0-2002 and the assessee was entitled to the benefit under Section 80HHE. However after approval was granted by the Director of STPI on 31- 12-2002 the assessee was entitled to the benefit of Section 10A of the Act. This is supported by the circular No. 1/05 dated 06-10-2005 issued by the CBDT.
11. Further, a similar view has been taken in CIT vs. EXPERT OUTSOURCES (supra). Hence, the law declared by the Division Bench of this Court referred to above is binding on the Assessing Officer. The First Appellate Authority as well as the Tribunal after considering the matter in detail and taking into consideration the Board Circular No. issued by the CBDT and the Import and Export Policy clearly held that the assessee is entitled för deduction under Section 10 of the Act. The respondent-Company fulfills all the conditions enumerated under Section 10A of the Act and it is not formed by splitting up, or reconstruction of the business already in existence. It is also not formed by transformation of new business of plant or machinery previously used for any purpose. Both the Assessing Authority as well as the Tribunal have concurrently held that the respondent-assessee is entitled for deduction under Section I()A of the Act. We find there is ne infirmity or irregularity in the said finding. Hence, the substantial question of law framed in these appeals is answered against the revenue and in favour of the assessee. Accordingly, we pass the following: ORDER The appeals are dismissed.”
11.11 In the light of above discussion, we are of the considered opinion that the NFAC was not justified in holding that denial of the deduction u/s 80-IB was justified. Thus, we allow the grounds No.4, 5 and additional ground raised by assessee in this appeal.
12. With regard to ground Nos.6 to 9 relating to granting of deduction u/s 80IB(10) of the Act, when certain housing units exist 1500sq.ft.
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 22 of 26 13. The ld. A.R. submitted that the ld. AO erred in concluding that the Assessee is not entitled to deduction under section 80- IB(10) of the Act since certain of the housing units in the project exceeds 1,500 sq. ft. without any factual basis or any legal basis for the conclusion. Additionally, the Assessee filed flatwise details placed at page nos.56-59 of the assessee’s paper book before the ld. AO and CIT(A). Further, he submitted that even if certain housing units in the project exceeds 1500 sq.ft. the deduction u/s 80IB(10) cannot be denied in its entirety. 13.1 He submitted that what is to be seen is the built-up area of the units and not the super-built up area. The CIT(A), as can be seen from the order has considered the super-built-up area. Here, the agreements that the CIT(A) relied on clearly indicated the built- up area which was less than 1500 sq. ft. That common area should not be included in the built-up area is affirmed by the Karnataka High Cour in Raghavendra Constructions (354 ITR 194). However, the ld. CIT(A) simply ignored this aspect. 13.2 Without prejudice to above, he submitted that the ld. AO and CIT(A) erred in not applying the ratio of the ruling of Karnataka High Court on similar facts in the Assessee’s predecessor case in ACIT v. SJR Builders (ITA 32 / 2010) where the Hon’ble Karnataka High court had upheld the claim of proportionate deduction under section 80-IB(10) of the Act to the extent of housing units satisfying the threshold under the Act. Same decision has been upheld in the following cases: a. Brigade Enterprises Ltd. V. CIT (120 taxmann.com 346) b. S. N. Builders & Developers v. CIT (127 taxmann.com 232) c. Varun Developers v. CIT (126 taxmann.com 235) 13.3 The ld. A.R. submitted that the Hon’ble CIT had also directed the ld. AO to consider the deduction claim concerning the ruling in the Assessee’s own case before the jurisdictional Karnataka HC.
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 23 of 26 However, the ld. AO fully denied the Assessee’s claim under section 80-IB(10) without taking cognizance of the rulings. Thus, if the ld. AO contends that the Assessee violated the conditions of section 80- IB, the proper action would have been to deny relief only for those flats which exceed 1,500 sq. ft. However, the ld. AO’s decision to make deny the entire deduction is incorrect and deserves to be quashed. 13.4 Additionally, the ld. A.R. for the assessee requested for guidance on the way the Assessee can file the sale deeds of flats due to larger size of the documents and the difficulty in filing these online placed at page no.267 of the assessee’s paper book. Without giving any opportunity for the same, the CIT(A) wrongly concluded that the Assessee did not produce the sale agreements to substantiate the claim under section 80-IB (10) of the Act. 13.5 Without prejudice to the above, he submitted that it is apparent from the order that the ld. CIT(A) dismissed the assessee’s Appeal without proper consideration, as evidenced by unrelated additions on page 24 of the order. It is apparent that some of the paragraphs in the order is just a copy paste of irrelevant information without any fresh application of mind.
The ld. D.R. relied on the order of lower authorities.
We have heard the rival submissions and perused the materials available on record. In our opinion, this issue came for consideration in assessee’s own case in earlier years before the jurisdictional High Court wherein the Hon’ble High Court in dated 19.3.2012, held as under: “3. The learned Counsel for the revenue assailing the Impugned order contended that once it is established that the flats constructed measures more than 1500 sq. ft., the assessee is not entitled to exemption under Section 801B(10) of the Act. It is immaterial whether such a violation is found only in few flats and therefore, he submits that the impugned order requires to be set aside.
4. Per contra, the learned Counsel for the ssessee submitted that on the day the plan was sanctioned and up to 01.04.2005, in view M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 24 of 26 of the interpretation of the building regulation, the barcony was not to be included for the bui!t LID area for the purpose of calculating 1500 sq. ft. The authorities by including the balcony area have come to the conclusion that the built up area is more than 1500 sq. ft. It is ex-facie incorrect. Similarly, prior to 01.04.2.009, there was no prohibiting for a person to purchase two flats in the said project. Nodoubt, the total constructed area is more than 1500 sq. ft, but the mezzanine floors as such are registered under a separate sale deed and the flat is registered under a separate sale deed. The total measurement in each of the sale deeds is not exceeding 1500 sq. ft. Therefore, the authorities were not justified in holding that the assessee is not entitled to the benefit of exemption Wider Section 801B (10) of the Act. Though the Tribunal held that the assessee is entitled to a proportionate benefit, which order is not challenged by the assessee, in view of the law declared by this Court in the case of Commissioner of Income Tax vs. M/s.G.R.Deve10pers in disposed off on 29.02.2012, the assessee entitled to a 100% benefit.
Prior to 01.04.2005, the balcony area was not added to the flats for the purpose of finding out the total built up area. It is only after 01204.2005, it was added. The word 'built up area' for the purpose of Section 801B has been defined and the position is made clear. In the instant case, ac the pian was sanctioned on 18.10.2003 and the modified plan was sanctioned on 01.06.2004, for calculating the total built up area of these flats, the space occupied by the balcony cannot be taken into consideration. Similarly, prior to 19.08.2009, during that period, there was no prohibition for a person purchasing two flats. Therefore, when a mezzanine floor and a flat is purchased under two separate sale deeds for the purpose of finding out the benefit under the aforesaid provision, we have to look into the measurement contained in the sale eds. If that is done, there is no violation. At any rate, the appellate Tribunal though has held that the assessee is entitled to proportionate benefit has remitted the matter to the Assessing Authority for adjudication afresh. We do not See any error committed by the Tribunal in setting aside the order passed by the lower authorities though not on the ground on which it is set aside but on the correct interpretation of the legal position.
Accordingly the substantial questions of law are answered in favour of the assessee and against the assessee. The Assessing Authority shall keep in mind the statutory provisions, the interpretation placed by this Court and then, pass appropriate orders in accordance with law. That would meet the ends of justice. Accordingly, we pass the following: ORDER i) The appeal is dismissed.
M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 25 of 26 ii) The Assessing Authority shall keep in mind the statutory provision, the interpretation placed by this Court and then, pass appropriate orders in accordance with law”
15.1 Further, in the case Brigade Enterprises Ltd. Vs. CIT in dated 22.9.2020, the Hon’ble Karnataka High Court held as under: “Section 80-1B of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings (Housing Projects) Assessment year 2007- 08 - Assessee engaged in business of construction, property development and real estate, filed its revised return claiming enhanced deduction under section 801B(10) - On scrutiny assessment, Assessing Officer held that assessee had used 60 per cent of total built up area for commercial purposes as against 5 per cent which was permissible in law and thus assessee would not be entitled to claim deduction under section 80-1B(10) - However, it was found that assessee had taken a separate approval in respect of each block and thereby complied with requirement of commercial area in a project not exceeding 5 per cent of buiit up area - Whether therefore, assessee would be entitled to deduction under section 80-1B(10) - Held, yes [Para 17] [In favour of assessee] Section 80-1B of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings (Housing Projects) Assessment year 2007- 08 - Assessee engaged in business of construction property development and real estate, filed its revised return claiming enhanced deduction under section 80-1B(10) - On scrutiny assessment, Assessing Officer held that assessee company in almost every block had a housing unit, which was more than 1500 square feet and approval from Bruhat Bangalore Mahanagara Palike (BBMP) had been obtained for entire project and not for individual units - However, Commissioner (Appeals) by placing reliance on order passed by Tribunal in respect of previous assessment year held that assessee was entitled to benefit of deduction under section 80-1B(10) proportionately in respect of residential units having built up area less than or equal to 1,500 square feet - Aforesaid finding was affirmed by Tribunal - Further, aforesaid view had also been affirmed by bench of instant court in respect of another project of assessee for assessment year 2004-05 Whether in view of above assessee would be entitled to deduction under section 80-1B(10) Held, yes [Para 16] Section 80-1B f the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings (Housing Projects) Assessment year 2007- 08 - Assessee engaged in business of construction, property M/s. SJR Enterprises Pvt. Ltd., Bangalore Page 26 of 26 development and real estate, filed its revised return claiming enhanced deduction under section 80-1B(10) - Assessing Officer held that one housing unit of assessee did not satisfy condition of minimum area i.e., one acre, and thus was not entitled to claim deduction under section SO-IB(IO) - However, it was found that housing project of assessee was approved in respect of an area of 48,939 square feet, which was more than one acre i.e., 43,500 square feet - Whether therefore, assessee would be entitled to deduction under section 80- IB(10) - Held, yes [Para 15] [In favour of assessee]”