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IN THE HIGH COURT OF KARNATAKA AT BENGALURU ON THE 14TH DAY OF NOVEMBER, 2018 BEFORE THE HON’BLE MR. JUSTICE RAVI MALIMATH
AND THE HON’BLE MR. JUSTICE K.NATARAJAN INCOME TAX APPEAL No.368 OF 2010 C/W INCOME TAX APPEAL No.367 OF 2010 INCOME TAX APPEAL No.368 of 2010
BETWEEN:
THE COMMISSIONER OF
INCOME TAX
C.R.BUILDING
QUEENS ROAD
BENGALURU
THE DY. COMMISSIONER OF
INCOME TAX
CIRCLE – 11(5)
C.R.BUILDING, QUEENS ROAD
BENGALURU ... APPELLANTS (BY SRI: K.V.ARAVIND, ADVOCATE) AND:
M/S.L.G.SOFT INDIA PRIVATE LIMITED CHERRY HILLS
EMBASSY GOLF LINKS BUSINESS PARK BENGALURU– 560 071 ... RESPONDENT
(BY SRI:T.SURYANARAYANA, ADVOCATE) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 19.05.2010 PASSED IN ITA NO.623/Bang/2010, FOR THE ASSESSMENT YEAR 2004- 2005, PRAYING TO I)FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II)ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN ITA NO.623/Bang/2010 DATED 19.05.2010 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE – 11(5), BENGALURU, IN THE INTEREST OF JUSTICE AND EQUITY.
INCOME TAX APPEAL No.367/2010
BETWEEN:
THE COMMISSIONER OF
INCOME TAX
C.R.BUILDING, QUEENS ROAD
BENGALURU
THE ASST. COMMISSIONER OF
INCOME TAX
CIRCLE – 11(5)
C.R.BUILDING, QUEENS ROAD BENGALURU ... APPELLANTS (BY SRI: K.V.ARAVIND, ADVOCATE) AND:
M/S.L.G.SOFT INDIA PRIVATE LIMITED CHERRY HILLS EMBASSY GOLF LINKS BUSINESS PARK BENGALURU – 560 071 ... RESPONDENT (BY SRI:T.SURYANARAYANA, ADVOCATE) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 19.05.2010 PASSED IN ITA NO.847/Bang/2010, FOR THE ASSESSMENT YEAR 2005- 2006, PRAYING TO I)FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II)ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BENGALURU IN ITA NO.847/Bang/2010 DATED 19.05.2010 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE – 11(5), BENGALURU, IN THE INTEREST OF JUSTICE AND EQUITY. ***** THESE INCOME TAX APPEALS COMING ON FOR HEARING THIS DAY, RAVI MALIMATH. J., DELIVERED THE FOLLOWING:
J U D G M E N T
The assessee is engaged in the business of software development. It filed a return of income for the assessment year 2004-05 declaring an income of Rs.77,29,220/-. Exemption was claimed under Section 10A of the Income Tax Act (hereinafter referred to as ‘the Act’ for brevity). The Assessing Officer held that the assessee could not claim exemption under Section 10A of the Act due to violation of the conditions stipulated in Section 10A(2)(ii) & (iii) of the Act; that the assessee has split-up and reconstructed the business already in existence; that the new business has been formed out of the plant and machinery previously used for the purpose and hence a sum of Rs.8,10,85,595/- was added back by disallowing the claim. On appeal, the order of assessment was set aside and relief under Section 10A of the Act was granted to the assessee. Aggrieved by the same, the Revenue preferred an appeal before the Tribunal. The same was dismissed. Hence, the present appeal in Income Tax Appeal 368 of 2010.
By order dated 25.05.2011 the appeal was admitted to consider the following substantial question of law :-
“Whether the finding of the Tribunal, confirming the order passed by the appellate authority that assessee has not violated the conditions stated in Sec.10A(2)(ii) and in view of organizational change, is perverse and arbitrary and contrary to law?”
The learned counsel for the Revenue contends that the assessee has violated the conditions as stated in Section 10A (2)(ii) of the Act with the organizational change in the company. Under the circumstances, grant of relief under Section 10A of the Act to the assessee is erroneous and that the findings recorded by the Appellate Authority as well as the Tribunal are erroneous. Hence, he pleads that the question of law be answered in favour of the Revenue and against the assessee.
The same is disputed by the assessee. The learned counsel on behalf of the assessee contends that the Unit has been running since the last eight years and exemption was consistently granted for eight years. It is only for this year, the same has been disallowed by the Assessing Officer. Even in terms of Section 10A of the Act such a claim cannot be disallowed in the 8th year of functioning of the Unit. That the proviso could be applied only at the inception stage. He placed reliance on the judgment of the High Court of Delhi reported in (2014) 366 ITR 523 (Delhi) wherein a similar question was answered in favour of the Assessee and against the Revenue.
Heard learned counsels. Admittedly the Unit has been functioning ever since the year 1996-97. This is the 8th year of operation of the assessee. It is only this year there has been a disallowance by the Assessing Officer under Section 10A of the Act. The High Court of Delhi in the aforesaid judgment held as follows :-
“We have already noted the factual position. It is an accepted and admitted fact that the undertaking was formed or created by HICS and there is no allegation or finding by the Assessing Officer that on the date of formation of the undertaking, there was violation of clause (ii) and (iii) of section 10B (2). The undertaking, when it was formed, satisfied and duly fulfilled the requirements of the said clauses, as it was not formed by splitting up or reconstruction of a business already in existence. It was a new undertaking and there is no factual finding that at the time or establishment or formation of the undertaking, business already in existence was splitted or reconstructed. It is accepted that the plant and machinery procured at the time of formation was new.
The next question, which arises for consideration, is whether there is any bar or prohibition in section 10B on transfer or sale of the undertaking by the assessee, who has formed or established the same, to another assessee and whether the purchaser/acquirer- accessee can be denied the benefit under
section 10B of the Act. Before we answer this question, one clarification is required. Sub- section (1) of section 10B stipulates the tax holiday period as 10 years, which should be continuous/consecutive and begins from the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles, things or computer software. Thus, the period of 10 years is with reference to the undertaking and transfer or change of undertaking will not alter or increase the tax holiday period of 10 years. The same is fixed with reference to the date on which the production or manufacture begins.”
Therefore, a distinction as sought to be made therein is that in terms of Sub-section (1) of Section 10B of the Act, the tax holiday period should be continuous and consecutive; that the period of ten years is referable to the undertaking and therefore, the transfer or change of the undertaking will not alter or increase the tax holiday period of ten years. Therefore, the contention of the Revenue that if there is change of undertaking, tax holiday would
stand restricted may not be correct. In so doing, the earlier orders of the High Court of Madras in the case of Heartland KG Information Ltd. Reported in (2013) 359 ITR 1 (Mad) and Sonata Software Ltd. (2012) 343 ITR 397 (Bom) were affirmed. Keeping in mind the three judgments, the substantial question of law requires to be answered in favour of the assessee and against the Revenue. The appeal is disposed off accordingly.
INCOME TAX APPEAL 367 of 2010
The assessee herein is the very assessee as in Income Tax Appeal 368 of 2010.
ITA 368 of 2010 was filed for the assessment year 2004-05. The present appeal- ITA 367 of 2010 is for the assessment year 2005-06. In view of answering the substantial question of law in ITA 368 of 2010, the following order is passed :
Income Tax Appeal No.367 of 2010 is disposed off by answering the substantial question of law in favour of the assessee and against the Revenue by following the judgment of this Court in Income Tax Appeal No.368 of 2010.
SD/-
SD/- JUDGE JUDGE