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Income Tax Appellate Tribunal, DELHI BENCH ‘H’ NEW DELHI
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
The present appeal is preferred by the assessee against the order dated 14.2.2012 passed by the Ld. CIT (A)-XXI, New Delhi.
The grounds of appeal taken by the assessee are as under:-
“1. That the impugned order of the learned CIT (Appeals) is bad in law as he has not applied his mind to the ‘findings of fact’ of the Assessing Officer which have been accepted as if such findings can not be interfered in appeal.
That the learned CIT (Appeals) erred in upholding the finding of the Assessing Officer that the assessee was not entitled to deduction (of Rs. 10,13,828) u/s 80- IB of the I.T. Act on the ground that the newly formed company is a reconstruction of old existing business and with old machineries.”
I.T.A. 2486/Del/2012 Assessment year 2003-04 2. The brief facts of the case as submitted by the Ld. AR and as gathered from the record are as under:-
2.1 Originally two partnership firms viz. Upkar International and Miglani Exports were operating different industrial undertakings, manufacturing and exporting diesel engines and their parts. Both the firms had the same 8 partners and both the undertakings were eligible for deduction u/s 80 IB of the Income Tax Act, 1961 (hereinafter called ‘the Act’) since 1995-96.
2.2 Subsequently on 13.08.2002, the firm Upkar International was converted into a Limited Company under Part IX (section 574) of the Companies Act, 1956 and renamed as Upkar International (P) Ltd. All the partners of the erstwhile firm became the shareholders of the company and shares for the amount equivalent to the capital of the partners in the firm were allotted to them. On such conversion, all the assets and properties of the firm automatically vested in the company under section 575 of the Companies Act.
2.3 On 13.08.2002 itself, the company took over business of Miglani Exports on a going concern basis. Thus, with effect from 13.08.2002, the two undertakings which were eligible for I.T.A. 2486/Del/2012 Assessment year 2003-04 deduction u/s 80 IB of the Act, came to be owned by the assessee company.
The assessee company filed its return of income for A.Y. 2003-04 which culminated in an assessment under section 143(3) vide order dated 07.03.2006. The AO disallowed the deduction u/s 80IB on the basis of some information received from the AO of M/s Upkar International (partnership firm) that in the assessment for the A.Y. 2001-02, he had disallowed the deduction, inter alia for the reason that the assessee did not fulfil the essential conditions required for claiming deduction u/s 80 IB.
3.1 The assessee carried the matter in appeal before the CIT (Appeals) and by the time the appeal of the assessee was heard, the first appellate authority in the cases of the two partnership firms held that the two firms were entitled to the deduction. Accordingly, in the case of the assessee also, the CIT (Appeals) held that it was entitled to deduction under section 80 IB.
I.T.A. 2486/Del/2012 Assessment year 2003-04 4. The Revenue challenged the order of CIT (Appeals) before the ITAT. The appeal in the Tribunal was heard ex parte, qua the assessee. The Tribunal, vide order dated 23.10.2009 remitted the matter back to the A.O. with the following directions:
“Secondly, the Assessing Officer while disallowing the claim of the assessee has observed that the assessee did not fulfill the essential conditions required under the Act for claiming deduction u/s 80IB. No finding whatsoever has been given by the Ld. C1T (A) that the assessee had fulfilled the conditions laid down in section 80IB for the year under consideration. Therefore, to examine that whether conditions for grant of deduction u/s 80IB were fulfilled or not, the matter is required to be restored back to the file of Assessing Officer.” 4.1 In the fresh assessment order (which is the subject matter of this appeal), the AO held that the assessee was not entitled to deduction u/s 80IB as the undertaking of the assessee company was formed by reconstruction of the undertakings of the erstwhile partnership firms. Apart from this, no other objection was raised by the Department regarding the assessee not fulfilling any other eligibility criteria for the purpose of deduction u/s 80IB of the Act. The reasons given by the AO were as follows:
“In this case, the erstwhile partners had equal ratio in the profit and loss, but when turned into ‘Directors’ acquired different shareholding pattern. In view of this fact of the case, it can be said that the newly formed company is a reconstruction of old existing 4 I.T.A. 2486/Del/2012 Assessment year 2003-04 business and with old machineries. The condition laid down by the provision of subsection 2 of section 80IB strictly states the business should not be formed by transfer of machinery or plant previously used for any purpose. ” 4.2 The Ld. CIT (Appeals) in his order has rejected the arguments of the assessee. Being aggrieved by the order of CIT (Appeals), the assessee has preferred the present appeal.
Before us, the Ld. AR while supporting his grounds of appeal submitted that the assessee company took over the entire business with all assets and liabilities of the two firms M/s.
Upkar International & of M/s. Miglani Exports on 13.8.2002, both the firms were entitled for deduction u/s. 80IB for the period of ten years starting from F.Y. 1995- 96. Both these partnership firms had the same eight partners and they formed a company M/s. Upkar International Pvt. Ltd., to take over the entire business of these two partnership firms with all assets and liabilities. All the partners became directors in this assessee company and the assessee company took over the running business with all assets and liabilities of these partnership firms and allotted the shares to the partners for their partner's capital stood in the books of firms on the date of take over. It was submitted that the business of the firms were taken over as a 5 I.T.A. 2486/Del/2012 Assessment year 2003-04 going concern basis with all assets and liabilities while keeping the said business intact. The shares to the partners were given for the amount standing in credit in their capital account in the respective partnership firm, at the time of succession. There was no change in shareholding/ ownership rights. It was submitted that the Assessing officer disallowed the deduction by saying that the transfer of business by the firms to the assessee company is a reconstruction of the old business. The stand of the Assessing officer is not justifiable & legal as there is no reconstruction of business of the undertakings, it is a case of takeover/ succession because M/s. Upkar international Pvt. Ltd. took over the entire business with all assets and liabilities of the predecessor partnership firms (I) M/s. Upkar International & (2)
Miglani Exports and the partners got the shares in the assessee company for the amount standing in their capital account on the date of succession by the assessee company. The Ld. AR submitted that reconstruction means expansion of existing industrial unit by increasing capacity of production to large extent or by setting up another industrial unit or it is the rejuvenation or rehabilitation of an existing undertaking. It was further submitted that in the case of Ashok Leyland Ltd Vs. CIT I.T.A. 2486/Del/2012 Assessment year 2003-04 (1995) 83 Taxman 482 (AP), it was held that expansion of existing industrial unit by increasing capacity of production to large extent is merely reconstruction of business. Similarly, in the case of Ganga Sugar Corp Ltd (1973) 92 ITR 173 (Del) it was held that where a company is already running one industrial unit sets up another industrial unit then it will amount to reconstruction of business. He submitted that the underlying idea of a reconstruction is that there be a continuation of the activities and business of the same undertaking. The original business or undertaking continues without its identity being lost.
Learned Departmental Representative submitted that the AO in the body of assessment order has discussed the conditions laid down by this 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 body of 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 I.T.A. 2486/Del/2012 Assessment year 2003-04 came in to existence by observing that assessee company was formed after reconstruction of two earlier existing business firms, namely; Miglani Exports and Upkar International. Therefore, after discussing the provision in detail, the AO has observed that condition laid down by Section 80IB (2)(ii) has not been fulfilled.
In the grounds of appeal it has been contended that assessee company took over the entire business with all assets and liabilities of two firms, namely; Upkar International and Miglani Exports as on 13.8.2002 and they are entitled for claim u/s. 80IB for period of 10. (ten) years from assessment year 1995-96. 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 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 two firms.
We have heard the rival submissions and carefully perused the relevant material placed on record. 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 8 I.T.A. 2486/Del/2012 Assessment year 2003-04 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 13.8.2002 and the Certificate of Incorporation issued by the Registrar of Companies, Punjab, H.P. and Chandigarh (Placed at page 17 of the paper book) also mentions that it is a company under Part IX of the Companies Act, 1956. 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 I.T.A. 2486/Del/2012 Assessment year 2003-04 u/s 80IB of the Income Tax Act, 1961, the business must not be a ‘reconstruction’ of earlier existing businesses. The Department has contended that in the present case, the erstwhile eight partners had equal profit/loss sharing ratios whereas the Directors have acquired a different shareholding pattern. Thus, in such a situation, as per the Department, the newly formed company was 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.
On facts, it is undisputed that the erstwhile partnership firm M/s Upkar International, having 8 partners was converted into a limited company under Part IX of the Companies Act, 1956 and was renamed as Upkar International (P) Ltd. and all the partners of the erstwhile firm became the shareholders of the company and the shares for the amounts equivalent to the capital of the partners in the firm were allotted to them. It is also undisputed that on such conversion, all the assets and properties of the firm vested in the company under section 575 of 10 I.T.A. 2486/Del/2012 Assessment year 2003-04 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 11 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 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. 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.”
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.
In CIT Vs. Gaekwar Foam and Rubber Company Ltd. (Supra) a Division Bench of this Court 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 I.T.A. 2486/Del/2012 Assessment year 2003-04 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 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 15 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." 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 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 I.T.A. 2486/Del/2012 Assessment year 2003-04 Machinery Corporation Ltd. Vs. Commissioner of Income Tax (1977) 107 ITR 195 (S.C.).
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.
In the result, the appeal of the assessee is allowed.
The order is pronounced in the open court on 24/02/2016.