DCIT,CIRCLE-1, KOLKATA, KOLKATA vs. M/S AXSYS TECHNOLOGIES LTD, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-I, Kolkata dated 09.08.2012. Assessment was framed by ITO Ward-1(1), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.12.2011 for assessment year 2009-10. Grounds raised by Revenue are reproduced below:- “1. The Ld. CIT(A) has erred and not justified in deleting the addition of Rs.74,16,576/- as added by the AO on account of disallowance of exemption u/s 10A on account of income from Export of software and It enabled services. 2. The Ld. CIT(A) has erred and not justified in deleting the addition of Rs.17,30,808 u/s 36(i)(iii) of the IT Act.”

ITA No.1639/Kol/2012 A.Y. 2009-10 DCIT, Cir-1 Kol. v. M/s Axsys Technologies Ltd. Page 2 2. First issue is regarding that Ld. CIT(A) erred in disallowing of Rs.74,16,576/- u/s 10A of the Act.

Facts in brief are that assessee in the present case is a Private Limited Company and incorporated on 03.08.2007. The assessee is engaged in the business of sale & export of software as well as IT enabled services and trading of hardware and computer accessories. The assessee-company is a registered unit under the Software Technology Park under the Scheme of Government of India and certificate of STP registration was issued on 05.12.2007 and started its commercial manufacturing and production from 23.11.2007. During the year under consideration Assessing Officer observed that assessee has claimed exemption amounting to Rs.74,16,576/- u/s 10A of the Act. However, AO observed that assessee-company has been formed after splitting off/reconstruction of old business in the name of Vision Comptech Integrators Ltd. (VCIL for short) by observing following facts:- 1. VCIL is also a company doing the same business and lot of software personnel has been transferred from VCIL to the assessee. Further, the assessee company has been incorporated on 03/08/2007 and in its first year of return it has debited its profit and loss account with the payment of gratuity and leave encashment paid to the employees. The payment of these expenses is not possible in the first year of commencement of business. So it was a clear cut case of shifting of business from VCIL to the assessee to avail the benefit of exemption under section 10A of the Act. 2. Assessee-company has given interest free loan to VCIL amounting to Rs.1.70 crores.

2.1 As per the conditions laid down under section 10A(2) of the Act for claiming exemption the undertaking should not be formed by splitting up or reconstruction of a business which is already in existence. Accordingly the AO sought the clarification from the assessee who submitted that the

ITA No.1639/Kol/2012 A.Y. 2009-10 DCIT, Cir-1 Kol. v. M/s Axsys Technologies Ltd. Page 3 nature of business of the assessee and VCIL is akin but their business is totally distinct from each other as detailed under: 1. The place of business for both companies is different. 2. The assessee company has its own Plant & Machinery, staff etc. amounting to Rs.2,88,46,000/- 3. The Board of Directors of both the companies are different. 4. The assessee company has its own separate STP license.

However the AO was not satisfied with the explanation given by the assessee and disallowed the exemption availed by the assessee u/s 10A of the Act.

ITA No.1639/Kol/2012 A.Y. 2009-10 DCIT, Cir-1 Kol. v. M/s Axsys Technologies Ltd. Page 4 appellant of the employees who are working earlier with VCIL does not amount to splitting up or reconstruction of a business already in existence as per section 10A(2)(ii).”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

4.1 We have heard the rival contentions of both the parties and perused the material available on records. The issue before us is that whether the Axsys Technologies Pvt. Ltd has been formed by reconstruction or not. This is because some employees were transferred from VCIL to the assessee along with some liability which was shared by the assessee company together. The AO accordingly treated that the assessee company was reconstructed after splitting the VCIL. However in many cases the courts have held the transfer of employees and sharing the liability of one company does not amount to reconstruction. Here we are reproducing the citation of some case laws dealing with similar issues as under:- i) Textile Machinery Corp. Ltd. Vs. CIT (1977)107 ITR 173 (SC) it was held that new undertaking may manufacture the same articles as manufactured by the existing unit. So contention of DR that both the companies having same nature of business and so the assessee company has been formed by reconstruction does not hold good.

ITA No.1639/Kol/2012 A.Y. 2009-10 DCIT, Cir-1 Kol. v. M/s Axsys Technologies Ltd. Page 5 ii) CIT Vs.Modi Spinning and Manufacturing 125 ITR 361 (All) it was held that every creation in business is some kind of expansion and advancement. If the undertaking is new and identifiable undertaking, separate and distinct, from the existing business then it will not be reconstruction of business already in existence.

iii) CIT vs. Quality Steel Tubes (P) LTD. (2006) 280 ITR 254 (All), where head note as under:- Deduction under ss. 80HH and 80J—Reconstruction of old business— Manufacture of new product partly using existing infrastructure—Tribunal has found that the assessee has set up a new project for manufacturing 4 inch diameter black pipe which is different from 2 inch diameter pipe which was already being manufactured by it—Merely because some of the manufacturing facilities are common, it does not mean that the new project is set up by reconstruction or splitting up of the existing business—Deduction under ss. 80HH and 80J admissible in respect of the new project—Textile Machinery Corporation Ltd. vs. CIT 1977 CTR (SC) 151 : (1977) 107 ITR 195 (SC) applied.

In the case of Quality Steel Tube Ltd. (supra), it was held that even if substantial persons have started the unit then it cannot be considered as reconstruction of the company. There is substantial investment in the Plant & Machinery in the company. We also find from the records that VCIL was still functioning and in support of it the ld. AR has submitted the copies of the financial statements and copies of ITR which are placed on record. We are relying on the above judgments of Hon'ble Supreme Court and Hon'ble Allahabad High Court and accordingly conclude that even though employees were transferred from VCIL to assessee were sharing some common liabilities and the shareholders of both the companies are same, it cannot be taken as a ground for denying the benefit u/s 10A of the Act by holding the assessee as reconstruction company. The assessee i.e. Asxys Tecnologies Pvt. Ltd. is a separate legal entity which is newly formed and having its own plant & machinery. Hence, we uphold the order of Ld. CIT(A) and this ground of Revenue is dismissed.

ITA No.1639/Kol/2012 A.Y. 2009-10 DCIT, Cir-1 Kol. v. M/s Axsys Technologies Ltd. Page 6 5. The next issue raised by Revenue in this appeal is that ld. CIT(A) erred in deleting the addition made by AO for Rs. 17,30,808/- on account of interest free loan provided to VCIL.

The assessee has given an interest free loan amounting to Rs.1,73,00,808/- to VCIL. Whereas the total own fund of the assessee was Rs.2,40,48,038/- which was invested in the fixed assets of the company. As such there was no surplus fund available to the assessee out of its owned fund. As per the return filed, the assessee has bought asset worth Rs. 2,88,46,000/-. Assessee was also having loan fund. During the year under consideration AO observed that the loan fund was used for giving interest free loan to VCIL. Since this loan amount was not utilized for the business of the assessee the AO disallowed a sum of Rs 17,30,808/- as interest expense u/s 36(1)(iii) by taking interest rate @ 10% per annum of Rs. 1,73,00,808.00. The calculation for the loan given to VCIL as per AO was made as under:

Opening Balance (Cr) 1,04,81,769.00 Amount received during the year 1,74,38,446.00 Total Amount 2,79,20,215.00 Amount repaid (4,45,21,023.00) Balance amount outstanding at year end (1,73,00,808.00)

The AO worked the interest on the aforesaid amount and disallowed the same by adding to the total income of the assessee.

ITA No.1639/Kol/2012 A.Y. 2009-10 DCIT, Cir-1 Kol. v. M/s Axsys Technologies Ltd. Page 7 Rs.1,04,81,769/- and during the financial year assessee company provided IT enabled services to the VCIL and accordingly a sum of Rs. 1,14,24,898/- was outstanding as on 31st March 2009 on account of Sundry Debtors. Accordingly, there was a closing balance of Rs.58,75,910/- with VCIL as on 31st March 2009.Assessee had submitted that there was credit balance on account of VCIL in the month of April, 2008 and the appellant did not pay any interest to VCIL for this credit balance of Rs.1,04,81,769/- and assessee had sufficient interest free funds including share capital and reserve & surpluses to cover for loan and advance of Rs.58,75,910/-. As per schedule 20 of the Profit & Loss a/c, assessee had debited interest of Rs.33,32,790/- on account of export packing credit and interest on term loan. As per schedule 13 assessee had received interest of Rs.5,91,434/-. Keeping in view these facts and circumstances, addition of Rs. 17,30,808/- made by Assessing Officer is deleted.”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

ITA No.1639/Kol/2012 A.Y. 2009-10 DCIT, Cir-1 Kol. v. M/s Axsys Technologies Ltd. Page 8 ledger placed on page 32 of the Paper book. These bills were raised with the service tax to VCIL by the assessee and VCIL has deducted the TDS from the bills. Accordingly the debit balance appearing in the ledger of the VCIL in the books of the assessee cannot be regarded as money advanced out of the borrowed fund. From the facts we also find that the debit balance was not there in the accounts of VCIL throughout the year. As per the submission of the assessee there was own interest free fund for Rs. 1,53,56,168.00 and the ld. DR failed to bring anything contrary to the findings of the ld. CIT(A). Hence in our considered view we do not find any reason to interfere in the order of ld. CIT(A). Hence this ground of Revenue’s appeal is dismissed.