2009 (5) TMI 614 - AT - Income Tax

Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings

Summary

Issues Involved:
1. Eligibility for deduction under section 80-IB of the Income Tax Act.
2. Determination of whether the industrial undertaking was formed by splitting up or reconstruction of an existing business.

Detailed Analysis:

1. Eligibility for Deduction under Section 80-IB:
The primary issue revolves around whether the assessee is eligible for deduction under section 80-IB of the Income Tax Act. The Assessing Officer (AO) denied the deduction on the grounds that the assessee did not meet the conditions stipulated in section 80-IB, specifically that the business was merely relocated rather than expanded by setting up a new industrial unit. The assessee argued that they had set up a new unit by installing new plant and machinery worth more than 80% of the total cost, which the AO rejected.

The Commissioner of Income Tax (Appeals) [CIT(A)] examined the conditions under section 80-IB and found that the assessee had indeed installed new plant and machinery, constituting 83.79% of the total cost. CIT(A) also referred to Explanation 2 to section 80-IB, which allows for the transfer of previously used machinery to a new business, provided it does not exceed 20% of the total value of the machinery used in the new business. Based on this, CIT(A) allowed the assessee's claim for deduction.

2. Formation by Splitting Up or Reconstruction:
The AO's objection was primarily that the industrial undertaking was formed by splitting up or reconstructing an existing business, which disqualifies it from the benefits under section 80-IB. The AO noted that the assessee did not provide reasons for relocating the factory and that the new setup was not an expansion but merely a relocation.

The assessee countered this by stating that they had moved from rented premises in Tirupur to a new leased premises in Tripura, investing significantly in new machinery and other assets. The learned Authorized Representative (AR) supported this claim with various judicial precedents, including cases like *CIT v. Electric Constructions & Equipment Co. Ltd.*, *CIT v. Associated Cement Co. Ltd.*, and others.

The Tribunal reviewed these submissions and the relevant judicial precedents. It highlighted that the purpose of sections like 80-IA/80-IB is to encourage the setting up of new industrial undertakings by offering tax incentives. The Tribunal referred to the Supreme Court's explanation in *Textile Machinery Corpn. Ltd. v. CIT*, which emphasized that substantial investment of new capital is essential and that the new business must be separate and distinct from the existing business.

The Tribunal also clarified that reconstruction implies continuity of the same business in an altered form, which was not the case here. The assessee had set up a new industrial unit with substantial new investments without disturbing the old business, thus not falling under the category of splitting up or reconstruction.

Conclusion:
The Tribunal concluded that the assessee had satisfied all the conditions laid down under section 80-IB. The new industrial undertaking was not formed by splitting up or reconstructing an existing business but was a separate and distinct entity with substantial new investments. Therefore, the CIT(A)'s order allowing the deduction under section 80-IB was upheld, and the revenue's appeals were dismissed.