2010 (6) TMI 650 - AT - Income Tax

Summary

Issues Involved:
1. Deduction u/s 10B of the Income-tax Act, 1961.
2. Transfer and use of previously used machinery.
3. Applicability of sub-section (9) of section 10B.
4. Interpretation of Board Circular No. 378 and Circular No. 8 of 2002.

Summary:

Issue 1: Deduction u/s 10B of the Income-tax Act, 1961

The Revenue contended that the CIT(A) erred in allowing deduction u/s 10B, as the assessee did not fulfill the conditions in sub-section (2) of this section. The machinery used by the assessee had been previously used by another entity, HICS, before its transfer and takeover by the assessee.

Issue 2: Transfer and use of previously used machinery

The assessee claimed deduction u/s 10B despite using machinery previously used by HICS. The Assessing Officer denied the deduction, stating that the conditions in sub-section (2) were not satisfied. The CIT(A) allowed the deduction, relying on the decision in Tech Books Electronics Services (P.) Ltd. v. Addl CIT, where it was held that a mere change in ownership does not lead to the inference of splitting up or reconstruction of a business already in existence.

Issue 3: Applicability of sub-section (9) of section 10B

Sub-section (9) of section 10B, applicable for assessment years 2002-03 and 2003-04, states that if the ownership or beneficial interest in the undertaking is transferred, the deduction shall not be allowed for the assessment year relevant to such previous year and subsequent years. The Tribunal agreed with the Departmental Representative that this provision applies to both the transferor and transferee, denying the deduction for the years 2002-03 and 2003-04.

Issue 4: Interpretation of Board Circular No. 378 and Circular No. 8 of 2002

The assessee relied on Board Circular No. 378, which states that the benefit of section 84 attaches to the undertaking and not to the owner. However, the Tribunal noted that this circular pertains to section 84, not section 10B. Circular No. 8 of 2002 explains that sub-section (9) of section 10B was introduced to prevent trading in incentives, but genuine business reorganizations were not intended to be affected. The Tribunal found no evidence that the transfer was for genuine business purposes and not for tax avoidance, thus denying the deduction for the years 2002-03 and 2003-04.

Conclusion:

Appeals for assessment years 2002-03 and 2003-04 are allowed, denying the deduction u/s 10B. The appeal for assessment year 2004-05 is dismissed, allowing the deduction u/s 10B.