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2006 (2) TMI 646 - AT - Income TaxExemption u/s 10B - profits derived from 100 per cent Export Oriented Undertaking ( EOU ) - activity of software development and processing of data - HELD THAT - 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. 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. 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. In the case of the assessee, neither the period of five years nor the block period of eight years expired when the amendment replacing the word ten for five was introduced by Income-tax (Second Amendment) Act, 1998 with effect from 1-4-1999. Since the assessee was entitled to exemption in the year in which amendment became effective and operative, the assessee will be entitled to the extended period of exemption because the period of five years had not exhausted up to assessment year 1999-2000. Since the right of the assessee was continuing in the year of amendment and was not lost on the date when the amendment came into existence, the view taken by the learned CIT(A) cannot be upheld. So far as the objections of the learned CIT(A) regarding conduct of the assessee-firm in not claiming the exemption in earlier year is concerned, the approach of the learned CIT(A) raising this objection, cannot be legally justified because if the assessee is entitled to any benefit under any statutory provision then the past conduct cannot be relevant particularly when reference to such conduct is not made in the Act. The eligibility of the assessee has to be seen in the year in which the claim is preferred and if in earlier years the assessee waived his right then he cannot be stopped in claiming the benefit in the subsequent years. The learned CIT(A) has also observed that the assessee did not file declaration exercising option prior to the due date for filing of return but filed it along with the return and, therefore, the assessee is disqualified from claiming exemption on this ground also. We do not find any force in such objection because this objection is merely of super-technical nature. Thus, we are unable to concur with the finding of learned CIT(A) and set aside the same. Consequently, we allow the ground of appeal taken by the assessee and direct that the assessee shall be entitled to claim exemption u/s 10B in the assessment year under consideration. Thus, we allow the claim of assessee for exemption u/s 10B of the Income-tax Act. Grounds stand allowed accordingly. In the result, Appeal is allowed.
Issues Involved:
1. Entitlement to exemption under section 10B of the Income-tax Act for the assessment years 2000-01 and 2001-02. 2. Reduction of interest income for the purposes of computation of deduction under section 80HHE of the Income-tax Act. Detailed Analysis: Issue 1: Entitlement to Exemption under Section 10B Background: The assessee, initially a partnership firm named M/s. Pinnacle Exports, converted into a private limited company, Techbook Electronics Services Pvt. Ltd., in 1997. The firm was a 100% Export Oriented Unit (EOU) engaged in software development and export, primarily to M/s. Tech Enterprises Inc., USA. The firm did not claim exemption under section 10B initially but claimed deductions under section 80HHE. Post-conversion, the company claimed exemption under section 10B for the assessment year 2000-01, which was denied by the Assessing Officer and upheld by the CIT(A) on the grounds of reconstruction of an existing business and procedural lapses. Arguments by Assessee: 1. No Reconstruction: The conversion from a firm to a company is a statutory vesting and not a transfer, as supported by various judicial precedents (e.g., CIT v. Texspin Engg. & Mfg. Works, 263 ITR 345). 2. Eligibility for Exemption: The business activity remained unchanged post-conversion, and thus, the company should be eligible for the exemption under section 10B. 3. Extended Period of Exemption: The amendment extending the exemption period from five to ten years should apply, allowing the company to claim exemption until the assessment year 2003-04. Findings: 1. No Reconstruction of Business: The Tribunal found that the conversion from a firm to a company did not constitute a reconstruction of the business. The business activities and structure remained unchanged, and the change was only in the ownership form. 2. Statutory Vesting: The conversion was deemed a statutory vesting, not a transfer, aligning with the decisions in CIT v. Texspin Engg. & Mfg. Works and other related cases. 3. Extended Exemption Period: The Tribunal agreed that the assessee was entitled to the extended exemption period of ten years as per the amended provisions of section 10B, effective from 1-4-1999. 4. Past Conduct Irrelevant: The Tribunal dismissed the CIT(A)'s objections regarding the assessee's past conduct of not claiming the exemption and procedural lapses in filing declarations, stating that these are not grounds to deny the statutory benefit. Conclusion: The assessee was entitled to claim exemption under section 10B for the assessment years 2000-01 and 2001-02. The Tribunal allowed the appeals, setting aside the findings of the CIT(A). Issue 2: Reduction of Interest Income for Computation of Deduction under Section 80HHE Background: The assessee challenged the CIT(A)'s decision to reduce interest income of Rs. 955 received on account of deposits with the bank from the computation of deduction under section 80HHE. Findings: 1. Nature of Interest Income: The Tribunal upheld the CIT(A)'s finding that the interest income earned from surplus funds was not generated from business activities but was assessable under the head "Income from other sources." 2. Correlation with Business Activity: The Tribunal found no direct correlation between the interest-earning and the business activity of the assessee, justifying the exclusion of this income from the computation of deduction under section 80HHE. Conclusion: The Tribunal upheld the CIT(A)'s decision to reduce the interest income from the computation of deduction under section 80HHE. Final Outcome: - ITA No. 282/Delhi/04 (Assessment year 2000-01): Allowed, granting the assessee exemption under section 10B. - ITA No. 3987/Delhi/04 (Assessment year 2001-02): Partly allowed, granting the assessee exemption under section 10B but upholding the reduction of interest income for the purposes of section 80HHE deduction.
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