2008 (5) TMI 661 - AT - Income Tax

Eligibility for deduction u/s 10B - business of export of computer software - shifted its business to new office - 100 per cent EOU - Jurisdiction of order passed by CIT u/s 263 - HELD THAT - It is pertinent to note here that the plant and machinery which was brought by the assessee at the new place of business was bearing charge of the bank and financial institution against the loan already availed by the assessee. Therefore the assessee could not dispose of these plant and machinery till the repayment of the earlier loan and consequently discharge of charge. This is a case where the assessee has shifted its ongoing business of export of computer software to a new place located in Software Technology Park of India notified by the Government of India. Whether the shifting of the business place from a domestic tariff area to a Software Technology Park of India notified by Government of India amounts to formation of business by splitting up or reconstruction of business already in existence as well as by transfer of all plant and machinery previously used to a new business for any purpose as contained in cls. (ii) and (iii) of sub-s. (2) to s. 10A? - HELD THAT - The shifting of existing business from one place to another place does not amount to forming a business by splitting or reconstruction or by transfer of plant and machinery previously used. In the facts and circumstances of the case formation of new business by splitting up a business already existing is totally ruled out. As far as reconstruction is concerned it is not a case of transfer of asset and ownership of assets. Moreover it is only shifting of existing business from a domestic area to STPI and getting approval as 100 per cent export-oriented undertaking. Therefore it is not establishing a new business by transfer of plant and machinery used previously for any purpose. We are of the considered view that this is not a case of setting up of a new business but only transfer of business place of existing business to a new place located in STPI area and thereafter getting the approval from the authorities and thereby the assessee becomes entitled to deduction u/s 10A. Merely because by shifting the business from one place to another and also keeping some of the plant and machinery as those are bearing charge of financial institution does not violate cls. (ii) and (iii) of sub-s. (2) to s. 10A of the IT Act. Board in Circular No. 1 of 2005 dt. 6th Jan. 2005 has clarified that the existing undertaking set up in the DTA and drawing profit from export of article shall be eligible for deduction under s. 10B on conversion of the area into EOU on getting approval as 100 per cent export-oriented undertaking. The only instruction (sic-restriction) is that the deduction shall be available only for the remaining period of 10 years beginning with the year in which it got the approval as 100 per cent EOU - Moreover when the claim of the assessee regarding deduction u/s 10A was considered and decided by the AO in the regular assessment and the same issue was taken by the assessee to the CIT(A) the order of assessment was merged with the order of the CIT(A) the order passed u/s. 263 is not sustainable as the CIT has exceeded the jurisdiction in invoking the provisions of s. 263 when assessment order as regards the claim of deduction u/s 10A has been merged with the order of the CIT(A). Therefore the order passed u/s 263 is not sustainable and liable to be set aside. Accordingly we set aside the impugned order - In the result the appeal is allowed.

Issues Involved:
1. Validity of CIT's order under Section 263 of the IT Act.
2. Eligibility for deduction under Section 10A of the IT Act.
3. Alleged splitting or reconstruction of business.
4. Transfer of plant and machinery.
5. Merger of assessment order with CIT(A)'s order.

Detailed Analysis:

1. Validity of CIT's Order under Section 263 of the IT Act:
The assessee challenged the CIT's order dated 17th March 2006, which was passed under Section 263 of the IT Act. The CIT had revised the assessment order dated 31st March 2005, arguing that the deduction under Section 10A was erroneously allowed by the AO. The CIT directed the AO to reconsider the deduction issue de novo. The assessee contended that the CIT exceeded his jurisdiction, as the assessment order had already merged with the CIT(A)'s order dated 25th October 2005.

2. Eligibility for Deduction under Section 10A of the IT Act:
The assessee, engaged in the export of computer software, claimed a deduction under Section 10A for the assessment year 2002-03. The AO restricted the deduction to Rs. 1,42,08,344 against the assessee's claim of Rs. 3,75,42,950. The CIT(A) later allowed the deduction to the extent of Rs. 2,32,02,927. The CIT, however, revised the assessment order, stating that the assessee did not satisfy the conditions under Section 10A(2)(ii) and (iii).

3. Alleged Splitting or Reconstruction of Business:
The CIT observed that the assessee's business was formed by splitting or reconstructing an existing business, as indicated by the depreciation schedule showing that the WDV of brought-forward assets was 52.4% of the total assets' value. The assessee argued that it had shifted its business to new premises in Anna Nagar, which were newly furnished and equipped, and this did not amount to splitting or reconstruction. The assessee relied on several judgments, including Textile Machinery Corporation Ltd. vs. CIT and CIT vs. Khemchand Motilal Jain, to support its case.

4. Transfer of Plant and Machinery:
The CIT noted that the assessee had transferred some plant and machinery to the new premises, which were previously used, thus violating Section 10A(2)(ii) and (iii). The assessee countered that the machinery was retained due to a loan condition from the Export Import Bank of India, which required the machinery to be charged against the loan. The Tribunal, referring to the case of Paradigm IT (P) Ltd. vs. Dy. CIT, held that shifting the business did not amount to forming a new business by transferring previously used machinery.

5. Merger of Assessment Order with CIT(A)'s Order:
The Tribunal noted that the assessment order had merged with the CIT(A)'s order dated 25th October 2005. Therefore, the CIT lacked the jurisdiction to pass the order under Section 263. The Tribunal cited the case of Textile Machinery Corporation Ltd. vs. CIT, which clarified that reconstruction involves the transfer of assets and some change in ownership, which was not applicable in the assessee's case.

Conclusion:
The Tribunal concluded that the shifting of the business to a new location in an STPI area and the subsequent approval as a 100% export-oriented unit did not violate the conditions under Section 10A(2)(ii) and (iii). The Tribunal set aside the CIT's order dated 17th March 2006, passed under Section 263, and allowed the assessee's appeal.

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