2010 (2) TMI 856 - AT - Income Tax

Deduction under s. 80-IA(4)(ii) of the Act - denial of benefit - submissions of Departmental that it is noticed that the assessee has not made a claim nor does the assessee have any income from the business of fax mail during the relevant assessment year - assessee admitted that it is not doing the business of fax mail services and the same had been discontinued - Held that - even on this ground the assessee cannot be denied deduction under s. 80-IA assessee is entitled to the deduction under s. 80-IA for the assessment year under appeal assessee does not have any income from the fax mail services there is no direction that is required to be issued to the lower authorities for any verification. In these circumstances the findings of learned CIT(A) and the AO on the issue are reversed and the AO is directed to grant the assessee the benefit of deduction under s. 80-IA on the income of the assessee from the business of internet services and internet telephony appeal of the assessee stands allowed.

Issues Involved:
1. Denial of deduction under Section 80-IA(4)(ii) of the Income Tax Act.
2. Applicability of Section 80-IA(3) to the assessee's case.
3. Principle of consistency in granting deductions.
4. Use of old plant and machinery in new business.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 80-IA(4)(ii):
The primary issue in this appeal was the denial of the benefit of deduction under Section 80-IA(4)(ii) of the Income Tax Act by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a company involved in providing internet and internet telephony services, claimed this deduction for the assessment year (AY) 2006-07. The AO denied the deduction on the grounds that the business was formed by splitting up or reconstruction of an existing business and used old plant and machinery, thus violating Section 80-IA(3). However, the assessee argued that the provisions of Section 80-IA(3) did not apply to their case as they fell under Section 80-IA(4)(ii) and had been granted the deduction in previous years (AY 2004-05 and 2005-06).

2. Applicability of Section 80-IA(3):
The assessee contended that Section 80-IA(3) was amended to include clause (ii) of sub-section (4) only from 1st April 2005, and this amendment did not apply retrospectively. Therefore, for the AY 2006-07, the provisions of Section 80-IA(3) should not bar the deduction under Section 80-IA(4)(ii). The Tribunal agreed with this argument, noting that the first year of the assessee's claim for deduction was AY 2004-05, and once the deduction is granted, it cannot be denied in subsequent years based on the formation of the business. The Tribunal emphasized that the eligibility for the deduction should be considered only in the first year of the claim.

3. Principle of Consistency:
The assessee argued that they had been granted the deduction under Section 80-IA for AY 2004-05 and 2005-06, and thus, the principle of consistency should apply. The Tribunal concurred, stating that once the deduction is granted in the first year and the formation of the business is accepted, it cannot be denied in subsequent years. The Tribunal highlighted that the AO cannot pick a subsequent year to deny the deduction based on the same grounds that were considered in the first year of the claim.

4. Use of Old Plant and Machinery:
The Revenue argued that the assessee's new business of internet services and internet telephony was formed by using old plant and machinery from the fax mail services, thus violating Section 80-IA(3). However, the Tribunal found that the business of providing internet services started on 17th October 2000, and the agreement with the Department of Telecommunication (DOT) dated 19th April 2002 replaced the earlier agreement dated 5th January 1999. The Tribunal noted that the assessee had stopped the business of fax mail services from AY 2004-05 and incurred substantial expenditure on the new business. Therefore, the Tribunal concluded that the provisions of Section 80-IA(3) did not apply to the assessee's case as the business was formed and started much before the amendment's effective date of 1st April 2005.

Conclusion:
The Tribunal allowed the appeal, directing the AO to grant the benefit of deduction under Section 80-IA on the income from internet services and internet telephony for AY 2006-07. The Tribunal reversed the findings of the CIT(A) and the AO, emphasizing that the assessee's case was not barred by the provisions of Section 80-IA(3) and upheld the principle of consistency in granting deductions.

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