2011 (8) TMI 633 - HC - Income Tax

Deduction under 80IA on internet services and internet telephone - reconstitution - change in shareholding - Revenue argued business was formed by splitting up and reconstruction of business already in existence or by transfer of old Plant & Machinery - Held That - Once the assessee is able to show that it has used new plants and machinery which has not been previously used for any purpose and the new undertaking is not formed by splitting up or reconstruction of business already in existence. Moreover provisions of 80IA(3) are not applicable to the present assessee, it having commenced its business much prior to 1.4.2005, Section 80IA(3) would not disentitle it from claiming deduction under Section 80IA on its income from internet services and internet telephony services. Pattern of shareholding - Insofar as the objection of the revenue that there had been change in the name of pattern of shareholding it does not make any difference as it is a well settled rule of law that benefit under Section 80IA of the Act is available to an undertaking and not to the assessee since the undertaking continues to carrying on its business without any reconstruction of business already in existence.

Issues Involved:
1. Entitlement to deduction under Section 80IA of the Income Tax Act, 1961 for income from internet services and internet telephone.
2. Continuity of deduction under Section 80IA after being granted in the first year of claim.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 80IA of the Income Tax Act, 1961:
The primary issue was whether the assessee was entitled to deductions under Section 80IA of the Income Tax Act, 1961 for income derived from internet services and internet telephone. The assessee company, initially engaged in fax mail services, began providing internet services and internet telephony services from October 2000 after acquiring a license from the Department of Telecommunication. The company claimed deductions under Section 80IA starting from the assessment year 2001-02, with the first claim made in the assessment year 2004-05.

The Assessing Officer (AO) rejected the deduction claim for the assessment year 2006-07, arguing that the business was not new but a continuation of the old business with old assets, thus violating Section 80IA(3). The AO contended that the business was formed by splitting up or reconstructing an existing business and using old machinery, which disqualified it from deductions under Section 80IA.

However, the Tribunal found that the provisions of Section 80IA(3) did not apply, as the business commenced before the amendment effective from 1.4.2005. The Tribunal noted that the assessee had been granted deductions in earlier years and held that the restriction under Section 80IA(3) should only be considered in the first year of the claim.

2. Continuity of Deduction under Section 80IA:
The second issue was whether the deduction under Section 80IA could be denied in subsequent years after being granted in the first year of the claim. The AO argued that the deduction allowed in earlier years did not set a precedent, as it was granted without examining the legal and factual aspects. The AO emphasized that the rule of consistency should only apply if the issue had been examined and adjudicated upon in earlier years.

The Tribunal, however, held that once the assessee met the conditions for deduction in the first year, the deduction could not be denied in subsequent years. The Tribunal stated that the bar under Section 80IA(3) should be considered only in the year of business formation. Since the assessee had been granted deductions from the assessment year 2004-05, it could not be denied for subsequent years.

Conclusion:
The High Court upheld the Tribunal's decision, stating that the provisions of Section 80IA(3) did not apply to the assessee's business, which commenced before the amendment effective from 1.4.2005. The Court emphasized that the restriction under Section 80IA(3) should only be considered in the first year of the claim, and once granted, the deduction could not be denied in subsequent years. The Court also noted that changes in ownership or shareholding did not affect the eligibility for deductions under Section 80IA, as the benefit was available to the undertaking, not the assessee.

Final Judgment:
The High Court answered both questions in favor of the assessee, dismissing the revenue's appeal and affirming the Tribunal's decision to allow deductions under Section 80IA for the assessment year 2006-07.

← Previous Next →