2013 (6) TMI 70 - HC - Income Tax

Deductions under Section 80-I - ITAT allowed the claim - whether ITAT was right in holding that Unit Nos. 2 & 3 are industrial undertakings for purposes of Sec. 80-I - Held that - Unable to accept the contention of the revenue that there is no material to indicate that the integrity of the business carried out by Unit No.1 or the integrity of Unit had been broken in any manner. Admittedly, Unit No.1 continues to function and carry on the business even after Unit Nos.2 & 3 were established. As it is not disputed that Unit Nos. 2 & 3 were established in addition to the existing Unit and were not formed by transfer of any asset from Unit No.1. Unit No. 1 was mainly engaged in publication and also carried on the job of composing, processing and printing of sheet fed presses. Merely, because the activity of printing was carried on by Unit No.1 also and the Unit No.1 was utilising the capabilities of Unit Nos.2 & 3 by getting job work done from them does not lead to the conclusion that Unit Nos.2 & 3 had been formed by splitting of the business of Unit No.1. The test whether industrial undertaking fulfills the condition as imposed under Section 80-I(2)(i) is not whether some part of the business of an assessee is carried on by the newly established undertaking but whether the newly established undertakings are formed by splitting up or reconstruction of the business of the existing Unit. Considering the case of Textile Machinery Corporation Ltd 1977 (1) TMI 3 - SUPREME Court & Indian Aluminium Company Limited 1977 (1) TMI 5 - SUPREME Court unable to find any material from the records to support the contention that Unit Nos.2 & 3 have been formed by splitting up of the business of the assessee and thus, the condition under Section 80-I(2)(i) has not been met. Admittedly, the activities being carried on by the assessee in Unit No.1 have not been discontinued and the Unit Nos.2 & 3 were established in addition to Unit No.1. It has been admitted that neither any machinery nor any equipment were transferred from Unit No. 1 to Unit Nos.2 & 3. Thus not inclined to entertain the contention of revenue that Unit Nos.2 & 3 fail to fulfill the condition under Section 80-I(2)(i). Whether it was open for AO to deny the benefit of Section 80-I to the assessee having allowed benefit to the assessee in the preceding three years - Held that - AO over a period of three years being assessment years 1988-89, 1989-1990 and 1990-1991 have consistently accepted the claim of the assessee for deduction under 80-I and it would not be open him to deny the deduction on the ground of non fulfillment of the conditions under 80-I(2 without disturbing the assessment for the assessment years relevant to the previous year in which the Unit Nos.2 & 3 were established. See Saurashtra Cement & Chemical Industries v. CIT 1979 (2) TMI 21 - GUJARAT High Court & CIT Tax v. Paul Brothers 1992 (10) TMI 5 - BOMBAY High Court wherein held that where relief of a tax holiday had been granted to an assessee in an initial assessment year in which the conditions for grant of tax holiday had to be examined, denial of relief in the subsequent years would not be permissible without disturbing the assessment in the initial assessment year. In favour of assessee.

Issues Involved:
1. Whether the conditions under Section 80-I are to be satisfied only in the initial year or in all assessment years.
2. Whether Unit Nos. 2 & 3 qualify as industrial undertakings for the purposes of Section 80-I.
3. Whether the activity of printing carried out by the assessee in Units 2 & 3 constitutes manufacturing or production.
4. Whether the employment of workers through a sister concern satisfies the condition of employing ten or more workers under Section 80-I.
5. Whether the benefit under Section 80-I can be denied in subsequent years if it was allowed in the initial year.
6. Whether Unit Nos. 2 & 3 were formed by splitting up or reconstructing the business of Unit No. 1.

Issue-wise Detailed Analysis:

1. Satisfaction of Conditions Under Section 80-I:
The Tribunal held that the conditions for claiming deductions under Section 80-I must be satisfied not only in the initial year but in all subsequent years where the deduction is claimed. This was affirmed by the court, rejecting the assessee's contention that once allowed, the deduction could not be re-examined in later years.

2. Qualification of Unit Nos. 2 & 3 as Industrial Undertakings:
The Tribunal and the court concluded that Unit Nos. 2 & 3 are independent industrial undertakings. Despite their interdependence with Unit No. 1, they could exist independently and carry on printing activities for other entities. Therefore, they qualify as separate industrial undertakings under Section 80-I.

3. Printing as Manufacturing or Production:
The court held that the activity of printing does constitute manufacturing or production of an article or thing. The printed material is distinct from the raw materials (paper and ink) used, fulfilling the requirement under Section 80-I(2)(iii). The court referenced the Supreme Court's decision in CIT v. Oracle Software India Ltd., which supported the notion that significant transformation of raw materials qualifies as manufacturing.

4. Employment of Workers:
The court determined that the condition of employing ten or more workers under Section 80-I(2)(iv) is met even if the workers are employed through a sister concern. The focus is on the number of workers involved in the manufacturing process, not their direct employment by the assessee. This interpretation aligns with the court's reasoning in Commissioner v. Nanda Mint and Pine Chemicals Ltd.

5. Consistency in Allowing Deductions:
The court emphasized the principle of consistency, stating that once the deduction under Section 80-I is allowed in the initial year, it should not be denied in subsequent years without any material change in circumstances. This principle is supported by the Supreme Court's decision in Radhasoami Satsang v. CIT and other similar cases.

6. Formation by Splitting or Reconstruction:
The court found no evidence that Unit Nos. 2 & 3 were formed by splitting up or reconstructing the business of Unit No. 1. The new units were established with new machinery and were capable of functioning independently. The court referred to the Supreme Court's decision in Textile Machinery Corporation Ltd. v. CIT, which supports the view that new units established without transferring assets from existing units do not constitute splitting or reconstruction.

Conclusion:
The court answered the first question in the negative, indicating that the conditions under Section 80-I must be satisfied in all assessment years. The second question and similar questions in the appeals were answered in the affirmative, confirming that Unit Nos. 2 & 3 qualify as industrial undertakings and their printing activities constitute manufacturing. The appeals by the revenue were dismissed, and no costs were awarded.

← Previous Next →