2014 (2) TMI 1076 - HC - Income Tax

Entitlement for benefit u/s 10A of the Act Business of exporting software Conversion from firm to company - Benefit u/s 80HHE of the Act - Whether the Tribunal was correct in holding that the conversion of assessee firm to a company and conversion of the same into an STP unit would not amount to transfer of ownership or beneficial interest or reconstruction or splitting of business - Held that -The benefit under Section 10A can be extended even to the existing units, if they have fulfilled the condition under Sections 10A(2)(a)(ii) and 10A(2)(a)(iii) of the Act and as contended by the assessee, the requirement of setting up of a new STP unit does not arise Relying upon Commissioner of Income-Tax Versus Texspin Engineering And Manufacturing Works 2003 (3) TMI 56 - BOMBAY High Court - the conversion of a Firm into a Company is not a case of distribution of assets or dissolution of the Firm. There is no transfer of business as contemplated under Section 45(1) of the Act and only the partnership firm was converted into a company and all the partners of the firm have become the shareholders of the company - In view of the STPI scheme framed by the Government of India, the existing DTA units can also be converted into STP units and enjoy the deduction under Section 10A of the Act - the assessee has not violated any of the conditions prescribed under Section 10A of the Act - The benefit under Section 10A would also be available even when an existing unit gets converted into STP unit - it is not open to the Assessing Officer to contend that no new undertaking came into being after approval of STPI Decided against Revenue.

Issues Involved:

1. Entitlement to Section 10A exemption for the assessee-Company.
2. Interpretation of "newly established undertaking" under Section 10A.
3. Validity of conversion from a partnership firm to a company.
4. Compliance with conditions under Sections 10A(2)(ii) and 10A(2)(iii).
5. Applicability of CBDT Circular No.1/2005 and Import and Export Policy.

Detailed Analysis:

1. Entitlement to Section 10A Exemption:

The core issue revolved around whether the assessee-Company, which was initially a partnership firm and later converted into a company, is entitled to the 100% exemption under Section 10A of the Income Tax Act, 1961. The Assessing Officer denied this benefit, arguing that the exemption is only for new undertakings and not for existing units that merely converted their business structure.

2. Interpretation of "Newly Established Undertaking":

The Assessing Officer contended that the assessee did not set up a new unit but continued its existing business, thus not qualifying as a "newly established undertaking." However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) disagreed, stating that the conversion from a partnership firm to a company does not disqualify the assessee from claiming the exemption. They emphasized that there was no transfer of ownership or beneficial interest, and it was merely a transformation.

3. Validity of Conversion from a Partnership Firm to a Company:

The CIT(A) and ITAT relied on the precedent set by the Bombay High Court in "Commissioner of Income Tax v. Texspin Engineering and Manufacturing Works," which held that converting a firm into a company is not equivalent to the distribution of assets or dissolution of the firm. They concluded that the conversion did not result in the transfer of business as contemplated under Section 45(1) of the Act.

4. Compliance with Conditions under Sections 10A(2)(ii) and 10A(2)(iii):

The CIT(A) and ITAT found that the assessee-Company met all the conditions specified under Sections 10A(2)(ii) and 10A(2)(iii). They noted that all partners of the firm became shareholders of the company, and no outsiders were inducted as shareholders. The assets and liabilities were transferred to the company without any violation of the stipulated conditions.

5. Applicability of CBDT Circular No.1/2005 and Import and Export Policy:

The CIT(A) and ITAT referenced CBDT Circular No.1/2005 and the Import and Export Policy, which allow existing Domestic Tariff Area (DTA) units to convert into Export Oriented Units (EOU) and claim exemptions under Section 10A. They emphasized that the scheme permits such conversions, and the benefit under Section 10A extends to existing units meeting the necessary conditions.

Conclusion:

The High Court upheld the findings of the CIT(A) and ITAT, affirming that the assessee-Company is entitled to the 100% exemption under Section 10A. The court concluded that the conversion from a partnership firm to a company did not amount to a transfer of ownership or beneficial interest and that the assessee complied with all statutory conditions. The court also recognized the applicability of CBDT Circular No.1/2005 and the Import and Export Policy, which support the assessee's claim for exemption.

Order:

The appeals were dismissed, and the substantial question of law was answered in favor of the assessee, confirming their entitlement to the Section 10A exemption.

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