2015 (8) TMI 412 - AT - Income Tax

Disallowance of deduction u/s.10B - assessee is a partnership firm carrying on business as 100% export oriented unit - CIT(A) deleted the addition - whether CIT(A) has erred in holding that the assessee firm cannot be said to have came into existence by way of splitting up or reconstruction of old business? - Held that - The list of customers of Metal Recycling industries and assessee has been submitted and it was found that there is not a single customer of assessee who was purchasing material from M/s metal Recycling Industries. There are separate licenses/registration and permissions governed both the units under various statutory laws. This establishes that assessee s undertaking is separate; Investments of the funds, separate production facilities, separate goods produced with different installed capacities and separate customers of the unit. Therefore under the facts and circumstances of the case, CIT(A) was justified in holding that unit is not setup by splitting up or reconstruction of the existing business. Mere fact that while setting up factory a small amount of plant and machinery was transferred from previous business cannot be basis to come conclusion that it is a reconstruction. Moreover, there is no commonality in the business of undertaking of the M/s. Metal Recycling Industry and the undertaking of assessee except that three partners were also the partners of assessee s undertaking. This cannot be basis to hold that undertaking setup by assessee has arisen because of splitting up or reconstruction of existing business of assessee. Thus CIT(A) justified in holding that new unit set up by assessee is not formed by splitting up or reconstruction of existing business and therefore deduction u/s. 10B cannot be denied to assessee especially when in the last year, same was allowed after examining the facts in detail and there was no change in the facts during the year. - Decided in favor of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of deduction under Section 10B of the Income Tax Act.
2. Determination of whether the assessee firm was formed by splitting up or reconstruction of an existing business.

Detailed Analysis:

1. Deletion of addition on account of disallowance of deduction under Section 10B of the Income Tax Act:
The primary issue before the Tribunal was the allowability of deduction under Section 10B of the Income Tax Act. The assessee, a partnership firm operating as a 100% export-oriented unit, claimed a deduction of Rs. 1,01,07,319/- under Section 10B for the Assessment Year (A.Y.) 2008-09. The Assessing Officer (AO) denied this deduction, asserting that it was previously allowed mechanically without thorough verification. However, the Tribunal found that the assessee had been assessed under Section 143(3) of the Act for the past three years, and specifically in A.Y. 2007-08, the AO had conducted a detailed examination of the deduction claim. Therefore, the Tribunal concluded that the AO's assertion of mechanical allowance was incorrect, and the deduction was initially granted after a detailed inquiry.

2. Determination of whether the assessee firm was formed by splitting up or reconstruction of an existing business:
The AO argued that the assessee firm was formed by splitting up or reconstructing the business of M/s Metal Recycling Industries due to several factors:
- Commonality of partners between the two firms.
- Shared business premises and leasehold land.
- Utilization of some staff members and assets from the old firm.

The Tribunal addressed each point as follows:

Commonality of Partners:
The Tribunal noted that while the assessee firm initially had the same partners as M/s Metal Recycling Industries, three additional partners were inducted before obtaining the Letter of Permission (LOP) from the DGFT. Thus, the firm had six partners when it commenced business, with only some being common with the old firm. The Tribunal held that mere commonality of some partners does not constitute splitting up or reconstruction.

Shared Business Premises and Leasehold Land:
The Tribunal acknowledged that the assessee operated on some leasehold land previously used by M/s Metal Recycling Industries but highlighted that the assessee also acquired new land and constructed a new factory with significant investments in new machinery and plant. Therefore, the Tribunal concluded that the assessee's operations on the same land did not amount to splitting up or reconstruction.

Utilization of Staff and Assets:
The Tribunal found that although six staff members from the old firm were employed by the new firm, this did not constitute splitting up or reconstruction, especially since the new firm had 29 staff members in total. Additionally, the assessee purchased some assets from the old firm, but these were mostly office equipment and auxiliary machinery, not core production machinery. The Tribunal emphasized that the assessee made substantial investments in new plant and machinery worth over Rs. 5 crores, indicating a separate and distinct business.

Legal Precedents and Analysis:
The Tribunal referred to the Supreme Court's judgment in Textile Machinery Corporation v. CIT, which outlined criteria for determining whether a business is formed by reconstruction. The Tribunal found that the assessee met these criteria, including substantial fresh capital investment, employment of requisite labor, manufacturing of new products, and maintaining a separate and distinct identity from the old business. The Tribunal also noted that the assessee had obtained separate regulatory approvals and produced different products with distinct production processes and customer bases.

Conclusion:
Based on the detailed analysis, the Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 10B, concluding that the new unit set up by the assessee was not formed by splitting up or reconstruction of the existing business. The Tribunal dismissed the Revenue's appeal and directed the AO to allow the deduction as claimed by the assessee.

Result:
The appeal filed by the Revenue was dismissed. The Tribunal pronounced the judgment in the open Court on June 24, 2015.