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2017 (5) TMI 1571 - HC - Income TaxBenefit of deduction u/s 10AA - modernization of existing unit or new undertaking - Held that - Following the decision of Delhi High Court in the case of CIT vs. Mahaan foods Ltd. 2008 (3) TMI 24 - HIGH COURT OF DELHI it is not the case of reconstruction of existing business but a totally new undertaking has started functioning. As all other requirements of the Section have been fulfilled claim of deduction u/s 10AA is justified. The AO is therefore directed to allow deduction claimed u/s 10AA on profits and gains derived from Exports thus the issue is answered in favour of the assessee.
Issues Involved:
1. Entitlement to benefit under Section 10AA of the Income Tax Act. 2. Violation of mandatory conditions prescribed in Section 10AA(4)(ii) of the Income Tax Act. 3. Reconstruction of a business already in existence. 4. Transfer of assets and its implications on the formation of a new unit. Detailed Analysis: Issue 1: Entitlement to Benefit under Section 10AA of the Income Tax Act The appellant challenged the Tribunal's judgment, which confirmed the CIT(A)'s order modifying the Assessing Officer's decision. The Tribunal and CIT(A) held the assessee entitled to the benefit under Section 10AA of the Act, granting significant deductions despite alleged violations of mandatory conditions. The substantial questions of law framed by the Court in various appeals revolved around whether the Tribunal and CIT(A) were justified in granting these deductions. Issue 2: Violation of Mandatory Conditions Prescribed in Section 10AA(4)(ii) of the Income Tax Act The Assessing Officer argued that the assessee violated the mandatory condition under Section 10AA(4)(ii), which states that the unit should not be formed by the reconstruction of a business already in existence. The Assessing Officer contended that the unit set up in the SEZ was not a new and identifiable unit but rather a reconstruction of the old business, involving the transfer of assets, human resources, and customer base from the old business to the new unit. Issue 3: Reconstruction of a Business Already in Existence The Assessing Officer's detailed observations highlighted that the new unit was formed by transferring substantial assets and capital from the old business, indicating reconstruction. The CIT(A) and Tribunal, however, concluded that the new unit was a separate and independent production unit, not formed by the reconstruction of the old business. They emphasized that substantial new capital was introduced, and the old business's assets were not shifted to the new unit. Issue 4: Transfer of Assets and Its Implications on the Formation of a New Unit The Assessing Officer argued that the transfer of assets and capital from the old business to the new unit constituted reconstruction. However, the CIT(A) and Tribunal found that the new unit involved new machinery and substantial new investment, and the employees who joined the new unit did so for better prospects, not as a transfer. The Tribunal relied on various judicial precedents, including the Supreme Court's decision in Textile Machinery Corporation Ltd. and other High Court rulings, to conclude that the new unit was not formed by reconstruction but was a separate and distinct entity. Conclusion: The Tribunal and CIT(A) concluded that the new unit was a separate and independent entity, not formed by the reconstruction of the old business. They emphasized the introduction of substantial new capital and machinery, and the fact that the old business's assets were not transferred to the new unit. The Tribunal's reliance on judicial precedents supported their conclusion. The High Court upheld the Tribunal's decision, answering the issue in favor of the assessee and against the department, and dismissed the appeals.
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