2015 (3) TMI 1331 - AT - Income Tax

Deduction claimed u/s 10B denied - claim disallowed by the AO by holding that Prajna (India) was formed by a splitting up of the business of M/s. Dynamech - rectification petition - Held that - As already held that for splitting up to be effective transfer of assets needs must be there from the old unit to the new unit which is entirely absent here. Then the facts of the present case are not in pari materia with those of Chenab Information Technologies (P) Ltd. 2008 (8) TMI 597 - ITAT MUMBAI in as much as it has been observed therein that the new unit carried on the existing business of the old unit using the same employees. Herein as noted the employees of M/s. Dynamech have not been proved to have carried on the business of Prajna (India). In Chenab Information Techonologies (P) Ltd. (supra) some of the existing staff was found to have been shifted to the new office in the same area taken on lease by making a small investment of about Rs. 2 lakhs in furniture and equipment. These evidently are not the facts of the present assessee. In Chenab Information Technologies (P) Ltd. (supra) itself it has been observed that each case has to be evaluated on its own facts to determine whether it is a case of splitting up of existing business or not. In assessee s case as discussed the facts do not lead to a conclusion of Prajana (India) having been formed by a splitting up of the business of M/s. Dynamech. To sum up we hold that a) The Tribunal rightly recalled its order dated 31.08.2009 in its entirety for hearing afresh and no prejudice was caused to any interest of the Revenue thereby. b) The ld. CIT(A) went wrong in holding it to be a case of transfer of capital from the existing business to the new one. c) The ld. CIT(A) has erred in holding that orders for manufacture were shifted from the existing business to the new one. d) The ld. CIT(A) has fallen into error in holding that there was a unity of control in the two businesses. e) The ld. CIT(A) has wrongly held that there was a shifting of staff from the existing unit to the one newly set up. f) The ld. CIT(A) has erroneously held that tax evasion was the sole reason for setting up the new unit. f) The ld. CIT(A) has on the basis of the above misplaced findings incorrectly held it to be a case of splitting up of existing business. Thus we hold that the ld. CIT(A) has misdirected himself in sustaining the disallowance of deduction claimed by the assessee u/s 10B of the Act. - Decided in favour of assessee.

Issues Involved:
1. Deduction under Section 10B of the Income Tax Act.
2. Splitting up or reconstruction of an existing business.
3. Transfer of capital and assets.
4. Unity of control between businesses.
5. Shifting of staff.
6. Allegation of tax evasion.

Detailed Analysis:

1. Deduction under Section 10B of the Income Tax Act:
The primary issue was whether the assessee was entitled to a deduction under Section 10B of the Income Tax Act. The Assessing Officer (AO) denied this deduction, claiming that the new unit, Prajna (India), was formed by splitting up the business of the existing firm, Dynamech. The Tribunal, however, found that Prajna (India) was set up as an independent entity with new investments in land, building, and machinery at a new location, and therefore, the deduction under Section 10B was allowable.

2. Splitting up or reconstruction of an existing business:
The AO initially held that Prajna (India) was formed by splitting up Dynamech's business. The CIT(A) later supported this by stating that the business of Dynamech had been diverted to Prajna (India). However, the Tribunal found no evidence of any orders from Mitsubishi, Japan (the sole customer), being shifted from Dynamech to Prajna (India). The Tribunal concluded that there was no splitting up or reconstruction as no assets or machinery were transferred from Dynamech to Prajna (India).

3. Transfer of capital and assets:
The CIT(A) observed that the capital for setting up Prajna (India) was obtained by withdrawing capital from Dynamech. The Tribunal found this observation to be unsupported by any material evidence. The partners' capital in Dynamech remained intact, and the investments in Prajna (India) were made from personal withdrawals and not from the firm's capital.

4. Unity of control between businesses:
The CIT(A) held that there was unity of control between Dynamech and Prajna (India) as both were managed by the assessee. The Tribunal disagreed, noting that the CIT(A)'s finding was based on assumptions without any substantial evidence. The Tribunal emphasized that Dynamech was a partnership firm while Prajna (India) was a proprietorship, and there was no transfer of assets or capital to suggest unity of control.

5. Shifting of staff:
The CIT(A) suggested that workers from Dynamech were possibly used in Prajna (India) during the year under consideration. The Tribunal found no evidence to support this claim. It noted that while some workers joined Prajna (India) in the subsequent year, there was no proof of any staff transfer during the relevant assessment year.

6. Allegation of tax evasion:
The CIT(A) concluded that the new unit was set up primarily to claim tax benefits under Section 10B. The Tribunal found this conclusion to be unfounded, noting that the new unit was established to meet the higher precision requirements of Mitsubishi, Japan, and that the profitability of Prajna (India) had significantly improved, indicating genuine business operations.

Conclusion:
The Tribunal held that the CIT(A) had misdirected himself in sustaining the disallowance of the deduction claimed by the assessee under Section 10B. The Tribunal reversed the CIT(A)'s order and allowed the assessee's appeals, concluding that Prajna (India) was an independent new unit and not formed by splitting up or reconstructing the existing business of Dynamech.

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