2016 (9) TMI 865 - HC - Income Tax

Additions made on accounts of exemptions under section 10A - confirmation of separate and distinct identity - ITAT confirming the order passed by the CIT(A) in deleting additions - Held that - We notice that CIT (Appeals) as well as the Tribunal have, while coming to the conclusion as reflected in respective orders, considered several factors and tested the contention of the revenue from all these aspects. The authorities have also considered the business activities of both the units; the business territory of both the units; the product in which both the units are dealing; the terms of the agreement and inasmuch as have also gone into the aspect of recruitment and training expenses as well. While coming to the conclusion, each details submitted to them have been considered minutely, so much so relationship of parties, strength of the employment, infrastructure facilities and capital investment having been brought in the new unit in respect of furniture, fixtures, computer equipments etc and also considered the parameters prescribed under Section 10A of the Act so as to become eligible for deduction. The Tribunal has also considered the relevant circular which has been placed for consideration and various authorities submitted to it and therefore, appears to this Court that the conclusion arrived at by the Tribunal is based upon sound reasoning, the orders impugned are not required to be interfered with. From the aforesaid background of fact since it is clearly emerging that the conditions contained under Section 10A of the Act are established on the case on hand, the record has revealed the independent and distinct identity of Unit-107 and all other relevant factors have rightly been concluded by the Tribunal to hold that Unit-107 is a separate and distinct identity, the conclusion arrived at by the Tribunal is not worth to be dislodged or disturbed. Therefore, we are of the opinion that the decision delivered by the Tribunal does not deserve to be disturbed or set aside and therefore, having not found case in favour of the revenue, we hereby confirm the order of the Tribunal

Issues Involved:
1. Eligibility for exemption under Section 10A of the Income-Tax Act for Unit-107.
2. Determination of whether Unit-107 was formed by splitting up or reconstruction of Unit-106.

Detailed Analysis:

Issue 1: Eligibility for Exemption under Section 10A
The primary issue was whether Unit-107 of the assessee company was eligible for exemption under Section 10A of the Income-Tax Act. The assessee claimed that Unit-107 was a new unit and therefore qualified for the exemption. The Assessing Officer disallowed this claim, arguing that Unit-107 was not an independent unit but merely an extension of Unit-106, thus not eligible for the exemption.

The CIT (Appeals) and the Income-Tax Appellate Tribunal (ITAT) both upheld the assessee's claim, stating that Unit-107 was indeed a separate and distinct unit. The Tribunal noted that Unit-107 had its own premises, separate electricity and water meters, and new investments in furniture, fixtures, and machinery. Furthermore, the Tribunal observed that Unit-107 catered to different markets (U.K., Austria, New Zealand, and Germany) compared to Unit-106, which catered to the USA market. Consequently, the Tribunal concluded that Unit-107 was an independent unit eligible for the Section 10A exemption.

Issue 2: Formation by Splitting Up or Reconstruction
The second issue was whether Unit-107 was formed by splitting up or reconstruction of Unit-106, which would disqualify it from the exemption under Section 10A. The Assessing Officer argued that Unit-107 was formed by splitting up Unit-106, citing shared resources and personnel as evidence. However, the CIT (Appeals) and the Tribunal found that Unit-107 was not formed by splitting up or reconstructing Unit-106.

The Tribunal observed that Unit-107 was set up with new investments and had a separate operational field. The Tribunal also noted that the business and employment of Unit-106 had not declined but had increased, indicating that Unit-107 was not created at the expense of Unit-106. The Tribunal relied on various judicial precedents, including decisions from the Supreme Court and the Gujarat High Court, which supported the view that new units set up with fresh capital and additional labor force should be considered separate and distinct entities.

Conclusion
The High Court confirmed the Tribunal's findings, stating that Unit-107 was a separate and distinct unit, not formed by splitting up or reconstructing Unit-106. The Court noted that the Tribunal had conducted a thorough examination of the facts, including the physical setup, business operations, and financial investments of both units. The Court also emphasized that minor overlapping expenses did not change the fundamental character of Unit-107 as an independent unit.

The Court concluded that the conditions under Section 10A were met, and therefore, Unit-107 was eligible for the exemption. Consequently, the appeals filed by the Revenue were dismissed, and the Tribunal's order was upheld.

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