2018 (11) TMI 441 - HC - Income Tax

Deduction claimed u/s 10B disallowed - whether the new firm has been formed by splitting business of the earlier partnership of M/s Dynamech and hence hit by Section 10B(2) (ii) of the Act? - assessee submitted that the new unit and the partnership firm were producing different products with no question of transfer of business - Held that - The products manufactured by two units are separate; any existing contracts of M/s Dynamech have been transferred to new firm; the new concern has been set up with advance and modern machinery to meet the fresh requirements of M/s Mitsubishi, Japan; there was any transfer of capital from the firm to the new concern or the capital was actually from the profit earned by the partnership firm needs to be taken into consideration. Apart from the said issues, the other issues raised by the Assessing Officer and the assessee are also required to be pointedly dealt with. It is clarified that facts mentioned herein are only illustrations. Thus be appropriate that without expressing any opinion on the merits of the case, the matter is remanded back to the Assessing Officer to decide the matter afresh after considering the material produced by the assessee and the contentions raised and by discussing the same in detail by passing a speaking order in accordance with law.

Summary

Issues:
- Whether the new firm was formed by splitting the business of the earlier partnership and is hit by Section 10B(2)(ii) of the Income Tax Act?
- Interpretation of Section 10B(2)(ii) & (iii) regarding newly established export-oriented undertakings.

Analysis:
1. The judgment pertains to four appeals filed by the revenue against the Income Tax Appellate Tribunal's order. The appeals were related to different assessment years but had similar facts and issues, hence being disposed of together.

2. The main issue revolved around whether the new firm was formed by splitting the business of the earlier partnership, affecting the eligibility for exemption under Section 10B of the Income Tax Act. The Tribunal had allowed the appeal of the assessee based on the contention that the new concern was set up with modern machinery to meet fresh requirements, and there was no transfer of capital from the old business to the new one.

3. Section 10B(2)(ii) & (iii) were crucial in determining the eligibility for exemption for export-oriented undertakings. The section prohibits exemption if the new business is formed by splitting up an existing business or by transferring old machinery to a new business.

4. The Assessing Officer disallowed the deduction under Section 10B due to perceived connections between the old and new businesses, such as common ownership, falling turnover of the old business, and capital source for the new business. The CIT(A) upheld the disallowance, leading to the appeal before the Tribunal.

5. The Tribunal allowed additional evidence, a letter from M/s Mitsubishi, which supported the assessee's claim of setting up a new concern with advanced machinery to cater to new requirements. The Tribunal overturned the Assessing Officer's decision based on this new evidence.

6. The dispute between the revenue and the assessee centered on whether there was a genuine separation between the old partnership firm and the new concern, especially concerning the products manufactured, capital transfer, and machinery procurement process.

7. Ultimately, the High Court remanded the matter back to the Assessing Officer for fresh consideration, emphasizing a detailed examination of the material presented by the assessee and a comprehensive discussion of the contentions raised, without expressing any opinion on the case's merits.

8. The judgment highlighted the importance of a thorough assessment of the facts and issues involved in determining the eligibility for tax exemptions under specific provisions of the Income Tax Act, ensuring a fair and detailed consideration of all relevant aspects before reaching a final decision.