2019 (1) TMI 598 - HC - Income Tax

Exemption u/s 10AA - eligibility - satisfaction of conditions mentioned in clause (ii) to sub-section (4) to Section 10AA - splitting up or reconstruction of the business already in existence - Held that - Negative stipulation in Clause (ii) to sub-section (4) of Section 10AA mandates that to claim exemption the unit should not be formed by splitting up or reconstruction of a business already in existence. The words and terms splitting up or re-construction used in clause (ii) to sub-section (4) to Section 10AA reflect a deliberate forethought in the choice of words. The increase in revenue in the new unit was 1166% higher. Obviously the existing business was not transferred and the new unit had generated revenue almost equal to the revenue earned by the existing business. Assessee had also carried out the expansion of the non-exempt EOU unit by adding additional area of 21817 sq. feet. There has been increase of 33%, 47%, 38% and 13% in the revenue earned by the exempt unit during the period relevant to the assessment years 2013-14 to 2016-17 respectively. However, the revenue earned by the non-exempt unit/business has not deceased and has shown increase as noted above between the financial years 2012-13 to 2015-16. Tribunal had also examined technical manpower employed in the new unit and has noted that percentage of new employees in the SEZ unit was 83% and 64% during the period relevant to the assessment years 2011-12 and 2013-14. Clearly new employment opportunities and jobs were created. Business had grown and increased substantially on setting up of the new unit, which was a legitimate and wise business decision and not subterfuge and an illegal act. Tribunal has accepted that the new unit was a separate identity for its income to qualify for exemption under Section 10AA for it was not formed and created by splitting up or reconstructing the existing business. The new unit was also not formed by transferring any machinery or plant previously used. Fresh investment was made in the new unit. The revenue earning and profits generated were clearly attributable to the new unit. No substantial question of law arises for consideration - Decided against revenue

Issues Involved:
1. Eligibility for exemption under Section 10AA of the Income Tax Act.
2. Interpretation of the term "splitting up" or "reconstruction" of an existing business.
3. Applicability of conditions under sub-section (4) of Section 10AA.
4. Examination of whether the new unit in SEZ was formed by splitting up or reconstruction of an existing business.
5. Consideration of previous judicial decisions on similar provisions.

Issue-wise Detailed Analysis:

1. Eligibility for exemption under Section 10AA of the Income Tax Act:
The primary issue is whether the respondent-assessee's new unit in the Special Economic Zone (SEZ) qualifies for exemption under Section 10AA of the Income Tax Act for the assessment year 2013-14. The respondent-assessee had claimed exemption for the SEZ unit starting from the assessment year 2010-11, which was allowed for the assessment years 2011-12 and 2012-13 but disallowed for 2013-14 by the Assessing Officer.

2. Interpretation of the term "splitting up" or "reconstruction" of an existing business:
Clause (ii) to sub-section (4) of Section 10AA stipulates that the unit should not be formed by splitting up or reconstruction of a business already in existence. The court emphasized that these terms reflect a deliberate legislative choice to ensure that the exemption is granted only to genuinely new units in SEZs, thereby promoting economic growth and job creation.

3. Applicability of conditions under sub-section (4) of Section 10AA:
Sub-section (4) of Section 10AA outlines the conditions that a unit must fulfill to qualify for exemption. These conditions are unit-specific and not assessee-specific, meaning each unit within the SEZ must independently satisfy the conditions to be eligible for exemption. The court noted that the respondent-assessee's unit met the conditions specified in clauses (i) and (iii) of sub-section (4).

4. Examination of whether the new unit in SEZ was formed by splitting up or reconstruction of an existing business:
The Tribunal examined the facts and data to determine whether the SEZ unit was a new unit or formed by splitting up or reconstruction of the existing business. The Tribunal's analysis included a detailed comparison of revenue growth from the existing business and the new SEZ unit, showing significant independent growth and investment in the new unit. The Tribunal concluded that the SEZ unit was not formed by splitting up or reconstruction of the existing business, and thus qualified for exemption under Section 10AA.

5. Consideration of previous judicial decisions on similar provisions:
The court referred to previous decisions, including Commissioner of Income Tax vs. Heartland Delhi Transcription Services Pvt. Ltd. and Commissioner of Income Tax vs. Tata Communications Internet Services Ltd., which interpreted similar provisions in Sections 10B and 80IA of the Act. These decisions supported the interpretation that the conditions for exemption should be examined in the first year of the unit's formation and that subsequent compliance with the conditions should be presumed if initially met.

In conclusion, the court upheld the Tribunal's decision, affirming that the new SEZ unit was eligible for exemption under Section 10AA as it was not formed by splitting up or reconstruction of the existing business. The appeal was dismissed with no substantial question of law arising for consideration.

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