1995 (6) TMI 64 - AT - Income Tax

Backward Area, New Industrial Undertaking, Plant And Machinery, Profits And Gains, Raw Material, Sales Tax Act

Summary

Issues Involved:
1. Eligibility for deduction under sections 80HH and 80-I of the Income-tax Act.
2. Determination of whether the new industrial undertaking was formed by splitting up or reconstruction of an existing business.
3. Transfer of machinery or plant from the old unit to the new unit.
4. Compliance with the requirement of employing ten or more workers.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction Under Sections 80HH and 80-I:
The appellant claimed deductions under sections 80HH and 80-I, amounting to Rs. 4,28,295 each, for a newly established industrial undertaking in a backward area. The Assessing Officer (AO) verified records and noted that the appellant had previously operated a manufacturing concern, M/s. Khandelwal Electricals, which was closed on 31st March 1989. The new unit, M/s. Khandelwal Wires, started on 1st June 1988, claimed deductions under sections 80HH and 80-I. The AO questioned the validity of these claims, citing that the new unit seemed to be a continuation or reconstruction of the old business.

2. Determination of Whether the New Industrial Undertaking Was Formed by Splitting Up or Reconstruction of an Existing Business:
The AO concluded that the new unit did not meet the conditions for deductions under sections 80HH and 80-I, as it appeared to be formed by splitting up or reconstructing the old business. The AO's reasoning included:
- Both units manufactured similar products.
- Similar raw materials were used.
- The new unit was started with machinery worth Rs. 1,64,164, and other assets from the old unit were transferred.
- The creditors and debtors of the old unit were transferred to the new unit.
- The AO inferred that the new unit was a mere reconstruction of the old business.

The Commissioner of Income-tax (Appeals) upheld the AO's decision, noting that the new unit did not qualify as a separate entity but was a continuation of the old business.

3. Transfer of Machinery or Plant from the Old Unit to the New Unit:
The AO highlighted that machinery and other assets were transferred from the old unit to the new unit, which disqualified the new unit from claiming deductions under sections 80HH and 80-I. The AO noted:
- The old unit's machinery was still usable.
- No evidence of the sale or disposal of the old machinery was provided.
- The new unit's machinery value was less than 20% of the old unit's machinery value.

The Commissioner of Income-tax (Appeals) agreed with the AO's findings, indicating that the transfer of assets from the old to the new unit showed continuity and reconstruction.

4. Compliance with the Requirement of Employing Ten or More Workers:
The Commissioner of Income-tax (Appeals) imposed an additional condition, noting that the new unit did not employ ten or more workers initially. The appellant argued that:
- The number of workers exceeded ten during the substantial part of the year.
- The appellant, being a qualified person, was not included in the worker count.

The Tribunal found that the new unit met the requirement of employing ten or more workers during a substantial part of the year, thus complying with the conditions for deductions.

Tribunal's Conclusion:
The Tribunal examined the submissions, material on record, and relevant decisions. It concluded that:
- The new unit was established at a different location, manufacturing a different product.
- The transfer of assets did not exceed 20% of the total value of the new unit's machinery.
- The new unit employed ten or more workers during a substantial part of the year.
- Exemptions granted by State Government authorities supported the appellant's claim of a new unit.

The Tribunal directed the AO to allow the deductions under sections 80HH and 80-I, subject to all other conditions being fulfilled.