1997 (6) TMI 54 - AT - Income Tax

Assessment Year Industrial Undertaking Plant And Machinery Profits And Gains Reconstruction Of Business Splitting Up

Issues Involved:
1. Eligibility for deduction under section 80-I of the Income-tax Act, 1961.
2. Formation of the industrial undertaking by splitting up or re-construction of an existing business.
3. Transfer of previously used machinery or plant to a new business.
4. Compliance with the conditions specified in clause (ii) of sub-section (2) of section 80-I read with Explanation 2.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80-I:

The assessee, a private limited company, claimed a deduction under section 80-I for the assessment year 1989-90. The Assessing Officer denied this claim, citing that the company was formed by splitting up the parent company, M/s. Bombay Brush Co. (P.) Ltd., and used old machinery exceeding 20% of the total plant and machinery, which violated section 80-I conditions. The CIT(Appeals) upheld this decision. However, upon appeal, it was determined that the assessee's industrial undertaking was not formed by the splitting up or re-construction of the business of the assessee already in existence, as required by section 80-I(2)(i).

2. Formation by Splitting Up or Re-construction of an Existing Business:

The CIT(Appeals) and the Assessing Officer concluded that the assessee-company was formed by splitting up the business of the parent company, M/s. Bombay Brush Co. (P.) Ltd., Bombay. The assessee argued that the parent company had ceased operations in 1981 and that the new company, formed in 1984, was not a result of splitting up but was a new entity. The Tribunal agreed with the assessee, noting that the industrial undertaking was not formed by splitting up or re-construction of an existing business, as the parent company had ceased operations before the formation of the new company.

3. Transfer of Previously Used Machinery or Plant:

The CIT(Appeals) and the Assessing Officer found that more than 20% of the machinery used by the assessee was previously used by the parent company, violating section 80-I(2)(ii). The assessee contended that the old machinery was not from its own existing business but was acquired from the parent company, and thus the 20% limit under Explanation 2 to section 80-I(2) did not apply. The Tribunal held that the language of section 80-I(2)(ii) was clear and covered all old and used machinery, regardless of the source. However, it found that in the assessment year under consideration, the value of previously used machinery did not exceed 20% of the total value of machinery used in the business, thus complying with the conditions of section 80-I.

4. Compliance with Conditions Specified in Clause (ii) of Sub-section (2) of Section 80-I Read with Explanation 2:

The Tribunal examined whether the assessee met the conditions specified in section 80-I(2)(ii) and Explanation 2. The total value of machinery used in the business and the percentage of previously used machinery were analyzed. It was found that in the initial assessment year, the percentage of previously used machinery was 14.53%, and in subsequent years, it did not exceed 20%, except for one year. For the assessment year in question, the percentage was 18.65%. Thus, the assessee complied with the conditions of section 80-I(2)(ii) read with Explanation 2, and the Tribunal directed the Assessing Officer to allow the deduction under section 80-I.

Conclusion:

The Tribunal concluded that the assessee's industrial undertaking was not formed by splitting up or re-construction of an existing business and that the value of previously used machinery did not exceed 20% of the total value of machinery used in the business for the assessment year in question. Thus, the assessee was entitled to the deduction under section 80-I, and the appeal was allowed.

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