2007 (6) TMI 265 - AT - Income Tax

Deduction claimed u/s 10B denied on the basis of established by splitting the earlier business - Free Trade Zone - development of software both for export and local market - New STPI Unit at Trichy - HELD THAT - We find that in this case there is a clear establishment of new unit by substantial investment in Plant and Machinery. The new unit though took some of the old unit s employees but during the financial year itself the substantial expansion led to almost threefold increase in the number of employees. There was substantial addition to the nature and type of services rendered to the clients and also in the volume of business. Furthermore there was good increase in the number of customers also. The old unit s incurring losses has been duly explained as mainly due to completion of Reliance Petroleum Ltd. Jam Nagar Project which led to substantial reduction in assessee s business. Another objection raised by the revenue is that the ld CIT (A) failed to note that in the earlier year the assessee had claimed relief u/s 80HHE which profits/receipts from Trichy Unit also and hence as per section 80HHE(5) the assessee is not permitted to claim relief u/s 10A. In this regard the learned counsel of the assessee submitted that this is factually wrong. He referred to Assessing Officer s finding in the assessment order where it is clearly mentioned that the STPI Unit commenced its commercial operation from April 2001. The ld DR did not dispute this finding. In this regard we further find that Hon ble jurisdictional High Court in the case of L.G. Balakrishnan Bros. Ltd. v. CIT 1983 (9) TMI 32 - MADRAS HIGH COURT held that a new undertaking can be said to have been formed only when it is ready to commence the production of article for which the undertaking was established and the formation of company will not include the initial steps taken for its establishment. Thus we find that this objection by the revenue is unfounded.

Summary

Issues Involved:
1. Eligibility for relief under section 10A for the STPI Unit at Trichy.
2. Compliance with conditions under section 10A(2).
3. Transfer of employees from the old unit to the new unit.
4. Competence of new employees at the STPI Unit.
5. Transfer of old clients to the new unit.
6. Losses incurred by the domestic unit.
7. Expenditure on communication costs.
8. Prior claims under section 80HHE.
9. Interpretation of "splitting up" or "reconstruction" of business.

Issue-wise Detailed Analysis:

1. Eligibility for relief under section 10A for the STPI Unit at Trichy:
The Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow relief under section 10A for the STPI Unit at Trichy, which the revenue contested.

2. Compliance with conditions under section 10A(2):
Section 10A(2) stipulates conditions for claiming exemption, including that the unit should not be formed by splitting up or reconstruction of an existing business. The revenue argued that the Trichy unit was formed by splitting up the Chennai unit.

3. Transfer of employees from the old unit to the new unit:
The Assessing Officer noted that many employees from the Chennai unit were transferred to the Trichy unit. However, the Commissioner of Income-tax (Appeals) found that while 86 employees were transferred, 214 new employees were recruited, resulting in a net addition of 153 employees.

4. Competence of new employees at the STPI Unit:
The Assessing Officer doubted the competence of new employees to handle complex software development. The Commissioner of Income-tax (Appeals) accepted the assessee's submission that the new employees were technically competent and trained.

5. Transfer of old clients to the new unit:
The revenue objected to the transfer of old clients to the new unit. The Commissioner of Income-tax (Appeals) found that out of ten clients, four were new, and the services provided had expanded to include new technological services.

6. Losses incurred by the domestic unit:
The Assessing Officer questioned the sudden losses in the domestic unit. The Commissioner of Income-tax (Appeals) accepted the assessee's explanation that the losses were due to the completion of a major project with Reliance Petroleum Ltd., resulting in a significant drop in turnover.

7. Expenditure on communication costs:
The Assessing Officer noted that communication costs were higher for the Chennai unit compared to the Trichy unit, suggesting that exports were managed from Chennai. The Commissioner of Income-tax (Appeals) clarified that some expenses incurred at Chennai were related to the Trichy unit, and after adjustment, the communication costs for the Trichy unit were higher.

8. Prior claims under section 80HHE:
The revenue argued that the assessee had claimed relief under section 80HHE in the previous year, which should bar the claim under section 10A. The Commissioner of Income-tax (Appeals) found this claim factually incorrect as the STPI Unit commenced operations in April 2001.

9. Interpretation of "splitting up" or "reconstruction" of business:
The Commissioner of Income-tax (Appeals) concluded that the Trichy unit was not formed by splitting up or reconstruction of the Chennai unit, based on substantial investment in new plant and machinery, significant recruitment, and expansion of services and clients. The Tribunal upheld this view, citing relevant case law that supports a liberal interpretation of provisions granting relief to new industrial undertakings.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the Commissioner of Income-tax (Appeals)'s decision to allow relief under section 10A for the STPI Unit at Trichy. The Tribunal emphasized that in cases of ambiguity, the interpretation favoring the assessee should be adopted, and provisions for new industrial undertakings should be construed liberally.