2014 (7) TMI 810 - HC - Income Tax

Interpretation of section 10B - Transfer or sale of undertaking - Whether there is any prohibition in Section 10B on transfer or sale of the undertaking by the assessee, who has formed or established the same, to another assessee and whether the purchaser/acquirer assessee can be denied benefit u/s 10B of the Act Held that - The undertaking was formed or created by HICS and there is no allegation or finding by the AO that on the date of formation of the undertaking, there was violation of clause (ii) and (iii) to Section 10B(2) - relying upon Commissioner of Income Tax-I, Coimbatore Vs. Heartland KG Information Ltd. 2013 (9) TMI 375 - MADRAS HIGH COURT . In case, the Legislature wanted to retain the prohibition contained in sub-section (9), it would have retained the said sub-section clear and categorical, and not omitted it - Sub-section (7A) would then have been a proviso and explanation to the prohibition in sub-section (9) like (9A) - Sub-section (9) would have then continued to apply to all other transfers by any mode other than the modes specified in sub-section (9A) or (7A) - This was not the intention of the Legislature because sub-section (9) and (9A) to Section 10B were deleted/omitted by Finance Act, 2003 with effect from 1st April, 2004 - Sub-section (9A) applied to different factual matrix and situations, which may not be covered by sub-section (7A) it is not a case of transfer by way of amalgamation or demerger. The assessee is well recognised and too apparent to be ignored and, therefore, when the Legislature in sub-section (1) and other sub-sections used the term undertaking as distinct from its owner/proprietor, the assessee, the effect thereof must be given full play - Way back in 1963, Circular F.No. 15/15/63-IT(A1) was issued with reference to Section 84 of the Act stating that the Board, i.e., the Central Board of Direct Taxes had agreed that benefit of the Section attaches itself to the undertaking and not to the owner - The successor would be entitled to benefit of the unexpired period of five years provided the undertaking was taken over as a running concern - It is pursuant to the circular that for the AY 2005-06, the AO in the case of assessee did not file any appeal before the tribunal after the first appellate authority had allowed the deduction to the assesse u/s 10A - for the AY 2006-07, AO wanted to deny the deduction, but DRP issued directions to allow the deduction - For AY 2007-08, the position is similar to AY 2005-06 and the AO has not filed any appeal against the decision in favour of the assessee by the first appellate authority Decided against Revenue.

Summary

Issues Involved:
1. Whether ITAT was correct in law in allowing deduction u/s 10B of the Act to the assessee.
2. Whether ITAT has correctly interpreted the provisions of Section 10B of the Act.

Issue-wise Detailed Analysis:

1. Whether ITAT was correct in law in allowing deduction u/s 10B of the Act to the assessee:

The appeal by the Revenue pertains to the assessment year 2004-05 and revolves around the interpretation of Section 10B of the Income Tax Act, 1961. The respondent-assessee claimed deduction under Section 10B for an undertaking acquired from their sister concern HICS during the assessment year 2002-03. The Assessing Officer disallowed the deduction, citing non-compliance with sub-section (2) of Section 10B, which mandates that the undertaking should not be formed by splitting up or reconstruction of an existing business and should not use previously used plant and machinery. The Commissioner of Income Tax (Appeals) reversed this decision, noting that the undertaking was originally set up by HICS with new machinery and later transferred to the respondent-assessee. The ITAT upheld the deduction for the assessment year 2004-05, observing that sub-section (9) to Section 10B, which disallowed the deduction upon transfer of ownership, was omitted from 1st April 2004.

2. Whether ITAT has correctly interpreted the provisions of Section 10B of the Act:

Section 10B(1) allows deduction of profits derived by a 100% export-oriented undertaking for ten consecutive years starting from the year of manufacture or production. Sub-section (2) sets conditions, including that the undertaking should not be formed by splitting up or reconstruction of an existing business or by transferring previously used machinery. The court noted that the undertaking was initially set up by HICS and met all the requirements of Section 10B(2) at the time of formation. The court further examined whether there was any prohibition in Section 10B against the transfer of the undertaking to another assessee. It was observed that the deletion of sub-section (9) by the Finance Act, 2003 removed the prohibition on claiming the deduction upon transfer of ownership. The court highlighted that the benefit of Section 10B attaches to the undertaking, not the owner, and the transferee could claim the deduction for the unexpired period.

Conclusion:

The court concluded that the ITAT correctly allowed the deduction under Section 10B for the assessment year 2004-05. The deletion of sub-section (9) allowed the benefit to be claimed by the transferee. The appeal was dismissed, and the respondent was entitled to costs as per Delhi High Court Rules.