2014 (8) TMI 209 - HC - Income Tax

Entitlement for deduction u/s 80IB - Conversion of proprietorship into partnership firm -Industrial undertaking formed by transfer of already existing proprietorship business and assets to the partnership firm Conversion of firm into partnership firm - Held that - The undertaking was already in existence and was not formed by splitting up or by reconstruction of the business - on the conversion of the proprietorship firm into a partnership firm there was no transfer of plant and machinery to the new firm - there was only transfer of the industrial undertaking as a whole along with assets and liabilities - the two conditions provided u/s 80-IB(2)(i) of the Act which disqualifies the deduction are not present thus the benefit u/s 80-IB of the Act is available to the partnership firm relying upon Commissioner of Income Tax Vs. Bullet International 2012 (5) TMI 187 - ALLAHABAD HIGH COURT - the exemption granted to a proprietorship concern which converted from a proprietorship into a partnership concern was still entitled for exemption u/s 10A of the Act thus the Tribunal was justified in holding that upon conversion of the proprietorship concern to a partnership concern there was no transfer of plant and machinery to the partnership firm inasmuch as there was a transfer of the industrial undertaking as a whole along with its assets and liabilities Decided against Revenue.

Summary

Issues:
1. Interpretation of Section 80-IB of the Income Tax Act, 1961 regarding deduction eligibility for industrial undertakings.
2. Determination of whether the conversion of a proprietorship business into a partnership firm constitutes a transfer of assets affecting deduction entitlement.
3. Analysis of whether the formation of a new industrial undertaking through the transfer of existing business assets impacts eligibility for tax deductions.

Issue 1: Interpretation of Section 80-IB of the Income Tax Act
The case involved a dispute over the interpretation of Section 80-IB of the Income Tax Act, focusing on the conditions for claiming deductions for profits and gains from industrial undertakings. The court emphasized that the provision prohibits deductions for undertakings formed by splitting up or reconstruction of existing businesses. It clarified that the focus should be on the formation of the undertaking rather than ownership. In this case, the existing undertaking was not formed through splitting up or reconstruction, meeting the criteria for claiming exemption.

Issue 2: Conversion of Proprietorship Business to Partnership Firm
The central question revolved around whether the conversion of a proprietorship business into a partnership firm constituted a transfer of assets affecting the eligibility for deductions under Section 80-IB. The court examined the ownership transition in the case and concluded that the conversion did not involve a transfer of plant and machinery to the new firm. Instead, it was a transfer of the entire industrial undertaking with its assets and liabilities, maintaining continuity rather than constituting a new formation that would disqualify the deductions.

Issue 3: Formation of New Industrial Undertaking through Asset Transfer
The court analyzed whether the transfer of existing business assets to form a new industrial undertaking impacted the eligibility for tax deductions. By referencing a similar provision under Section 84 of the Act and a relevant court precedent, the court established that the benefit of deductions is attached to the undertaking itself, not the owner. Therefore, in this case, where the undertaking was in existence before the conversion from proprietorship to partnership, the partnership firm retained the entitlement to deductions under Section 80-IB without being hindered by the conditions related to the formation of a new business through asset transfers.

In conclusion, the court dismissed the appeals, affirming that the assessee was entitled to deductions under Section 80-IB of the Income Tax Act. The judgment clarified that the conversion from proprietorship to partnership did not involve a transfer of assets that would disqualify the deductions, as the industrial undertaking remained intact through the transition. The court's interpretation emphasized the continuity of the business entity and its assets, ensuring the eligibility for tax benefits under the specified provisions.