2014 (11) TMI 319 - HC - Income Tax

Entitlement for claim of deduction u/s 80IC for first year - Whether a new partnership firm which has been formed by the same partners by splitting up the business of an existing partnership by and which utilizes the infrastructure and employees of the existing firm, would be entitled to 1st year of deduction under Section 80 IC Held that - In Commissioner of Income Tax Delhi-I, vrs. Gedore Tools India Pvt. Ltd. 1980 (8) TMI 79 - DELHI High Court it has been held that it is not necessary for the employment of the capital to be formal in the sense of actually raising the captial and putting it into the new industrial undertaking - Employment of capital in a new industrial undertaking is different from the capital belonging to the assessed company. The AO has erred in law by coming to the conclusion that the new undertaking was formed by splitting up of business, already in existence - For all intents and purposes, the assessee firm is a new Unit - The AO has ignored the quantum of fresh capital, investment in plant and machinery, new building, new registration number and PAN number - The new unit cannot be even presumed as reconstruction of the old existing business, much less the formation of the undertaking by splitting up the existing undertaking - The shifting of the employees would not affect the constitution of the new firm to avail the benefit u/s 80IC - If surplus reserve capital is available with the assessed company it can utilize a specific amount of this capital for the purchase of the plant and machinery, buildings and other assets of the new undertaking - it cannot be said that the same persons were carrying on substantially the same business - the business of the assessee could not be said to be reconstruction of a business already in existence - it is not necessary to define as to what the expression splitting up of a business means thus, the assessee was entitled to the benefit of Section 80IC Decided against revenue.

Summary

Issues Involved:
1. Whether a new partnership firm formed by the same partners by splitting up the business of an existing partnership and utilizing the infrastructure and employees of the existing firm is entitled to the first year of deduction under Section 80 1C of the Income Tax Act.

Detailed Analysis:

1. Formation of New Partnership Firm and Utilization of Existing Infrastructure:
The core issue revolves around whether the new partnership firm, which shares the same partners and utilizes the infrastructure and employees of the existing firm, qualifies for the first year of deduction under Section 80 1C of the Income Tax Act. The Assessing Officer initially denied the deduction, asserting that the new unit was formed by splitting up the existing business. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal both ruled in favor of the assessee, leading to this appeal.

2. Assessing Officer's Observations:
The Assessing Officer observed that the assessee had set up a new unit in a new building with new machinery, investing a significant amount of Rs. 1,64,82,152/- in plant and machinery, with only a minor portion (Rs. 2,15,631/-) purchased from the erstwhile firm, constituting merely 1.31% of the total investment. This investment was in line with Section 80 1C(4) of the Income Tax Act. The new unit had a different PAN number, separate registration, and was located at a different plot, indicating a physically separate industrial unit.

3. Legal Precedents and Interpretation:
The judgment heavily references the Supreme Court's decision in Textile Machinery Corp. Ltd. vrs. CIT (1977) 107 ITR 195 (SC), which emphasized that a new industrial undertaking must be a separate and distinct unit with substantial fresh capital investment, different from mere reconstruction or splitting up of an existing business. The new unit must produce articles, employ requisite labor, and have a distinct identity.

4. Analysis of Substantial Fresh Capital Investment:
The court noted that the new unit had invested significantly in new plant and machinery, land, and building, and had a higher installed capacity compared to the old unit. This substantial fresh capital investment aligns with the requirements set forth in the cited precedents, indicating that the new undertaking was not merely a continuation or reconstruction of the old business.

5. Shifting of Employees and Management Control:
The court held that the shifting of employees from the old unit to the new one did not affect the new firm's constitution or its eligibility for benefits under Section 80 1C. The new unit's separate registration, different PAN number, and substantial fresh capital investment were crucial factors in determining its eligibility.

6. Supporting Case Laws:
The judgment also referenced several other cases, including Commissioner of Income Tax Delhi-I vrs. Gedore Tools India Pvt. Ltd. (1980) 126 ITR 673 (Delhi), Commissioner of Income Tax Bihar vrs. Ridhkeren Someni (1980) 121 ITR 668 (Pat.), and Commissioner of Income Tax vrs. Kamani Engineering Corporation Ltd. (1986) 161 ITR 473 (Bom.), which supported the view that substantial fresh capital investment and a distinct identity of the new unit are essential for claiming benefits under Section 80 1C.

7. Conclusion:
The court concluded that the new partnership firm was indeed a separate and distinct industrial unit, with substantial fresh capital investment and a different identity from the old firm. Thus, it was entitled to the first year of deduction under Section 80 1C of the Income Tax Act. The substantial question of law was answered in favor of the assessee, and the appeal was dismissed.

Final Order:
The appeal is dismissed, and the assessee is entitled to the benefit of Section 80 1C of the Income Tax Act.