2015 (6) TMI 212 - AT - Income Tax

Entitlement to claim of exemption u/s 10B denied - whether Unit-2 is a separate unit and not expansion of Unit-1? - Held that - The direct evidence in the facts of the case would be the letter/application addressed by the assessee to the Competent Authority at the time of setting up Unit II as that is the evidence which would demonstrate whether the assessee intended to start a new independent undertaking or did the assessee intend to expand the existing unit as for both the eventualities permission/approval of the Competent Authority was necessary. The permission evidently having been granted which the Revenue on facts considers it to be in the case of expansion it is for the assessee to show that the permission granted was on the application of setting up a new unit and not on an application for expansion. The self-serving note in the accounts cannot be treated to be a direct evidence of any credible relevance. The justification for setting up a new undertaking on the basis of costs incurred for capital acquisition, investments in assets, new employees, new business, new premises etc. would be irrelevant evidences as both for expanding an existing unit or setting up a new unit specific separate bonded premises, assets, employees, separate books of account and bank accounts and business premises would be necessary. Thus reliance placed on decisions rendered in different facts and arguments would be of no relevance. The assessee after setting up Steel Foundry Division and Jute Mill Division started consuming their products instead of procuring them from the market as was done in the past. Rejecting the reasoning of the Revenue their Lordships held that reconstruction presupposes that transfer of assets of the existing business took place which was not a fact in that case as fresh capital had been introduced. It was also held that the fact that the product of the two divisions was utilized by the assessee who earlier was purchasing it from outsiders was not a relevant criteria for denying the claim. What was the intention of the assessee at the time of setting up the new unit would be brought out from the application made to the Competent Authority. Introduction of fresh capital is required even for expanding an existing business to a different location. Accordingly in the absence of any discussion on the direct evidence to decide the issue the same is remitted back to the file of the AO with the direction to decide the same afresh by way of a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Whether Unit-2 is a separate unit or an expansion of Unit-1.
2. Whether the loss of Unit-2 should be merged with the profit of Unit-1.
3. Applicability of Section 10B of the Income Tax Act, 1961 to Unit-2.
4. The validity of the claim that Unit-2 is a 100% export-oriented undertaking.
5. The relevance of the "Green Card" in determining the eligibility of Unit-2 for tax exemption.
6. The principle of consistency in allowing tax benefits.

Issue-wise Detailed Analysis:

1. Whether Unit-2 is a separate unit or an expansion of Unit-1:
The appellant argued that Unit-2 was established independently with a fixed capital outlay and was capable of manufacturing cotton yarn and grey knitted fabrics separately from Unit-1. The Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the appellant failed to provide evidence that Unit-2 was a separate unit, thus considering it an expansion of Unit-1. The Tribunal noted that the CIT(A) had not thoroughly discussed the facts and had relied on irrelevant discussions about the "Green Card."

2. Whether the loss of Unit-2 should be merged with the profit of Unit-1:
The appellant contended that since no deduction was claimed under Section 10B for Unit-2, its losses should not be merged with the profits of Unit-1. The Assessing Officer (AO) had reduced the eligible profits of Unit-1 by the losses of Unit-2, which the appellant argued was incorrect. The Tribunal found that the AO had not discussed the full facts and had directly reduced the eligible profits of Unit-1 by the losses of Unit-2.

3. Applicability of Section 10B of the Income Tax Act, 1961 to Unit-2:
The appellant claimed that Unit-2 was not eligible for Section 10B benefits and had not claimed such exemptions. The CIT(A) and AO, however, treated Unit-2 as an eligible unit and merged its losses with the profits of Unit-1. The Tribunal noted that the CIT(A) had misdirected the discussion towards the "Green Card" and had not provided substantial evidence to support the claim that Unit-2 was an eligible unit.

4. The validity of the claim that Unit-2 is a 100% export-oriented undertaking:
The appellant argued that Unit-2 was established as a 100% export-oriented undertaking as per the permission granted by the Government of India. The CIT(A) concluded that the green card issued to the appellant covered both units, implying that Unit-2 was also eligible for Section 10B benefits. The Tribunal found that the CIT(A)'s reliance on the green card and the appellant's submission was not sufficient to conclude that Unit-2 was a separate and distinct unit.

5. The relevance of the "Green Card" in determining the eligibility of Unit-2 for tax exemption:
The CIT(A) discussed the green card issued to the appellant, which covered both units, and concluded that Unit-2 was an eligible unit under Section 10B. The Tribunal found that the discussion on the green card was introduced by the appellant and was a valid consideration. However, the Tribunal noted that the green card alone could not determine the eligibility of Unit-2 for tax exemption without further evidence.

6. The principle of consistency in allowing tax benefits:
The Tribunal noted that the Co-ordinate Bench had allowed the appeal of the appellant based on the principle of consistency, as the appellant had received similar benefits in previous years. However, the Hon'ble High Court remitted the issue back to the Tribunal, directing it to decide the issue on merits rather than on the principle of consistency.

Conclusion:
The Tribunal concluded that the issue needed to be sent back to the AO for a fresh decision. The AO was directed to verify the direct evidence, such as the letter/application made to the Competent Authority at the time of setting up Unit-2, to determine whether it was intended to be a new independent undertaking or an expansion of the existing unit. The Tribunal held that the self-serving note in the accounts was not sufficient evidence and emphasized the need for a speaking order in accordance with the law after giving the appellant a reasonable opportunity of being heard. The appeal was allowed for statistical purposes.