2024 (12) TMI 900 - AT - Income Tax

Deduction of section 80IA(4)(iv) - change of ownership of an undertaking - Denial of claim as conditions prescribed under the section was not complied by the assessee - HELD THAT - In the case in hand, it is not a transfer of a plant or machinery to new business, but it is a transfer of an existing ongoing business undertaking under slump sale and therefore, the undertaking remains intact and only the ownership got changed. There is no transfer of any plant or machinery already used for any purpose to a new business, rather the undertaking is not a new business in the hands of the assessee because it is already existed business undertaking acquired by the assessee because it is way of slump sale as an ongoing concern basis. Thus, if the undertaking is otherwise eligible for deduction u/s 80IA(4)(iv), then the mere change of ownership would not disentitle the undertaking from benefits u/s 80IA As observed that the formation of an undertaking should not be confused with ownership of the business if the undertaking is formed by splitting up or by reconstruction in that case the undertaking will not be qualified for exemption. However, if the undertaking was already in existence and was not formed by splitting up or reconstruction of the business, then mere change of ownership on conversion of proprietorship into partnership firm would not amount to transfer of plant and machinery to a new firm. A similar view has been taken in the case of CIT vs. Tata Communication Network Services Ltd. 2011 (8) TMI 633 - DELHI HIGH COURT Mere change of ownership cannot be a ground to deny the benefit of section 80IA(4) so long as the undertaking under consideration remains intact and same without any change in the Plant Machinery or business already in existence. The conditions, as stipulated u/s 80 IA(3)(iii) of the Act contemplate a situation of forming an undertaking by splitting up or reconstruction of existing business as well as transfer of Plant Machinery already used to a new business but, none of those transaction/incidents are part of the acquisition of the business undertaking by the assessee under consideration. Accordingly, we are of the considered opinion that, the disallowance of deduction u/s 80IA(4) to the assessee by the AO and confirmed by the learned CIT (A) is highly unjustified and not sustainable. Hence we allow the claim of the assessee.

Summary

Issues Involved:

1. Eligibility for deduction under Section 80IA(4)(iv) of the Income Tax Act, 1961.
2. Interpretation of "slump sale" and its impact on eligibility for tax deductions.
3. Application of Section 80IA(3) and Explanation 2 regarding transfer of plant and machinery.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80IA(4)(iv):

The primary issue in these appeals was whether the assessee was eligible for deduction under Section 80IA(4)(iv) of the Income Tax Act, 1961, which pertains to deductions for undertakings involved in infrastructure development. The assessee claimed this deduction for its solar power division acquired from its holding company through a slump sale. The Assessing Officer denied the deduction, arguing that the conditions stipulated under Section 80IA(3)(ii) were not met, specifically regarding the transfer of plant and machinery. The Tribunal, however, found that the mere change of ownership due to a slump sale does not disqualify an undertaking from claiming deductions if it continues to operate as before without any reconstruction or splitting up of the business. The Tribunal relied on various judicial precedents and CBDT Circular No. 1/2013, which clarified that tax benefits should not be denied solely due to a change in ownership.

2. Interpretation of "Slump Sale" and Its Impact on Eligibility for Tax Deductions:

The Tribunal examined whether the acquisition of the solar power division through a slump sale constituted a reconstruction or splitting up of an existing business, which would disqualify the undertaking from claiming deductions under Section 80IA. The assessee argued that the transaction was a transfer of an ongoing concern, not a formation of a new business by splitting or reconstruction. The Tribunal agreed with the assessee, noting that the business undertaking was transferred as a whole, including assets and liabilities, and continued to operate as before. The CBDT Circular and various court rulings supported this view, confirming that a slump sale does not inherently lead to disqualification from tax benefits if the business remains unchanged in its operations.

3. Application of Section 80IA(3) and Explanation 2 Regarding Transfer of Plant and Machinery:

The Assessing Officer emphasized that the transfer of plant and machinery exceeded the 20% threshold specified in Explanation 2 to Section 80IA(3), which could disqualify the deduction. However, the Tribunal clarified that Explanation 2 serves as an exception to the general rule, allowing for certain transfers without disqualification if the undertaking is not newly formed by such transfers. In this case, since the entire business was transferred as an ongoing concern, the Tribunal found that the conditions of Section 80IA(3)(ii) were not violated. The Tribunal concluded that the transfer did not involve the formation of a new business or the splitting up of an existing one, and thus, the deduction under Section 80IA(4)(iv) was justified.

Conclusion:

The Tribunal allowed the appeals filed by the assessee, granting the deduction under Section 80IA(4)(iv) for both assessment years 2017-18 and 2018-19. The decision was based on the interpretation that a slump sale does not constitute a reconstruction or splitting up of business, and the mere change in ownership does not affect the eligibility for tax benefits if the undertaking continues to operate as before. The Tribunal's decision was pronounced in the open court on 27th November 2024.