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TMI Blog2012 (4) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... ived from the STP undertaking on the basis that the conditions of Section 10A(2) are fulfilled; (B) Whether the assessee's claim for depreciation, repairs and maintenance on the plant and machinery and interest on borrowings which does not have nexus to the trading activity is not allowable as deduction on trading activity; (C) Whether excess provisions in the total turnover made by the assessee are liable to be added back in the total turnover for the purpose of determining the deduction under Section 80HHE of the Act; (D) Whether the miscellaneous income is to be excluded in computation of deduction under Section 80HHE of the Act; (E) Whether the assessee is not entitled for claim under Section 80HHE if the claim has not been made within the stipulated time limit prescribed under Section 139(5) of the Act and required audit report had not been filed during the assessment proceedings; (F) Whether the expenditure incurred for indigenisation of software is a Capital Expenditure as against the Revenue Expenditure as claimed by the assessee? 2. The appeal is admitted on the first question. The appeal is taken up for hearing and final disposal at this stage by consent. 3. The fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was formed by splitting up of the business already in existence ; and (iii) the assessee had taken over all the assets and liabilities of the software division including the plant and machinery. 4. In appeal, the Tribunal has held that the entire software division was transferred as a going concern by an agreement dated 19 October 1994 to the assessee. The software division had two sources of income viz. from the non STP activity and the STP activity. The claim by the assessee was only in respect of the STP activity, under the provisions of Section 10A. The STP activity was set up on 24 May 1994, the first purchase was on 3 July 1994 and the first export was on 12 October 1994. Hence the manufacturing or production activities in the STP activities commenced only after 24 May 1994 which was after the stipulated date of 1 April 1994 provided for in Section 10A. While the non STP undertaking had commenced business in the early 1980s the STP was found to have commenced business after 1 April 1994 and as noted earlier the deduction was confined under Section 10A in respect of the STP unit. The Tribunal observed that it was an admitted fact that the undertaking of the software division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f during the previous year; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose." Explanation (v) to the provision defined a "software technology park" to mean any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce. 7. Sub-section (1) of Section 10A provides that the gains derived by an assessee from an industrial undertaking to which the Section applies are not to be included in the total income of the assessee. The conditions on the fulfillment of which the provision would apply are spelt out in sub-section (2) of Section 10A. In relation to a software technology park, the condition required that the undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer had rejected the claim of exemption under Section 15C on the ground that the assessee was formed by the reconstruction of the business already in existence. The Appellate Commissioner took a different view which was affirmed by the Tribunal. The Division Bench of this Court held that the reconstruction of a business connotes that the original business is not to cease functioning and the undertaking must continue to carry on the same business in an altered form. On the other hand if the ownership of a business or an undertaking is transfered that would not constitute a reconstruction. The Division Bench held as follows: "...The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be - and this is brought out by the section itself - of a "business already in existence". There must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that in order to be entitled to the benefit of Section 15C the following facts would have to be established by the assessee: "(1) investment of substantial fresh capital in the industrial undertaking set up; (2) employment of requisite labour therein; (3) manufacture or production of articles in the said undertaking; (4) earning of profits clearly attributable to the said new undertaking and (5) above all, a separate and distinct identity of the industrial unit set up." 10. The Supreme Court was of the view that the new undertaking must not be substantially the same old existing business. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will not be available. From this perspective the Court held that a substantial investment of new capital is imperative. 11. The Tribunal in the present case has come to the conclusion that where a running business is transferred lock, stock and barrel by one assessee to another assessee the principle of reconstruction, splitting up and transfer of plant and machinery cannot be applied. According to the Tribunal the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the entire business of the software undertaking was transferred to the Assessee. The undertaking of the Assessee was not formed by the splitting up of the business. 13. For the aforesaid reasons, the first question of law would have to be answered in the affirmative in favour of the assessee and against the Revenue. 14. As regards the second question, the Tribunal has noted that the assessee had bifurcated its expenditure under three heads: (i) STP unit entitled to a deduction under Section 10A; (ii) non STP unit which was not entitled to deduction under Section 10A; and (iii) support services. The Tribunal has noted that the expenses of the support services were allocated between Section 10A and the non-Section10A activities in the ratio of turn over. This issue was restored to the file of the Assessing Officer with a direction to allocate interest and depreciation of the support services division in the ratio of turn over between the Section 10A and non Section 10A activities. There is no cogent challenge to this finding at all. No substantial question of law would arise on the second question. 15. The third, fourth and fifth questions really do not arise from the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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