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TMI Blog2012 (1) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... n 28.11.2006, declaring business income of ₹ 5,46,64,296/- after claiming deduction u/s.10B of the IT Act amounting to ₹ 37,51,36,552/-. The assessee was conducting business under two (EOU) units, namely, (i) Seide unit and (ii) Filati unit. The assessee company had claimed the entire deduction under section 10B from its business profit pertaining to Filati unit of the assessee company. The assessment was taken up for scrutiny by issuance of notice under section 143(2) of the Act and scrutiny assessment was completed vide order dated.31.12.2009. In the scrutiny assessment, the entire claim of deduction u/s.10B amounting to ₹ 37,51,36,552/- was disallowed by the Assessing Officer. The Assessing Officer, on the basis of Annual Report and the Cost Audit Report for various years held that the assessee company had two integrated business units, namely, fabric division and yarn division. In those reports, the assessee's performance was categorized under the two production units namely the fabric and yarn production units, and thus the business of fabric division which was brought into existence in the yarn division was still an integral part of fabric division. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of shifting of plant and machinery from fabric division to yarn division and addition of new machinery in regular course of fabric business under Yarn Division. From the above detailed discussion, it is clear that the assessee company has brought business of Seide Division to yarn division for the purpose of only income-tax benefits. Even the accounts of Seide Division and Fabric Division, as seen Annexure-I, shows that the company has been maintaining these two divisions as separate and independent production units which were perhaps furnished to the Department by over-sight. However, the said details in Annexure-I represent true business activity of the company as the relevant details of fabric production and the revenues realized thereon are in conformity with the general trends of the fabric business and yarn business of the company. However, the details furnished along with the returns of income for all these years are manipulated in such a way that the income from Seide Division is shifted to Yarn Division with the sole intention of bringing the taxable income into the ambit of deductible income contrary to the provisions of section 10B of the IT Act. Therefore, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .................................... Provided..................................................................... ........in that section." 11.1. The above shows three words appearing in section 10B (2) (ii) need deep analysis and interpretation. The words are - (i) formed (ii) splitting up and (iii) reconstruction None of the words have been defined in the Act. However, while formation refers to the newly set up industrial undertaking which is considered eligible or otherwise to get the deduction u/s 10B (2) of I.T. Act on its manufacture or production or articles or things or computer software and export of the same from the year it has begun to produce or manufacture the same. Therefore, formation means beginning or setting up of such industrial undertaking. Setting up of any industry normally requires four factors of production commonly called as 4Ms viz., (i) Man (employees); (ii) method (technology) (knowledge ;) (iii) Machines/materials; & (iv) money (capital) The word 'formed' is preceded by the negative term 'not'. Therefore in order to be new, or to go out of the restraint provision of section 10B (2)(ii), the industrial undertaking should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egrated with the existing units. The Supreme Court held that the assessee is eligible for the claim because these two units were distinct industrially recognizable units which cannot be treated as having been formed by the reconstruction of the old business merely because of their association or because of common ownership or because they produce the same commodities and deal with same customers. It was thus held as a case of expansion and not reconstruction. Similar is the case here. The appellant floated to manufacture and export yarn by setting up a new unit named Filati in AY 1999-2000, but, in time with the market trend it went for expanding its Fabric business by starting production of the same from Filati Unit from AY 2001-02 by obtaining the approval of CEPZ as a separate unit on 19.9.2000 to produce 'fabric' along with yarn. Hence, applying the ratio of textiles case, the Filati Division is eligible for claim of deduction u/s 10B of I.T Act not being formed either by splitting up or reconstruction of Seide Unit. (c) Asserting that the ruling of the Hon'ble Apex Court in the case of Textile Machinery Corporation cited supra which has been followed as a precede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Private Limited (1990) 181 ITR 518 (Kar); • Tata Communications Internet Services v. ITO (2010) 130 TTJ Delhi ITAT 'E' Bench He went on further to observe that - "11.5. I find, in this case also, exactly the same facts. Filati Division of HSL was formed on 9.4.1997 after obtaining necessary approvals from competent authorities to manufacture and export spun silk and blended yarn. Later on, it got the certificates changed to include the manufacture and export of 'fabric' also claimed the deduction u/s 10B of I.T. Act in AY 2002-03 for the first time and also was allowed by the Department. In AYs 1998-99 & 1999-2000, no claim of deduction on production of yarn by the Filati Division was made because of loss. Such loss also impelled the assessee to change its line partially to go for manufacture of fabric in a big way. In the AY 2001-02, the appellant showed loss of ₹ 3,11,26,485/- in Filati Division and, therefore, did not claim any deduction u/s 10B of I.T. Act and also claimed deduction u/s 80HHC of ₹ 110,24,91,850/- from the profits of Seide Unit only. The AO set off the loss of Filati Unit against the profit of Seide Unit and reduced th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had been producing the same article even prior to the new industrial undertaking as its main business. While in the former case (Pai's case) splitting up was alleged, in the latter, reconstruction was sought to be presumed. Both the decisions are in favour of the tax payers. 11.6. In view of the detailed discussion made above, I am not inclined to buy the arguments of the AO that the Filati Unit was reconstructed out of existing Seide Unit in AY 2006-07 and, hence, the claim of ₹ 37,51,36,552/- made u/s. 10B(1) of I.T. Act is disallowable. Hence, the addition is deleted..........." 5. The Revenue being aggrieved is in appeal before us raising the following effective grounds : "2. The learned Commissioner of Income-tax (Appeals) is not justified in holding that the assessee company is entitled to deduction u/s.10B of the IT Act, 1961, in respect of the Filati unit/division without appreciating the facts and circumstances under which the same was disallowed by the Assessing Officer. 3. The Commissioner of Income-tax (Appeals) erred in holding that relief u/s.10B(2)(ii) of the IT Act, 1961 can only be denied only in the year of formation by split ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially, approval was given in the name of Company - Himatsingka Seide Limited - which was subsequently amended as Himatsingka - Faced with the global slowdown and falling margins for spun silk yarn and in order to capture the market potential of new kinds of fabrics, the appellant decided to expand the Filati unit by adding machineries to manufacture fabric also, in addition to yarn after obtaining approvals from all concerned authorities; that accordingly, the Appellant expanded its Filati EOU unit and made a capital expenditure of ₹ 12.28 crores which eventually in subsequent years increased to ₹ 90.63 crores. The additions made in Filati unit (Fabric only) were duly disclosed in the audited balance sheet for the year ending 31.3.2001 and subsequent years. - that the commercial production of the fabric under Filati unit commenced in October 2000. In other words from the year 2000-2001, Filati unit started manufacturing fabrics also, in addition to yarn, that deductions u/s 10B for its yarn and fabric manufacturing of the Filati unit which were allowed by the A Os in respect of AYs 2000-01 to 2005-06 and following the same basis as in earlier years, deduction u/s 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng land, building and machineries has been done gradually to claim deduction u/s 10B. The Filati unit has been established in collaboration with M/s Filati Buratti SpA, Italy as an independent unit to produce the products based on latest technology and demand of the customers. Some transfer of the assets, if at all has been done from the Seide unit to the Filati unit, the same has been in accordance with the law and the unit has fulfilled all the conditions laid down u/s 10B right from the inception. The AO has failed to appreciate that the appellant has invested more than ₹ 90 crores over the period in the Filati division to increase its production of fabric to meet the market demands. It is not a case where the production of Filati unit has increased without making any capital investment and is purely based on transfer of the assets from the Seide unit. The allegations of the AO in this regard are unfounded, without any evidence and are denied. - the AO had disallowed the entire claim u/s 10B of the Act on the sole ground that the Filati unit must have been formed by transfer of the business from old business to new business and by way of reconstruction of the existing un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is crucial to determine the above but is not defined in the Act. Hence, it imbibes the meaning as is understood in common parlance. As per Oxford English Dictionary, the word "form" means, "come into being, go to make up, compose" etc. (b) The term 'formation' has also been discussed at length in various decisions of the High Court and Supreme Court in India. Though, the same was rendered in the context of exemption/deduction under section 15C of the erstwhile Indian Income-tax Act, 1922 or under the erstwhile section 84 of the Act, the principles remain the same and they can be adopted for interpreting the provisions of Section 10B of the Act. We wish to state here that the aforesaid provisions of Section 10B are also analogous to the provisions of Sections 80J, 80IA of the present Act and therefore, we have relied on the judicial precedent laid down by the Courts in India, in respect of the said sections while analyzing the issues involved. (c) The Supreme Court examined the term "formed" in the case of CWT v Ramaraju Surgical Cotton Mills Limited. The Apex Court dealing with the expression "setting up" occurring in Section 5(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is splitting up or reconstruction of an undertaking, it is not necessary to see whether the new undertaking has produced a different article than that produced by the Old undertaking as held by the Madras High court in the case of Premier Cotton Mills Ltd Vs CIT (240 ITR 434) - that recently, the Chennai Tribunal in the case of ITO vs. DSM Soft P Ltd has held that once the test of formation is satisfied by the company in its initial year of operation, the new unit cannot be held to be formed as a result of splitting up or reconstruction of its existing business merely on the ground that the company has transferred few of its employees to the new unit or it serves the same client. - that the Mumbai Tribunal in the case of DCIT v. Shamrock (32 SOT 1) has observed that the concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set-up by a company which is already running an industrial unit before the setting up of the new unit. In another case the Hon'ble Allahabad High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction u/s.10B of the Act and correspondingly, the turnover under Seide unit had been brought down substantially. This mistaken conclusion drawn by the Assessing Officer that the Seide unit is exclusively manufacturing fabrics and Filati unit is exclusively manufacturing yarn probably could have occurred due to the assessee furnishing segment-wise accounts (product-wise). The assessee being a company was also required to report segment-wise accounts (product-wise) as per the Accounting Standards-17. The assessee while submitting information to the Assessing Officer inadvertently submitted the segment wise instead of unit wise profitability and balance-sheet. It was submitted that the copies of the segment wise accounts are furnished to respective stock exchange in which the assessee shares are listed and it is a matter of record. A copy of the segment wise accounts published in the Business Standard newspaper for the year ending 31.03.2006 and audited balance sheet for the concerned year disclosing segment wise figures are enclosed in the paper book filed by the assessee. We are of the view the Assessing Officer misconstrued the facts and concluded that segment wise accounts were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also accepted by The department with minor changes in quantification 8. A.Y. 2006-07 The claim of deduction under section 10B Relating to Filati Unit was denied by the Assessing Officer on the Ground that the same has been formed by splitting up or Reconstruction of the existing Seide Unit. Till 1999-2000, fabric was produced only in Seide unit and Filati unit was producing only yarn. Later on Filati unit was expanded by adding machinery to manufacture fabric in addition to yarn. Necessary approvals were duly obtained from all concerned authorities including the approval of CEPZ. CEPZ gave their approval vide letter No.1/32:96:EOU:CEPZ/6447 dated 19 September, 2000 clearly giving the approval for the manufacture of velvet pile fabrics and other kinds of fabrics (Annexure F of paper book). CEPZ also issued revised Green Card No.450 dated 8.3.01 giving the various products to be manufactured by the unit i.e. Yarns of spun silk/woolen/viscose/blends, Velvet (Pile) & chenille fabrics made out of Spun Silk/Natural silk/woolen/Viscose/cotton & blends (Inc. Jacquard woven) (Courtesy : Annexure G of paper book). Based on the approval, the assessee expanded its Filati EOU and made a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B has been denied for the first time in this assessment year, namely, A. Y. 2006-07. The onus is very heavy on the Revenue to examine the facts in the initial year and come to a conclusion whether benefit u/s.10B(2)(ii) is to be allowed or denied. This legal proposition has been elaborately discussed by the jurisdictional High Court in CIT v. Nippon Electronics (India) Pvt. Ltd., (1990) (181 ITR 518) and Sami Labs Ltd., v. ACIT (2011) (334 ITR 157). 7.2. The observations of the Assessing Officer in para 27 is not correct that the transfer of the assets including land, building and machineries has been done gradually to claim deduction under section 10B. The Filati unit has been established in collaboration with M/s Filati Buratti Spa, Italy as an independent unit to produce the products based on latest technology and demand of the customers. Some transfer of the assets, if at all has been done from the Seide unit to the Filati unit, the same has been in accordance with the law and the unit has fulfilled all the conditions laid down under section 10B right from the inception. The Assessing Officer has failed to appreciate that the assessee has invested more than ₹ 90 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries on a similar issue: (a) In the case of CIT v. Nippon Electronics (India) Pvt. Ltd reported in 181 ITR 518 (Kar), the Hon'ble jurisdictional Court had held in the context of s.80J of the Act that "the word 'formed' suggests that the transfer contemplated is one at the time of formation of the new undertaking. Once the condition is satisfied in the year of formation of the Unit, there is no need to look at this condition in later years." The ratio laid down by the Hon'ble Court is directly applicable to the issue on hand. In the present case, the claim of deduction u/s 10B of the Act for Filati Division for the AY 2002-03 was allowed. Subsequently, the claims for deductions u/s 10B of the Act for Filati Division were allowed for the AYs. 2003-04 to 2005-06, of course, at reduced propositions. This unambiguously proves that the AO must have come to a definite conclusion that there was neither reconstruction nor splitting up of the existing units, and, therefore, allowed the appellant's claim though at reduced amounts, otherwise, it is a simple logic that he could have raked up the issue at that relevant time itself. (b) With regard to the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness but on undertaking. The exemption is granted to new undertakings and the essence of the exemption is that it is a new industrial unit that is established and that it is not merely a rehash of an already existing unit. (d) The Hon'ble ITAT, 'E' Bench in the case of Tata Communications Internet Services v. ITO reported in (2010) 130 TTJ (Del) had allowed the claim of the assessee by holding that such objection could only be made in the first year of formation or at best the first year of the claim made and not in subsequent years especially when in earlier years, no objection had been raised on such ground even if assessment was completed under scrutiny and such claims had been accepted by the Department as such." (e) To top it all, the Hon'ble jurisdictional High Court in the case of Sami Labs Ltd. Reported in 334 ITR 157 had observed that - 'starting point of the holiday period would be the year in which the manufacture or production of the article begins and there is no dispute on this. Eligibility test has to be in the initial assessment year and if for any reason like not earning profits and gains in the initial years on account of its infa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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