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TMI Blog2019 (5) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. CIT(A), though appreciates this as the issue (para 3, pg. 4 of the impugned order), does not issue any finding thereon, merely stating that there is no splitting or reconstruction of the existing unit. The assessment, is set-aside back to the file of the AO for proper determination, who shall examine the issue in all its aspects, and decide afresh, taking into account the material deemed relevant, including that the assessee may wish to additionally rely upon. This, then, decides the issue as regards deduction u/s. 80-IB. Capital receipt - The only issue is if the same is, as claimed by the assessee, reduced from the cost of the relevant plant and machinery for claim of depreciation. If so, that is the end of the matter. If not, the same would need to be adjusted for computing the depreciation admissible (refer Explanation 8 to s. 43(1)). - Revenue s appeal is allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... cr. for the immediately two preceding years, which was further accompanied by a continuing decline in the profit rate, as under: AY NP(%) Exemption Status 2007-08 31.05 100% 2008-09 16.41 100% 2009-10 15.51 25% 2010-11 7.04 25% 2011-12 (unstated) 25% 2012-13 (loss) 25% 2013-14 (loss) 25% In view of the foregoing, he inferred that the assessee had, in view of the phasing out of the section 80-IB benefit, with the current year being the last year for the said deduction, shifted the production (sales) as well the profit to, as stated, a new Unit, i.e., to secure a fresh lease of section 80IB benefit - in fact, a complete exemption of profit. Reliance was placed by him on the decision in Orient Paper Mills Ltd. v. CIT [1989] 176 ITR 110 (SC). The assessee had, in his view, claimed unverifiable cash expenditure at ₹ 4.22 cr. for the current year, depressing the profit for the current year, decline in which (profit) over the years was, in any case, unexplained and, accordingly, computed a profit rate of 17.5% (i.e., the average for AYs. 2007-08 and 2010-11). The capital subsidy of ₹ 136.27 lacs received by the assessee during year was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated above, I hold that the appellant is entitled to get 100% deduction u/s. 80IB of the Income tax Act. Accordingly, the grounds of appeal are allowed.' [(*) to be read as 07/04/2005] The capital subsidy of ₹ 136.27 lacs was confirmed by him to be a capital receipt on the basis of the decisions of the Apex Court in Ponny Sugar and CIT v. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC). As regards the rejection of accounts and estimation of profit, he again found no substance in the Revenue's case in view of no defects having been pointed out by the AO. Aggrieved, the Revenue is in appeal, raising the followings grounds: '1. The ld. CIT(A) has erred in allowing the appeal of the assessee by accepting contention that the deduction claimed u/s. 80IB on the 2nd unit was allowable @100% treating it a new unit whereas the assessee has shifted his profit to Unit-2, formed by reconstruction/splitting up of the already existing undertaking and thus was not eligible for 100% of deduction applicable to a new undertaking. 2. The ld. CIT(A) has erred in allowing the appeal of the assessee regarding subsidy on plant and machinery by relying on the order of the Apex Court in case of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able of producing product/s without using any existing plant and machinery, though was unable to show any contention to that effect by the assessee before, much less a finding in that respect by, the ld. CIT(A), not to speak of the AO. With regard to the transfer of capital (from Unit I to Unit II), he explained the same to be the transfer of 'surplus' capital, not impacting Unit-I, and with a view to reduce the dependence of Unit-II on borrowed capital, which was therefore not assumed. On the depleting sales of Unit-I, he explained the same to be since restored; the Unit-I sales for AY 2015-16 and AY 2017-18 being at ₹ 13.10 cr. and ₹ 12.11 cr. respectively. 4. We have heard the parties, and perused the material on record. 4.1 Our first observation is that while the assessee states of the AO having not followed the directions by the Jt. CIT u/s. 144A, he does not explain as to in what manner, nor has made these directions a part of the paper-book. In fact, the AO himself states (at para 3 (vii), pg. 10) of the assessment order of it being in deference to the guidance issued u/s. 144A. We consider it pertinent to mention this as a direction/s u/s. 144A is binding on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only issue in that case would be of the accounts of the second unit bearing an appropriate charge for the resources used, viz. rent (or depreciation) for the building used, power consumption, etc. It may produce the same or a different variety of the same product. What is decisive of the matter, and the test therefore of a new unit is its' independence, i.e., from the first (existing) unit. We say so as this only would distinguish a case of extension - substantial or otherwise, of a unit from establishing a new undertaking. The ld. CIT(A), though appreciates this as the issue (para 3, pg. 4 of the impugned order), does not issue any finding thereon, merely stating that there is no splitting or reconstruction of the existing unit. Where, one may ask, is the question of splitting-up or reconstruction in case of expansion or capacity enhancement? 4.4 In the instant case, the assessee states of the Unit-II being for the manufacture of craft paper, while Unit I manufactures writing and printing paper. However, there is nothing to show that this was stated, much less demonstrated, before the AO, even as Sh. Gupta was specifically queried on this aspect during hearing. Again, though s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is the exercise as to whether the 'new' plant and machinery has been used earlier at any time, as indicated by depreciation claimed thereon, as that would show of it having been bought for Unit I. Further, is it a coincidence that the decline in sales of Unit-I, stated to be on account of fall in the demand and need for repairs, both since restored, occurred simultaneous to the flight of capital from Unit-I? In fact, declining demand would rather discourage a Management from undertaking repairs, stated by Sh. Gupta to be carried out on an extensive scale, so that the matter needs to be clarified further. 4.6 Finally, there is the aspect of transfer of capital from Unit-I to Unit-II, not explained at any stage of the proceedings. It was before us stated to be the 'surplus' capital of the existing Unit (Unit-I), which therefore was transferred to set up the new facility, saving on the reliance on borrowed capital to that extent. Borrowing entails cost. A reduction therein, and in the concomitant financial risk, is therefore laudable. The issue, however, is if the transfer of capital is at the cost of the operational capacity of Unit-I. There has been apparently no transfer of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing authority's case on the basis of firm findings (refer: Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC)). He, while correctly discerning the issue arising (refer paras 2.2 & 4.3 of this order), has not answered the same. As we observe, neither the assessee nor the Revenue has done its' job properly, i.e., one on the basis of which it could be possible to issue findings determining the issue/s arising. Without doubt, the assessee has obtained registrations under the name and style of 'Unit II'. That, as explained, though relevant, would not however be by itself conclusive of the matter in view of it being essentially a question of fact. The certificates are issued primarily on the representation by the assessee. In fact, these are in the nature of clearances and permissions, viz., pollution, excise, sale tax, endorsement from which would be required even for capacity expansion. There is, it may be appreciated, installation of additional capacity, so that the issue is not the setting up of the additional capacity but of whether it represents an extension of the existing capability or a new undertaking, which, by definition, should be able to function and operate independen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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