TMI Blog2014 (7) TMI 810X X X X Extracts X X X X X X X X Extracts X X X X ..... her than the modes specified in sub-section (9A) or (7A) - This was not the intention of the Legislature because sub-section (9) and (9A) to Section 10B were deleted/omitted by Finance Act, 2003 with effect from 1st April, 2004 - Sub-section (9A) applied to different factual matrix and situations, which may not be covered by sub-section (7A) – it is not a case of transfer by way of amalgamation or demerger. The assessee is well recognised and too apparent to be ignored and, therefore, when the Legislature in sub-section (1) and other sub-sections used the term “undertaking” as distinct from its owner/proprietor, the assessee, the effect thereof must be given full play - Way back in 1963, Circular F.No. 15/15/63-IT(A1) was issued with reference to Section 84 of the Act stating that the Board, i.e., the Central Board of Direct Taxes had agreed that benefit of the Section attaches itself to the undertaking and not to the owner - The successor would be entitled to benefit of the unexpired period of five years provided the undertaking was taken over as a running concern - It is pursuant to the circular that for the AY 2005-06, the AO in the case of assessee did not file any appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income Tax (Appeals) reversed the opinion of the Assessing Officer, following the first appellate order for the assessment year 2002-03. He observed that the undertaking eligible for deduction under Section 10B was setup by HICS after approval of Software Technology Park India (STPI) dated 8th July, 1999. Subsequently, this undertaking owned by HICS was transferred to the respondent assessee vide transfer agreement dated 14th February, 2001. The undertaking had not been setup by the respondent assessee, but was setup earlier by HICS and was transferred to the respondent assessee. In these circumstances, there was no violation of Section 10B(2)(ii) or (iii) as the respondent assessee had entered into business transfer agreement dated 14th February, 2001 with HICS. Commissioner of Income Tax (Appeals) observed that there was no finding/observation that HICS had acquired or previously used machinery or equipments. 5. Revenue preferred appeals before the Income Tax Appellate Tribunal in respect of assessment years 2002-03 to 2004-05 as the respondent assessee had succeeded before the first appellate authority in the three years. The tribunal allowed the appeals of the Revenue in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:] Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, [2012] and subsequent years : Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139. (2) This section applies to any undertaking which fulfils all the following conditions, namely :- (i) it manufactures or produces any articles or things or computer software; (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 undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such 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 prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on will equally govern and is applicable to Section 10B. [For the purpose of present appeal, we need not decide the question whether the stipulation in explanation 2 to Section 80I(2) as applicable to Section 10B, would be applicable at the stage of initial formation or would be even applicable thereafter/subsequently and has to be examined in each assessment year. The said issue does not arise for consideration in the present appeal]. 10. Sub-section (1) refers to deduction of profit and gains of an undertaking. The deduction is to be allowed for a period of 10 years from the year in which undertaking begins to manufacture, produce etc. articles, things or computer software. The beginning and end points for claiming the deduction are stipulated. These have reference to the eligible undertaking. Sub-clause (ii) to Section 10B(2) incorporates a negative condition and states that the undertaking must not be formed by splitting up or reconstruction of business already in existence. Clause (ii) refers to the date on which the undertaking mentioned in sub-section (1) is created or formed. On the date of formation, the undertaking should not violate the condition stipulated in clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to manufacture or produce articles, things or computer software. Thus, the period of 10 years is with reference to the undertaking and transfer or change of undertaking will not alter or increase the tax holiday period of 10 years. The same is fixed with reference to the date on which the production or manufacture begins. 13. Sub-section (9) to Section 10B before it was deleted/omitted with effect from 1st April, 2004 by the Finance Act, 2003 used to read as under:- (9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. 14. Before we interpret the aforesaid section, the effect thereof and why and how it was omitted, we would also like to reproduce sub section (9A) to Section 10B, which was inserted by the Finance Act, 2002 with effect from 1st April, 2003, but was deleted/omitted by the Finance Act, 2003 with effect from 1st April, 2004. Sub-section (9A) used to read:- (9A) Notwithstanding anything contained in sub-section (9), where as a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be allowed to the assessee in the assessment year relevant to the said previous year i.e. the year of transfer and subsequent years. In other words, if there was change of ownership of the undertaking by any mode, benefit under Section 10B would not be available to the seller or transfer in the year of transfer or the new owner/beneficial owner in that year or subsequent years. Deletion of the said sub-section had the consequence or removing the specific negative covenant. Thus, for accounting period after 1st April, 2003, the aforesaid prohibition or bar was no longer applicable and ceased to operate. When we examine sub-section (9A), which was inserted by the Finance Act, 2002 and omitted after one year by the Finance Act, 2003 with effect from 1st April, 2004, it would indicate that the Legislature had noticed the ill effect of the prohibition casted in sub-section 9 and had partly modified and removed the bar in specific/particular cases by the Finance Act, 2002 with effect from 1st April, 2003. Sub-section 9A operated as an exception to absolute bar/prohibition created by sub-section 9. However, there was no need for sub-section (9A) to exist and remain in the statute, once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the transfer did not attract the pari materia restriction and negative covenant under clauses (ii) and (iii) to Section 10A(2) as it was not a case of splitting up or reconstruction. It was a case of transfer of entire business or the undertaking itself as a whole. In Section 10A there was no specific prohibition and implied bar by inference to adduce that transfer of entire business would be treated as hit by clauses (ii) and (iii) of Section 10A(2). The Madras High Court had relied upon decision of the Supreme Court in Textile Machinery Corporation Limited, Calcutta versus Commissioner of Income Tax, West Bengal (1977) 2 SCC 368 and Bombay High Court in Sonata Software Limited (supra). 20. This decision of the Madras High Court was subsequently followed in Commissioner of Income Tax, Chennai versus Sri Renuga Textile Mills Limited (2012) 26 TAXMAN 108 (Madras). The subsequent decision refers to Section 10B(2), clauses (ii) and (iii). Reference was made to CBDT Circular dated 13th December, 1963 stating that benefit under Section 84 would be available to the successor for remaining years. We shall refer to this circular subsequently. 21. Sonata Software Limited (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. Thus for instance if the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively, that would not be reconstruction or if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganization of the business on sounder lines or alterations in the mode or method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of the business which may even be by some changes in the constitution of persons interested in the undertaking would certainly be no more than reconstruction of the business if it is substantially the same business carried on by sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benefit of Section 10A attaches to the undertaking and not to the assessee which owns the undertaking. The benefit of Section 10A was held to have attached itself to the STP unit of the software division which was owned by IOCL till 19 October 1994 and it was owned by the assesse subsequent to that date. What is material, according to the Tribunal, is not who owns the undertaking but whether the undertaking is entitled to the benefit available under Section 10A. As regards the issue of transfer by IOCL to the assessee, the Tribunal noted that Section 10A(9) was substituted by the Finance Act 2000 with effect from 1 April 2002. Section 10A(9) provided that where during any previous year the ownership or beneficial interest in an undertaking of the business is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the Assessment Year relevant to such previous year and the subsequent years. The Tribunal noted that if a transfer between IOCL and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formed by splitting up or reconstruction of business already in existence or transfer of a new building, machinery of plant, previously used in business, was set up for consideration and it was opined:- 9. .. Sub-section (2) advances the objective of sub-section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to the interpretation. The formation should not be by such transfer. The emphasis is on formation not on use. Therefore it is not transfer of building or material but the one which can be held to have resulted in formation of the undertaking .. 10. Reverting to the Bombay decision on which the High Court relied for answering the question against the assessee we would assume for purposes of this case that lease of the building amounted to transfer. Yet what is significant is that the High Court did not examine the impact of word formed . It proceeded on basis that once lease amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereof, i.e., the assessee is well recognised and too apparent to be ignored and, therefore, when the Legislature in sub-section (1) and other sub-sections used the term undertaking as distinct from its owner/proprietor, the assessee, the effect thereof must be given full play. Way back in 1963, Circular F.No. 15/15/63-IT(A1) was issued with reference to Section 84 of the Act stating that the Board, i.e., the Central Board of Direct Taxes had agreed that benefit of the said Section attaches itself to the undertaking and not to the owner thereof. The successor would be entitled to benefit of the unexpired period of five years provided the undertaking was taken over as a running concern. More specific is the support and affirmation from the circular issued by the Board after amendment was brought about by Finance Act 2002 to Sections 10A and 10B. The relevant portions of which read as under:- 19.5 Under the existing provisions of section 10A, the deduction is available for a maximum period of ten consecutive assessment years starting from the year of commencement of production. After the assessment year commencing on or after 1-4-2010, no deduction shall be available irrespecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than fifty-one per cent of the total voting power in the company and their shareholding continues to be as such for the period for which the deduction under this section is being claimed by the company in respect of the undertaking. 25. However, as noted above, in the very next year substantial changes were made by Finance Act 2003, sub-sections (9) and 9A of Section 10B were both deleted. Similar changes were also made in Section 10A of the Act. Noticing the different views and interpretations being taken, CBDT has issued Circular No. 01/2013 dated 17th January, 2013 and in paragraph (iv) it has been observed:- (iv) WHETHER TAX BENEFITS UNDER SECTIONS 10A, 10AA AND 10B WOULD CONTINUE TO REMAIN AVAILABLE IN CASE OF A SLUMP-SALE OF A UNIT/UNDERTAKING. The vital factor in determining the above issue would be facts such as how a slump-sale is made and what is its nature. It will also be important to ensure that the slump sale would not result into any splitting or reconstruction of existing business. These are factual issues requiring verification of facts. It is, however, clarified that on the sole ground of change in ownership of an undertaking, the claim of exemption ca ..... 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