2010 (10) TMI 690 - AT - Income Tax

Exemption u/s 10B - a lease transaction would qualify to be a transfer within the meaning of the term as used in section 10B(2)(iii) which provides that an eligible undertaking under the section should not be formed by the transfer to a new business of plant and machinery that stands previously used for any purpose - This issue or aspect of the matter stands settled in the context of different provisions similarly or identically worded and bearing as such the same condition as in section 10B(2)(iii) by the higher courts of law including the apex court as in the cases of CIT v. Narang Dairy Products (1996 -TMI - 5505 - SUPREME Court) and Bajaj Tempo Ltd. v. CIT (1992 -TMI - 5372 - ITAT PUNE); the latter being relied upon by the assessee itself - In the facts of the present case the assessee itself neither disputes nor possibly could this aspect of the matter so that we find no basis or even the reason for the ld. CIT(A) s finding of the said reliance by the AO as being misconceived Assessee s undertaking could not be formed but for the transfer of plant and machinery and which therefore apart from being much in excess of the statutorily prescribed ratio of 20% has played a significant role in the setting up of its undertaking apart from other assets/resources equally crucial and similarly transferred or even shared so that it is not a new undertaking or even a substantially so. Under the circumstances we therefore hold that the assessee s undertaking does not fulfil the conditions stipulated u/s. 10B(2) and as such is not qualified for the benefit conferred by the said section - Decided against the assessee Regarding disallowance of consultancy charges - No doubt the onus for a disallowance u/s. 40A(2)(a) is on the Revenue but the same can only be on the basis of the primary details and the information supplied in support by the assessee - The term consultancy is too wide and vague to provide any definite understanding of the services rendered by him particularly as the assessee has a whole range of professional and further who stand paid much less in comparison - In the present case however it is just the reverse with the assessee claiming full tax exemption while the remuneration allowed to its resident director being in respect of services rendered in India is only fully taxable in India - Secondly if anything it only goes to show that the arrangement was entered into on purely commercial considerations and is not tainted by any ulterior motive of tax avoidance - In the result both the Revenue s appeal and the assessee s CO are partly allowed

Summary

Issues Involved:

1. Assessee's eligibility for exemption/deduction under section 10B of the Income-tax Act, 1961.
2. Deletion of disallowance of consultancy charges paid to the resident director under section 40A(2)(a) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessee's Eligibility for Exemption/Deduction under Section 10B of the Income-tax Act, 1961:

The principal issue raised by the Revenue concerns the assessee's claim for exemption/deduction under section 10B in relation to its profits. The assessee had advanced a sum of Rs. 12 lakhs to its sister concern, M/s. Stabilix Technologies Pvt. Ltd. (STPL), explained as advance rent for 4000 sq. ft. of built-up area sub-leased from STPL. The Assessing Officer (A.O.) observed that the ratio of the plant and machinery leased by STPL was disproportionate to the space leased out, inferring that the entire space was being utilized by STPL, with part rented out to the assessee.

The A.O. argued that the lease transaction qualified as a 'transfer' under section 10B(2)(iii), which disqualifies an undertaking formed by the transfer of previously used plant and machinery. Reliance was placed on the Supreme Court decision in CIT vs. Narang Dairy Products, where it was held that letting out of machinery is considered 'otherwise transferred' and thus disqualifies the assessee from claiming exemption under section 10B.

In appeal, the assessee cited Bajaj Tempo Ltd. v. CIT, emphasizing that the disqualification should be viewed with reference to the formation of a new undertaking, not merely the transfer of machinery. The CIT(A) found that the assessee's unit could not be said to have been formed by the transfer of second-hand machinery and thus allowed the deduction under section 10B.

The Revenue contended that the assessee's undertaking was set up by leasing space and infrastructure from STPL, which amounts to a transfer disqualifying it under section 10B(2)(iii). The assessee argued that the lease did not lead to the formation of the undertaking, as the emphasis should be on the formation, not the transfer.

The Tribunal examined the facts and found that the assessee's undertaking was formed by taking on lease furnished office space, including computers and workstations, from STPL. The Tribunal held that the lease constituted a transfer under section 10B(2)(iii), and the assessee's undertaking was not eligible for exemption under section 10B. The Tribunal concluded that the assessee's unit was formed by the transfer of second-hand machinery and thus did not fulfill the conditions stipulated under section 10B(2).

2. Deletion of Disallowance of Consultancy Charges Paid to the Resident Director under Section 40A(2)(a):

The second issue raised by the Revenue pertains to the deletion of disallowance of Rs. 4.25 lakhs in respect of consultancy charges paid to Lyju Alexander Thomas, the resident director of the assessee-company. The A.O. called for details regarding the qualifications and reasonableness of the charges paid, invoking section 40A(2)(a). The assessee explained that the director was rendering consultancy in connection with software development and was a qualified Engineer with relevant certifications.

The CIT(A) deleted the disallowance, stating that the A.O. had not provided valid reasons to restrict the claim to 50% and that the issue should be decided objectively from the businessman's point of view. The Revenue argued that the CIT(A) had not provided a basis for the deletion and that the assessee had not furnished adequate material to substantiate its claim.

The Tribunal noted the absence of sufficient substantiation by the assessee and the CIT(A)'s failure to notice that no details were submitted to the A.O. However, the Tribunal also considered the Board's clarification that section 40A(2)(a) should be applied only where there is a scope of availing tax benefits. In this case, the assessee claimed full tax exemption, and the remuneration paid to the resident director was fully taxable in India. The Tribunal concluded that the arrangement was entered into on commercial considerations and was not motivated by tax avoidance. Therefore, the Tribunal dismissed the Revenue's grounds on this issue and allowed the assessee's claim for consultancy charges.

Conclusion:

The Tribunal partly allowed both the Revenue's appeal and the assessee's cross-objection. The assessee's claim for exemption under section 10B was disallowed, while the disallowance of consultancy charges paid to the resident director was deleted.