2011 (12) TMI 323 - AT - Income Tax

Dis-allowances under 10A - manufacturing in Free trade zone - STPI approval on 28.03.2000 - conversion of undertaking in 96-97 beneficial interest transferred under consideration - Held That - Assessee had intended to convert the existing unit set up in assessment year 1996-97 to STP unit. Therefore contention of the assessee that a new unit was set up is an after thought and nothing more.

Summary

Issues Involved:
1. Disallowance of the claim of exemption under section 10A of the Income-tax Act.
2. Determination of whether there was a conversion of an undertaking into an STPI unit.
3. Applicability of Circular No. 1 of 2005.
4. Examination of shareholding patterns concerning section 10A(9) and Explanation 1.
5. Interpretation of section 10A as an incentive provision.

Detailed Analysis:

1. Disallowance of the Claim of Exemption under Section 10A:
The primary issue for consideration was the disallowance of the claim of deduction of Rs. 34,83,866/- under section 10A of the Income-tax Act, 1961. The assessing officer disallowed the claim based on several grounds:

(i) The assessee had claimed deduction under section 80HHE in the assessment year 2000-01, thus making it ineligible for deduction under section 10A for any subsequent year as per section 80-HHE(5).
(ii) Introduction of sub-section (1B) in section 80-HHE from the assessment year 2001-02, which phased out the deduction under section 80HHE.
(iii) The principal objective of section 10A was to encourage the setting up of new industrial undertakings, which was not met in this case as no new undertaking was established.
(iv) Deduction under section 10A should commence from the first year of manufacturing, which in this case was the assessment year 1996-97.
(v) Section 10A(2)(ii) specifies that deduction under section 10A is not allowed if the business is already in existence.

The CIT (Appeals) agreed that there was no bar in law for claiming deduction under section 10A where deduction under section 80HHE was earlier claimed, provided all conditions were satisfied. However, the CIT (Appeals) disallowed the claim based on section 10A(9) due to the transfer of ownership or beneficial interest.

2. Determination of Whether There Was a Conversion of an Undertaking into an STPI Unit:
The CIT (Appeals) found that the undertaking established in the assessment year 1996-97 was converted into an STPI unit and not a new unit established in 1999-2000. The application for STP registration indicated a conversion of an existing software export unit to an STPI unit. The infrastructure, staff, and equipment of the existing unit were included in the STP registration application, indicating no new unit was set up.

3. Applicability of Circular No. 1 of 2005:
The CIT (Appeals) relied on Circular No. 1 of 2005, which was issued in the context of section 10B of the Act, to support the conclusion that the STPI approval date does not determine the date of setting up the undertaking for section 10A purposes.

4. Examination of Shareholding Patterns Concerning Section 10A(9) and Explanation 1:
The CIT (Appeals) analyzed the shareholding pattern from the assessment year 1996-97 to 2002-03. It was found that the shareholding of the original shareholders had fallen below 51% by the assessment year 2002-03, thus triggering the provisions of section 10A(9). The beneficial ownership had transferred, making the assessee ineligible for deduction under section 10A.

5. Interpretation of Section 10A as an Incentive Provision:
The assessee argued that section 10A is an incentive provision and should be construed liberally. However, the Tribunal held that the provisions of section 10A(9) and Explanation 1 were clear and applicable to the facts of the case, leading to the disallowance of the deduction.

Conclusion:
The Tribunal upheld the findings of the CIT (Appeals) that the assessee was not eligible for deduction under section 10A due to the conversion of an existing unit into an STPI unit and the change in beneficial ownership as per section 10A(9). The appeal filed by the assessee was dismissed.