2025 (6) TMI 1125 - AT - Income Tax

Deduction u/s. 80IA in respect of profits gains of wind mills - HELD THAT - Windmill undertakings were acquired by the assessee from the previous owners as going concern the fulfillment of the condition specified in clause (ii) of section 80IA(3) of the Act is required to be evaluated in respect of each of the four windmill undertakings of the assessee at the time of setting-up/formation of the said undertakings by the respective previous owners and if the undertakings are found to have been set-up/formed with entirely new machinery or plant it has to be considered that the condition prescribed in section 80IA(3)(ii) of the Act has been fulfilled. This view is also supported by the decision of Premier Cotton Mills Ltd 1999 (2) TMI 41 - MADRAS HIGH COURT The said judgment was rendered with reference to the provisions of section 80-J(4) of the Act where the condition prescribed in clause (ii) thereof is identical to the condition prescribed in section 80IA(3)(ii). Therefore the ratio laid down in the said decision is squarely applicable to the interpretation of section 80IA(3)(ii) also. We find that the ld.CIT(A) was convinced that the wind mill undertakings owned by the assessee were formed/set-up entirely with new machinery or plant by the previous owners as established by the assessee by furnishing additional evidence during the course of the appellate proceedings. In the present facts of the case we are of the considered view that the condition laid down in clause (ii) of Section 80IA(3)(ii) of the Act is duly fulfilled by all the four wind mill undertakings of the assessee and as a consequence it has to be considered that the said wind mill undertakings are eligible for the deduction u/s. 80IA(4)(iv) of the Act in respect of their profits and gains. Therefore no infirmity in the order of the CIT(A) in holding that the four wind mill undertakings of the assessee which fulfilled the condition in section 80IA(3)(ii) of the Act at the time of their formation are eligible for deduction u/s. 80IA(4)(iv) of the Act in respect of their profits and gains in all the assessment years falling within the specified period of eligibility. Thus we dismiss the grounds of the appeal filed by the revenue. Similar issue of deduction claimed by the assessee u/s. 80IA of the Act has been raised by the Revenue for AYs 2019-20 and 2020-21 also. It is an admitted position that facts in AY 2018-19 are quite identical. This being so our adjudication as for AY 2018-19 hereinabove on the issue of deduction claimed u/s. 80IA shall mutatis mutandis apply to the AYs 2019-20 and 2020-21 also. Applicability of higher rate of tax u/s. 69A/69B r.w.s 115BBE - business income admitted by the assessee in the return of income towards stock difference found during the survey - difference in number of birds - HELD THAT - CIT(A) has categorically held that it is an undisputed fact that no evidence by way of purchase bills/invoices were found during the survey which reveal that the assessee made unaccounted purchases of birds which could result in such excess physical stock of birds and the AO mainly relied on the statement of the assessee recorded during the course of the survey to evaluate the correctness of the excess physical stock worked out at the time of survey and reject the explanation of the assessee during the assessment proceedings. After analyzing the entire facts and circumstances of the case the ld.CIT(A) opined that conclusion arrived by the AO that there was excess physical stock of birds at the time of survey was substantiated by unassailable evidence and notwithstanding the admission of additional income towards the value of such excess physical stock under the head business income by the assessee in the return of income with a view to avoid any litigation. CIT(A) held that the very finding of excess physical stock of birds by the AO was untenable on facts and unsustainable in the eyes of law and hence the provisions of section 69A of the Act cannot be invoked in the said facts of the case. Consequently it was held by the ld.CIT(A) that the additional income which was disclosed as business income by the assessee in the return of income towards excess physical stock of birds cannot be brought to tax as Income from other sources u/s. 69A r.w.s115BBE of the Act. Revenue has failed to bring any contrary evidence to disprove the claim of the assessee. Therefore we see no infirmity in the order of the Ld.CIT(A) on these issues and accordingly we uphold the findings of the Ld.CIT(A) and reject the ground nos.2 to 4.2 raised by the Revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these consolidated appeals are:

• Whether the deduction claimed under section 80IA(4)(iv) of the Income Tax Act in respect of profits and gains from wind mill undertakings is admissible when the undertakings were acquired as going concerns from previous owners, and whether the condition under section 80IA(3)(ii) that the undertaking should not be formed by transfer of previously used machinery or plant is violated in such acquisition.
• Whether the deduction under section 80IA(4)(iv) is specific to the assessee or to the undertaking.
• Whether the transfer of an undertaking as a going concern from one legal entity to another amounts to transfer of used machinery or plant to a new business within the meaning of section 80IA(3)(ii), thereby disqualifying the deduction.
• Whether the additional income disclosed by the assessee towards excess physical stock of birds and difference in valuation of stock found during survey can be taxed as income from other sources under sections 69A and 69B read with section 115BBE, or should be treated as business income.
• Whether the onus lies on the assessee to furnish evidence to substantiate excess stock found during survey.

2. ISSUE-WISE DETAILED ANALYSIS

a) Deduction under section 80IA(4)(iv) in respect of wind mill undertakings acquired as going concerns

Legal framework and precedents: Section 80IA provides deduction in respect of profits and gains derived by an undertaking engaged in eligible business. Section 80IA(3)(ii) prescribes that the undertaking should not be formed by transfer to a new business of machinery or plant previously used for any purpose. The deduction is available for a specified period from the initial assessment year.

Precedents relied upon include judgments of the Hon'ble Madras High Court in CIT v. Premier Cotton Mills Ltd and Madras Machine Tool Manufacturers v. CIT, which establish that the deduction and conditions under section 80IA apply to the 'undertaking' and not to the 'assessee' as a legal entity. Further, judgments in CIT v. Heartland KG Information Ltd, Super Auto Forge Ltd v. Addl. CIT (Madras High Court), and CIT v. Sonata Software Ltd (Bombay High Court) interpret analogous provisions (sections 10A and 10B) and hold that transfer of an undertaking as a going concern does not amount to transfer of used machinery or plant to a new business.

Court's interpretation and reasoning: The Tribunal, following the CIT(A)'s reasoning, held that the deduction under section 80IA is specific to the undertaking and the conditions in section 80IA(3) apply to the undertaking at the time of its formation. Since the wind mill undertakings were formed by the previous owners with entirely new machinery or plant, the condition under section 80IA(3)(ii) was satisfied at the time of formation.

The Tribunal noted that the transfer of the wind mill undertakings as going concerns to the assessee did not amount to formation of a new business with previously used machinery or plant. The transfer involved the entire business, including assets, liabilities, rights, and obligations, and thus did not violate the negative condition in section 80IA(3)(ii).

The Tribunal relied on the binding precedents of the jurisdictional High Court and CBDT Circular dated 13.12.1963, which confirm that the benefit of deduction attaches to the undertaking and not to the owner, and the successor is entitled to the deduction for the unexpired period if the undertaking is taken over as a running concern.

Key evidence and findings: The assessee furnished additional evidence under Rule 46A of the Income Tax Rules, including confirmation letters from previous owners, establishing that the undertakings were formed with new machinery and transferred as going concerns. The AO did not dispute these facts but disagreed with the legal interpretation.

Application of law to facts: Applying the legal principles, the Tribunal found that the condition in section 80IA(3)(ii) is to be evaluated at the time of formation of the undertaking, not at the time of transfer to the assessee. Since the undertakings were originally formed with new machinery, the condition was fulfilled, and the deduction was rightly allowed by the CIT(A).

Treatment of competing arguments: The Revenue argued that the deduction is specific to the assessee and that the transfer of previously used machinery to the new business of the assessee violates section 80IA(3)(ii). The Tribunal rejected this, holding that the deduction is specific to the undertaking, not the assessee, and the transfer of an undertaking as a going concern is not a transfer of used machinery or plant to a new business.

Conclusions: The Tribunal upheld the CIT(A)'s order allowing the deduction under section 80IA(4)(iv) in respect of the four wind mill undertakings for the relevant assessment years, dismissing the Revenue's grounds.

b) Taxability of additional income disclosed towards excess physical stock of birds and difference in valuation of stock

Legal framework and precedents: Sections 69A and 69B read with section 115BBE provide for taxation of unexplained investments or income at higher rates. The question was whether the additional income disclosed by the assessee towards excess stock and valuation difference found during survey can be taxed under these provisions or should be treated as business income.

Precedents relied upon include the Hon'ble Rajasthan High Court decision in PCIT v. Bajargan Traders and coordinate Bench decisions in Overseas Leathers v. DCIT and Suresh Kumar v. DCIT, which hold that excess stock found during survey in a regular business is to be treated as business income and not as unexplained investment under sections 69A/69B.

Court's interpretation and reasoning: The Tribunal accepted the CIT(A)'s findings that the excess physical stock of birds was not substantiated by unassailable evidence and that the assessee had offered plausible explanations for the stock differences. The Tribunal noted that the valuation difference related to stock already accounted for in the books and that no evidence was found of unaccounted expenditure or cost.

The Tribunal observed that the value of closing stock at the end of the financial year, not the interim valuation at the time of survey, is relevant for income computation.

Key evidence and findings: During survey, physical stock was valued higher than book stock, and the assessee admitted additional income to avoid litigation. The assessee explained that birds varied in age and value, some were culled, and the AO's valuation was uniform and not reflective of actual conditions. No purchase bills or invoices were found to indicate unaccounted purchases.

Application of law to facts: The Tribunal applied the principles from the cited case law and held that the additional income should be treated as business income and taxed at normal rates, not as unexplained investment attracting higher rates under sections 69A/69B and 115BBE.

Treatment of competing arguments: The Revenue contended that the additional income should be taxed as unexplained income under sections 69A/69B. The Tribunal rejected this, finding no evidence to support the Revenue's contention and accepted the assessee's explanation and CIT(A)'s order.

Conclusions: The Tribunal upheld the CIT(A)'s order directing taxation of the additional income at normal rates under business income and dismissed the Revenue's grounds on this issue.

3. SIGNIFICANT HOLDINGS

"The deduction u/s. 80IA of the Act is specific to the 'undertaking' owned by an assessee and not specific to the assessee itself. It is the 'undertaking' which is required by law to be engaged in the eligible business and the profits & gains derived by the undertaking from such eligible business is eligible for the deduction in the hands of the assessee who owns the undertaking."

"The condition prescribed in section 80IA(3)(ii) of the Act that the undertaking is not formed by transfer to a new business of machinery or plant previously used for any purpose has to be necessarily construed as the condition specific to the undertaking and not a condition specific to the assessee."

"The transfer of an undertaking as a going concern from one legal entity to another does not fall under the scope of the negative condition prescribed in section 80IA(3)(ii) of the Act, so as to attract disallowance of the deduction u/s 80IA(4)(iv) of the Act."

"The additional income disclosed by the assessee towards excess physical stock of birds and difference in valuation of stock found during survey is to be treated as business income and taxed at normal rates and not as unexplained investment under sections 69A/69B read with section 115BBE."

"The value of closing stock as determined at the end of the financial year has a bearing on the computation of income and the value worked out at some intervening point of time during the course of the year (i.e. at the time of survey) does not have any relevance for the purpose of determining the income in this line of business."

Final determinations:

• The deduction under section 80IA(4)(iv) is admissible in respect of four wind mill undertakings acquired as going concerns, as the undertakings were originally formed with new machinery and the transfer does not violate section 80IA(3)(ii).
• The additional income disclosed by the assessee on account of excess stock and valuation difference is taxable as business income at normal rates, not as unexplained income under sections 69A/69B.
• All appeals filed by the Revenue were dismissed.