TMI Blog2011 (12) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (Appeals) has failed to appreciate that there were two distinct undertakings i.e. domestic STPI undertaking of the appellant company; 1.2 That the ld. CIT (Appeals) has erred in holding that there was conversion of the undertaking established in assessment year 1996-97 into STPI unit; 1.3 That on the facts and circumstances of the case, the ld. CIT (Appeals) ought to have held that a new unit undertaking exports was established in financial year 1999-2000; 1.4 That the finding of the ld. CIT (Appeals) that the business of the STPI unit were the same as provided by the domestic unit is contrary to the material on record; 1.5 That the Circular No. 1 of 2005 dated 6/01/2005 ought to have been applied in relation to the new export undertaking established in financial year 1999-2000; 2. That on the facts and in the circumstances of the case, the ld. CIT (Appeals) has erred in holding that the ownership / beneficial interest has been transferred in the year under consideration in terms of Section 10A(9) read with explanation 1 of the section; 2.1 That for the purpose of section 10A(9) read with explanation 1 the comparison of share-holding oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 80HHE would be gradually or discriminately phased off with the result that in assessment year 2005-06 no deduction under section 80HHE would be available. On the contrary deduction under section 10A was available equivalent to hundred per cent of profit till assessment year 2009-10. Therefore, it was a deliberate move on the part of the assessee company to switch over to section 10A from section 80HHE and thereby kept on availing extended benefit, not intended to be given by the Legislature; (iii) that the principal object of section 10A is to encourage setting up of new industrial undertakings by offering tax incentives. In the case of the assessee this principal object is getting defeated as no new industrial undertaking has been set up as the old industrial undertaking on which the assessee was hither to was claiming deduction under section 80HHE has been used for the purposes of claim of section 10A by taking undue advantage of the provisions of the Act; (iv) that sub-section (1) of section 10A provides deduction for ten consecutive years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be allowed to the assessee for such assessment year and subsequent years. He further noted that under Explanation 1 to section 10A(9), in the case of the company, the deduction under section 10A(1) shall be allowed only if 51 per cent of the voting power is held by the same set of persons as on the last day of previous year in which undertaking was set up. In other words, in order to apply Explanation 1, it must be shown that those very persons who held the shares of the company carrying not less than the 51 per cent of the voting power on the last day of the year in which undertaking was set up have ceased to beneficially hold the shares carrying not less than 51 per cent of voting power as on the last day of the relevant previous year. Before ld. CIT (A) it was argued by the assessee that since the STPI status was granted on 28th March, 2000, the assessee for the purpose deduction u/s 10A should be treated to have been set up on this date and in that view of matter the beneficial ownership of not less than 51 per cent of voting power remained un-changed as on 31st March, 2002 with reference to shares held as on 31.03.2000. In this regard ld. CIT (A) has noted that the undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare capital of ₹ 6,45,36,650/- comprising of 64,53,665 shares of ₹ 10/- each, 24,31,000 shares were by them detailed as under:- 1. Shri Rohit Aggarwal 4,19,875 2. Shri Rahul Aggarwal 4,13,545 3. Mrs. Rashmi Aggarwal 8,91,250 4. Shri Rahul Shri Rohit [joint] 80 5. Shri Manoj Morarka 7,06,250 24,31,000 On the basis of above mentioned share holding pattern on two different dates, ld. CIT(A) observed that in the previous year relevant to AY 1996-97 in which the undertaking was set up the share holding of above five persons was hundred per cent. However, for assessment year 2002-03 the share holding of those five persons had fallen to 37.66 per cent of total issued capital of ₹ 6,45,36,650/-. The ld. CIT (A) relying on decision of ITAT in the case of Zycus Infotech (P.) Ltd. v. ITO [2007] 17 SOT 310 (Mum.) came to the conclusion that the provisions of section 10A(9) read with Explanation-1 thereof were applicable to the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be considered with reference to share-holding pattern as on 31st March, 2000 and not with reference to 31.03.1996. The ld. CIT (Appeals) had relied on the decision of ITAT, Mumbai Bench in the case of Zycus Infotech (P.) Ltd. ( supra ) for applying the provisions of sub-section (9) of section 10A of the Act. The decision of ITAT, Mumbai Bench has been reversed by Hon'ble Bombay High Court reported as Zycus Infotech (P.) Ltd v CIT [2010] 191 Taxman 13. Hon'ble Bombay High Court in the case of Zycus Infotech (P.) Ltd. ( supra ) has held that the provisions of section 10A(9) will not be applicable to existing assessees. It will be applicable only for those undertakings which had been set up after 1.4.2001 i.e. after substitution of the new section 10A. He, therefore, submitted that the Legislative intention being clear cannot be made applicable for assessment year under consideration and hence, the assessee is eligible for deduction under section 10A of the Act. Accordingly, the change in the share-holding pattern with reference to assessment year 1996-97 would not affect the case of the assessee for assessment year under consideration. 7.3 Further since provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 10A of the Act. We have gone through the order of the ITAT. The Tribunal on examination of the facts of the case and judicial pronouncement in the case of Legato Systems (P.) Ltd. ( supra ) has held that the assessee who has claimed deduction u/s 80HHC / 80HHE could claim benefit of section 10A if all the conditions of the section were satisfied. Since the assessing officer did not examine the applicability of provisions of section 10A the issue was set aside to the file of assessing officer with the directions that the assessing officer would re-examine the matter in the light of decision of the Tribunal and in accordance with law. The ld. CIT(A) has held that there is no bar in law to claim deduction u/s 10A in the cases where deduction u/s 80HHE was earlier claimed and allowed, provided that all the conditions of section 10A were satisfied. It is a fact that the Department had not filed appeal against this part of the decision. Therefore, to this extent the issue is settled in favour of assessee in the instant case. However, ld. CIT(A) has disallowed the claim for deduction u/s 10A by holding that (i) there was conversion of the undertaking established in assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had given details of indigenous equipments under the column 'Existing' at 128 and proposed equipments both indigenous and imported required during the period of five years. (iv) In Item 'XIII' the assessee gave details of existing (40) and proposed staff and labour (837) requirements for the implementation of the STP project during five years. (v) Item 'XVI' contains details of Space requirement/ Built up land . Against this, the assessee gave information as Existing Unit on Appx. 5000 sft. Build up . (vi) In item 'XVIII' the assessee was required to indicate establishment time required for commencement of development/export from the date of issue of permission. Against this the assessee mentioned Export Development in Process . From above facts one may find that the assessee had intended to use 280 existing indigenous equipments, 5000sq. ft area of existing unit, existing staff and labour numbering 40[managerial (4); Supervisory (1); Supervisory non-technical (1); labour skilled (35)]. The assessee had also stated that export development was in process. There is neither any whisper of a word in STP registration ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g unit for the purpose of 100% EOU. For this purpose the assessee had to recruit more staff and purchase computers and other equipments. Mere purchase of new equipments and employing more staff will not prove the contention of the assessee that new unit was set up. 12. There is another aspect of the matter. The assessee had claimed deduction u/s 80HHE in assessment year 2001-02 which disallowed on the ground that assessee was claiming deduction u/s 80HHE of the Act. This fact is also clear from the order of ITAT for assessment year 2001-02 wherein it has been held that deduction u/s 10 will be available to the units which have enjoyed benefit of section 80HHE in earlier years if all the conditions of section 10A were satisfied. If it was a case of a new unit altogether, the assessee would not have claimed deduction u/s 80HHE in assessment year 2001-02 and would not have come to the Tribunal in appeal against disallowance of deduction u/s 10A. Moreover, the reasons for switch over to deduction under section 10A from 80HHE was that from AY 2001-02 a new sub section (1B) was inserted in section 80HHE through which deduction under section 80-HHE was gradually being phased off with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing pattern for the year under consideration cannot be made with that of 31st March, 2000. We, therefore, reject the contention of the assessee that new undertaking was set up when STP registration was granted to it on 28.03.2000. 15. Now let us examine as to whether there was any change in share holding attracting the provisions of section 10A(9) of the Act. The assessee has filed share holding pattern ( page 185 of paper book) for various years starting from the year in which the undertaking was set up i.e. previous year 1995-96 relevant to assessment year 1996-97 which is tabulated as below in respect of five share holders (out of total share allotted in respective previous year) who were initially contributed share capital as below: Name of share holder. 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 *(1000000) (1450045) (1500000) (2000000) (5045000) (5045000) (6452665) Rohit Aggarwal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking is transferred by any means, deduction under sub section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and subsequent years. Explanation 1 below section 10A (9) provides that where on the last day of any previous year the shares of the company carrying not less than 51 per cent of the voting power are not beneficially held by the persons who held the shares of the company carrying not less than 51 per cent of the voting power on the last day of the year in which undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking. Proviso to Explanation 1 says that provisions of this Explanation shall not apply to change in share holdings of the company as a result its becoming a company in which public are substantially interested or disinvestment of equity shares as a result of disinvestment of its equity shares by any venture capital company or venture capital fund. Admittedly, the assessee's case does not fall in the proviso to Explanation 1. From above it is clear that the share-holding of the five persons as on as on 31.03.2002 has declined to 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be,- (i) hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter; (ii) for the next three consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the Special Economic Zone Re-investment Allowance Reserve Account ) to be created and utilised for the purposes of the business of the assessee in the manner laid down in sub-section (1B) : Provided that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r export processing zone into a special economic zone. The deduction under section 10A shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or produce such articles or things or computer software in such free trade zone or export processing zone. In both the situations the deduction u/s 10A will be only for the unexpired period of the ten consecutive assessment years. Hon'ble Delhi High Court in the case of CIT v. Damco Solutions (P.) Ltd. [2011] 200 Taxman 26 (Mag.) 11 taxmann.com 365 has held that undertakings which have been allowed deduction u/s 80HHE can claim deduction u/s 10A subject to fulfillment of all conditions of section 10A. However, in case of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone the deduction shall be computed in accordance with the provisions of section 10A (1A), 10A (1B) and 10A (1C) of the Act. From the provisions of section 10A and 10A(1A) it is crystal clear that in respect undertakings which bega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or de-merger, the deduction shall be allowed in the hands of the amalgamated or the resulting company. However, no deduction shall be admissible under these sections to the amalgamating company or demerged company for the previous year in which amalgamation or de-merger takes place. As a consequence, sub section (9), (9A) and Explanation thereafter in sections 10A and 10B, become redundant and are proposed to be omitted so that the tax benefit is not lost on change of ownership of eligible undertaking. The proposed amendments will take effect from 1st April, 2004 and will accordingly, apply in relation to assessment year 2004-05 and subsequent years. ** ** ** 17.2 From the explanatory note it is clear that the provisions of sections 10A(9), 10A(9A) and Explanation 1 were omitted as they became redundant because of insertion of sub section (7A) in section 10A of the Act w.e.f 1.4.2004. Therefore, up to assessment year 2003-04 the provisions of sections 10A (9) and Explanation 1 will have full effect to act as a bar in allowance of deduction u/s 10A in a case where 51 per cent of shares are not benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ld. AR of the assessee in the case of Zycus Infotech (P.) Ltd. ( supra ). We have gone through the decision of the ITAT as well as the decision of Hon'ble Bombay High Court in the case of Zycus Infotech (P.) Ltd. ( supra ). In this case the assessee company had been treated as a newly established undertaking in free trade zone in accounting period relevant to assessment year 1996-97 and was enjoying deduction of its profits and gains under section 10A on 31st March, 1998. As on 31.03.1996 two promoters of the company were holding hundred per cent shares of the company and were having hundred per cent voting power in respect of shares held by them. However, during the year under consideration i.e. assessment year 2001-02, due to new shares were issued to NRI, the shareholding was reduced to 42.63 per cent and voting power in respect of shares held by them was reduced to 51.42 per cent. The Revenue authorities held that since percentage of shares held by promoters had been reduced to less than 51 per cent, it was established that beneficial interest in the undertaking was transferred and, therefore, in view of Explanation 1 to section 10A(9) the assessee was not entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent from the facts in the case of Zycus Infotech (P.) Ltd. ( supra ). In that case the share holding pattern changed in the year relevant to assessment year 1998-99. In that case the assessee company was treated as newly established undertaking in free trade zone in accounting year relevant to assessment year 1996-97 and was enjoying deduction of its profit and gains under section 10-A. The assessee had issued shares to NRIs without voting rights. As a result original promoters continued to hold shares of the company carrying not less than 51 per cent of voting power. It was held that ownership of the assessee company was not transferred by any means and, therefore, assessee was entitled to claim deduction under section 10-A(1) of the Act. However in the case of assessee the undertaking was set up during the period relevant to assessment year 1996-97. STP status was accorded on 28.08.2000. The assessee did not enjoy benefit of section 10A from assessment years 1996-97 to 2000-01. The assessee claimed deduction u/s 80HHE of the Act in the return of income in assessment year 2001-02 and claimed benefit of section 10A at assessment stage for the first time. Thus no rights by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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