TMI Blog2012 (4) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... le of reconstruction, splitting up and transfer of plant and machinery cannot be applied - Reconstruction is of a business already in existence and there must be a continuation of the activities and business of the same industrial undertaking - In the present case, the entire business of the software undertaking was transferred to the Assessee - Decided in favor of the assessee - INCOME TAX APPEAL LODGING NO.311 OF 2004 - - - Dated:- 6-3-2012 - DR.D.Y. CHANDRACHUD M.S.SANKLECHA, JJ. Mr.Suresh Kumar for appellant. Mr.Percy J. Pardiwala, Sr.Advocate with Mr.A.K.Jasani for respondent. ORAL JUDGMENT (PER DR.D.Y.CHANDRACHUD, J.) 1. This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 arises from a decision of the Income Tax Appellate Tribunal dated 17 March 2003; the Assessment Year to which the appeal relates being 1998-1999. The Revenue has raised six questions of law. During the course of hearing we have granted leave to the learned counsel to amend the first question so as to correctly reflect the nature of the controversy raised in the appeal. The amendment may be carried out forthwith. Verification is dispensed with. The questions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 10A as it then stood. The Assessing Officer rejected the claim under Section 10A on the ground that (i) If an STP undertaking was already engaged in a manufacture of software programs before 1 April 1994, the Section 10A benefits could not be extended to the unit; (ii) In order to fulfill the conditions prescribed by Section 10A, an undertaking must commence production on or after the stipulated date; (iii) It should not be formed by splitting up or reconstruction of a business already in existence and it should not be formed by the transfer to a new business of plant and machinery previously used for any purpose. The Assessing Officer held that the undertaking was carrying on the same business before Assessment Year 1995-96; it was formed by splitting up or reconstruction of a business already in existence since the same business was being carried on by the software division of IOCL before the assessee came into existence and all the assets and liabilities including plant and machinery previously used were transferred to the Section 10A undertaking. This finding was confirmed in appeal by the Commissioner (Appeals). The Commissioner (Appeals) held that (i) The business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing up and reconstruction of the business which was already in existence; (ii) The business of the assessee was in existence prior to 1-4-1994 and was carried on by IOCL; (iii) All assets and liabilities including plant and machinery were transferred to the assessee. On this submission it was urged that the requirements of Section 10A have not been fulfilled. 5. Sub-sections (1) and (2) of Section 10A as they stood at the material time, inter alia, provided as follows: 10A. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:- (i) it has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after 1st day of April, 1994, in any electronic hardware technology park or, as the case may be, software technology park; (ia) in relation to an under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Rs.8.13 crores on a going concern basis. Consequently, the first requirement that the unit must commence production or manufacturing of articles or things in the previous year relevant to the Assessment Year commencing on or after 1 April 1994 was fulfilled. 8. The issue before the Court is whether the two requirements, cast in negative terms, have been fulfilled. Clause (ii) of Sub-section (1) of Section 10A stipulates that the industrial undertaking must not be formed by splitting up or reconstruction of a business already in existence. In other words, the test in law is as to whether the undertaking is formed by splitting up or reconstruction of a business already in existence. In CIT Vs. Gaekwar Foam and Rubber Company Ltd. (Supra) a Division Bench of this Court construed the provisions of Section 15C of the Income Tax Act, 1922, Section 15C(2)(i) contained a similar provision that the section would apply to an industrial undertaking which is not formed by the splitting up or the reconstruction of a business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before 1 April 1948. In tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantially the same business carried on by substantially the same persons. Reconstruction, the Division Bench held, means that substantially the same business is carried on and substantially the same persons carry it on: ...The emphasis, it will be noticed, is on two things - when substantially the same business was carried on and substantially the same persons were carrying it on. It is also to be noticed that the learned Judge draws a clear distinction between a reconstruction and a sale of an undertaking. In the case of a sale, there can be no question of reconstruction. Now, in these matters, we have to look at the substance of the transaction and not the form. If looking at the substance of the transaction, it is a sale, then the concept of reconstruction must be ruled out for in such a case there is no scope for speaking about any reconstruction of an existing business.... 9. The judgment of the the Division Bench of this Court in Gaekwar Foam was approved by the Supreme Court in a judgment in Textile Machinery Corporation Ltd. Vs. Commissioner of Income Tax (Supra). The Supreme Court in that case dealt with the issue as to whether within the meaning of Section 15C(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a transfer between IOCL and the assessee were to be effected after 1 April 2001, that would result in the undertaking being disentitled to the benefit under Section 10A. This was a pointer to the fact that prior to the substitution a transfer of ownership or beneficial interest in the undertaking would not disentitle an assessee to the benefit of Section 10A. (As a matter of fact it may also be noted that the provisions of Section 10A(9) were omitted by the Finance Act 2003 with effect from 1 April 2004). 12. The judgment of the Division Bench of this Court in Gaekwar Foam explains that the concept of a reconstruction of a business implies that the original business is not to cease functioning and its identity is not lost. Reconstruction is of a business already in existence and there must be a continuation of the activities and business of the same industrial undertaking. Where the ownership of a business or undertaking changes hands that would not be regarded as reconstruction. This judgment has specifically been approved by the Supreme Court in Textile Machinery Corporation (Supra). As regards the splitting up of a business, the relevant test is whether an undertaking is for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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