TMI Blog2012 (10) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the basis of factual error pointed out by the audit part is permissible under the law - against assessee. Disallowance of maintenance expenses and depreciation on electrical installation - assessee had already enjoyed deduction u/s 24(1) - Held that:- Assessee had rented a part of its building and had also entered into a separate agreement for providing maintenance services - the objection of the AO that assessee had already enjoyed deduction u/s 24(1) in respect of depreciation on electrical equipments is not correct. However the disallowance of Rs.14,06,505/- being expenses incurred on building repairs/partition etc. was justified in view of the fact that the assessee had already enjoyed deduction u/s 24(1) against income from house property. Therefore, CIT(A) has rightly allowed the claim of assessee in respect of depreciation and had rightly upheld the disallowance on account of building repairs etc. Deduction under section 10B - disallowance as no new activity was started at new unit at Gurgaon - assessee company was claiming deduction u/s 80HHE on its existing business - Held that:- The assessee though originally was operating from Delhi but had purchased separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001-02, 02- 03,03-04,04-05 2005-06 dated 5.3.2009, 2.8.2010,5.3.2009,2.8.2010 and 5.3.2009 respectively. These appeals were heard together and there is common issue involved, therefore these appeals and cross objections are being disposed off through a common consolidated order. 2. The sole issue raised by the revenue is the allowing of deduction under section 10B of the Income Tax Act, 1961. The revenue has also challenged the deletion of disallowance of Rs.1876004 on account of depreciation on electrical installation in assessment year 2003-04. The assessee vide cross objection has challenged the reopening of the cases under section 147/148 of the Income Tax Act, 1961 and also against upholding of disallowance of Rs.14,06,505/- on account of maintenance expenses during assessment year 2003-04. 3. The brief facts of the case as stated by assessee and reproduced by the Assessing Officer are that the assessee is a company which was incorporated in the year 1994-95 and was operating from 15, DSIDC, Okhla Industrial Area, New Delhi. Simultaneously, the assessee company was in the process of setting up of a new industrial undertaking at Plot No.27, Electronic City, Sector-18, G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be reached that the new business is formed by splitting up of the business already in existence. 5. In view of the above, the Ld AR explained that business was not formed by splitting existing business and new activity was started at new unit at Gurgaon. 6. The Assessing Officer did not agree with the contentions of the assessee and held that business activity of the assessee company was same since 1996-97 and it was held that there was only a single undertaking belonging to the assessee which was into operation before the deduction u/s 10B came in to operation w.e.f. assessment year 2001-02. The Assessing Officer also relied upon the fact that the assessee was preparing only single P L Account and Balance Sheet and entire profits of the business were claimed to be eligible for deduction u/s 80HHE prior to insertion of section 10B of the Act. He further held that even if it was assumed that new undertaking had come into being w.e.f. assessment year 2001-02 for availing deduction u/s 10B it should fulfill the conditions as laid down in provisions of section 10B which require that the new undertaking should not be formed by transferring to new business, machinery and plant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld AR argued that in the above cases, it was held that where form for obtaining approval for issuance of notice contains incorrect information, entire assessment proceedings were held to be void ab initio and merely writing of Yes does not amount to recording of reasons. 11. In the case of assessment year 2003-04, besides defects relating to assessment year 2001-02 the Ld AR submitted as under:- 1. That the case of the assessee was reopened on the basis of a report by audit party. 2. The Ld Assessing Officer had no where recorded his satisfaction or belief that the income had escaped assessment. 3. That from the inspection of record file, it was seen that notice u/s 154 was being issued but the same was abandoned without any conclusion. In this respect, it was submitted that proceedings u/s 154 are continuous of assessment proceedings and where assessment proceedings were pending re-assessment proceedings u/s 148 cannot be initiated. 12. Reliance was placed on the following judgments:- 1. Rajesh Leasing Finance Ltd. v. ACIT (1996) wherein it was held by Hon'ble Gujarat High Court that where the notice u/s 148 was issued on the basis of audit report and CIT(A) s appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases, the ld AR submitted along with return u/s 147/148 that in the alternative to claim u/s 10B claim of the assessee company u/s 10A may be considered and following submissions were made which were almost identical for all assessment years. 1). That the assessee company was incorporated in the year 1994-95. The undertaking was functioning from New Delhi since financial year 1997-98. 2). That company started process of setting up of new undertaking at Plot No.27, Sector-18, Electronic City, Gurgaon. The land was allotted in financial year 1995-96 and construction was completed in financial till year 1999-2000. The new unit got itself registered with STPI on 25.3.2000 and letter of exemption from Income tax till 2010 was issued by STPI. 3). That the company was operating with 8 employees from its Delhi unit whereas new undertaking at Gurgaon had 182 employees. 4). That the assessee company made substantial capital out lay for the new undertaking. 5). That assessee obtained custom warehousing license for the new undertaking premises on 20.3.2000 for Gurgaon unit. 6). That new undertaking was allotted separate TAN from Income tax authority, Gurgaon. 7). That assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has not claimed deduction u/s 80HHE. Therefore, it was entitled to claim exemption u/s 10B of the Act as it fulfilled all the conditions. 13). That the objection of Assessing Officer that assessee had transferred nearly 51.78% of machinery from old unit at New Delhi to new unit at Gurgaon is not based upon the facts of the case as the Assessing Officer had computed the alleged 51.78% after taking into consideration computers only whereas the explanation (2) to section 80I in regard to 20% criteria mentioned about the plant machinery as a whole and not each and individual item separately. Clause (3) of section 43 defines plant as under:- Plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes. Thus this inclusive definition makes it clear that plant means not a particular item but many items. Thus, in view of the above, findings by Assessing Officer was incorrect and in fact if the whole plant machinery is considered the percentage of transferred plant machinery comes out at less than 20%. Besides above, in respect of assessment year 2003-04 regarding dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that the assessee has made only one profit and loss account and balance sheet for both the undertakings (units), which are engaged in the same business. The second objection of !he AO is that as per the accounts of the assessee it was calculated that majority of the assets, precisely 51.78% were used in the old undertaking, therefore, it exceeds the maximum limit of 20% prescribed under the provisions of section 10B. As regards, the first objection of the AO, I am not convinced at all with the view of the AO as it is not necessary for the assessee to make separate P L Account and Balance Sheet for different units for availing the claim of deduction u/s 10B. In the cases relied upon by the appellant specifically the case of M/s. Ganga Sagar Corporation Ltd. 92 ITR 173 and M/s. Orissa Cement Ltd. 200 ITR 36 of Jurisdictional Delhi High Court, it was held that having a single P L Account and balance sheet can not be a ground for rejecting the claim of different units. As regards, the second objection of the AO, it is noted that the AO has not properly appreciated the full facts of the case. After a careful perusal of the documents/accounts of the appellant, it is noted that most of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully considered the facts of the case, order of the A.O submissions made by the Id. AR appearing for the appellant. In the re-assessment proceedings the AO has also disallowed a sum of Rs. 18,76,004/- towards depreciation on Electrical installation and Rs. 14,06,505/- towards maintenance expenses which were allowed during original assessment u/s 143(3). The disallowed depreciation and maintenance expenses on the ground that since the income of letting out of the factory premises is income from house property depreciation cannot be allowed as the assessee has already claimed 30% deduction u/s 24(1). It appears that the AO has overlooked two important aspects of t First, the deduction was allowed u/s 143(3) in original assessment, the disallowance in re-assessment proceedings will tantamount to change in opinion unless the AO has strong reasons in support of the changed opinion which could indicate that earlier view was either legally incorrect or perverse. Further, the AO has also ignored the second agreement of the appellant regarding maintenance services provided to the tenant, wherein it was agreed that the maintenance and repairs of electrical installations will be carried ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. The Ld AR further argued that after completion of formalities and after getting registration of the new unit under STPI, the new unit of the assessee started working as back office and data operator for Quadrant USA and first claimed deduction u/s 10B for assessment year 2001-02 in respect of profits from the said unit and continued to avail such deduction until assessment year 2005- 06 when the Assessing Officer in the assessment order disallowed the claim of deduction u/.s 10B of the Act on the following grounds:- i) That the activity of the assessee company was same and activities of Gurgaon mere expansion of business already in existence. ii) That assessee was preparing single P L Account and therefore there was only one single entity. iii) That assessee has transferred about 51.78% of asset from existing business and the amount of transferred assets was more than thresh-hold limit of 20% as contemplated in section 10B of the Act. 22. The Ld AR further submitted that deduction disallowed u/s 80HHE of the Act for assessment year 1998-99 was in respect of undertaking at Okhla Industrial Area and not for Gurgaon unit and therefore he argued that finding of Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional High Court in the case of CIT v. Legato Systems India Private Ltd. reported in 203 CTR 101 (Del.) wherein it was held that prior claim of deduction u/s 80HHE of the Act was not an embargo to claim deduction u/.s 10 of the Act if all other conditions were satisfied. The Ld AR also argued that claim of Assessing Officer that old machinery being 51.78% from the existing business was transferred to new undertaking was factually incorrect. In view of the fact that while calculating the Assessing Officer had over looked the investment in electrical installation amounting to Rs.1.19 crores and office equipment to the extent of Rs.6.29 crores. Therefore, he argued that if these values are taken into account the percentage amount of assets transferred from existing business comes down to 3.97%. In this respect pages 69 to 70 of paper book 4 were referred to wherein the detailed calculation was made. The Ld AR also argued that even if there was an expansion in the existing unit even then the deduction cannot be disallowed. Reliance was placed in a number of cases placed at page 9 10 of synopsis dated 12.3.2012 Lastly, the Ld AR argued that no disallowance u/s 10B has been in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were invalid and without jurisdiction. Besides the above, the Ld AR argued that ACIT had granted said permission mechanically and therefore approval so granted was invalid rendering the proceedings initiated illegal and untenable in law. Reliance was placed in the following judgments:- 1. Chhuganmal Rajpal v. SP Chaliha 79 ITR 603 (SC). 2. United Electricals v. CIT 258 ITR 317 (Del.). 3. Mohinder Singh malik v. CCIT 267 ITR 716 (P H). 4. Signsature Hotels (P) Ltd. v. ITO 338 ITR 51 (Del.). 30. As regards the cross objection for assessment year 2003-04, the Ld AR submitted that re-assessment proceedings were initiated on the basis of audit objection and which cannot be a ground to initiate proceedings u/s 147 of the Act as it constitute change of opinion. Reliance was placed in the following judgments:- 1. CIT v. Kelvinator of India Limited. 256 ITR 1 (SC). 2. CIT v. Kerlvinator of India Ltd. or CIT v. Eicher Limited. 320 ITR 561(SC). 3. Transworld International inv. V. JCIT. 273 ITR 242 (Del.). 4. CIT v. Foramer France 264 ITR 566. 31. The Ld AR further submitted that claim of deduction u/s 80HHE of the Act in earlier years cannot be a ground to assume tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that though the assessee had sought all statutory approval for setting up of unit in Gurgaon but it was not proved that whether actual software development was ever carried out in the said unit in financial year 2000-001 relevant to assessment year 2001-02. He further argued that assessee cannot take the alternative plea that even in the case of expansion in existing unit deduction u/s 10B should be allowed merely because for claiming deduction, it is mandatory that undertaking has been proved as 100% export oriented undertaking. He further argued that if assessee wanted to avail deduction in existing unit on account of expansion of its business separate approval was required for existing unit from STPI as was held by Hon'ble ITAT, Hyderabad Bench in the case of Infotech Pvt. Ltd. v. CIT 85 ITD 325. In the existing unit, the assessee was never allowed to avail deduction u/s 80HHE through out its operation and if the assessee wanted to avail deduction under different section of the Act, separate statutory approval was required which was absent in the case of the assessee because the approval was not granted for Delhi unit. Therefore, the alternate plea taken by the assessee is defec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Hence, he argued that ratio laid down by Hon'ble Courts supra were not applicable to the facts of the present case. 35. Regarding percentage of utilization of used machinery from the existing undertaking the Ld Dr submitted that Ld AR has included the value of electrical equipment and plant machinery so as to determine the percentage of old machinery being utilized in Gurgaon unit. In this respect he submitted that all bills relating to purchase of computers were raised at Delhi unit of the assessee. He further argued that as per assessee s own admission that building was completed before 31.3.1999 and approval for setting up of STPI unit was taken in the year 2000 even then purchase of computers made after 1.4.1999 having address of Delhi office instead of Gurgaon office. Therefore, he argued that whatever expenses claimed to have been incurred on account of construction of building, electrical installation were in fact for the purpose of making premises workable, useable so that same could be leased out and ultimately the premises was leased out in February, 2000. Further he argued that definition of block of asset u/s 2(11) of the Act where tangible asset has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in 241 ITR 856 (Mad.). He further argued that in the case of Jai Prakash reported in 285 ITR 369, the Hon'ble Kerala High Court had ruled that even if the Assessing Officer had dropped the proceedings on the basis of certain objections filed by the assessee and issue a fresh notice u/s 148, the issue of notice was still valid. Hon'ble high Court in the case of Amar Investment Ltd. reported in 287 ITR 482 held that a notice issued u/s 148 of the Act based on assessment or subsequent year is valid. In the light of above he argued that in the present case before initiating an action u/s 147/148 of the Act, the Assessing Officer had made an opinion for other years on the basis of findings of Assessing Officer in assessment year 2005-06 and ratio laid down of Hon'ble High Court was squarely applicable to the facts of the case. 37. In respect of assessee s objection that proceedings initiated on the basis of audit objection cannot be a ground to initiate proceedings u/s 147 of the Act. It was submitted that audit objection was not only made a ground but was one of the grounds. In this connection reliance was placed on the decision of Hon'ble Supreme Court in the case of PVS Bidi Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding use of old machinery exceeding specified statutory limit and there was no adverse finding that Gurgaon unit did not carry any activity of development of software. 39. Regarding objection of Ld DR with respect to claim of Ld AR for claim u/s 10A, the Ld AR submitted that assessee had never claimed in fact deduction u/s 10B for Delhi unit and therefore there was neither any requirement and nor any approval was obtained for Delhi unit. 40. Regarding objection of Ld DR that premises during the period February, 2000 to March, 2003 was occupied by the tenant, the Ld AR submitted that it was not disputed by the Assessing Officer that assessee had its occupation 50% of the area at building at Gurgaon where it carried on software development work and only 50% of the area of the building had been leased to M/s Daksh.Com Service Pvt. Ltd. He further submitted that Ld DR had over looked that the area in occupation of the assessee and used for its business plan of assessee had incurred expenditure was allowed by the Assessing Officer. The Ld AR submitted that total area available in Delhi unit was only 550 sq.ft. whereas in Gurgaon unit total area available with the assessee was 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry though it is not denied by the assessee that electrical fittings which are integral part of plant and machinery were included as part of plant machinery for calculation of percentage of old machinery used in the new undertaking. The Ld AR further submitted that even if the value of furniture and electrical fittings are excluded from the value of plant machinery, the value of new machinery in the new unit is well about 80%. 43. Regarding objection of Ld DR that order for assessment year 2006-07 cannot be a basis to support the claim of deduction since the doctrine of res judicata does not apply to Income Tax proceedings, the Ld AR submitted that it is a settled law that principle of consultancy must be followed particularly when there is neither change in facts of the case and nor any change in the position of law. Reliance was also placed in a number of judgments mentioned at page 8 of the rejoinder. 44. Regarding cross objection with respect to reopening of cases for assessment year 2001-02 and 2003-04, the Ld AR submitted that in assessment year 2001-02 no prior approval was obtained before issue of notice u/s 148 and in fact the approval was obtained for assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gular repairs eligible for deduction and it cannot said to be part of 30% straight deduction under the head income from house property. 47. We have heard the rival submissions of the parties and have gone through the material available on record. Basically there are five issues in the appeal and in the cross objection which are as under:- a) Whether reopening of cases in respect of assessment year 2001-02 and assessment year 2003-04 in accordance with law (raised by the assessee as ground No.1 in both the years). b) Whether additional evidence accepted by the ld CIT(A) was in violation of law especially keeping in view the fact that assessee was given sufficient opportunity by Assessing Officer to justify his claim u/s 10B of the Act (raised by the revenue as ground No.3 in respect of assessment year 2001-02, 2003-04 and 2005-06). c) Whether Ld CIT(A) had erred in upholding the order of Assessing Officer in disallowing maintenance expenses of Rs.14,06,505/- (raised by the assessee as ground No.2 in assessment year 2003-04). d) Whether Ld CIT(A) had erred in deleting the addition made by the Assessing Officer on account of disallowance of depreciation on eleltrical install ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. (supra) as relied upon by the Ld DR is that of Hon'ble Supreme Court which had clearly held that there can be no dispute that audit party is entitled to point out factual error or omission in the assessment and Hon'ble Court further held that reopening of assessment on the basis of factual error pointed out by the audit part is permissible under the law. 51. The other contentions raised by the Ld AR regarding technical defects are well covered by the provisions of section 2292B and as regards the contention of Ld AR that proceedings u/s 154 were abandons, we do not find force in the above argument as in our opinion unless the notice is issued to the assessee, it does not carry any meaning. Therefore, on the basis of above discussion, we hold that reopening in both the year was justified and was in accordance with law. Therefore, we reject ground No.1 of the cross objection of the assessee. 52. Now we come to the point of acceptance of additional evidence in the assessment year 2001-02, 2003-04 and 2005-06. We have observed from the appellate order relating to at 2001-02 and assessment year 2003-04 that there is no mention of acceptance of any additional evidence. In r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove, ground No.2 of the assessee cross objection and ground No.4 of revenue s appeal for assessment year 2003-04 are dismissed. 54. Now the last and most important question to be decided by us is as to whether the assessee was eligible for deduction u/s 10B or not. In this respect we have observed that primarily the objections of Assessing Officer were twofold which are dealt below:- 1. That the assessee s new undertaking had assets from old undertaking to the extent of 51.78% which was above the thresh-hold limit of 20% and therefore the assessee did not comply with conditions set out in section 10B of the Act. 2. That the business activity was same since 1996-97 onwards and there was only a single undertaking belonging to the assessee. This fact was further strengthened by the fact that assessee had prepared only single P L Account and entire profits were claimed to be exempted u/s 80HHE of the Act prior to insertion of section 10B. From the plain reading of provisions of section 10B along with explanation (1) (2) of section 80I it emerges that for claiming deduction under the said section following conditions must be fulfilled. 1. The income should be derived by a 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istered as 100% export oriented unit. The Assessing Officer had alleged that assessee s total plant and machinery contained 51.78% of plant machinery transferred from old unit. In calculation of the above figure, the Assessing Officer had really over-looked the fact that electric installations installed at new unit amounting to Rs.1.19 crores were also part of plant machinery. Moreover, the Assessing Officer has taken WDV of computers as on 31.3.2000 at Rs.46,73,704/- being computers of old unit but in fact this figure includes purchase of computers worth Rs.30,24,630/- for Gurgaon unit. Thus, the correct percentage of used plant machinery in the new unit works out to be at 9.87% as calculated below:- Gross value of computers as on 1.4.2000 Rs.46,73,704/- Less: Purchase for Gurgaon unit between 1.4.1999 to 31.,3.2000 calculated as per Installation report as attached with purchase Bills placed at paper book pages 54 to 126 of Paper book No.7. Rs.30,24,630/- ------------------------------- A Gross value of computers alleged to have been transferred to new unit. Rs.16,49,074/- Computers purchased during the year ending ..... 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