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2015 (8) TMI 412 - ITAT RAJKOT

2015 (8) TMI 412 - ITAT RAJKOT - TMI - Disallowance of deduction u/s.10B - assessee is a partnership firm carrying on business as 100% export oriented unit - CIT(A) deleted the addition - whether CIT(A) has erred in holding that the assessee firm cannot be said to have came into existence by way of splitting up or reconstruction of old business? - Held that:- The list of customers of Metal Recycling industries and assessee has been submitted and it was found that there is not a single customer o .....

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that unit is not setup by splitting up or reconstruction of the existing business. Mere fact that while setting up factory a small amount of plant and machinery was transferred from previous business cannot be basis to come conclusion that it is a reconstruction. Moreover, there is no commonality in the business of undertaking of the M/s. Metal Recycling Industry and the undertaking of assessee except that three partners were also the partners of assessee’s undertaking. This cannot be basis to h .....

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A. No. 1367/RJT/2010 - Dated:- 24-6-2015 - SHRI SHAILENDRA KUMAR YADAV AND SHRI N. S. SAINI, JJ. For The Appellant : Shri Avinash Kumar, D.R. For The Respondent : Shri M. J. Ranpura ORDER PER SHAILENDRA KUMAR YADAV, J.M: This appeal has been filed by Revenue against the order of Commissioner of Income Tax (Appeals), Jamnagar, dated 27.10.2010 on the following grounds: 1. The CIT(A) has erred in law and on facts in deleting addition of ₹ 1,01,07,319/- on account of disallowance of deduction .....

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iming deduction u/s.10B of ₹ 1,01,07,319/-. Assessing Officer denied the deduction u/s.10B of the Act to the assessee for following reasons: i. Though appellant is assessed as 100 % EOU from AY 2005- 06 to 2007- 08 but according to AO the deduction was first claimed by the appellant in AY 2007-08 and the same was allowed mechanically as claimed. ii. According to the AO because of commonality of partners as the appellant firm's partner and the partners of M/S Metal Recycling Industries .....

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e of the partners of the appellant are common. c) Erstwhile firm and the appellant are carrying on business on same plot of land taken on lease from relatives of partners. d) Appellant could not prove that the appellant is carrying on business with increased capacity of electricity connection as well as diversification into new products. e) Entry gate of the old unit erstwhile firm and the appellant is same. f) Whole of compound and compound wall security room and water connection and electricit .....

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First Appellate Authority, wherein various contentions were raised on behalf of assessee as detailed in para 5 of the order of CIT(A) and having considered the same CIT(A) has allowed the appeal of assessee. Same has been opposed on behalf of Revenue before us inter alia submitting that CIT(A) erred in law and on facts in deleting addition of ₹ 1,01,07,319/- on account of disallowance of deduction u/s.10B of the Act. According to learned Departmental Representative order of CIT(A) on the .....

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st three assessment years. Specifically in A.Y. 2007-08, this aspect of deduction was examined in detail by Assessing Officer. On verification of file, it was found that Assessing Officer has put a detailed office note allowing claim of assessee after making detailed enquiry on issue. It shows that in A.Y. 2007-08, Assessing Officer has verified the claim in detail covering all the aspects of issue such as commonality of partners, funds of the partnership, nature of business of the partnership, .....

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which was granted in earlier years. There is no change in the facts of case in the present assessment year. Therefore, Assessing Officer was not justified to change its stand without there being any change in the facts of case. 2.3 Another reason given by Assessing Officer is that partners of M/s. metal Recycling industries and assessee are same. Regarding this, it was found that assessee was formed initially by the same partners of the firm, which were partners of M/s Metal Recycling industrie .....

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ng Officer for disallowance in question is that assessee is carrying on the business on same old leasehold land on which Metal Recycling Industry was carrying on business and therefore, it was same unit and not the new unit. In this regard, it was found that though some portion of assessee is lease hold land which was also given on lease to M/s Metal Recycling Industries. However, Assessing Officer has lost sight that assesseet has purchased new land at the cost of ₹ 23,26,653/- and on whi .....

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e also the staff members of Metal Recycling Industries and therefore, it is splitting up or reconstruction of metal recycling Industry. In assessment order, Assessing Officer has mentioned that new firm had 29 staff members whereas, in case of Metal Recycling Industries out of its staff six members were employed by the new firm. Even if some members of the staff were common to the old and new unit, it would not be a bar on the eligibility. Same is not splitting up or reconstruction. Therefore, m .....

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, Weighing scale, EPABX system and cutting and rolling machines for ₹ 7,96,915/-. Now it is to be looked whether these machineries are capable of producing the amount of products that has been manufactured by assessee. We find that most of the machineries were office equipments, furniture, and not machineries which could be used for production. Assessee has produced 1331.304 MT of finished goods during the year. For this production, assessee has purchased plant and machineries worth more t .....

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the purposes of clause (ii) of that sub-section. According to these provisions, the undertaking can purchase 20 % of plant and machinery, which are used one. Therefore purchase of some of the fixed assets of M/s. Metal Recycling cannot be used for denying the benefit of deduction u/s l0B of the Act to assessee. 2.7 Having said so, CIT(A) examined whether there was any similarity between new undertaking and old undertaking to hold that new unit is set up by splitting up or reconstruction of exist .....

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he word "reconstruction" in a company matter, observed as follows: "What does 'reconstruction' mean? To my mind it means this. An undertaking of some definite kind is being carried on, and the conclusion is arrived at that it is not desirable to kill that undertaking, but that it is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on- that would be a mere sale-but in some altered form to continue the undertaking in su .....

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e the same." This concept of reconstruction was accepted by the Bombay High Court in CIT vs. Gaekwar Foam & Rubber Co. Ltd. (1959) 35 ITR 662 (Bom) . TC25R.511 dealing with s.15C of the Act. While adverting to the passage which we have just quoted the Bombay High Court observed as follows in the above decision: "Now fully appreciating the distinction which counsel for the Revenue has sought to make between the case of a reconstruction of a company and the case of reconstruction of .....

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a business, as in the reconstruction of a company. there is an element of transfer of assets and of some change, however partial or restricted it may be, of ownership of the assets. The transfer, however, need not be of all the assets. It is nonetheless imperative that there should be continuity and preservation of the old undertaking though in an altered form. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up ano .....

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tant case continues to do the same business of heavy engineering-no matter certain spare parts necessary as components to completion of the end-product are now manufactured in the business itself The fact that the assessee is carrying on the general business of heavy engineering will not prevent him from setting up new industrial undertakings and from claiming benefit under s. 15C of that section is otherwise applicable. However, in order to be entitled to the benefit under s.15C, the following .....

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n a particular business to set up a new industrial undertaking on account of which exemption of tax under s. 15C may be claimed. The legislature has advisedly refrained from inserting a definition of the word "reconstruction" in the Act. Indeed, in the infinite variety of instances of restructuring of industry in the course of strides in technology and of other developments, the question has to be left for decision on the peculiar facts of each case. If any undertaking is not formed by .....

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the old business, they are not to be treated as being formed by reconstruction of the old business. 15. The business of the assessee is of heavy engineering. The Iwo new undertakings are independently producing articles which may be of aid to the principal business but yet the undertakings are distinct and not reconstruction out of the existing business of the assessee. Use by the assessee of the articles produced in its existing business or the concept of expansion are not decisive tests in con .....

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factory on that land. Huge investment in plant and machinery as detailed above has also been made. Funds employed in new firm as well as old firm are also not comparable. The unit has also obtained a separate letter of permission from DGFT which is the regulatory body over 100 % export oriented units. This regulatory body has given permission to manufacture the goods to the new unit as well as old undertaking. Old unit was granted LOP for processing of material and scarp and manufacturing of ing .....

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production capacity of 13500 MT per annum where as the new unit has production capacity of 10000 MT. This proves that what is manufactured by the undertaking of assessee was not manufactured by Metal Recycling Industries. Assessee has also detailed the production process of both units. There is difference in the production process of these units. The list of customers of Metal Recycling industries and assessee has also been submitted and it was found that there is not a single customer of asses .....

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