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Upkar International Pvt. Ltd. Versus Income Tax Officer, New Delhi

2016 (2) TMI 840 - ITAT DELHI

Deduction u/s 80IB - Held that:- We have no hesitation in holding that this is not a case of reconstruction as alleged by the Department. We are unable to concur with the findings of the authorities below and while allowing the grounds of appeal, we direct that the assessee shall be entitled to claim deduction u/s 80IB of the Income Tax Act in the assessment year under consideration. - Decided in favour of assessee - ITA No. 2486/Del/2012 - Dated:- 24-2-2016 - Shri J. Sudhakar Reddy, Accountant .....

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he Assessing Officer which have been accepted as if such findings cannot be interfered in appeal. 2. That the learned CIT (Appeals) erred in upholding the finding of the Assessing Officer that the assessee was not entitled to deduction (of ₹ 10,13,828) u/s 80- IB of the I.T. Act on the ground that the newly formed company is a reconstruction of old existing business and with old machineries. 2. The brief facts of the case as submitted by the Ld. AR and as gathered from the record are as un .....

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of the Companies Act, 1956 and renamed as Upkar International (P) Ltd. All the partners of the erstwhile firm became the shareholders of the company and shares for the amount equivalent to the capital of the partners in the firm were allotted to them. On such conversion, all the assets and properties of the firm automatically vested in the company under section 575 of the Companies Act. 2.3 On 13.08.2002 itself, the company took over business of Miglani Exports on a going concern basis. Thus, wi .....

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d the deduction, inter alia for the reason that the assessee did not fulfil the essential conditions required for claiming deduction u/s 80 IB. 3.1 The assessee carried the matter in appeal before the CIT (Appeals) and by the time the appeal of the assessee was heard, the first appellate authority in the cases of the two partnership firms held that the two firms were entitled to the deduction. Accordingly, in the case of the assessee also, the CIT (Appeals) held that it was entitled to deduction .....

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n given by the Ld. C1T (A) that the assessee had fulfilled the conditions laid down in section 80IB for the year under consideration. Therefore, to examine that whether conditions for grant of deduction u/s 80IB were fulfilled or not, the matter is required to be restored back to the file of Assessing Officer. 4.1 In the fresh assessment order (which is the subject matter of this appeal), the AO held that the assessee was not entitled to deduction u/s 80IB as the undertaking of the assessee comp .....

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it can be said that the newly formed company is a reconstruction of old existing business and with old machineries. The condition laid down by the provision of subsection 2 of section 80IB strictly states the business should not be formed by transfer of machinery or plant previously used for any purpose. 4.2 The Ld. CIT (Appeals) in his order has rejected the arguments of the assessee. Being aggrieved by the order of CIT (Appeals), the assessee has preferred the present appeal. 5. Before us, th .....

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se two partnership firms with all assets and liabilities. All the partners became directors in this assessee company and the assessee company took over the running business with all assets and liabilities of these partnership firms and allotted the shares to the partners for their partner's capital stood in the books of firms on the date of take over. It was submitted that the business of the firms were taken over as a going concern basis with all assets and liabilities while keeping the sai .....

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o reconstruction of business of the undertakings, it is a case of takeover/ succession because M/s. Upkar international Pvt. Ltd. took over the entire business with all assets and liabilities of the predecessor partnership firms (I) M/s. Upkar International & (2) Miglani Exports and the partners got the shares in the assessee company for the amount standing in their capital account on the date of succession by the assessee company. The Ld. AR submitted that reconstruction means expansion of .....

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(Del) it was held that where a company is already running one industrial unit sets up another industrial unit then it will amount to reconstruction of business. He submitted that the underlying idea of a reconstruction is that there be a continuation of the activities and business of the same undertaking. The original business or undertaking continues without its identity being lost. 6. Learned Departmental Representative submitted that the AO in the body of assessment order has discussed the co .....

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see company was formed after reconstruction of two earlier existing business firms, namely; Miglani Exports and Upkar International. Therefore, after discussing the provision in detail, the AO has observed that condition laid down by Section 80IB (2)(ii) has not been fulfilled. In the grounds of appeal it has been contended that assessee company took over the entire business with all assets and liabilities of two firms, namely; Upkar International and Miglani Exports as on 13.8.2002 and they are .....

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rms. 7. We have heard the rival submissions and carefully perused the relevant material placed on record. It is the contention of the assessee that it is a case of conversion of partnership firm into a limited company under Part IX of the Companies Act, 1956 whereas the Department contends that it is a clear case of reconstruction. It is seen from the records that the assessee company was incorporated on 13.8.2002 and the Certificate of Incorporation issued by the Registrar of Companies, Punjab, .....

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ans a company having a permanent paid up or nominal share capital of fixed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided or held partly in one way and partly in the other, and formed on the principle of having for its members the holders of those shares or that stock, and no other persons. Once the new company is formed, the entire business of the firm along with all its assets and liabilities is transferred to the newly formed company. It is the .....

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machineries and since sub-section (2) of section 80IB of the Income Tax Act, 1961 states that the business should not be formed by transfer of machinery or plant previously used for any purpose, the assessee company was not entitled to claim deduction u/s 80IB of the Act. 8. On facts, it is undisputed that the erstwhile partnership firm M/s Upkar International, having 8 partners was converted into a limited company under Part IX of the Companies Act, 1956 and was renamed as Upkar International .....

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ing. There was no change in the business of the undertaking which was already in existence. The issue of reconstruction was discussed at length by the ITAT Delhi B Bench in Tech Books Electronic Services (P) Ltd. vs ACIT, Range-16, 100 ITD 125 (Del) wherein the Bench, adjudicating on the issue of exemption u/s 10B of the Act, observed as under:- However, we are not concerned with the change in the ownership. Rather we are to enquire as to whether there was any change or reconstitution of the bui .....

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ion. The Assessing Officer as well as the learned CIT (A) have not pointed out as to in what manner there was any change in the business of the undertaking. The business of the undertaking was not formed by splitting up of the old business or by reconstruction of the old business i.e., business already in existence. The departmental authorities have laid much emphasis on the change in the ownership and it appears that they have not properly appreciated the terminology used in the provision refer .....

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s to be judged by the company it keeps". As stated by the Privy Council, "it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them". This rule, according to Maxwell, means that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general .....

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citur a sociis. 10.3-3 In view of the above maxim of Rule of interpretation, the term 'reconstruction, is to be seen and considered in the light of splitting up Otherwise also, as per the dictionary meaning of 'reconstruction', as given in Judicial Dictionary by K.J. Iyer, Eighth Edition 1980, the word 'reconstruction' is expressed by synonymous 'rebuild'. Thus, if there is change of ownership from one person to another but the business continued to be the same, it ca .....

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or equipments of the earlier business and that is the reason that Sub-clause (iii) says in specific terms that the undertaking to be qualified for exemption under Section 10B should not be formed by the transfer to a new business of machinery or plant previously used for any purpose. Thus, the emphasis is on the previous business, business already in existence or old business establishment. However, if the new undertaking has been formed and conditions laid down in various clauses of Sub-sectio .....

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the ownership then it cannot be said that the business of the undertaking has been reconstructed. 10.3-5 Thus, the undertaking acquired by the assesseecompany remained the same and the observation of the Assessing Officer that undertaking acquired by the company is nothing but reconstruction of business already in existence cannot be accepted. 10.4 So far as the conversion of firm into company is concerned, again it cannot be said that there was any transfer. On incorporation of company, consequ .....

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h of the ITAT has also taken a similar view. Thus, it cannot be said that EOU owned by the assessee-company is formed as a result of reconstruction of EOU owned by the firm. 9. Similarly, A Bench of Chennai ITAT has held in Kumaran Systems (P) Ltd. vs ACIT 14 SOT 1(Chennai) that where the assessee was converted from partnership firm to private limited company as per the provisions of section 575 of Companies Act, 1956, exemption u/s 10A of the Income Tax Act, 1961 could not be denied as there wa .....

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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 that case, there was a partnership firm and its assets and goodwill were taken over by the assessee for a stated consideration and against the allotment of shares to the three .....

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the same business in an altered form. On the other hand if the ownership of a business or an undertaking is transferred that would not constitute a reconstruction. The Hon ble Division Bench held as follows: "...The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be lost or abandoned. The concept essentially rests on changes but the changes must be .....

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