TMI Blog2012 (1) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... income of ₹ 5,46,64,296/- after claiming deduction u/s.10B of the IT Act amounting to ₹ 37,51,36,552/-. The assessee was conducting business under two (EOU) units, namely, (i) Seide unit and (ii) Filati unit. The assessee company had claimed the entire deduction under section 10B from its business profit pertaining to Filati unit of the assessee company. The assessment was taken up for scrutiny by issuance of notice under section 143(2) of the Act and scrutiny assessment was completed vide order dated.31.12.2009. In the scrutiny assessment, the entire claim of deduction u/s.10B amounting to ₹ 37,51,36,552/- was disallowed by the Assessing Officer. The Assessing Officer, on the basis of Annual Report and the Cost Audit Report for various years held that the assessee company had two integrated business units, namely, fabric division and yarn division. In those reports, the assessee's performance was categorized under the two production units namely the fabric and yarn production units, and thus the business of fabric division which was brought into existence in the yarn division was still an integral part of fabric division. Therefore, it was concluded that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ric division to yarn division and addition of new machinery in regular course of fabric business under Yarn Division. From the above detailed discussion, it is clear that the assessee company has brought business of Seide Division to yarn division for the purpose of only income-tax benefits. Even the accounts of Seide Division and Fabric Division, as seen Annexure-I, shows that the company has been maintaining these two divisions as separate and independent production units which were perhaps furnished to the Department by over-sight. However, the said details in Annexure-I represent true business activity of the company as the relevant details of fabric production and the revenues realized thereon are in conformity with the general trends of the fabric business and yarn business of the company. However, the details furnished along with the returns of income for all these years are manipulated in such a way that the income from Seide Division is shifted to Yarn Division with the sole intention of bringing the taxable income into the ambit of deductible income contrary to the provisions of section 10B of the IT Act. Therefore, the assessee is not entitled for deduction u/s 10B of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d..................................................................... ........in that section. 11.1. The above shows three words appearing in section 10B (2) (ii) need deep analysis and interpretation. The words are - (i) formed (ii) splitting up and (iii) reconstruction None of the words have been defined in the Act. However, while formation refers to the newly set up industrial undertaking which is considered eligible or otherwise to get the deduction u/s 10B (2) of I.T. Act on its manufacture or production or articles or things or computer software and export of the same from the year it has begun to produce or manufacture the same. Therefore, formation means beginning or setting up of such industrial undertaking. Setting up of any industry normally requires four factors of production commonly called as 4Ms viz., (i) Man (employees); (ii) method (technology) (knowledge ;) (iii) Machines/materials; (iv) money (capital) The word 'formed' is preceded by the negative term 'not'. Therefore in order to be new, or to go out of the restraint provision of section 10B (2)(ii), the industrial undertaking should bring in everything new or at least should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is eligible for the claim because these two units were distinct industrially recognizable units which cannot be treated as having been formed by the reconstruction of the old business merely because of their association or because of common ownership or because they produce the same commodities and deal with same customers. It was thus held as a case of expansion and not reconstruction. Similar is the case here. The appellant floated to manufacture and export yarn by setting up a new unit named Filati in AY 1999-2000, but, in time with the market trend it went for expanding its Fabric business by starting production of the same from Filati Unit from AY 2001-02 by obtaining the approval of CEPZ as a separate unit on 19.9.2000 to produce 'fabric' along with yarn. Hence, applying the ratio of textiles case, the Filati Division is eligible for claim of deduction u/s 10B of I.T Act not being formed either by splitting up or reconstruction of Seide Unit. (c) Asserting that the ruling of the Hon'ble Apex Court in the case of Textile Machinery Corporation cited supra which has been followed as a precedent by various judiciaries including in the cases of (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Internet Services v. ITO (2010) 130 TTJ Delhi ITAT 'E' Bench He went on further to observe that - 11.5. I find, in this case also, exactly the same facts. Filati Division of HSL was formed on 9.4.1997 after obtaining necessary approvals from competent authorities to manufacture and export spun silk and blended yarn. Later on, it got the certificates changed to include the manufacture and export of 'fabric' also claimed the deduction u/s 10B of I.T. Act in AY 2002-03 for the first time and also was allowed by the Department. In AYs 1998-99 1999-2000, no claim of deduction on production of yarn by the Filati Division was made because of loss. Such loss also impelled the assessee to change its line partially to go for manufacture of fabric in a big way. In the AY 2001-02, the appellant showed loss of ₹ 3,11,26,485/- in Filati Division and, therefore, did not claim any deduction u/s 10B of I.T. Act and also claimed deduction u/s 80HHC of ₹ 110,24,91,850/- from the profits of Seide Unit only. The AO set off the loss of Filati Unit against the profit of Seide Unit and reduced the claim u/s 80HHC to ₹ 27,27,01,073/- in the assessment completed u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial undertaking as its main business. While in the former case (Pai's case) splitting up was alleged, in the latter, reconstruction was sought to be presumed. Both the decisions are in favour of the tax payers. 11.6. In view of the detailed discussion made above, I am not inclined to buy the arguments of the AO that the Filati Unit was reconstructed out of existing Seide Unit in AY 2006-07 and, hence, the claim of ₹ 37,51,36,552/- made u/s. 10B(1) of I.T. Act is disallowable. Hence, the addition is deleted........... 5. The Revenue being aggrieved is in appeal before us raising the following effective grounds : 2. The learned Commissioner of Income-tax (Appeals) is not justified in holding that the assessee company is entitled to deduction u/s.10B of the IT Act, 1961, in respect of the Filati unit/division without appreciating the facts and circumstances under which the same was disallowed by the Assessing Officer. 3. The Commissioner of Income-tax (Appeals) erred in holding that relief u/s.10B(2)(ii) of the IT Act, 1961 can only be denied only in the year of formation by splitting up or reconstruction and not in the subsequent years or any of the subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s subsequently amended as Himatsingka - Faced with the global slowdown and falling margins for spun silk yarn and in order to capture the market potential of new kinds of fabrics, the appellant decided to expand the Filati unit by adding machineries to manufacture fabric also, in addition to yarn after obtaining approvals from all concerned authorities; that accordingly, the Appellant expanded its Filati EOU unit and made a capital expenditure of ₹ 12.28 crores which eventually in subsequent years increased to ₹ 90.63 crores. The additions made in Filati unit (Fabric only) were duly disclosed in the audited balance sheet for the year ending 31.3.2001 and subsequent years. - that the commercial production of the fabric under Filati unit commenced in October 2000. In other words from the year 2000-2001, Filati unit started manufacturing fabrics also, in addition to yarn, that deductions u/s 10B for its yarn and fabric manufacturing of the Filati unit which were allowed by the A Os in respect of AYs 2000-01 to 2005-06 and following the same basis as in earlier years, deduction u/s 10B in respect of its Filati unit. - that the AO had predetermined his mind by decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B. The Filati unit has been established in collaboration with M/s Filati Buratti SpA, Italy as an independent unit to produce the products based on latest technology and demand of the customers. Some transfer of the assets, if at all has been done from the Seide unit to the Filati unit, the same has been in accordance with the law and the unit has fulfilled all the conditions laid down u/s 10B right from the inception. The AO has failed to appreciate that the appellant has invested more than ₹ 90 crores over the period in the Filati division to increase its production of fabric to meet the market demands. It is not a case where the production of Filati unit has increased without making any capital investment and is purely based on transfer of the assets from the Seide unit. The allegations of the AO in this regard are unfounded, without any evidence and are denied. - the AO had disallowed the entire claim u/s 10B of the Act on the sole ground that the Filati unit must have been formed by transfer of the business from old business to new business and by way of reconstruction of the existing unit. (Refer para 33 a.) It has been submitted that the Filati unit which was estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the meaning as is understood in common parlance. As per Oxford English Dictionary, the word form means, come into being, go to make up, compose etc. (b) The term 'formation' has also been discussed at length in various decisions of the High Court and Supreme Court in India. Though, the same was rendered in the context of exemption/deduction under section 15C of the erstwhile Indian Income-tax Act, 1922 or under the erstwhile section 84 of the Act, the principles remain the same and they can be adopted for interpreting the provisions of Section 10B of the Act. We wish to state here that the aforesaid provisions of Section 10B are also analogous to the provisions of Sections 80J, 80IA of the present Act and therefore, we have relied on the judicial precedent laid down by the Courts in India, in respect of the said sections while analyzing the issues involved. (c) The Supreme Court examined the term formed in the case of CWT v Ramaraju Surgical Cotton Mills Limited. The Apex Court dealing with the expression setting up occurring in Section 5(1) (xxi) of the Wealth Tax Act has observed that unless a factory is erected and plant and machinery are installed therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has produced a different article than that produced by the Old undertaking as held by the Madras High court in the case of Premier Cotton Mills Ltd Vs CIT (240 ITR 434) - that recently, the Chennai Tribunal in the case of ITO vs. DSM Soft P Ltd has held that once the test of formation is satisfied by the company in its initial year of operation, the new unit cannot be held to be formed as a result of splitting up or reconstruction of its existing business merely on the ground that the company has transferred few of its employees to the new unit or it serves the same client. - that the Mumbai Tribunal in the case of DCIT v. Shamrock (32 SOT 1) has observed that the concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set-up by a company which is already running an industrial unit before the setting up of the new unit. In another case the Hon'ble Allahabad High Court in the case of CIT v Mahesh Chand Gupta (279 ITR 396) has laid down that the commonalities of the customers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally. This mistaken conclusion drawn by the Assessing Officer that the Seide unit is exclusively manufacturing fabrics and Filati unit is exclusively manufacturing yarn probably could have occurred due to the assessee furnishing segment-wise accounts (product-wise). The assessee being a company was also required to report segment-wise accounts (product-wise) as per the Accounting Standards-17. The assessee while submitting information to the Assessing Officer inadvertently submitted the segment wise instead of unit wise profitability and balance-sheet. It was submitted that the copies of the segment wise accounts are furnished to respective stock exchange in which the assessee shares are listed and it is a matter of record. A copy of the segment wise accounts published in the Business Standard newspaper for the year ending 31.03.2006 and audited balance sheet for the concerned year disclosing segment wise figures are enclosed in the paper book filed by the assessee. We are of the view the Assessing Officer misconstrued the facts and concluded that segment wise accounts were the unit wise accounts. The Assessing Officer ignored all the documents and records and in particular the uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under section 10B for Both fabric as well as yarn and department allowed the Claim partially. 7. A.Y. 2002-03, 03-04, 04-05 05-06 In all these years, claim of deduction under section 10B Was made by the Filati Unit for its manufacture and Export of yarn as well as fabric and was also accepted by The department with minor changes in quantification 8. A.Y. 2006-07 The claim of deduction under section 10B Relating to Filati Unit was denied by the Assessing Officer on the Ground that the same has been formed by splitting up or Reconstruction of the existing Seide Unit. Till 1999-2000, fabric was produced only in Seide unit and Filati unit was producing only yarn. Later on Filati unit was expanded by adding machinery to manufacture fabric in addition to yarn. Necessary approvals were duly obtained from all concerned authorities including the approval of CEPZ. CEPZ gave their approval vide letter No.1/32:96:EOU:CEPZ/6447 dated 19 September, 2000 clearly giving the approval for the manufacture of velvet pile fabrics and other kinds of fabrics (Annexure F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -do- 67,900,502 63,934,532 2002-03 2003-04 -do- 213,830,976 183259,431 2003-04 2004-05 -do- 280,112,162 239,256,051 2004-05 2005-06 -do- 343,698,388 307,572,784 2005-06 2006-07 -do- 392,943,877 Disallowed first time by Assessing Officer, allowed by CIT(Appeals) and Dept. is in ITAT From the above, it is clear that the assessee has been claiming deduction under section 10B of the Act from the year in which it has been set up, namely, A. Y.1999-00 onwards. It was a loss for the A.Ys.1999-00 to 2001-02. Loss was ignored and was not set off against the other profits of the assessee company. The deduction under section 10B of the Act was allowed from assessment year 2002-03 onwards. The claim of deduction u/s.10B has been denied for the first time in this assessment year, namely, A. Y. 2006-07. The onus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit to Filati unit, is only a presumption without any evidence to substantiate the same. 7.4. Therefore, we are in total agreement with the sound reasoning of the first appellate authority that the Filati Division started as a separate unit in AY 1997-98 for production of yarn. It started production of Fabric in AY 2001-02 because of loss incurred and also did not claim set off of loss, but, the loss was set off against the profits of Seide Unit to reduce the claim u/s 80HHC of I.T. Act. The appellant claimed deduction u/s 10B of I.T.Act from Filati Division for fabric and yarn production taken together in AY 2002-03 for the first time. Therefore, the issue of formation out of reconstruction or splitting up could have been raised either of these three assessment years and, therefore, the AO is not justified in disallowing the claim u/s 10B of I.T. Act in AY 2006-07 which is not the formation year of the Filati Division on the plea that the Filati Division was born out of reconstruction process of existing Seide Unit. 7.4.1. At this juncture, we venture to quote the rulings of various judiciaries on a similar issue: (a) In the case of CIT v. Nippon Electronics (India) Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of Section 15C the new undertaking must be formed by reconstruction of the old business. If an undertaking is not formed by the reconstruction of the old business that undertaking will not be denied the benefit of section 15C merely because it goes to expand the general business of the assessee in some directions. Use by the assessee of the articles produced in its existing business or the concept of expansion are not decisive tests in construing section 15C. (c) Incidentally, the Hon'ble Delhi High Court in the case of CIT v. Hindustan General Industries Limited reported in (1981) 137 ITR 851 (Del) had interpreted that the term 'reconstruction' is no doubt very wide but it does not hold in a case of a company setting up or establishing a totally independent and viable industrial unit for carrying on the same or similar business even though it might be so set up by way of expanding the already existing business. The emphasis is not on business but on undertaking. The exemption is granted to new undertakings and the essence of the ex ..... 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