M/s Hothur Traders 100 % EOU, Bellary V. DCIT, Bellary

CO 84/BANG/2013

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9345 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 10 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 07-03-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 24-02-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 27-08-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: M V SESHACHALA
• Keywords: Depreciation; Question of law; Competent authority; Scheme of amalgamation
• Section: 143(3); 10AA; 10B; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NOS. 1044 & 1055/BANG/2012 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1, BELLARY. VS. M/S. SHARMEEN TRANSPORT COMPANY, PAN : AAUFS 3062N AND M/S. HOTHUR TRADERS 100% EOU, PAN : AAEFH 7705H PLOT NO.5, 6, 7 & 8, HOTHUR HOUSE, INFANTRY ROAD, CANTONMENT, NEAR NANDI SCHOOL, BELLARY. APPELLANT RESPONDENTS C.O. NOS.43 & 84/BANG/2013 (IN ITA NOS.1044 & 1055/BANG/2012) ASSESSMENT YEAR : 2009-10 M/S. SHARMEEN TRANSPORT COMPANY, PAN : AAUFS 3062N AND M/S. HOTHUR TRADERS 100% EOU, PAN : AAEFH 7705H BELLARY. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1, BELLARY. CROSS OBJECTORS RESPONDENT REVENUE BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(D R) ASSESSEE BY : SHRI M.V. SESHACHALA, ADVOCATE DATE OF HEARING : 26.02.2014 DATE OF PRONOUNCEMENT : 07.03.2014 ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 2 OF 35 O R D E R PER BENCH ITA 1044/B/12 IS AN APPEAL FILED BY THE REVENUE. THE ASSESSEE, VIZ., M/S. SHARMEEN TRANSPORT CO. [STC] HAS FILED CO BEING CO NO.43/B/13. SIMILARLY, ITA 1055/B/12 IS AN APPEA L FILED BY THE REVENUE AND CO I.E., CO NO.84/B/13 IS FILED BY THE ASSESSEE , VIZ., M/S. HOTHUR TRADERS 100% EOU [HT]. THESE APPEALS AND THE CRO SS OBJECTIONS ARE DIRECTED AGAINST THE SEPARATE ORDERS, BOTH DATED 30 .05.2012 OF THE CIT(APPEALS), HUBLI RELATING TO ASSESSMENT YEAR 200 9-10. 2. SINCE COMMON ISSUES ARE INVOLVED IN BOTH THE AP PEALS BY THE REVENUE, WE DEEM IT CONVENIENT TO PASS A CONSOLIDAT ED ORDER. 3. STC WAS A PARTNERSHIP FIRM COMPRISING OF TWO PAR TNERS VIZ., HOTHUR MD. IQBAL AND SMT. NADIRA IQBAL HAVING 60% AND 40% SHARE TO THE PROFITS & LOSSES OF THE PARTNERSHIP, WHICH CAME INTO EXISTENC E ON 1.4.2002. STC IS ENGAGED IN THE BUSINESS OF MANUFACTURE/PRODUCTION O F IRON ORE AND ITS EXPORT. THE ASSESSEE IS RECOGNISED AS A 100% EOU W .E.F. 5.12.2005 BY THE COMPETENT AUTHORITY SPECIFIED UNDER THE ACT AND THEREFORE WAS ELIGIBLE TO CLAIM DEDUCTION U/S. 10B OF THE ACT. IN THE A.Y . 2008-09, STC CLAIMED DEDUCTION U/S. 10B OF THE ACT AS A 100% EOU AND WAS ALLOWED DEDUCTION IN THE PROCEEDINGS COMPLETED U/S. 143(3) OF THE ACT . ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 3 OF 35 4. HT WAS ALSO A PARTNERSHIP FIRM WHICH CAME INTO EXISTENCE ON 5.10.2007. THE PARTNERS OF HT WERE THE SAME AS TH AT OF STC WITH THE SAME PROFIT SHARING RATIO. HT SET UP AN INDUSTRIAL UNDERTAKING WHICH WAS INTO MANUFACTURE OF IRON ORE AND ITS EXPORT. HT WA S GRANTED RECOGNITION AS A 100% EOU ON 22.11.2007 AND WAS ENTITLED TO THE BE NEFITS OF DEDUCTION U/S. 10B OF THE ACT. 5. DURING THE RELEVANT PREVIOUS YEAR, AN AGREEMENT DATED 2.5.2008 WAS EXECUTED BY STC AND HT, WHEREBY W.E.F. 10.5.200 8 THE TWO FIRMS MERGED. HT TOOK OVER THE ASSETS AND LIABILITIES OF STC INSOFAR AS ITS BUSINESS OF MANUFACTURE OF IRON ORE AND EXPORT OF T HE SAME IS CONCERNED VIZ., 100% EOU. THE ABOVE FACTS CAN BE SUMMARISED IN THE FORM OF FOLLOWING CHART:- SL. NO. DETAILS HOTHUR TRADERS 100% EOU SHARMEEN TRANSPORT CO. REMARKS 1. NAME OF THE PARTNERS 1. HOTHUR MD. IQBAL 2. NADIRA IQBAL 1. HOTHUR MD. IQBAL 2. NADIRA IQBAL SAME PARTNERS 2. PROFIT SHARING RATIO 60% & 40% 60% & 40% SAME PROFIT SHARING RATIO 3. DATE OF FOR- MATION OF THE PARTNER- SHIP FIRM 5.10.2007 1.4.2002 - 4. DATE OF FOR- MATION OF 100% EOU 22.11.2007 100% EOU 05.12.2005 100% EOU - 5. DATE OF MERGER 02.05.2008 02.05.2008 SAME DATE 6. WHETHER ELIGIBLE FOR DEDUCTION U/S. 10B YES YES BOTH UNITS ARE ELIGIBLE. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 4 OF 35 6. STC FILED RETURN OF INCOME FOR THE A.Y.2009-10 W HEREIN IT CLAIMED DEDUCTION U/S. 10B OF THE ACT FOR THE PERIOD FROM 1 .4.2008 TO 10.5.2008. IN THIS RETURN OF INCOME, THE ASSESSEE CLAIMED DEDUCTI ON U/S. 10B OF THE ACT IN RESPECT OF EXPORT OF IRON ORE BY 100% EOU. IT MAY BE POINTED OUT HERE THAT UPTO 10.5.2008, STC WAS A 100% EOU ON ITS OWN AND W AS ENTITLED TO CLAIM DEDUCTION U/S. 10B OF THE ACT. W.E.F. 10.5.2008, T HE 100% EOU BUSINESS MERGED WITH HT. THE AO DID NOT ALLOW CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 10B OF THE ACT FOR THE FOLLOWING REASONS:- (I) AS ON THE LAST DAY OF THE PREVIOUS YEAR, THE 10 B UNIT SHOULD BE IN EXISTENCE. SINCE 10B UNIT WAS NOT IN EXISTENCE AS ON 31.3.2009, DEDUCTION U/S. 10B IS NOT ADMISSIBLE. ONCE THE UND ERTAKING CEASES TO BE IN EXISTENCE, BENEFIT OF SECTION 10B IS NOT A VAILABLE. (II) THE MERGER OF STC AND HT CANNOT BE ACCEPTED A S IN LAW, TWO FIRMS CANNOT MERGE. SUCH MERGER OF TWO PARTNERSHIP FIRMS CAN ONLY GIVE BIRTH TO A NEW PARTNERSHIP FIRM AS THE TWO PARTNERS HIP FIRMS WHICH MERGED WERE BY THEMSELVES INDEPENDENT ENTITIES UNDE R THE INCOME- TAX LAW. THE FACT THAT THE TWO PARTNERS WERE SAME IN BOTH THE PARTNERSHIP FIRMS CANNOT BE THE BASIS TO HOLD THAT THERE WAS A VALID MERGER OF THE TWO FIRMS. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 5 OF 35 (III) STC CONTINUED TO CARRY ON BUSINESS EVEN AFTER MERGER, THOUGH IT WAS IN RESPECT OF A NON-EOU UNIT. EVEN ON THIS BAS IS, MERGER CANNOT BE ACCEPTED. 7. IN THE CASE OF HT, A RETURN OF INCOME WAS FILED FOR THE A.Y. 2009-10. IN THE RETURN SO FILED, HT CLAIMED DEDUCTION U/S. 1 0B OF THE ACT IN RESPECT OF PROFITS OF MANUFACTURE AND EXPORT OF IRON ORE IN IT S 100% EOU. THE INCOME SO INCLUDED THE INCOME FROM 10.5.2008 OF STCS 100% EOU WHICH GOT MERGED WITH THAT OF 100% EOU BUSINESS OF THE ASSESS EE. IN THEIR ASSESSMENT, THE AO TOOK THE VIEW THAT UNDER THE PRO VISO TO SECTION 10B OF THE ACT, THE CONDITIONS FOR CLAIMING EXEMPTION IS T HAT :- (I) THE UNDERTAKING SHOULD NOT BE FORMED BY SPLITTI NG UP OR RECONSTRUCTION OF BUSINESS ALREADY IN EXISTENCE; (II) IT IS NOT FORMED BY THE TRANSFER OF A NEW BUSI NESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE; AND (III) THE VALUE OF THE SECOND HAND MACHINERY OR PLA NT TRANSFERRED TO A NEW UNDERTAKING SHOULD NOT EXCEED 20% OF THE TOTAL VALUE OF MACHINERY OR PLANT USED FOR THE INDUSTRIAL UNIT. 8. THE AO WAS OF THE VIEW THAT STC MERGED WITH THE ASSESSEE ON 11.05.2008 AND THE MERGER WAS RECOGNIZED BY CENTRAL EXCISE AUTHORITIES. AS A RESULT OF THE MERGER, SUBSTANTIAL PORTION OF A SSETS PERTAINING TO STC TO THE EXTENT OF RS.17,34,83,021 BECAME THE ASSETS OF HT. THE OPENING WDV OF ASSETS OF HT WAS ONLY RS.28,48,317. HT PURC HASED ASSETS WORTH RS.3,68,75,561 BEFORE SEPTEMBER, 2008 AND RS.2,70,6 2,532 AFTER ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 6 OF 35 SEPTEMBER, 2008 TOTALLING IN ALL RS.6,39,38,093. A CCORDING TO THE AO, THE TOTAL ASSETS OF HT AFTER THE MERGER BECAME RS.24,02 ,69,431 OUT OF WHICH STCS ASSETS ON MERGER WAS RS.17,34,83,021. ACCORD ING TO THE AO, THE ASSESSEE ACQUIRED OLD MACHINERY TO THE EXTENT OF 72 % USED BY STC BEFORE MERGER AND HENCE ASSESSEE WAS NOT ELIGIBLE TO CLAIM DEDUCTION U/S. 10B OF THE ACT. 9. IN REPLY TO THE PROPOSAL OF THE AO IN THIS REGAR D, HT SUBMITTED THAT BUT FOR THE MERGER THE PROFITS FROM 100% EOU WOULD HAVE BEEN EXEMPT IN THE HANDS OF THE TWO FIRMS AND JUST BECAUSE THE TWO FIRMS MERGED, DEDUCTION U/S. 10B CANNOT BE DENIED. THE ASSESSEE FURTHER POINTED OUT THAT BY REASON OF THE MERGER, IT CANNOT BE SAID THA T THE ASSESSEE IS FORMED BY SPLITTING UP OR RECONSTRUCTION OF A BUSINESS ALR EADY IN EXISTENCE. THE AO HOWEVER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. HE HELD THAT THE TWO FIRMS ARE TWO DIFFERENT ENTITIES IN THE EYE OF LAW AS FAR AS INCOME TAX PROCEEDINGS ARE CONCERNED AND THEREFORE IT WAS A CA SE WHERE THE CONDITIONS MENTIONED IN SECTION 10B(2)(II) AND (III ) OF THE ACT WERE VIOLATED VIZ., NEW UNIT WAS FORMED BY SPLITTING UP OR RECONS TRUCTION OF BUSINESS ALREADY IN EXISTENCE AND THAT NEW UNIT IS FORMED BY A TRANSFER OF A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED. 10. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) HEL D THAT DEDUCTION U/S. 10B HAD TO BE ALLOWED IN THE CASE OF STC UPTO THE DATE OF MERGER. IN THE CASE OF HT, THE CIT(APPEALS) HELD THAT THE ASSE SSEE SATISFIED ALL THE ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 7 OF 35 CONDITIONS AND THEREFORE DEDUCTION U/S. 10B OF THE ACT HAD TO BE ALLOWED TO THE ASSESSEE ON THE ENTIRE PROFITS INCLUDING THE PR OFITS AFTER MERGER. AGGRIEVED BY THE ORDERS OF THE CIT(A), THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS. AN IDENTI CAL ISSUE HAD COME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CA SE OF DCIT V. TRIDENT MINERALS (100% EOU) IN ITA NO.1050/BANG/2012 FOR THE A.Y. 2009-10, ORDER DATED 07.02.2014. IN THAT CASE ON IDENTICAL FACTS, THIS TRIBUNAL HE LD THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION U/S. 10 B OF THE ACT. THE OBSERVATIONS OF THE TRIBUNAL WERE AS FOLLOWS:- 6.4.1 WE HAVE HEARD BOTH PARTIES AT LENGTH AND PER USED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDI NG THE ORDERS OF THE AUTHORITIES BELOW, SUBMISSIONS MADE, JUDICIA L DECISIONS CITED ETC. FROM AN APPRECIATION OF THE FACTS ON REC ORD, IT IS NOT IN DISPUTE THAT THE UNIT OF THE ASSESSEE FIRM IS A 100 % EOU UNIT ENTITLED FOR DEDUCTION UNDER SECTION 10B OF THE ACT . IT IS ALSO SEEN THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE EOU STATUS OF THE UNIT OF M/S. KMMI EXPORTS ALSO. THE ISSUE FOR CONSI DERATION IS AFTER THE MERGER OF THE FIRM M/S. KMMI EXPORTS WITH THE ASSESSEE FIRM, WHETHER THE ASSESSEE FIRM IS ENTITLE D FOR DEDUCTION UNDER SECTION 10B OF THE ACT OR NOT. 6.4.2 ON CAREFUL CONSIDERATION, WE DO NOT CONCUR W ITH THE VIEW OF THE ASSESSING OFFICER THAT THE LAW RECOGNISES ME RGER OF ONLY COMPANIES AND NOT THE MERGER OF FIRMS. EARLIER, THE RE WAS SUB- SECTION 9 TO SECTION 10B OF THE ACT WHICH SPECIFICA LLY PROVIDED AND THAT THE DEDUCTION SHALL NOT BE ALLOWED IF THER E WAS A TRANSFER OF OWNERSHIP OR BENEFICIAL INTEREST IN THE UNDERTAK ING. THIS SUB- SECTION 9 OF SECTION 10B OF THE ACT WAS OMITTED FRO M THE STATUTE W.E.F. 1.4.2004. ANOTHER SUB-SECTION 9A OF SECTION 10B OF THE ACT WAS INTRODUCED W.E.F. 1.11.2003, WHICH PROVIDED THA T THE DEDUCTION CAN BE ALLOWED IF A FIRM IS SUCCEEDED BY A COMPANY. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 8 OF 35 THIS SUB-SECTION WAS ALSO OMITTED W.E.F. 1.4.2004. IN THIS VIEW OF THE MATTER, THE INEVITABLE AND APPROPRIATE CONCLUSI ON IS THAT THE LIMITATIONS SPECIFIED IN SUB-SECTIONS 9 AND 9A OF S ECTION 10B OF THE ACT DO NOT EXIST FROM 1.4.2004 AND THEREFORE TH E CONCLUSION OF THE ASSESSING OFFICER THAT DEDUCTION UNDER SECTI ON 10B OF THE ACT CANNOT BE GRANTED ON THE MERGER OF FIRMS IS NOT CORRECT. 6.4.3 IT IS A SETTLED PRINCIPLE, UPHELD BY VARIOUS JUDICIAL DECISIONS, THAT DEDUCTION UNDER SECTION 10B OF THE ACT IS GRANTED TO AN UNDERTAKING AND NOT AN ASSESSEE. FURTHER, THE CBDT CIRCULAR NO.1/2013 IN F.NO.178/84/2012 DT.17.1.2013 , RELIED ON BY THE ASSESSEE, IS CLEAR THAT THE DEDUCTION IS GRA NTED TO THE UNDERTAKING. THEREFORE, IT FOLLOWS THAT AS LONG AS THE UNDERTAKINGS REMAIN ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT, THE DEDUCTION CANNOT BE DENIED MERELY ON THE GROUND THA T THERE HAS BEEN A MERGER OF THE FIRMS WHICH OWN THE UNDERTAKIN GS. WE ALSO FIND THAT THE ASSESSING OFFICER HAS NOT RENDERED AN Y FINDING THAT EITHER OF THE UNITS, ONE BELONGING TO THE ASSESSEE AND THE OTHER BELONGING TO THE FIRM THAT GOT MERGED I.E. KMMI EXP ORTS, IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT . THE ONLY REASON ADDUCED IS THAT DUE TO THE MERGER OF THE TWO UNITS, THE ASSESSEE IS DEPLOYING ASSETS ALREADY PUT TO USE BY THE MERGED FIRM AND HENCE THE ASSESSEE CANNOT CLAIM DEDUCTION UNDER SECTION 10B OF THE ACT. AS ELABORATELY DISCUSSED ABOVE, BOTH TH E UNITS / UNDERTAKINGS OF THE ASSESSEE FIRM AND M/S. KMMI EXP ORTS ARE OTHERWISE ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT AND THE DEDUCTION IS TOWARDS THE UNDERTAKING. AS LONG A S THE UNDERTAKINGS ARE ELIGIBLE FOR DEDUCTION UNDER SECTI ON 10B OF THE ACT, WHICH HAS NOT BEEN DISPUTED BY THE ASSESSING O FFICER, THE MERGER OF THE FIRM, M/S. KMMI EXPORTS WITH THE ASSE SSEE DOES NOT ALTER THE STATUS OF THE UNDERTAKINGS. IN THIS V IEW OF THE MATTER, WE UPHOLD THE ORDER OF THE LEARNED CIT (APPEALS) IN ALLOWING THE ASSESSEE DEDUCTION UNDER SECTION 10B OF THE ACT. A CCORDINGLY, REVENUES GROUNDS AT S.NOS.2 AND 3 ARE DISMISSED. S INCE THE ASSESSEES C.O. AT S.NOS.1 TO 4 SUPPORT THE ORDER O F THE LEARNED CIT (APPEALS) IN ALLOWING IT DEDUCTION UNDER SECTIO N 10B OF THE ACT AND WHICH HAVE BEEN ADDRESSED BY OUR DISMISSAL OF THE AFORESAID GROUNDS RAISED BY REVENUE ON THIS ISSUE, THERE IS NO REQUIREMENT TO ADJUDICATE C.OS OF THE ASSESSEE AS THEY ARE RENDERED INFRUCTUOUS. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 9 OF 35 12. THE ABOVE CONCLUSIONS ARRIVED AT BY THE TRIBUNA L WILL APPLY TO THE FACTS OF THE PRESENT CASE AND THEREFORE THE ORDERS OF THE CIT(APPEALS) HAVE TO CONFIRMED. WE MAY ALSO ADD THAT DEDUCTION U/S. 10B OF THE ACT IS GIVEN FOR TEN CONSECUTIVE ASSESSMENT YEARS. IT IS NOT TH E COMPLAINT OF THE REVENUE THAT BY REASON OF MERGER, THIS PERIOD GETS EXTENDED. THERE IS NO DISPUTE ALSO THAT THE YEAR IN QUESTION FALLS WITHIN TEN CONSECUTIVE ASSESSMENT YEARS IN THE CASE OF HT AS WELL AS STC. THE CONCEPT OF SUCCESSION IN THE CASE OF FIRMS IS WELL RECOGNIZED U/S. 188 AND 170 OF THE ACT AND THEREFORE THE CONCLUSIONS OF THE ASSESSING OFFICER THAT THERE CANNOT BE MERGER OF TWO FIRMS, IN OUR VIEW, IS WITH OUT ANY BASIS. 13. THE CONTRAVENTION OF CONDITIONS MENTIONED IN S ECTION 10B(2)(II) AND (III) REFERRED TO BY THE AO IN THE CASE OF HT IS AG AIN WITHOUT ANY BASIS. THIS FINDING OF THE ASSESSING OFFICER IS TOTALLY ERRONEO US AND CONTRARY TO LAW. THE ASSESSING OFFICER HAS IGNORED THE LEGAL POSITIO N AND PROCEEDED TO HOLD THAT THE ASSESSEE CONTRAVENED SECTIONS 1OB(2)(II) & (III) OF THE ACT. IT SHOULD BE NOTED THAT THE HT AND STC ARE FIRMS. THE PROVISION APPLICABLE FOR MERGER OF FIRMS IS CONTAINED SECTIONS 170 & 188 OF THE ACT. IF ONLY THIS PROVISION HAD BEEN APPRECIATED AND THE JUDGMENTS ON THE ISSUE EXAMINED, SUCH AN ERRONEOUS FINDING WOULD NOT HAVE CULMINATED . THE FOLLOWING TABLE WOULD HIGHLIGHT THIS ISSUE:- ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 10 OF 35 SECTION 10B(2) OF THE ACT SECTION 188 & SECTION 170 OF THE ACT (2) THIS SECTION APPLIES TO ANY UNDERTAKING WHICH FULFILS ALL THE FOLLOWING CONDITIONS NAMELY:- (I) (II) IT IS NOT FORMED BY THE SPLITTING UP, OR THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE: (III) IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. WHERE A FIRM CARRYING ON A BUSINESS OR PROFESSION IS SUCCEEDED BY ANOTHER FIRM, AND THE CASE IS NOT ONE COVERED BY SECTION 187, SEPARATE ASSESSMENTS SHALL BE MADE ON THE PREDECESSOR FIRM AND THE SUCCESSOR FIRM IN ACCORDANCE WITH THE PROVISIONS OF SECTION 170. (1) WHERE A PERSON CARRYING ON ANY BUSINESS OR PROFESSION (SUCH PERSON HEREINAFTER IN THIS SECTION BEING REFERRED TO AS THE PREDECESSOR) HAS BEEN SUCCEEDED THEREIN BY ANY OTHER PERSON (HEREINAFTER IN THIS SECTION REFERRED TO AS THE SUCCESSOR) WHO CONTINUES TO CARRY ON THAT BUSINESS OR PROFESSION,- (A) THE PREDECESSOR SHALL BE ASSESSED IN RESPECT OF THE INCOME OF THE PREVIOUS YEAR IN WHICH THE SUCCESSION TOOK PLACE UP TO THE DATE OF SUCCESSION; (B) THE SUCCESSOR SHALL BE ASSESSED IN RESPECT OF THE INCOME OF THE PREVIOUS YEAR AFTER THE DATE OF SUCCESSION. 14. IT MUST BE REMEMBERED THAT THE EXPRESSION FOR MED AS USED IN 10B(2)(II) AND (III) OF THE ACT AND THE EXPRESSION SUCCESSION AS ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 11 OF 35 UNDERSTOOD IN SEC. 188 & 170 OF THE ACT HAVE DEFINI TE MEANINGS AS EXPLAINED IN JUDICIAL PRONOUNCEMENTS REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US. IN 196 ITR 188 (SC) BAJAJ TEMPO LTD., VS. CIT 196 ITR 188 (SC), THE HONBLE SUPREME COURT OBSERVE D THAT LEASE OF PROPERTIES CANNOT BE SAID TO BE FORMATION. THE FOL LOWING WERE THE RELEVANT OBSERVATIONS. 10. THE INITIAL EXERCISE, THEREFORE, SHOULD BE TO FIND OUT IF THE UNDERTAKING WAS A NEW ONE . THE EMPHASIS IS ON FORMATION NOT ON USE. THEREFORE, IT IS NOT EVERY TRANSFER OF BUILDING OR MATERIAL BUT THE ONE WHICH CAN BE HELD TO HAVE RESULTED IN FORMATION OF THE UNDERTAKING . EVEN THOUGH THIS DECISION WAS CONCERNED WITH THE CL AUSE DEALING WITH RECONSTRUCTION OF AN EXISTING BUSINESS, THE EXPRESS ION NOT FORMED WAS CONSTRUCTED TO MEAN THAT THE UNDERTAKING SHOULD NOT BE A CONTINUATION OF THE OLD BUT EMERGENCE OF A NEW UNIT . THEREFORE, EVEN IF THE UNDERTAKING IS ESTABLISHED BY TRANSFER OF BU ILDING, PLANT OR MACHINERY BUT IS NOT FORMED AS A RESULT OF SUCH TRA NSFER, THE ASSESSEE COULD NOT BE DENIED THE BENEFIT 11. ...YET WHAT IS SIGNIFICANT IS THAT THE HIGH C OURT DID NOT EXAMINE THE IMPACT OF THE WORD FORMED. IT PROCEED ED ON THE BASIS THAT ONCE THE LEASE AMOUNTED TO A TRANSFER, THE ASS ESSEE BECAME INELIGIBLE FROM CLAIMING ANY EXEMPTION. 15. IN CIT VS. K.H. CHAMBERS 55 ITR 674(SC), IT WA S HELD: 13 SUCCESSION INVOLVES CHANGE OF OWNERSHIP; THAT I S, THE TRANSFEROR GOES OUT AND THE TRANSFEREE COMES IN; IT CONNOTES THAT THE WHOLE BUSINESS IS TRANSFERRED; IT ALSO IMP LIES THAT SUBSTANTIALLY THE IDENTITY AND THE CONTINUITY OF THE BUSINESS ARE PRESERVED . IF THERE IS A TRANSFER OF A BUSINESS, ANY ARRANGEMENT BETWEEN THE TRANSFEROR AND THE TRANSFER EE IN RESPECT OF SOME OF THE ASSETS AND LIABILITIES NOT W ITH A VIEW TO ENABLE THE TRANSFEROR TO RUN A PART OF THE BUSINESS TRANSFERRED BUT TO ENABLE THE TRANSFEREE TO RUN THE BUSINESS UN HAMPERED ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 12 OF 35 BY THE LOAD OF DEBTS OR FOR ANY OTHER APPROPRIATE C OLLATERAL PURPOSE CANNOT DETRACT FROM THE TOTALITY OF SUCCESSION . 16. APPLYING THE RATIO LAID DOWN IN THE AFORESAID C ASES, WE CAN SAFELY CONCLUDE THAT IN THE PRESENT CASE THERE WAS NO FORM ATION OF A NEW UNDERTAKING BUT IT WAS A CASE OF SUCCESSION AND THE REFORE THE PROVISIONS OF SEC.10B(2)(II) & (III) OF THE ACT, SOUGHT TO BE APP LIED BY THE AO, DID NOT APPLY. 17. WE MAY ALSO ADD THAT THE MERGER IN THE PRESENT CASE IS AKIN TO A SLUMP SALE OF THE BUSINESS OF 100% EOU. IN THE CAS E OF SLUMP SALE, THE TRIBUNAL AS WELL AS HIGH COURTS HAVE TAKEN A VIEW T HAT THE TRANSFEREE IS ENTITLED TO DEDUCTION U/S. 10A/10B OF THE ACT. 18. THE FINANCE ACT, 2000 SUBSTITUTED THE THEN EXIS TING SECTION 10A W.E.F. 1ST APRIL, 2001. THE PROVISIONS SO SUBSTITU TED, IN SO FAR AS IT IS RELEVANT TO THE PRESENT CASE READ THUS:- '10A. SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLI SHED UNDERTAKINGS IN FREE TRADE ZONE, ETC.-(1) SUBJECT T O THE PROVISIONS OF THIS SECTION, A DEDUCTION OF SUCH PROFITS AND GA INS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICL ES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE A SSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT T O THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS TH E CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSES SEE : PROVIDED THAT ..... PROVIDED THAT...... PROVIDED THAT...... ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 13 OF 35 PROVIDED ALSO THAT ......... (2) THIS SECTION APPLIES TO ANY UNDERTAKING WHICH F ULFILS ALL THE FOLLOWING CONDITIONS, NAMELY :- (I) IT HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUC E ARTICLES OR THINGS OR COMPUTER SOFTWARE 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 THE 1ST DAY OF APRIL, 1994, IN ANY ELECTRONIC HARDWARE TECHNOLOGY PARK OR, AS THE CASE MAY BE, SOFTWARE TECHNOLOGY PARK; (C) COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2001 IN ANY SPECIAL ECONOMIC ZONE; (II) IT IS NOT FORMED BY THE SPLITTING UP, OR THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE : PROVIDED THAT THIS CONDITION SHALL NOT APPLY IN RESPECT OF ANY UNDERTAKING WHICH IS FORMED AS A RES ULT OF THE RE-ESTABLISHMENT, RECONSTRUCTION OR REVIVAL BY THE ASSESSEE OF THE BUSINESS OF ANY SUCH UNDERTAKING AS IS REFERRED TO IN SECTION 33B, IN THE CIRCUMSTANCES AN D WITHIN THE PERIOD SPECIFIED IN THAT SECTION; (III) IT IS NOT FORMED BY THE TRANSFER TO A NEW BUS INESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPO SE. EXPLANATION.- THE PROVISIONS OF EXPLANATION 1 AND EXPLANATION 2 TO SUB-SECTION (2) OF SECTION 80-I SH ALL APPLY FOR THE PURPOSES OF CLAUSE (III) OF THIS SUB-SECTIO N AS THEY APPLY FOR THE PURPOSES OF CLAUSE (II) OF THAT SUB-S ECTION. 19. THE RELEVANT PROVISIONS OF SEC. 80-I(2) EXPLN. -1 & 2 READ THUS:- ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 14 OF 35 EXPLANATION 1 : FOR THE PURPOSES OF CL. (II) OF TH IS SUB- SECTION, ANY MACHINERY OR PLANT WHICH WAS USED OUTS IDE INDIA BY ANY PERSON OTHER THAN THE ASSESSEE SHALL N OT BE REGARDED AS MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE, IF THE FOLLOWING CONDITIONS ARE FULFILLED, NAMELY : (A) SUCH MACHINERY OR PLANT WAS NOT, AT ANY TIME PREVIOUS TO THE DATE OF THE INSTALLATION BY THE ASSESSEE, USED IN INDIA; (B) SUCH MACHINERY OR PLANT IS IMPORTED INTO INDIA FROM ANY COUNTRY OUTSIDE INDIA; AND (C) NO DEDUCTION ON ACCOUNT OF DEPRECIATION IN RESPECT OF SUCH MACHINERY OR PLANT HAS BEEN ALLOWED OR IS ALLOWABLE UNDER THE PROVISIONS OF THIS ACT IN COMPUTING THE TOTAL INCOME OF ANY PERSON FOR ANY PERIOD PRIOR TO THE DATE OF THE INSTALLATION OF THE MACHINERY OR PLANT BY THE ASSESSEE. EXPLANATION 2 : WHERE IN THE CASE OF AN INDUSTRIAL UNDERTAKING, ANY MACHINERY OR PLANT OR ANY PART THE REOF PREVIOUSLY USED FOR ANY PURPOSE IS TRANSFERRED TO A NEW BUSINESS AND THE TOTAL VALUE OF THE MACHINERY OR PL ANT OR PART SO TRANSFERRED DOES NOT EXCEED TWENTY PER CENT OF THE TOTAL VALUE OF THE MACHINERY OR PLANT USED IN THE B USINESS, THEN, FOR THE PURPOSES OF CL. (II) OF THIS SUB-SECT ION, THE CONDITION SPECIFIED THEREIN SHALL BE DEEMED TO HAVE BEEN COMPLIED WITH.' 20. SUB-SECTION (9) OF THE SUBSTITUTED PROVISIONS P ROVIDED AS FOLLOWS: (9) WHERE DURING ANY PREVIOUS YEAR, THE OWNERSHIP OR THE BENEFICIAL INTEREST IN THE UNDERTAKING IS TRANSFERR ED BY ANY MEANS, THE DEDUCTION UNDER SUB-SECTION (1) SHALL NOT BE AL LOWED TO THE ASSESSEE FOR THE ASSESSMENT YEAR RELEVANT TO SUCH P REVIOUS YEAR AND THE SUBSEQUENT YEARS. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 15 OF 35 EXPLANATION 1.-FOR THE PURPOSES OF THIS SECTION, IN THE CASE OF A COMPANY, WHERE ON THE LAST DAY OF ANY PREVIOUS YEAR , THE SHARES OF THE COMPANY CARRYING NOT LESS THAN FIFTY-ONE PER CENT OF THE VOTING POWER ARE NOT BENEFICIALLY HELD BY PERSONS W HO HELD THE SHARES OF THE COMPANY CARRYING NOT LESS THAN FIFTY- ONE PER CENT OF THE VOTING POWER ON THE LAST DAY OF THE YEAR IN WHI CH THE UNDERTAKING WAS SET UP, THE COMPANY SHALL BE PRESUM ED TO HAVE TRANSFERRED ITS OWNERSHIP OR THE BENEFICIAL INTERES T IN THE UNDERTAKING. EXPLANATION 2.- ........ 21. CBDT IN CIRCULAR NO.14 OF 2001 HAS EXPLAINED TH E PROVISIONS OF SEC.10A(9) OF THE ACT THUS:- 21.3 SUB-SECTION (9) PROVIDES THAT WHERE DURING ANY PREV IOUS YEAR, THE OWNERSHIP OR BENEFICIAL OWNERSHIP INTERES T IN THE UNDERTAKING IS TRANSFERRED, THE BENEFIT OF THE DEDU CTION WOULD NOT BE ALLOWED FOR THAT YEAR AND SUBSEQUENT YEARS. AN E XPLANATION APPLICABLE IN CASES OF COMPANIES FURTHER PROVIDES T HAT WHERE 51% OF SHARES ARE NOT BENEFICIALLY HELD BY PERSONS, WHO HELD THESE SHARES AT THE TIME OF SETTING UP OF THE UNIT, IT WI LL BE DEEMED TO BE A TRANSFER OF OWNERSHIP. 21.4 OWING TO DIFFICULTIES IN MONITORING CHANGE IN SHARE HOLDING PATTERN IN LISTED COMPANIES IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, THE AMENDMENT PROVIDES THAT THE PROVISI ONS OF SUB- SECTION (9) WOULD NOT BE APPLICABLE IN THE CASE OF A COMPANY WHERE ITS SHAREHOLDING UNDERGOES ANY CHANGE AS A RE SULT OF ITS BECOMING A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALL Y INTERESTED. THE PROVISO WOULD ALSO NOT BE APPLICABLE TO A COMPA NY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED AT THE TIME OF SETTING UP OF THE UNDERTAKING. IN OTHER WORDS, THE PROVISO WILL NOT A PPLY TO COMPANIES IN WHICH PUBLIC ARE SUBSTANTIALLY INTERES TED EITHER AT THE TIME OF SETTING UP OR LATER ON ITS BECOMING A C OMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED. THE PROV ISO ALSO APPLIES TO ANY CHANGE IN THE SHAREHOLDING PATTERN O F ANY VENTURE CAPITAL COMPANY OR A VENTURE CAPITAL FUNDS, WHICH H AVE TO NECESSARILY DISINVEST AT SOME STAGE. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 16 OF 35 22. BY THE FINANCE ACT, 2001 THE FOLLOWING AMENDM ENTS WERE MADE IN S. 10A, NAMELY :- AFTER SUB-S. (9),- (I) BELOW EXPLANATION 1, THE FOLLOWING PROVISO WAS INSERTED, NAMELY :-; 'PROVIDED THAT NOTHING CONTAINED IN THIS EXPLANATION SHALL APPLY TO ANY CHANGE IN THE SHAREHOLDING OF THE COMPANY AS A RESULT OF- (A) ITS BECOMING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED; OR (B) DISINVESTMENT OF ITS EQUITY SHARES BY ANY VENTURE CAPITAL COMPANY OR VENTURE CAPITAL FUND.' 23. THE FOLLOWING AMENDMENTS WERE MADE IN SECTION 1 0A BY THE FINANCE ACT, 2002 W.E.F. 1ST APRIL, 2003, NAMELY :- AFTER SUB-SECTION (9) AND BEFORE EXPLANATION 1, TH E FOLLOWING SHALL BE INSERTED, NAMELY : '(9A) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SEC TION (9), WHERE AS A RESULT OF REORGANISATION OF BUSINES S, A FIRM OR A SOLE PROPRIETARY CONCERN IS SUCCEEDED BY A COM PANY AND THE OWNERSHIP OR BENEFICIAL INTEREST IN THE UND ERTAKING OF THE FIRM OR THE SOLE PROPRIETARY CONCERN IS TRAN SFERRED TO THE COMPANY, THE DEDUCTION UNDER SUB-SECTION (1) IN RESPECT OF SUCH UNDERTAKING SHALL BE ALLOWED TO THE COMPANY, AS THE SAME WOULD HAVE BEEN ALLOWED TO SUC H FIRM OR SOLE PROPRIETARY CONCERN, AS THE CASE MAY B E, IF THE REORGANISATION HAD NOT TAKEN PLACE : PROVIDED THAT,- (A) IN THE CASE OF A FIRM, THE AGGREGATE OF THE SHAREHOLDING IN THE COMPANY OF THE PARTNERS OF THE ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 17 OF 35 FIRM IS NOT LESS THAN FIFTY ONE PER CENT, OF THE TO TAL VOTING POWER IN THE COMPANY AND THEIR SHAREHOLDING CONTINUES TO BE AS SUCH FOR THE PERIOD FOR WHICH THE COMPANY IS ELIGIBLE FOR DEDUCTION UNDER THIS SECTION; (B) IN THE CASE OF THE SOLE PROPRIETARY CONCERN, TH E SHAREHOLDING OF THE SOLE PROPRIETOR IN THE COMPANY IS NOT LESS THAN FIFTY-ONE PER CENT OF THE TOTAL VO TING POWER IN THE COMPANY AND HIS SHAREHOLDING CONTINUES TO REMAIN AS SUCH FOR THE PERIOD FOR WHICH THE COMPANY IS ELIGIBLE FOR DEDUCTION UNDER THIS SECTION.'. 24. THE FOLLOWING MODIFICATIONS WERE EFFECTED BY TH E FINANCE ACT, 2003: SUB-SECTIONS (9) AND (9A) WERE OMITTED WITH EFFECT FROM THE 1ST DAY OF APRIL, 2004; 25. SUB-SECTION 7A WAS INTRODUCED WHICH READ AS FOL LOWS: '(7A) WHERE ANY UNDERTAKING OF AN INDIAN COMPANY WHICH IS ENTITLED TO THE DEDUCTION UNDER THIS SECTI ON IS TRANSFERRED, BEFORE THE EXPIRY OF THE PERIOD SPECIF IED IN THIS SECTION, TO ANOTHER INDIAN COMPANY IN A SCHEME OF AMALGAMATION OR DEMERGER,- (A) NO DEDUCTION SHALL BE ADMISSIBLE UNDER THIS SECTION TO THE AMALGAMATING OR THE DEMERGED COMPANY FOR THE PREVIOUS YEAR IN WHICH THE AMALGAMATION OR THE DEMERGER TAKES PLACE; AND (B) THE PROVISIONS OF THIS SECTION SHALL, AS FAR AS MAY BE, APPLY TO THE AMALGAMATED OR THE RESULTING COMPANY AS THEY WOULD HAVE APPLIED TO THE AMALGAMATING OR THE DEMERGED COMPANY IF THE AMALGAMATION OR DEMERGER HAD NOT TAKEN PLACE.'; ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 18 OF 35 26. THE CBDT IN CIRCULAR NO.7 DATED 5.9.2003 EXPLAI NED THE ABOVE AMENDMENTS IN THE FOLLOWING WORDS: 21. ALLOWING DEDUCTION UNDER SECTIONS 10A AND 10B TO THE RESULTING ENTITY IN THE CASE OF AMALGAMATION OR DEM ERGER. 21.1 THE DEDUCTION UNDER SECTIONS 10A AND 10B, ARE NOT ALLOWED TO THE ASSESSEE WHERE THE OWNERSHIP OR THE BENEFICI AL INTEREST IN THE UNDERTAKING IS TRANSFERRED BY ANY MEANS, DUE TO THE PROVISIONS OF SUB-SECTION (9) OF SECTION 10A AND SU B-SECTION (9) OF SECTION 10B. HOWEVER, THIS CONDITION IS NOT APPL ICABLE IN CERTAIN CASES, SUCH AS WHERE A FIRM OR SOLE PROPRIE TARY CONCERN IS SUCCEEDED BY A COMPANY AS A RESULT OF THE REORGANIS ATION OF THE BUSINESS, OR WHERE AS A RESULT OF CHANGE IN OWNERSH IP, THE RESULTANT ENTITY IS A PUBLIC LIMITED COMPANY OR A V ENTURE CAPITAL COMPANY. 21.2 WITH A VIEW TO GIVE BOOST TO THE EXPORT-LED GROWTH , AND TO ELIMINATE THE HURDLES IN THE MERGERS AND ACQUISITIO NS (M&A) AND OTHER MODES OF BUSINESS RESTRUCTURING, A NEW SUB-SECTION (7A) IN SECTION 10A AND A NEW SUB-SECTION (7A) IN S ECTION 10B HAVE BEEN INSERTED TO PROVIDE THAT WHERE AN UNDERTA KING OF AN INDIAN COMPANY IS TRANSFERRED TO ANOTHER COMPANY UN DER A SCHEME OF AMALGAMATION OR DEMERGER, THE DEDUCTION S HALL BE ALLOWABLE IN THE HANDS OF THE AMALGAMATED OR THE RE SULTING COMPANY. HOWEVER NO DEDUCTION SHALL BE ADMISSIBLE U NDER THIS SECTION TO THE AMALGAMATING COMPANY OR THE DEMERGED COMPANY FOR THE PREVIOUS YEAR IN WHICH AMALGAMATION OR DEME RGER TAKES PLACE. AS A CONSEQUENCE, SUB-SECTIONS (9), (9A) AND THE EXPLANATION BELOW THERETO IN SECTIONS 10A AND 10B, BECOME REDUNDANT AND HAVE BEEN OMITTED. 21.3 THE AMENDMENTS WILL TAKE EFFECT FROM 1ST APRIL, 20 04 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSM ENT YEAR 2004- 2005 AND SUBSEQUENT YEARS. (EMPHASIS SUPPLIED) 27. IT CAN BE SEEN FROM THE AFORESAID STATUTORY PRO VISIONS AND ITS AMENDMENTS FROM TIME TO TIME, THAT ORIGINALLY DEDUC TION UNDER SEC.10A OF ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 19 OF 35 THE ACT WAS NOT ALLOWED IF THE OWNERSHIP OR THE BEN EFICIAL INTEREST IN THE UNDERTAKING IS TRANSFERRED BY ANY MEANS DURING THE TAX HOLIDAY PERIOD. THE PROVISIONS OF SEC.10A(9) OF THE ACT SPECIFICALLY PR OVIDED THAT THE DEDUCTION UNDER SUB-SECTION (1) SHALL NOT BE ALLOWED TO THE A SSESSEE IF THE OWNERSHIP OR THE BENEFICIAL INTEREST IN THE UNDERTAKING IS TR ANSFERRED BY ANY MEANS, FOR THE ASSESSMENT YEAR RELEVANT TO SUCH PREVIOUS YEAR AND THE SUBSEQUENT YEARS. THE RIGOUR OF THE PROVISIONS OF SEC.10A(9) OF THE ACT WAS SOUGHT TO BE DILUTED BY INSERTION OF A PROVISO TO SEC.10A(9) BY THE FINANCE ACT, 2001 AND BY INSERTION OF SEC.10A(9A) OF THE ACT BY THE F INANCE ACT, 2002. THE LEGISLATURE HOWEVER DECIDED TO DO AWAY WITH THESE P ROVISIONS AND THOUGHT IT FIT TO RESTRICT THE DISALLOWANCE ONLY IN THE CASE O F AMALGAMATION OR DEMERGER BY DELETING THE PROVISIONS OF SEC.10A(9) A ND 10A(9A) AND INSERTING SEC.10A(7A) OF THE ACT. THE AFORESAID LE GISLATIVE INTEND IS VERY CLEARLY SET OUT IN THE CBDT CIRCULAR NO.7 DATED 5.9 .2003 EXPLAINING THE PROVISIONS AS DONE WITH A VIEW TO GIVE BOOST TO THE EXPORT-LED GROWTH, AND TO ELIMINATE THE HURDLES IN THE MERGERS AND ACQUISI TIONS (M&A) AND OTHER MODES OF BUSINESS RESTRUCTURING, AND TO ALLOW THE DEDUCTION U/S.10A OF THE ACT IN THE CASE OF AMALGAMATION AND DEMERGER IN THE HANDS OF THE AMALGAMATED OR THE RESULTING COMPANY, EXCEPT FOR TH E PREVIOUS YEAR IN WHICH AMALGAMATION OR DEMERGER TAKES PLACE. 28. IN CBDT CIRCULAR NO.1/2013 DATED 17/01/2013, C LARIFICATION OF SEVERAL ISSUES OF EXEMPTION U/S.10A OF THE ACT IN R ESPECT OF PROFITS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE HAVE BEEN GIVE N: THE RELEVANT ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 20 OF 35 EXTRACT OF THE CIRCULAR IN SO FAR AS IT IS RELEVANT TO THE PRESENT APPEAL ARE EXTRACTED BELOW: EXPORT INCENTIVE SECTION 10A, 10AA & 10B OF INCOME TAX ACT, 1961 THE INDIAN SOFTWARE INDUSTRY HAS BEEN THE BENEFICIA RY OF DIRECT TAX INCENTIVES UNDER THE PROVISIONS LIKE SECTIONS 10A, 10AA & 10B OF THE INCOME -TAX ACT, 1961 IN RESPECT OF THEIR PROFI TS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE. THESE PROVISIONS PRESC RIBE INCENTIVES TO 'UNITS' OR 'UNDERTAKINGS', ESTABLISHED UNDER DIFFER ENT SCHEMES, WHICH ARE/WERE DERIVING PROFITS FROM EXPORT OF COMPUTER S OFTWARE SUBJECT TO FULFILLING THE PRESCRIBED CONDITIONS. 2. IT HAS BEEN REPRESENTED BY THE SOFTWARE COMPANIE S THAT SEVERAL ISSUES ARISING FROM THE ABOVE MENTIONED PROVISIONS ARE GIVING RISE TO DISPUTES BETWEEN THEM AND THE INCOME-TAX AUTHORITIE S LEADING TO DENIAL OF TAX BENEFITS AND CONSEQUENT LITIGATION AN D, THEREFORE, REQUIRE CLARIFICATION. VARIOUS ISSUES HIGHLIGHTED BY THE SO FTWARE INDUSTRY HAVE BEEN EXAMINED BY THE BOARD AND THE FOLLOWING C LARIFICATIONS ARE HEREBY ISSUED (I)..... TO (III)...... (IV) WHETHER TAX BENEFITS UNDER SECTIONS 10A, 10AA AND 10B WOULD CONTINUE TO REMAIN AVAILABLE IN CASE OF A SLUMP-SALE OF A UNIT/UNDERTAKING. THE VITAL FACTOR IN DETERMINING THE ABOVE ISSUE WOU LD BE FACTS SUCH AS HOW A SLUMP-SALE IS MADE AND WHAT IS ITS NA TURE. IT WILL ALSO BE IMPORTANT TO ENSURE THAT THE SLUMP SALE WOU LD NOT RESULT INTO ANY SPLITTING OR RECONSTRUCTION OF EXISTING BU SINESS. THESE ARE FACTUAL ISSUES REQUIRING VERIFICATION OF FACTS. IT IS, HOWEVER, CLARIFIED THAT ON THE SOLE GROUND OF CHANGE IN OWNE RSHIP OF AN UNDERTAKING, THE CLAIM OF EXEMPTION CANNOT BE DENIE D TO AN OTHERWISE ELIGIBLE UNDERTAKING AND THE TAX HOLIDAY CAN BE AVAILED ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 21 OF 35 OF FOR THE UNEXPIRED PERIOD AT THE RATES AS APPLICA BLE FOR THE REMAINING YEARS, SUBJECT TO FULFILMENT OF PRESCRIBE D CONDITIONS. 29. IT IS CLEAR FROM THE AFORESAID CIRCULAR THAT IN THE EVENT OF A SLUMP SALE, DEDUCTION U/S.10A OF THE ACT HAS TO BE ALLOWE D TO THE TRANSFEREE FOR THE REMAINING TAX HOLIDAY PERIOD. THE AO SHOULD HO WEVER ENSURE THAT BY REASON OF THE SLUMP SALE THERE IS NO SPLITTING OR R ECONSTRUCTION OF BUSINESS. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. SONATA SOFTWARE LTD. 343 ITR 397 (BOM) HAD AN OCCASION TO CONSIDER A CASE IDENTICAL TO THE PRESENT CASE BEFORE THE TRIBUNAL. THE FACTS OF THE CASE WERE THAT INDIAN ORGANIC CHEMICALS LTD. SET UP A SOFTWARE DIV ISION IN THE 1980S. THIS SOFTWARE DIVISION WAS TRANSFERRED AS A GOING CONCER N ON A SLUMP SALE BASIS UNDER AN AGREEMENT DATED 19 OCTOBER 1994 TO SONATA SOFTWARE LTD., FOR A TOTAL CONSIDERATION OF RS.8.13 CRORES. SONATA SOFTW ARE DIVISION WHICH WAS TRANSFERRED TO THE ASSESSEE CONSISTED OF TWO PARTS (I) A NON STP UNDERTAKING; AND (II) AN STP UNDERTAKING. IN RESPEC T OF THE ASSESSMENT YEAR 1998-1999 THE ASSESSEE MADE A CLAIM FOR DEDUCT ION UNDER SECTION 10A AS IT THEN STOOD. ONE OF THE REASON ASSIGNED BY THE AO FOR REJECTING THE ASSESSING OFFICER REJECTED THE CLAIM UNDER SECT ION 10A WAS THAT THE ASSESSEE WAS FORMED BY SPLITTING UP OR RECONSTRUCTI ON OF A BUSINESS ALREADY IN EXISTENCE AND THAT IT WAS FORMED BY THE TRANSFER TO A NEW BUSINESS OF PLANT AND MACHINERY PREVIOUSLY USED FOR ANY PURPOSE. THE TRIBUNAL HAS HELD THAT THE ENTIRE SOFTWARE DIVISION WAS TRANSFERRED AS A ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 22 OF 35 GOING CONCERN BY AN AGREEMENT DATED 19 OCTOBER 1994 TO THE ASSESSEE. THE TRIBUNAL OBSERVED THAT IT WAS AN ADMITTED FACT THAT THE UNDERTAKING OF THE SOFTWARE DIVISION WHICH WAS HITHERTO OWNED BY I OCL WAS TRANSFERRED ON A GOING CONCERN BASIS TOGETHER WITH ITS ASSETS AND LIABILITIES TO THE ASSESSEE. THE TRIBUNAL RELIED UPON A DECISION OF TH E HONBLE BOMBAY HIGH COURT IN CIT VS. GAEKWAR FOAM AND RUBBER COMPANY LTD (1959) 35 ITR 662 IN WHICH A DISTINCTION WAS DRAWN BETWEEN RECONSTRUC TION OF A BUSINESS AND SALE OF THE BUSINESS AND IT WAS HELD T HAT IN THE CASE OF A SALE THERE CAN BE NO QUESTION OF RECONSTRUCTION. THIS DE CISION WAS APPROVED BY THE SUPREME COURT IN TEXTILE MACHINERY CORPORATION LTD. VS. CIT. (1977) 107 ITR 195 . RELIANCE WAS ALSO PLACED ON A CIRCULAR ISSUED BY THE BOARD UNDER THE PROVISIONS OF SECTION 84 STATIN G THAT THE BENEFIT UNDER THE PROVISION ATTACHES NOT TO THE OWNERSHIP OF THE UNDERTAKING BUT TO THE UNDERTAKING ITSELF. ON FURTHER APPEAL BY THE REVENU E TO THE HONBLE HIGH COURT, THE HONBLE HIGH COURT HAD TO CONSIDER THE F OLLOWING QUESTION RAISED BY THE REVENUE, VIZ., WHETHER CONDITIONS MENTIONED U/S 10A ARE FULFILLED IN THE INSTANT CASE . THE HONBLE HIGH COURT HELD :- 11. THE TRIBUNAL IN THE PRESENT CASE HAS COME TO THE CONCLUSION THAT WHERE A RUNNING BUSINESS IS TRANSFE RRED LOCK, STOCK AND BARREL BY ONE ASSESSEE TO ANOTHER ASSESSE E THE PRINCIPLE OF RECONSTRUCTION, SPLITTING UP AND TRANSFER OF PLA NT AND MACHINERY CANNOT BE APPLIED. ACCORDING TO THE TRIBUNAL THE BE NEFIT OF SECTION 10A ATTACHES TO THE UNDERTAKING AND NOT TO THE ASSESSEE WHICH OWNS THE UNDERTAKING. THE BENEFIT OF SECTION 10A WAS HELD TO HAVE ATTACHED ITSELF TO THE STP UNIT OF THE SOFTWARE DIVISION WHICH WAS OWNED BY IOCL TILL 19 OCTOBER 19 94 AND IT ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 23 OF 35 WAS OWNED BY THE ASSESSEE SUBSEQUENT TO THAT DATE. WHAT IS MATERIAL, ACCORDING TO THE TRIBUNAL, IS NOT WHO OWN S THE UNDERTAKING BUT WHETHER THE UNDERTAKING IS ENTITLED TO THE BENEFIT AVAILABLE UNDER SECTION 10A. AS REGARDS THE ISSUE O F TRANSFER BY IOCL TO THE ASSESSEE, THE TRIBUNAL NOTED THAT SECTI ON 10A(9) WAS SUBSTITUTED BY THE FINANCE ACT 2000 WITH EFFECT FRO M 1 APRIL 2002. SECTION 10A(9) PROVIDED THAT WHERE DURING ANY PREVIOUS YEAR THE OWNERSHIP OR BENEFICIAL INTEREST IN AN UND ERTAKING OF THE BUSINESS IS TRANSFERRED BY ANY MEANS, THE DEDUCTION UNDER SUB- SECTION (1) SHALL NOT BE ALLOWED TO THE ASSESSEE FO R THE ASSESSMENT YEAR RELEVANT TO SUCH PREVIOUS YEAR AND THE SUBSEQUENT YEARS. THE TRIBUNAL NOTED THAT IF A TRAN SFER BETWEEN IOCL AND THE ASSESSEE WERE TO BE EFFECTED AFTER 1 A PRIL 2001, THAT WOULD RESULT IN THE UNDERTAKING BEING DISENTITLED T O THE BENEFIT UNDER SECTION 10A. THIS WAS A POINTER TO THE FACT T HAT 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 NO TED THAT THE PROVISIONS OF SECTION 10A(9) WERE OMITTED BY THE FI NANCE ACT 2003 WITH EFFECT FROM 1 APRIL 2004). 12. THE JUDGMENT OF THE DIVISION BENCH OF THIS COU RT IN GAEKWAR FOAM EXPLAINS THAT THE CONCEPT OF A RECONST RUCTION OF A BUSINESS IMPLIES THAT THE ORIGINAL BUSINESS IS NOT TO CEASE FUNCTIONING AND ITS IDENTITY IS NOT LOST. RECONSTRU CTION IS OF A BUSINESS ALREADY IN EXISTENCE AND THERE MUST BE A C ONTINUATION OF THE ACTIVITIES AND BUSINESS OF THE SAME INDUSTRIAL UNDERTAKING. WHERE THE OWNERSHIP OF A BUSINESS OR UNDERTAKING CH ANGES 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 SPLIT TING UP OF A BUSINESS, THE RELEVANT TEST IS WHETHER AN UNDERTAKI NG IS FORMED BY SPLITTING UP OF A BUSINESS ALREADY IN EXISTENCE. UN LESS THE FORMATION OF THE UNDERTAKING TAKES PLACE BY THE SPL ITTING UP OF A BUSINESS ALREADY IN EXISTENCE, THE NEGATIVE PROHIBI TION WOULD NOT BE ATTRACTED. IN THE PRESENT CASE, THE ENTIRE BUSIN ESS OF THE SOFTWARE UNDERTAKING WAS TRANSFERRED TO THE ASSESSE E. THE UNDERTAKING OF THE ASSESSEE WAS NOT FORMED BY THE S PLITTING UP OF THE BUSINESS. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 24 OF 35 13. FOR THE AFORESAID REASONS, THE FIRST QUESTION OF LAW WOULD HAVE TO BE ANSWERED IN THE AFFIRMATIVE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 30. IT IS CLEAR FROM THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COURT THAT (1) THE CONCEPT OF RECONSTRUCTION OF BUS INESS MEANS THAT THE ORIGINAL BUSINESS DOES NOT CEASE FUNCTIONING AND IT S IDENTITY IS NOT LOST. THE SAME BUSINESS IS CARRIED ON BY SUBSTANTIALLY THE SA ME PERSON, THEN THAT WOULD AMOUNT TO RECONSTRUCTION. BUT WHEN THE OWNERS HIP OF A BUSINESS OR UNDERTAKING CHANGES, IT WOULD NOT BE REGARDED AS RE CONSTRUCTION. IN CASE OF SALE, THERE CAN BE NO QUESTION OF RECONSTRUCTION. ( 2) IN THE CASE OF SPLITTING UP AN UNDERTAKING IS FORMED BY SPLITTING UP OF A BU SINESS ALREADY IN EXISTENCE. WHEN THE ENTIRE BUSINESS OF THE UNDERTAK ING IS TRANSFERRED AS A 'GOING CONCERN' THEN IT CANNOT BE SAID THAT THE TRA NSFEREE UNDERTAKING IS FORMED BY SPLITTING UP OF THE BUSINESS. 31. THE VIEW EXPRESSED BY THE HONBLE BOMBAY HIGH C OURT HAS BEEN FOLLOWED AND APPROVED BY THE MADRAS HIGH COURT ON A N IDENTICAL QUESTION OF LAW IN THE CASE OF CIT VS. HEARTLAND KG INFORMATION LTD. (MAD) 359 ITR 1 (MAD) . 32. AS FAR AS THE REFUSAL OF DEDUCTION U/S. 10B OF THE ACT IN THE CASE OF STC IS CONCERNED, WE ARE OF THE VIEW THAT THERE IS NO REQUIREMENT THAT 10B UNIT SHOULD BE IN EXISTENCE AS ON THE LAST DAY OF T HE PREVIOUS YEAR. THIS HAS BEEN THE MAIN PLANK OF ARGUMENT ON THE BASIS OF WHICH AO REFUSED ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 25 OF 35 DEDUCTION U/S. 10B OF THE ACT TO STC. THE VIEW OF THE AO IN THIS REGARD IS ERRONEOUS AND WAS RIGHTLY REVERSED BY THE CIT(APPEA LS). 33. CONSEQUENTLY, THE COMMON GROUNDS RAISED BY THE REVENUE IN ITS APPEALS ARE REJECTED. 34. IN THE APPEAL OF THE REVENUE IN THE CASE OF HT, ONE MORE REASON HAS BEEN ASSIGNED FOR DENYING THE BENEFIT OF DEDUCTION U/S. 10B OF THE ACT VIZ., THAT HT WAS NOT CARRYING ON A MANUFACTURING ACTIVIT Y. IN THIS REGARD, THE CASE OF THE AO IS MADE OUT IN THE ORDER OF ASSESSME NT AS FOLLOWS:- SECTION 10B ONLY PROVIDES INCENTIVES TO INDUSTRI ES ENGAGED IN ONLY MANUFACTURE OR PRODUCTION OF GO ODS OR ARTICLES OR COMPUTER SOFTWARE AND THE ACT DOES NOT USE THE WORD PROCESS AND THEREFORE INDUSTRIES ENGAGED IN THE PRO CESSING OF GOODS OR ARTICLES OR DEBARRED FROM THE BENEFIT OF T HIS SECTION. THE EXPRESSION MANUFACTURE INVOLVES THE CONCEPT OF CH ANGE EFFECTED TO A BASIC RAW MATERIAL RESULTING IN THE E MERGENCE OF, OR TRANSFORMATION INTO A NEW COMMERCIAL COMMODITY. WHE THER AN ARTICLE IS CONVERTED INTO DIFFERENT ARTICLE DEPENDS ON SEVERAL CRITERIA AND ONE OF THE ESSENTIAL TESTS IS WHETHER IN THE COMMERCIAL SENSE, THE ORIGINAL ARTICLE AS CEASED TO EXIST AND A NEW ARTICLE HAS TAKEN ITS PLACE. IT IS, HOWEVER, NOT NECESSARY THAT THE ORIGINAL ARTICLE OR MATERIAL SHOULD HAVE LOST ITS IDENTITY C OMPLETELY; ALL THAT IS IMPORTANT IS WHETHER WHAT HAS EMERGED AS A RESUL T OF THE OPERATION, IS A DIFFERENT COMMERCIAL COMMODITY, HAV ING ITS NAME, IDENTITY, CHARACTER AND END USE. [ARTHUR V. NEWELL VS. CIT (1997) 223 ITR 776 (AAR)]. THE TEST FOR DETERMINING WHETHER MANUFACTURE CAN BE SAID TO HAVE TAKEN PLACE IS WHET HER COMMODITY, WHICH IS SUBJECT TO THE PROCESS OF MANUF ACTURE CAN NO LONGER BE REGARDED AS THE ORIGINAL COMMODITY, BU T IS RECOGNIZED IN THE TRADE AS A NEW AND DISTINCT COMMO DITY. SECTION 10B LAYS DOWN ANOTHER CONDITION THAT IT SHO ULD NOT HAVE FORMED SPLITTING UP OF OR RECONSTRUCTION OF A BUSINESS ALREADY IN EXISTENCE. IN THE RECONSTRUCTION OF A BU SINESS, THERE IS A ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 26 OF 35 LIMIT OF TRANSFER OF ASSETS. FURTHER, SECTION 10B E MPHASIZES THAT THE ASSETS SO TRANSFERRED SHOULD NOT HAVE BEEN USED BY ANY OTHER PERSON IN INDIA. ON PERUSAL OF THE RECORDS, IT REVEALS THAT THE ASSE SSEE HAS NOT MAINTAINED DAY TO DAY PRODUCTION REGISTER DESCR IBING THE QUALITY OF ORE PRODUCED UNDER VARIOUS GRADES. MOST OF THE IRON ORE WAS PURCHASED FROM ITS SISTER CONCERN ON PLACEM ENT OF SPECIFIC ORDERS. SIMILARLY THE ASSESSEE ALSO PURCHA SED IRON ORE FROM OTHERS PLACING SPECIFIC ORDERS. ON PROCUREMENT OF MATERIALS, THERE IS NO PROCESS OF IRON ORE EXCEPT SEGREGATING QUALITY WISE PROCUREMENTS. 35. ON THE ABOVE ISSUE, THE ASSESSEE SUBMITTED BEFO RE THE CIT(APPEALS) AS TO HOW IT WAS ENGAGED IN PRODUCTION OR MANUFACTURE OF AN ARTICLE OR THING. THE ASSESSEE POINTED OUT THAT IT WAS CARRYING ON THE PRODUCTION AND MANUFACTURE OF IRON ORE AND THE EXPO RT OF THE SAME. THE MANUFACTURING AND PRODUCTION PROCESS INVOLVED BY TH E ASSESSEE IS THE CHANGE IN CHEMICAL AND PHYSICAL COMPOSITION OF THE IRON ORE. THE IRON ORE WHICH IS PURCHASED BY THE ASSESSEE IS BASIC AND VER Y RUDIMENTARY ELEMENT. IN ORDER TO REFINE IT AND PREPARE IT FOR EXPORT CER TAIN CHEMICAL AND PHYSICAL PROCEDURES HAVE TO BE UNDERTAKEN. THE FOREIGN CUSTO MER WOULD SPECIFY THAT THE IRON ORE CONTENT SHOULD BE AS PER A PARTIC ULAR SPECIFICATION. THIS SPECIFICATION WILL NOT BE MET WHEN RAW IRON ORE IS PURCHASED. THEREFORE WITH THE CHANGE IN CHEMICAL AND PHYSICAL COMPOSITION OF RAW IRON ORE, THE SAME WOULD BE READY FOR EXPORT. THIS WOULD INVOLVE A PRO CESS OF PRODUCTION AND MANUFACTURE. HENCE THE ASSESSEE WOULD FALL WITHIN T HE PROVISIONS OF ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 27 OF 35 SECTION 10B(2)(I) OF THE ACT. THE ASSESSEE GAVE THE FOLLOWING TABLE TO INDICATE THE CHEMICAL AND PHYSICAL CHANGE: COMMODITY PRODUCE/ MANUFACTURERS RAW IRON ORE ACQUISITION CHEMICAL SPECIFICATION PHYSICAL SPECIFICATIONS (A) IRON ORE FINES MEDIUM GRADE 52% TO 54% FE. 62% TO 64% FE. -10MM. (-)100 MESH MAX. 30% (B) IRON ORE FINES MEDIUM GRADE 52% TO 54% FE. 62% TO 64% FE. -10MM. (-)100 MESH MAX. 30% (C) IRON ORE FINES LOW GRADE 52% TO 54% FE. 60% TO 62% FE. -10MM. (-)100 MESH MAX. 30% (D) IRON ORE CALIBRATED LUMPS 52% TO 54% FE. 62% FE. (E) FOR STEEL PLANTS 52% TO 54% FE. 64% FE. -10MM. -40MM. ( 5% TOLERANCE) (F) FOR SPONGE IRON PLANTS 52% TO 54% FE. 56% TO 62% FE. -10MM. -40-MM. ( 5% TOLERANCE) 36. THE ASSESSEE ALSO SUBMITTED THAT SECTION 2(29BA) OF THE ACT, MANUFACTURE HAS BEEN DEFINED BY FINANCE NO.2 ACT, OF 2009 W.E.F. 01.04.2009. THIS DEFINITION CLEARLY CONTEMPLATES TH AT A NEW AND DISTINCT OBJECT OR ARTICLE WITH A DIFFERENT CHEMICAL COMPOSI TION OR INTEGRAL STRUCTURE WOULD AMOUNT TO MANUFACTURE OF AN ARTICLE OR THING. ADMITTEDLY IN THE FACTS OF THE PRESENT CASE, THIS CHEMICAL AND PHYSICAL COM POSITION OF RAW IRON ORE IS TRANSFORMED INTO EXPORT AND MARKETABLE COMMODITY WITH A REQUIRED ACCEPTABILITY OF THE FOREIGN BUYER. THIS PROCESS OF CHANGING THE ORIGINAL PRODUCT WITH A CHEMICAL COMPOSITION AND PHYSICAL CH ANGES WOULD AMOUNT TO MANUFACTURE. HENCE THE CONCLUSION OF THE ASSESSING OFFICER THAT THE ASSESSEE DOES NOT CARRY ON MANUFACTURE OR PRODUCTIO N ACTIVITY IS ERRONEOUS. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 28 OF 35 37. FURTHER RELIANCE WAS ALSO PLACED BY THE ASSESS EE ON THE DECISION OF THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH IN SESA GOA LTD., VS ASSESSING OFFICER, ITA NO.72/ONJ/2012 FOR AY 09-10 ORDER DATED 8.3.2013, WHEREIN IT WAS THAT SIMILAR ACTIVITY WOULD AMOUNT T O MANUFACTURE AND PRODUCTION AND IS NOT HIT BY SECTION 10B(2)(I) OF T HE ACT. FURTHER REFERENCE WAS ALSO MADE TO THE DECISION OF THE HONBLE APEX C OURT IN ASPINWALL AND CO. LTD., VS. CIT (2001) 251 ITR 323 (SC), WHEREIN IT WAS HELD THAT: IT IS TO BE UNDERSTOOD AS MEANING THE PRODUCTION OF ARTICLES FOR USE FROM RAW OR PREPARED MATERIALS BY GIVING SUCH MATERIALS NEW FORMS, QUALITIES OR COMBINATIONS WHETHER BY HAND LABOUR OR MACHINES. IF THE CHANGE MADE IN THE ARTICLES RESULTS IN A NEW AND DIFFERENT ARTICLE, THEN IT WOULD AMOUNT TO A MANUFACTURING ACTIVITY. 38. THE ABOVE SUBMISSIONS OF THE ASSESSEE FOUND FAV OUR WITH THE CIT(A). THE REVENUE IS AGGRIEVED AND HAS CHALLENGE D THE ORDER OF THE CIT(A) BEFORE US IN ITS APPEAL. 39. BEFORE US, THE LD. DR RELIED ON THE FINDINGS OF THE AO IN THE ORDER OF ASSESSMENT. THE LD. COUNSEL FOR THE ASSESSEE, ON T HE OTHER HAND, BROUGHT TO OUR NOTICE THE VERY RECENT DECISION OF THE ITAT GOA BENCH IN THE CASE OF SESA GOA LTD. V. ACIT, ITA NO.72/PNJ/12 FOR THE A.Y . 2009-10, ORDER DATED 8.3.2013, WHEREIN THE PANAJI BENCH EXTENSIVELY DISCUSSED THE ISSUE IN A CASE OF THE ASSESSEE WHO WAS ENGAGED IN THE BU SINESS OF PROCESS OF ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 29 OF 35 IRON ORE. THE FOLLOWING OBSERVATIONS OF THE PANAJI BENCH IN THIS REGARD ARE WORTH NOTICING :- 45.8 NOW COMING BACK TO THE ISSUE WHETHER AN ASSE SSEE WHO IS ENGAGED IN PROCESSING FOR UPGRADING AND MAKING THE COMMODITY FIT FOR EXPORT AND WHICH IS A 100% EOU APPROVED BY THE COMPETENT AUTHORITY CAN BE SAID TO HAVE BEEN ENGAGE D IN MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THING. W E HAVE NOTED THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THE SPECIAL BENCH IN THE CASE OF MADHU JAYANTI INTERNATIONAL LT D.(SUPRA). THE RELEVANT PARAGRAPH OF THIS JUDGEMENT HAS BEEN REPRO DUCED BY US IN THE PRECEDING PARAS. 45.9 LN THIS DECISION, SPECIAL BENCH HAS EXHAUSTIV ELY DEALT WITH THE PROVISIONS OF SECTION 10B, SECTION 2(29BA) OF T HE INCOME-TAX ACT, 1961 AND SECTION 2(R) OF THE SPECIAL ECONOMIC ZONES ACT, 2005; AND THE VARIOUS DECISIONS OF THE SUPREME COUR T AS WELL AS THE HIGH COURT WHICH DEALT WITH THE ISSUE AND EVEN THE DECISION OF CHOWGULE & CO (SC) AS WAS REFERRED BY US IN THE PRECEDING PARAS HEREIN ABOVE. THE SPECIAL BENCH CLEARLY NOTED IN THIS DECISION, THE DECISION OF THE SUPREME COURT IN TATA AGENCIES CASE 292 ITR 444 IN WHICH IT WAS HELD BLENDING AND PACKING OF TEA AMOUNTS TO PROCESSING AND IS NOT MANUFACTURING OR PRODUCING OF AN ARTICLE OR THING. IN DECISION THE SPECIAL BEN CH ALSO NOTED THAT KERALA HIGH COURT IN THE CASE OF TATA TEA LTD. VS. ACIT 338 ITR 285 (KER.) WHICH TOOK THE VIEW THAT 100% EOU EN GAGED IN PROCESSING CANNOT BE DENIED EXEMPTION ON THE BASIS THAT THE UNITS ARE NOT ENGAGED IN MANUFACTURE OR PRODUCTION. MOREO VER, ON FACTS EXACTLY SIMILAR TO THE FACTS OF THE ASSESSEE, IN TH E CASE OF CHOWGULE & CO. PVT. LTD. VS UNION OF INDIA (1981) 1 SCC 653 AIR 1981 SC 014, HONBLE SUPREME COURT WERE CONCERN ED WITH THE QUESTION WHETHER THE BLENDING OF ORE, WHILST LO ADING IT IN THE SHIP BY MEANS OF THE MECHANICAL ORE HANDLING PLANT, CONSTITUTED MANUFACTURE OR PROCESSING OF ORE FOR SALE WITHI N THE MEANING OF SECTION 8(3)(B) AND RULE 13 OF CENTRAL SALES TAX ACT, 1956. THE HONBLE SUPREME COURT, IN CONSTRUING THE EXPRES SION PROCESSING ALLOWED THE APPEAL OF THE ASSESSEE, IN CHOWGULE & CO. PVT. LTD. (SUPRA), HOLDING, INTER ALIA, THAT WH ERE ANY COMMODITY IS SUBJECTED TO A PROCESS OR TREATMENT WI TH A VIEW TO ITS DEVELOPMENT OR PREPARATION FOR THE MARKET IT WOULD AMOUNT TO PROCESSING OF THE COMMODITY WITHIN THE MEANING O F CENTRAL ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 30 OF 35 SALES TAX ACT, 1956. THE SPECIAL BENCH ULTIMATELY A LLOWED EXEMPTION TO THE ASSESSEE ON THE SIMILAR ISSUE WHER E THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF BLENDING THE TEA FOR UPGRADING FOR MARKETING. THUS, IN VIEW OF THE DECISION OF THE SP ECIAL BENCH AND OTHER DECISIONS DISCUSSED IN THE PRECEDING PARA GRAPHS AND THAT OF HONBLE SUPREME COURT IN THE CASE OF CHOWGU LE & CO. (SUPRA) AS WELL AS DEFINITION OF MANUFACTURE AS I NSERTED W.E.F. 14.2009 BY WAY OF SECTION 2(29AB) OF THE INCOME TAX ACT AS REFERRED TO BY BOTH THE PARTIES, WE HOLD THAT ALL T HE THREE 100% EOU ENGAGED IN PROCESSING SO AS TO MAKE CRUDE ORE A ND WASTE I.E. TAILINGS USABLE OR MARKETABLE ARE ENTITLED FOR EXEMPTION U/S 10B SUBJECT TO THE OTHER CONDITIONS FOR EXEMPTION U NDER SECTION 10B ARE BEING FULFILLED. 40. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AR E OF THE VIEW THAT THE DECISION RENDERED BY THE PANAJI BENCH IN THE CA SE OF ASSESSEE CARRYING ON SIMILAR ACTIVITY IS SQUARELY APPLICABLE TO THE P RESENT CASE AND FOLLOWING THE SAME, WE HOLD THAT THE ASSESSEE WAS ENGAGED IN MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THING AND THEREFORE FUL FILLED THE CONDITIONS LAID DOWN IN SECTION 10B(2)(II) & (III) OF THE ACT. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY MERIT IN THE APPEAL FILED BY THE REVENUE. 41. CONSEQUENTLY, THE APPEALS BY THE REVENUE ARE DI SMISSED. CO 43/B/13 (CROSS OBJECTION BY STC) 42. THE CROSS OBJECTIONS ARE PURELY SUPPORTIVE OF THE ORDER OF THE CIT(APPEALS) AND THEREFORE REQUIRE NO ADJUDICATION. CONSEQUENTLY THE SAME IS DISMISSED. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 31 OF 35 CO 84/B/13 (CROSS OBJECTION BY HT) 43. THERE IS A DELAY OF ABOUT 115 DAYS IN FILING TH E CO BY THE ASSESSEE. THE MANAGING PARTNER OF HT HAS FILED AN AFFIDAVIT W HEREIN HE HAS STATED THAT THE CO AGAINST THE ORDER OF THE CIT(APPEALS) W AS BY INADVERTENCE FILED BEFORE THE OFFICE OF CIT ON 1.4.2013 WITHIN TIME FO R FILING THE APPEAL BEFORE THE TRIBUNAL. THE CO OUGHT TO HAVE BEEN FILED IN T HE OFFICE OF ITAT INSTEAD OF FILING THE SAME BEFORE THE CIT. THEREAFTER ON C OMING TO KNOW THE CORRECT POSITION, THE CO WAS FILED IN THE OFFICE OF ITAT. 44. WE HAVE CONSIDERED THE REASONS GIVEN IN THE AFF IDAVIT AND ARE OF THE VIEW THAT THE SAME ARE SUFFICIENT CAUSE FOR NOT FIL ING THE APPEAL WITHIN TIME. THE DELAY IN FILING THE CO IS ACCORDINGLY CONDONED. 45. GROUNDS NO.1 TO 4 RAISED IN THE CO ARE SUPPORTI VE OF THE ORDER OF THE CIT(APPEALS) AND THEREFORE REQUIRE NO ADJUDICAT ION. 46. GROUND NO.5 RAISED IN THE CO READS AS FOLLOWS:- 5. THE ASSESSING OFFICER AND APPELLATE COMMISSIONE R COMMITTED AN ERROR IN HOLDING THAT THE LOSS DUE TO MANUFACTURE, PRODUCTION, LOADING, UNLOADING, SCREENING, SIZING, MIXING, TRANSPORTATION, CHEMICAL AND PHYSICAL CHANGES WOULD AMOUNT TO NORMAL EXIGENCY OF BUSINESS IN IRON ORE WHICH IS 6. 3% CLAIMED BY THE ASSESSEE AND FULLY JUSTIFIED. 47. THIS GROUND CAN BE CONVENIENTLY DEALT WITH GROU ND NO.4 RAISED BY THE REVENUE IN ITS APPEAL WHICH READS AS FOLLOWS:- ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 32 OF 35 4. THE CIT(APPEALS) OUGHT TO HAVE APPRECIATED THE FACTS NARRATED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS NOT MAINTAINED PROPER DOCUMENTS FOR CL AIMING OF SHORTAGE OF IRON ORE. 48. WHILE CONCLUDING THE ASSESSMENT IN THE CASE OF HT, THE AO MADE AN ADDITION OF RS.4,62,37,200 ON ACCOUNT OF SHORTAG E OF IRON ORE AND IRON ORE FINES FOR THE FOLLOWING REASONS:- ON VERIFICATION OF THE DETAILS FURNISHED, IT IS NO TICED THAT THE ASSESSEE FIRM HAS CLAIMED SHORTAGE / EXCESS (PRODUC TION LOSS) OF IRON ORE (ROM) TO THE EXTENT OF 32,103 M.TS AND SHO RTAGE / EXCESS (PRODUCTION LOSS ) OF IRON ORE ( C-ORE & FIN ES) TO THE EXTENT OF 11,921 M.TS. WHEN THE ASSESSEE WAS ASKED TO RECONCILE, IT IS STATED THAT DUE TO TRANSPORTING AND HANDLING THERE IS BOUND TO BE GROUND LOSS AND PLEADS TO ALLOW SHORTAGES. THE S HORTAGE CLAIMED ON IRON ORE ( ROM AND IRON ORE (C-ORE & FIN ES) IS ALLOWED AT 3% OF 11,921 M.TS. AND THE DIFFERENCE IS DISALLOWED, WHICH IS WORKED OUT AS UNDER: SHORTAGE OF IRON ORE (ROM) 32,103 X RS.900/- = RS .2,88,92,700 SHORTAGE OF IRON ORE (C-ORE & FINES): 11,921 358 [11,921 X 3% = 358]= 11,563 X RS.1,500/- = RS.1,73,44,500 RS.4,62,37,200 49. ON APPEAL BY THE ASSESSEE, IT WAS SUBMITTED BY THE ASSESSEE THAT THE AO OUGHT TO HAVE ALLOWED SHORTAGE OF IRON ORE N OT ON THE TOTAL QUANTITY HANDLED BUT ON THE SHORTAGE OF QUANTITY CLAIMED AT 11,921 M.T. IT WAS SUBMITTED THAT THE AO IF HE ALLOWS SHORTAGE CLAIM A T 3% IT SHOULD BE ON THE TOTAL QUANTITY HANDLED AND NOT ON THE SHORTAGE QUAN TITY. ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 33 OF 35 50. THE CIT(APPEALS) ON THE AFORESAID ISSUE HELD AS FOLLOWS:- 9. INSPITE OF THE FACTS PRESENTED IN THIS REGARD THROUGH THE LETTER DATED 29.12.2011 (COPY ENCLOSED), THE ASSESS ING OFFICER HAS NOT BROUGHT ON RECORD ANY BASIS FOR DISALLOWING THE CLAIM OF SHORTAGE OF IRON ORE AT 32103 M.TS IN HANDLING AND 11563 M.T. (11921-358) IN PRODUCTION. HE WAS DUTY BOUND TO BRI NG ON RECORD MINIMUM MATERIAL IN SUPPORT OF HIS CONCLUSION, WHIC H HE FAILED TO DO SO. HE SHOULD HAVE AT LEAST BROUGHT ON RECORD CLAIMING LOSSES OF COMPARABLE CASES TO SHOW HOW THE ASSESSEE HAS CLAIMED EXCESSIVE LOSS. 10. IN ASSESSEES WRITTEN SUBMISSION IT IS MENTION ED THAT THE APPELLANT HAS PURCHASED RUN OF MINES (ROM) WHICH IS RAW MATERIAL FOR PRODUCTION OF THE EXPORT SALE OF IRON ORE. THE APPELLANT HAS CARRIED OUT CRUSHING, SCREENING, SIZI NG, MIXING, GRADING, BLENDING, BENEFICIATION INTO SALEABLE / EX PORT QUALITY OF IRON ORE WITH ORDERED SPECIFIC IRON FE CONTENT, WHI CH IS 62% FE., MINIMUM GRADE REQUIRED FOR EXPORT. THESE ACTIVATES ARE INTEGRATED AND AMOUNTS TO PRODUCTION OF IRON ORE AS ALREADY SUBMITTED, RELYING ON THE DECISION OF THE HONBLE A PEX COURT IN THE CASE OF N/S. SESA GOA LTD., (SUPRA), WHICH IS T HE LOCUS CLASSICUS ON THE SUBJECT. THE APPELLANT ASSESSEE CO ULD NOT HAVE SOLD THE ROM, WHICH IS THE RAW MATERIAL FOR PRODUCT ION OF THE REQUIRED IRON ORE WITH SPECIFIED FE CONTENT. IT MAY ALSO BE MENTIONED THAT ANY EXPORT OF IRON ORE BELOW THE CON TENT SPECIFIED AND AGREED UPON BETWEEN THE APPELLANT AND THE IMPOR TER ABROAD WOULD ENTAIL HUGE LOSSES BY WAY OF REJECTION AND DE MURRAGES. HENCE, THE GROUND OF THE ASSESSING OFFICER IS UNSUS TAINABLE ON FACTS AND IN LAW. I HAVE GONE THROUGH THE FACTS OF THE CASE CONTENTS IN THE ASSESSMENT ORDER AND ASSESSEES WRITTEN SUBMISSION. THE ASSESSEE HAS CLAIMED 6.4% OF SHORTAGE ON TOTAL TURNOVER AGAI NST THE 3% ON WASTAGE ALLOWED BY THE AO. THE AO SHOULD HAVE VERIF IED COMPARATIVE CASES OR COMPARATIVE ANALYSIS SHOULD HA VE MADE TO KNOW THE AVERAGE WASTAGE AND THE AO SHOULD ALLOW 3% ON TOTAL QUANTITY. THIS GROUND OF ASSESSEE IS PARTIALLY ALLO WED. 51. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. AGGRIEVED BY THE ORDER OF THE ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 34 OF 35 CIT(APPEALS) IN NOT DELETING THE ENTIRE ADDITION, T HE ASSESSEE HAS RAISED THE CO BEFORE THE TRIBUNAL. 52. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE QUAN TITY OF SHORTAGE ALLOWED SHOULD BE ON THE TOTAL QUANTITY HANDLED AND NOT ON THE SHORTAGE QUANTITY. THE CIT(A) IN OUR VIEW HAS RIGHTLY HELD THAT LOSS SHOULD BE ALLOWED AT 3% OF THE TOTAL QUANTITY AS AGAINST THE ACTION OF THE AO IN ALLOWING THE SAME ON THE QUANTITY OF WASTAGE. WE D O NOT FIND ANY COMPARATIVE CASE OR PAST HISTORY GIVEN BY THE ASSES SEE ON THIS ASPECT. NOR WERE THE FIGURES OF LOSS IN THE INDUSTRY GIVEN. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE RELIEF GIVEN TO THE ASS ESSEE BY THE CIT(A) IS JUST AND SUFFICIENT. WE FIND NO GROUNDS TO INTERFERE WI TH THE ORDER OF THE CIT(A). CONSEQUENTLY THE RELEVANT GROUNDS OF THE REVENUE AN D THE CROSS- OBJECTIONS OF THE ASSESSEE ARE DISMISSED. 53. IN THE RESULT, THE APPEALS BY THE REVENUE AND C .O.S BY THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 7 TH DAY OF MARCH, 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 7 TH MARCH, 2014 . /D S/ ITA NOS. 1044 & 1055/BANG/12 & CO NOS.43 & 84/BANG/2013 PAGE 35 OF 35 COPY TO: 1. REVENUE 2. ASSESSEE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.