CIT V. M/S VETO ECLECTRO POWER

ITA/314/2011

AI Insights

The case revolves around the appeal by the Commissioner of Income Tax, Jaipur-II against M/s Veto Electropowers concerning the deduction under section 10B of the Income Tax Act, 1961. M/s Veto Electropowers, after acquiring M/s Anjali Exports, claimed deductions for both entities. The primary legal question was whether the Tribunal was justified in allowing the deduction for the acquired unit despite it not having the mandatory certificate of Export Oriented Unit at the time of acquisition. The Tribunal and the High Court found that the continuity of business and the nature of the acquisition did not disrupt the eligibility for the deduction under section 10B.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 720186 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 11-09-2017
• Assessment Year: misc
• Other Referred Cases: Tech Books Electronics Services Pvt. Ltd. v/s Addl.CIT Range -16 (100 ITD 125)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MAHENDRA GARGIEYA
• Assessee Lawyers: R B MATHUR
• Keywords: Deduction under section 10B; Export oriented unit; Income tax appeal; Acquisition of business
• Section: 10B

Judgement Text

"HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 314 / 2011 COMMISSIONER OF INCOME TAX, JAIPUR-II ,JAIPUR ----Appellant Versus M/s VETO ELECTROPOWERS, C-55, SAKET COLONY, ADARSH NAGAR, JAIPUR ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. Mathur For Respondent(s) : Mr. Mahendra Gargieya _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 11/09/2017 1. By way of this appeal, the Department has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal preferred by the Department. 2. While admitting the matter on 10.04.2013, the court has framed the following question of law:- “Whether in the facts and circumstances of the case that ITAT was justified in law in allowing the benefit of deduction u/s. 10B even to the acquired unit of M/S. Anjali Exports despite of the facts the same was not having certificate of Export Oriented Unit which was mandatory requirement” 3. The facts of the case are that the assessee is a partnership concern and was established in the year 2000. The assessee was claiming deduction u/s 10B of 100% of EOU. The firm earlier was known as M/s. V.K. Exports. On 30.12.2006, reconstitution of business was made and new partner has introduced & Old partner (2 of 7) [ITA-314/2011] retired. After reconstitution of business, the name is changed to M/s Veto Electro Power. On 15.01.2007, the assessee firm has purhcased another undertaking named M/s Anjali Exports through MOU. M/s Anjali Exports was established in the year 2001 and was claiming deduction u/s 10B. On 24.03.2007, M/s Veto Electro Power was converted into company named M/s Veto Electro Power Pvt. Ltd. And M/s Veto Electro Power Pvt. Ltd. has signed another MOU for purchase of M/s Anjali Exports on 15.01.2007 and the assessee firm has shown purchase of M/s Anjali Exports retrospectively from 01.04.2006. Similarly, MOU signed by M/s Veto Electro Power Pvt. Ltd. On 24.03.2007 and purchase of M/s Anjali Exports was shown retrospectively from 01.04.2006. The books of accounts of M/s Anjali Exports are not maintained separately. The books of accounts of M/s Anjali Exports and M/s Veto Electro Power are merged. No separate audit of these accounts was made. In case of assessee following points have emerged- 1. M/s Veto Electro Power is formed after reconstitution of M/s V.K. Exports on 30.12.2006. 2. M/s Veto Electro Power has purchased M/s Anjali Exports through slump sales amounting to Rs.3 crores. 3. The partners and name of assessee firm has changed during the reconstitution of business. 4. After purchase of M/s Anjali Exports, both the undertaking have merged and reconstitution of the business came into existence because all the old plant & machinery, assets, liabilities, etc. Have purchased by M/s Veto Electro Power. 5. The books of accounts of M/s Anjali Exports and M/s Veto Electro Power have merged. 6. No separate audit have made of M/s Anjali Exports and M/s Veto Electro Power. (3 of 7) [ITA-314/2011] 7. The ownership of undertaking M/s Anjali Exports have changed. The assessee firm has claimed deduction u/s 10B of Income Tax Act, 1961 for both the undertakings, M/s Anjali Exports & M/s Veto Electro Power in its return. 4. The counsel for the appellant has taken us to the order of AO and CIT (A) and contended that CIT(A) has seriously committed an error taking into consideration that income of Anjali Exports is of the previous year therefore, he cannot be allowed benefit for the whole year. He particularly invited our attention to the observations by the CIT (A) which reads as under:- I have considered facts of the case and arguments taken by Sh. Shah quite carefully. Basic facts of the case regarding reconstitution of the firm, introduction of the new partners, retirement of the partner, change of name of the firm as M/s Veto Electro Powers (formally known as M/s V.K. Exports), acquisition of undertaking namely M/s Anjali Exports and 100% EOU unit w.e.f 1.4.2006 by the MOU dt.15.1.2007 and conversion of M/s Veto Electro Powers into a Pvt.Ltd.Co. w.e.f. 20.3.2007 as M/s Veto Electro Powers (india) Pvt.Ltd. are already reproduced in earlier part of this appellate order and therefore, it is not considered necessary to reproduce them again. On factual appreciation of development of the events it is undisputedly clear that M/s V.K. Exports after reconstitution of the firm had changed its name to Veto Electro Powers w.e.f 6.12.2006 and thereafter, by a MOU dt.15.1.2007 M/s Veto Electro Powers acquired the export oriented undertaking from a partnership firm namely M/s Anjali Exports. Such industrial undertaking was a 100% EOU unit set up by M/s Anjali Exports on 2.1.2002 at F-6, Malviya nagar Ind. Area, Jaipur which has commenced manufacturing operation on 18.7.2004 which was claiming exemption /deduction in respect of the income of the said unit u/s 10B of I.T.Act which was also granted by the assessing officer of M/s Anjali Exports. I have also gone through the copy of MOU dt.15.1.2007 and copy of agreement of assignment of business with Anjali Exports according to which M/s Anjali Exports was having a manufacturing unit at F-6, Malviya industrial Area, Jaipur and w.e.f 1.4.2006 all the assets and liabilities of said unit said business as on 1.4.2006 becomes the assets and (4 of 7) [ITA-314/2011] liability of the appellant firm. It is clear that the appellant firm had acquired on slump sale basis the aforesaid 100% EOU unit set up by M/s Anjali Exports at F-6, Malviya Nagar Ind. Area, Jaipur. Thereafter, the appellant firm vide their letter dated 11.1.2007 to the Development Commissioner, Noida Special Economic zone has intimated regarding change in the name of partnership firm from M/s V.K.Exports to M/s veto Electro Powers and regarding changes of partners in the partnership firm and in response to that Assistant Development Commissioner from the office of Development Commissioner Noida Special Economic Zone vide his two letters dt.18.1.2007 has informed the noting regarding changes in the partners and regarding change in the name from M/s V.K Exports to M/s Veto Electro Powers. Further, from the perusal of copy of certificate of Importer Exporter Code (IEC) Number dated 22.8.2001 with endorsement having mention of different 3 units which includes one unit at F-6, Malviya Ind. Area, Jaipur earlier owned by M/s Anjali Exports which makes it clear that in the certificate issued by Jt. Development Commissioner, Noida Special Economic Zone the 100% EOU of M/s Anjali Exports is covered through the endorsement and since, by the time of issuing this endorsement the appellant firm had converted into a Pvt.Ltd.CO. w.e.f 20.3.2007 therefore, the name of the unit in the certificate was stated as M/s Veto Electro Powers India Pvt.Ltd. This is a case of appellant firm for the accounting year upto 19.3.2007 because thereafter, it has converted into a Pvt.Ltd.Co. With this factual discussion supported with documentary evidence it is clear that the appellant firm had acquired all the assets and liabilities for the 100% EOU of M/s Anjali Exports situated at F-6, Malviya Ind. Area, Jaipur and this fact is evidenced by the endorsement made by Jt. Development Commissioner, Noida Special Economic zone to the original certificate issued to M/s V.K. Exports whose name has been changed as M/s Veto Electro Powers which is the case of present appellant firm. It is clear that this is not a case of new concern coming into existence but the manufacturing and export activity being run in 100% EOU by M/s V.K. Exports and M/s Anjali Exports was continuing as such. Further from the perusal of copy of P&L A/c and Balance Sheet of M/s Veto Electro Powers (formally V.K. Exports) as on 19.3.2007 and for the period from 1.4.2006 to 19.3.2007 it is clear that separate figures of various accounts namely Income & Expenditure for Anjali Exports and veto Electro Powers were given alongwith consolidated (5 of 7) [ITA-314/2011] figure of the audited accounts and therefore, the officer is assessing factually incorrect in his finding that there were no separate books of accounts and separate audit of M/s Anjali Exports and M/s Veto Electro Powers. In fact, with such separate audited figures only the assessing officer could come to know about the exemption claimed u/s 10B pertaining to 100% EOU of M/s Anjali Export which was disallowed at Rs 8,25,38,959/-. The assessing officer is also not correct in his observation that M/s Anjali Export has completely merged with M/s Veto Electro Power because as per MOU M/s Anjali Export had transferred sold assets liabilities of its 100% EOU at F-6, Malviya Nagar Ind.Area, Jaipur. Such acquiring of business of M/s Anjali Exports cannot be said as reconstruction of business as referred by assessing officer and on this issue there is direct judgment of ITAT Delhi bench in the case of Tech Books Electronics Services Pvt. Ltd. v/s Addl.CIT Range -16 (100 ITD 125) in which Hon'ble ITAT has referred the term reconstruction as per the dictionary meaning as given in judicial dictionary by K.J.Iyer where the word reconstruction is expressed by synonymous \"re- build\". Thus, if there is change of ownership from one person to another person but the business continuous to be the same it cannot be said that the undertaking is formed as a result of reconstruction. Further, by referring the conversion of the firm into company Hon'ble ITAT has observed that it could not be said that there was any transfer. On incorporation of a company consequences as per the provisions of the Companies Act,1956 and other statutory provisions follow ensue. Thus, there is merely statutory vesting and it could be said that EOU owned by assessee company was formed as a result of reconstruction of EOU owned by the firm. Further, the PAN of prior and post acquisition of appellant firm i e. M/s Veto Electro Power is the same and all other registration of M/s V.K. Exports such as IEC number, registration with Ministry of Commerce and Industry, Excise and Custom Authorities etc. continued to remain in same manner in new name namely M/s Veto Electro Powers. This is a clear case of acquisition of an entity of 100% EOU unit by the another 100% EOU unit through slump sale. It shall not be out of place to analyze that the re-organization of M/s Veto Electro Powers and M/s Anjali Exports is complete tax neutral exercise not aimed to gain any undue tax advantage. As per provisions of S.10B(1) the deduction in respect of an undertaking and it is not to the assessee and therefore, deduction u/s 10B is qua undertaking and qau (6 of 7) [ITA-314/2011] assessee and therefore, the change in the ownership of an undertaking will have no effect on the eligibility of the undertaking to claim deduction u/s 10B of I.T. Act. As per para No 6.34(6) of the foreign trade policy the name can be changed and the two firms can also be merged as per provisions of clause 6.34(10) of the said policy. Further, the observation of assessing officer regarding provisions of S.10B (7A) for denying the deduction exemption on the ground that as per this provision the benefit is available to only Indian Companies and not to other entity is far from correct. The said sub section only prohibits the companies other than Indian companies but the AO has conveniently ignored the provisions of sub Section 9 and 9A of 10B which were omitted w.e.f. 1.4.2004 by Finance Act,2003 and with such omission it makes prominently clear that there is no such ban now on the availability of such deductions in case of the firms. Rather in the explanatory memorandum it is clear that sub section 9 and 9A become redundant so that the tax benefit is not lost on the change of ownership of the eligible undertaking. With this discussion and analysis of facts and evidence in my considered view the assessing officer was not justified in disallowing the deduction / exemption claimed u/s 10B of I.T. Act in respect of 100% EOU of M/s Anjali Exports at Rs 8,25,38,959/- and AO is thereby directed to allow the same. 5. He also pointed out the finding of the Tribunal which reads as under:- 37. The other objection of the AO is that an agreement of assignment of business was also entered by Ms. Anjali Exports and M/s. Veto Electric Power Pvt. Ltd.. therefore there was a contradiction in MOUs entered into by assessee and the successor company. This is a technical objection of the AO. There will be no impact on the revenue either M/s. Anjali Exports is taken over by assessee firm or by its successor company. The successor company is not a new entity as the same was converted from partnership firm to private limited company. All its partners were taken as Director or shareholder of the successor company. Upto 19.3.2007 there were two firms in existence. M/s. Anjali Exports were taken over by assessee firm and, therefore, the profits of M/s Anjali exports have been shown in the hands of the assessee firm. From 20.3.2007 the asses firm has converted into a private limited company and from that date the successor (7 of 7) [ITA-314/2011] company is doing the business in the name of private limited company. In the name of private limited company again there is no dispute in respect to allowability of deduction under section 10B. Only condition is that section 10B deduction is allowable for 10 years. It is not a case that the private limited company will take deduction for another 10 years. For the years the firm M/s. Veto Electric Power formerly known as M/s, V.K Exports have allowed deduction in those yeas will be excluded from the period of 10 years and for remaining period only the successor company in our considered view can claim deduction under section 10B. Therefore, there is no case of department that by an act of entering into MOU the company is extending the period of deduction Rather the facts are reversed as M/s. Anjali Exports who started its operation from assessment year 05-06 was entitled for deduction for 10 years. However, the business of M/s. Anjali exports was taken over by assessee firm, therefore, Ms. Anjali Export lost its deduction for remaining years i.e about 7 years, as the deduction can be allowed only for 10 years i.e. in case of M/s. Veto Electric Powers or in case of M/s. Veto Electric Power Pvt. Ltd. Therefore, for this reason also we see no infirmity in the finding of ld CIT (A) in holding that deduction under 10B is allowable. 6, In our considered opinion, MOU was entered on 24.03.2007 in that view of the matter any benefit will be taken from the date of MOU and the effect will be given in the relevant year. 7. In that view of the matter, the view taken by the Tribunal is required to be confirmed. The issue is answered in favour of assessee against the Department. 8. The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Gandhi/Gourav-38 "