ACIT, Bangalore V. M/s. Himatsingka Seide Ltd., Bangalore

ITA 1379/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57465 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 03-01-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 03-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARCHANA CHOWDHRY CITII
• Assessee Lawyers: P TIWARI
• Keywords: Business income; Benefit of exemption; Capital expenditure
• Section: 143(3); 80HHC; 10B

Judgement Text

ITA NO.1379/BANG/2010 PAGE 1 OF 3 2 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1379/BANG/2010 (ASST. YEAR 2006-07) THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-11(4), BANGALORE. - APPELLANT VS M/S HIMATSINGKA SEIDE LTD., NO.10/24, KUMARAKRUPA ROAD, HIGH GROUNDS, BANGALORE-1. - RESPONDENT PA NO.AAACH3507N DATE OF HEARING : 03/01/2012 DATE OF PRONOUNCEMENT : 27/01/2012 APPELLANT BY: SMT. ARCHANA CHOWDHRY, CIT-II ADVOC ATE RESPONDENT BY :SHRI. P. TIWARI, CA O R D E R PER N. BARATHVAJA SANKAR, VICE PRESIDENT : THIS IS AN APPEAL PREFERRED BY THE REVENUE, IN THE CASE OF THE ASSESSEE, M/S. HIMATSINGKA SEIDE LTD., BANGALORE, A GAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), DATED.22.09.2 010. THE RELEVANT ASSESSMENT YEAR IS 2006-07. THE ONLY ISSUE THAT IS RAISED IS WHETHER THE COMMISSIONER OF INCOME-TAX (APPEALS) IS JUSTIFIED I N HOLDING THAT THE ASSESSEE COMPANY IS ENTITLED TO DEDUCTION UNDER SEC TION 10B OF THE IT ACT, 1961, IN RESPECT OF FILATI UNIT/DIVISION. ITA NO.1379/BANG/2010 PAGE 2 OF 3 2 2. BRIEFLY STATED, THE FACTS ARE AS FOLLOWS. THE A SSESSEE IS A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF NATURAL/BLENDED SILK FABRICS AND VARIOUS KINDS OF Y ARNS. THE RETURN OF INCOME WAS FILED FOR THE CONCERNED ASSESSMENT YEAR ON 28.11.2006, DECLARING BUSINESS INCOME OF RS.5,46,64,296/- AFTER CLAIMING DEDUCTION U/S.10B OF THE IT ACT AMOUNTING TO RS.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 ASSESS MENT WAS COMPLETED VIDE ORDER DATED.31.12.2009. IN THE SCRUTINY ASSES SMENT, THE ENTIRE CLAIM OF DEDUCTION U/S.10B AMOUNTING TO RS.37,51,36,552/- WA S DISALLOWED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER, ON THE B ASIS OF ANNUAL REPORT AND THE COST AUDIT REPORT FOR VARIOUS YEARS HELD TH AT THE ASSESSEE COMPANY HAD TWO INTEGRATED BUSINESS UNITS, NAMELY, FABRIC D IVISION AND YARN DIVISION. IN THOSE REPORTS, THE ASSESSEE'S PERFORMA NCE WAS CATEGORIZED UNDER THE TWO PRODUCTION UNITS NAMELY THE FABRIC AND YARN PRODUCTION UNITS, AND THUS THE BUSINESS OF FABRIC DIVISION WHICH WAS BROU GHT INTO EXISTENCE IN THE YARN DIVISION WAS STILL AN INTEGRAL PART OF FABRIC DIVISION. THEREFORE, IT WAS CONCLUDED THAT THE FABRIC PRODUCTION SHOWN UNDER THE YARN DIVISION WAS ITA NO.1379/BANG/2010 PAGE 3 OF 3 2 NOTHING BUT THE RECONSTRUCTION OF THE EXISTING BUSI NESS OF SEIDI DIVISION (PARA 35 OF IMPUGNED ASSESSMENT ORDER). IT WAS FURTHER HELD BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD BROUGHT THE BUSINESS OF SEIDI DIVISION TO THE 'YARN DIVISION' FOR THE SOLE PURPOS E OF INCOME-TAX BENEFITS AND THUS DECLINED THE DEDUCTION U/S.10B OF THE ACT. THE ASSESSING OFFICER ALSO RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS NOTA BLY REPORTED IN 107 ITR 195, 137 ITR 851 AND 108 ITR 367. THE RELEVANT FIN DING OF THE ASSESSING OFFICER READS AS FOLLOWS : 34. FIRSTLY, IT IS UNDISPUTED FACT THAT THE COMPAN Y IS ENTITLED FOR DEDUCTION U/S 10B IN RESPECT OF YARN DIVISION REGAR DING PROFITS ON SALE OF YARN. AS STATED EARLIER, THE COMPANY HA S SET UP NEW EOU UNIT UNDER THE NOMENCLATURE YARN DIVISION OR YARN UNIT (ALSO KNOWN AS FILATI UNIT) AND COMMENCED COMMERCIA L PRODUCTION OF SPUN SILK AND BLENDED YARNS ON 1.4.08 . THIS UNIT WAS SET UP UNDER TECHNICAL COLLABORATION WITH M/S. FILATI BURRATI SPA OF ITALY. THIS DIVISION IS ENTITLED TO DEDUCTI ON U/S 10B OF THE IT ACT FROM 1998-99 TO AY 2008-09. 35. HOWEVER, THE ABOVE UNIT IS NOT ENTITLED FOR DE DUCTION U/S 10B IN RESPECT OF FABRIC BUSINESS WHICH WAS BROUGHT INT O EXISTENCE UNDER THE YARN DIVISION FROM SEIDE DIVISION. ON PE RUSAL OF THE ANNUAL REPORTS AND ON PERUSAL OF THE COST AUDIT REP ORTS FOR VARIOUS YEARS, WHAT IS CLEAR THAT THE COMPANY HAS T WO INTEGRATED BUSINESS UNITS, I.E., FABRIC DIVISION (FABRIC PRODU CTION UNIT) AND YARN DIVISION (YARN PRODUCTION UNIT). THE GIST S OF THE SAID REPORTS ARE APPENDED AS ANNEXURE-III FOR READY REFE RENCE. IN ALL THESE REPORTS, THE COMPANYS PERFORMANCE HAS BEEN C LASSIFIED UNDER THE TWO PRODUCTION UNITS, NAMELY, FABRIC PROD UCTION UNIT AND YARN PRODUCTION UNIT. THUS, THE BUSINESS OF FA BRIC DIVISION WHICH WAS BROUGHT INTO EXISTENCE IN YARN DIVISION I S STILL AN INTEGRAL UNIT OF FABRIC PRODUCTION UNIT. THEREFORE , THE FABRIC PRODUCTION SHOWN UNDER YARN DIVISION IS NOTHING BUT THE RECONSTRUCTION OF THE EXISTING BUSINESS OF SEIDE DI VISION. FROM THE DETAILS THAT THE COMPANYS PRODUCTION OF FABRIC OVER THE YEARS IS WELL WITHIN THE INSTALLED CAPACITY OF THE FABRIC DIVISION SHOWS THAT WHAT COMPANY CAN PRODUCE UNDER FABRIC DIVISION IS BEING ITA NO.1379/BANG/2010 PAGE 4 OF 3 2 PRODUCED UNDER YARN DIVISION AND EVEN SUCH PRODUCTI ON IS ON ACCOUNT OF SHIFTING OF PLANT AND MACHINERY FROM FAB RIC DIVISION TO YARN DIVISION AND ADDITION OF NEW MACHINERY IN REGU LAR COURSE OF FABRIC BUSINESS UNDER YARN DIVISION. FROM THE ABOV E DETAILED DISCUSSION, IT IS CLEAR THAT THE ASSESSEE COMPANY H AS BROUGHT BUSINESS OF SEIDE DIVISION TO YARN DIVISION FOR THE PURPOSE OF ONLY INCOME-TAX BENEFITS. EVEN THE ACCOUNTS OF SEI DE 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 REVEN UES REALIZED THEREON ARE IN CONFORMITY WITH THE GENERAL TRENDS O F 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 SEID E 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. THERE FORE, THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION U/S 10B OF T HE IT ACT. 36. HOWEVER, THE ASSESSEE COMPANY IS ENTITLED TO D EDUCTION U/S 10B ONLY IN RESPECT OF PROFITS ON SALE OF YARN. TH E PROFIT ON SALE OF YARN WHICH WAS SHOWN AT RS.1,87,69,856/- (PROFIT BEFORE TAX AS PER COMPANIES ACT) IS ELIGIBLE FOR DEDUCTION TO THE EXTENT COMPUTED AS PER THE PROVISIONS OF 10B IT ACT. 37. SINCE THE DETAILS RELEVANT TO THE COMPUTATION O F THE PROFIT UNDER YARN SALES AS PER THE PROVISIONS OF IT ACT AR E NOT AVAILABLE, NO DEDUCTION U/S 10B WAS COMPUTED. 3. AGGRIEVED BY THE ASSESSMENT DENYING THE BENEFIT OF SECTION 10B OF THE ACT, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 4. THE COMMISSIONER OF INCOME-TAX (APPEALS) AFTER ELABORATELY CONSIDERING THE SUBMISSIONS, THE REMAND REPORT AND THE REJOINDER OF THE ITA NO.1379/BANG/2010 PAGE 5 OF 3 2 ASSESSEE ALLOWED THE APPEAL OF THE ASSESSEE. THE C OMMISSIONER OF INCOME- TAX (APPEALS) IN HIS ORDER AFTER NARRATING THE CHRO NOLOGY OF EVENTS OF THE HISTORICAL FACTS OF THE CASE AND AFTER ELABORATELY CONSIDERING THE JUDICIAL DECISIONS CONCLUDED THAT BASED ON FACTS OF THE CASE , IT IS NOT A CASE OF SPLIT/RECONSTRUCTION BY ANY IMAGINATION AND THE ISS UE OF RECONSTRUCTION, IF AT ALL COULD HAVE BEEN THERE, THE SAME SHOULD HAVE BEE N CONSIDERED IN THE YEAR OF ESTABLISHMENT OF THE UNIT. 4.1 THE RELEVANT PORTIONS OF THE FINDINGS OF THE L EARNED CIT(A) ARE EXTRACTED BELOW:- (A) 10. IN THE LIGHT OF THE (ABOVE) CHRONOLO GY OF EVENTS, THE PERTINENT QUESTIONS FOR ANSWERING THE SAME ARE FRAM ED AS UNDER: (I) WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, IT CAN BE HELD THAT THE FILATI UNIT WAS SET UP BY SPLITTING UP OR RECONSTRUCTING THE OLD AND EXISTING SEIDE UNIT? (II) IF THE ANSWER TO THE QUESTION RAISED AT (I) ABOVE I S HELD YES, IS IT JUSTIFIED TO MAKE DISALLOWANCE IN THIS AY 2006-0 7? 11. IT IS RELEVANT TO ANSWER THE QUESTION FRAMED A T (II) ABOVE FIRST BECAUSE IT GOES TO THE ROOT OF THE MATTER OF ALLOWA NCE OR DISALLOWANCE U/S 10B OF I.T. ACT IN THIS CASE. IN ORDER TO ANSWER THE QUESTION, IT IS BETTER TO QUOTE THE RELEVANT PR OVISION OF THE I.T. ACT AND INTERPRET THE SAME. THE RELEVANT PROVISION IS SECTION 10B (2)(II) REPRODUCED BELOW: THIS SECTION .. (II) IT IS NOT PROVIDED ..IN THAT SECTION. ITA NO.1379/BANG/2010 PAGE 6 OF 3 2 11.1. THE ABOVE SHOWS THREE WORDS APPEARING IN SECT ION 10B (2) (II) NEED DEEP ANALYSIS AND INTERPRETATION. THE WO RDS ARE (I) FORMED (II) SPLITTING UP AND (III) RECONSTRUC TION NONE OF THE WORDS HAVE BEEN DEFINED IN THE ACT. HO WEVER, WHILE FORMATION REFERS TO THE NEWLY SET UP INDUSTRIAL UND ERTAKING WHICH IS CONSIDERED ELIGIBLE OR OTHERWISE TO GET THE DEDU CTION U/S 10B (2) OF I.T. ACT ON ITS MANUFACTURE OR PRODUCTION OR ART ICLES OR THINGS OR COMPUTER SOFTWARE AND EXPORT OF THE SAME FROM TH E YEAR IT HAS BEGUN TO PRODUCE OR MANUFACTURE THE SAME. THEREFOR E, FORMATION MEANS BEGINNING OR SETTING UP OF SUCH INDUSTRIAL UN DERTAKING. SETTING UP OF ANY INDUSTRY NORMALLY REQUIRES FOUR F ACTORS OF PRODUCTION COMMONLY CALLED AS 4MS VIZ., (I) MAN (EMPLOYEES); (II) METHOD (TECHNOLOGY) (KNOW LEDGE ;) (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 R ESTRAINT PROVISION OF SECTION 10B (2)(II), THE INDUSTRIAL UNDERTAKING SHOULD BRING IN EVERYTHING NEW OR AT LEAST SHOULD NOT BRING ANY OF THESE FOUR FACTORS FROM ITS OLD AND EXISTING BUSINESS BECAUSE THAT WOULD BRING IT WITHIN THE AMBIT OF RESTRICTIONS OF SPLIT TING UP OR RECONSTRUCTION. IN FACT, SPLITTING UP OCCURS WHE N THE OLD EXISTING BUSINESS GETS DIVIDED INTO TWO OR MORE, ALMOST EQUA L PARTS, EACH PART GETTING SEPARATE NAMES AND SHARES FROM THE OLD BUSINESS DIVIDING ALL THE FOUR FACTORS OF PRODUCTION OBLITER ATING THE IDENTITY OF OLD UNDERTAKING AND, HENCE, SUCH CASE IS MUCH MO RE DISCERNIBLE FROM THE CASE OF RECONSTRUCTION. THE MEANING OF RECONSTRUCTION IS VERY LIBERAL AND ALSO INTERPRETED VERY LIBERALLY BY THE COURTS. THE ACT ITSELF PROVIDES THAT THE NEWLY FORMED UNDERTAKI NG MAY USE THE MACHINERIES OF THE OLD UNDERTAKING WITH 20% TOLERAN CE LIMIT VIDE SECTION 80IA. IN THIS CASE, THE OLD AND EXISTING UNIT DOES NOT LOSE ITS IDENTITY BUT IT GETS MODIFIED TO THE EXTENT THA T THE OTHER UNDERTAKING STARTS FUNCTIONING BY UTILIZING A PORTI ON OF ITS CAPITAL, MACHINERIES, TECHNOLOGY AND MANPOWER AND, THUS, THE NEW UNIT WAS CONSIDERED AS FORMED OUT OF RECONSTRUCTION OF T HE OLD UNIT. .. ITA NO.1379/BANG/2010 PAGE 7 OF 3 2 (B) EXTENSIVELY QUOTING/EXTRACTING THE RELEVAN T PORTION OF THE RULING OF THE HONBLE HIGHEST JUDICIARY OF THE LAND IN THE CASE OF TEXTILE MACHINERY CORPORATION LIMITED V. CIT (1977) 107 ITR 195 ( SC), THE LD. CIT (A) WENT ON TO OBSERVE THAT THUS, THE RATIO IS, THE NEW INDUSTRIAL UNDERTAKING MUST HAVE A SEPARATE PHYSICAL EXISTENCE AND MUST HAVE AN IDENTITY AS A VIABLE UNIT. IF THIS CONDITION IS F ULFILLED, THE NEGATIVE CONDITIONS THAT IT HAS COME INTO EXIST ENCE BY VIRTUE OF TRANSFER OF CAPITAL, MACHINERY OR MAN POWER OR TECHNOLOGY ETC., WOULD NOT BE ABLE TO RESTRICT I T FROM GETTING THE BENEFIT OF SECTION 10B OF I.T. ACT. IN THE CASE OF TEXTILE MACHINERY CORPORATION, THE ASSESSEE , A HEAVY ENGINEERING OUTFIT SET UP TWO NEW UNITS BEING STEEL FOUNDRY DIVISION AND JUTE MILL DIVISION. THE FOUNDRY DIVISION MANUFACTURED CASTINGS WHICH WERE EARLIER BROUGHT BY THE ASSESSEE. AS FOR THE JUTE M ILL DIVISION, THE RAW MATERIALS WERE SUPPLIED BY THE EX ISTING BOILER DIVISION. DEPARTMENT DENIED THE DEDUCTION HOLDING IT A CASE OF RECONSTRUCTION BECAUSE THE ACT IVITIES OF FOUNDRY DIVISION AND JUTE MILL DIVISION WERE INEXTRICABLY INTEGRATED WITH THE EXISTING UNITS. T HE SUPREME COURT HELD THAT THE ASSESSEE IS ELIGIBLE FO R THE CLAIM BECAUSE THESE TWO UNITS WERE DISTINCT INDUSTR IALLY RECOGNIZABLE UNITS WHICH CANNOT BE TREATED AS HAVIN G BEEN FORMED BY THE RECONSTRUCTION OF THE OLD BUSINE SS MERELY BECAUSE OF THEIR ASSOCIATION OR BECAUSE OF COMMON OWNERSHIP OR BECAUSE THEY PRODUCE THE SAME COMMODITIES AND DEAL WITH SAME CUSTOMERS. IT WAS T HUS 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 UNI T NAMED FILATI IN AY 1999-2000, BUT, IN TIME WITH THE MARKET TREND IT WENT FOR EXPANDING ITS FABRIC BUSIN ESS 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 ALON G WITH YARN. HENCE, APPLYING THE RATIO OF TEXTILES C ASE, 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. ITA NO.1379/BANG/2010 PAGE 8 OF 3 2 (C) ASSERTING THAT THE RULING OF THE HONBLE A PEX COURT IN THE CASE OF TEXTILE MACHINERY CORPORATION CITED SUPRA WHICH HAS BEEN FOLLOWED AS A PRECEDENT BY VARIOUS JUDICIARIES INCLUDING IN THE C ASES OF (I) BAJAJ TEMPO V. CIT (1992) 196 ITR 188 (SC); (II) CIT V. ADARSHA CO LD STORAGE (2006) 280 ITR 58 (ALL); & (III) CIT V. QUANTITY STEEL TUBES P . LIMITED (2006) 280 ITR 254, THE LD. CIT (A) EMPHASIZED THAT 11.3. THE ABOVE SHOWS THAT THE WORD RECONSTRUCTI ON HAS MADE INROADS INTO THE STRICT INTERPRETATION OF WORD FORMATION BUT STILL NOT ENOUGH TO INCLUDE IN IT C ASES OF EXPANSION AT LEAST BY EMPLOYMENT OF SOME FRESH CAPI TAL, USE OF NEW PLANT AND MACHINERY, EVEN IF TECHNOLOGY AND PART OF MAN POWER IS SAME. (D) WITH REGARD TO SUBSTANTIAL EMPLOYMENT OF FR ESH CAPITAL, THE LD. CIT (A) RELIED ON THE FINDING OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. GEDORE TOOLS (INDIA) P. LIMITED (1980) 126 ITR 673 (DEL), WHEREIN IT HAS BEEN HELD THAT FOR THE EMPLOYMENT OF THE CAPITAL, IT SHOULD HAVE BEEN NEWLY RAISED. IF SURPLUS RESERVE CAPITAL IS AVAILA BLE WITH AN ASSESSEE IN HIS EXISTING BUSINESS, THE ASSE SSEE CAN UTILIZE SUCH CAPITAL FOR THE PURCHASE OF PLANT, MACHINERY AND OTHER ASSETS FOR THE NEW UNIT. AS SO ON AS THE CAPITAL IS SO UTILIZED, IT WILL BE AN EMPLOY MENT OF CAPITAL IN THE NEW UNIT WHICH WOULD ENTITLE THE NEW UNIT FOR TAX CONCESSION AVAILABLE IN S.80J. (E) APPLYING THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT REFERRED ABOVE, THE CIT (A) HAD RE-EMPHASIZED THAT - 11.3 IN THIS CASE, ADMITTEDLY CAPITAL OF RS.12.26 CRORES HAS BEEN EMPLOYED TO INSTALL THE ITA NO.1379/BANG/2010 PAGE 9 OF 3 2 MACHINERY AND IN PURCHASE OF LAND FOR SET UP OF FAC TORY IN AY 2001-02 FOR MANUFACTURE OF FABRIC PROVIDING I T THE STATUS OF A RECOGNIZABLE AND VIABLE UNDERTAKI NG DISTINCT AND SEPARATE FROM EXISTING SEIDE UNIT EVEN IF THE PRODUCTS ARE SAME WHICH CAN BE CHARACTERIZED AS A CASE OF EXPANSION AND NOT A CASE OF FORMATION BY RECONSTRUCTION. (F) WITH REGARD TO THE SUBMISSIONS THA T THE RELIEF U/S 10B (2) (II) OF THE ACT CAN ONLY BE DENIED IN THE YEAR OF FORMATION BY SPLITTING UP OR RECONSTRUCTION AND NOT IN SUBSEQUENT YEARS OR ANY O F THE SUBSEQUENT YEARS, THE LD. CIT (A) OBSERVED THAT THE ONUS IS VERY HEAV Y ON THE REVENUE TO EXAMINE THE FACTS IN THE VERY BEGINNING I.E., THE I NITIAL YEAR TO COME TO A CONCLUSION WHETHER THE BENEFIT U/S 10B(2)(II) BE DE NIED OR NOT. TO FORM THIS VIEW, THE LD. CIT (A) TOOK SUPPORT FROM THE RULINGS OF CIT V. NIPPON ELECTRONICS (INDIA) PRIVATE LIMITED ( 1990) 181 ITR 518 (KAR); TATA COMMUNICATIONS INTERNET SERVICES V. ITO (2010) 130 TTJ DELHI ITAT E BENCH HE WENT ON FURTHER TO OBSE RVE 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 CH ANGED TO INCLUDE THE MANUFACTURE AND EXPORT OF FABRIC A LSO CLAIMED THE DEDUCTION U/S 10B OF I.T. ACT IN AY 200 2-03 FOR THE FIRST TIME AND ALSO WAS ALLOWED BY THE DEPARTMENT. IN AYS 1998-99 & 1999-2000, NO CLAIM O F DEDUCTION ON PRODUCTION OF YARN BY THE FILATI DIVIS ION 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, ITA NO.1379/BANG/2010 PAGE 10 OF 32 THE APPELLANT SHOWED LOSS OF RS.3,11,26,485/- IN FI LATI DIVISION AND, THEREFORE, DID NOT CLAIM ANY DEDUCTION U/S 10B OF I.T. ACT AND ALSO CLAIMED DEDUCTION U/S 80HHC OF RS.110,24,91,850/- FROM THE PROFITS OF SEIDE UNI T ONLY. THE AO SET OFF THE LOSS OF FILATI UNIT AGAIN ST THE PROFIT OF SEIDE UNIT AND REDUCED THE CLAIM U/S 80HH C TO RS.27,27,01,073/- IN THE ASSESSMENT COMPLETED U/ S 143(3) OF I.T. ACT ON 29.3.2004. IN THE AY 2002-03 , THE ASSESSMENT WAS COMPLETED U/S 143(3) R.W.S. 147. ON 14.12.2009, THE DEDUCTION CLAIMED U/S 10B FOR FILAT I DIVISION OF RS.6,39,34,632/- WAS ALLOWED AS SUCH. IN THE AY 2003-04, IN THE ASSESSMENT COMPLETED U/S 143 (3) ON 27.3.2006, THE CLAIM OF RS.18,67,95,1257 U/S 10B FOR FILATI DIVISION WAS REDUCED TO RS.18,32,59,431/-. SIMILARLY FOR THE AYS. 2004.05 AND 2005-06, THE CL AIMS U/S 10B FOR FILATI DIVISION WERE REDUCED TO RS.23,92,56,051/- AND RS.30,75,72,784/- RESPECTIVEL Y FROM THE CLAIMS OF RS.26,812,89,159/- AND RS.34,36,94,213/-. THE ABOVE SHOWS THAT FILATI DIV ISION STARTED AS A SEPARATE UNIT IN AY 1997-98 FOR PRODUC TION OF YARN. IT STARTED PRODUCTION OF FABRIC IN AY 200 1-02 BECAUSE OF LOSS INCURRED AND ALSO DID NOT CLAIM SET OFF OF LOSS BUT THE LOSS WAS SET OFF AGAINST THE PROFITS O F SEIDE UNIT TO REDUCE THE CLAIM U/S 80HHC OF I.T. ACT. TH E APPELLANT CLAIMED THE 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 RECONSTRUC TION OR SPLITTING UP COULD HAVE BEEN RAISED EITHER OF TH ESE THREE YEARS AND, THEREFORE, THE AO IS NOT JUSTIFIED IN DISALLOWING THE CLAIM U/S 10B OF I.T. ACT IN AY 200 6-07 WHICH IS NOT THE FORMATION YEAR OF THE FILATI DIVIS ION ON THE PLEA THAT THE FILATI DIVISION WAS BORN OUT OF RECONSTRUCTION PROCESS OF EXISTING SEIDE UNIT. IN FACT, MAINTENANCE OF SEPARATE BOOKS BY FILATI DIVISION SEPARATELY FROM THAT OF SEIDE UNIT FOR MAKING THE C LAIM U/S 10B ITSELF ALSO SHOWS THAT IT IS A DISTINCT, VI ABLE INDUSTRIAL UNIT HAVING SEPARATE EXISTENCE FROM SEID E UNIT. COMPARED AGAINST SUCH POSITIVE EVIDENCE, I F IND THE AO HAS NOT PINPOINTED ANY MATERIAL EVINCING THA T THE RECONSTRUCTION HAS TAKEN PLACE IN AY 2006-07. WHAT WAS REFERRED IN THE ASSESSMENT ORDER IS THAT THE SA ME PRODUCTS I.E., SAME BRAND NAMED FABRICS ARE BEING MANUFACTURED AND EXPORTED BY THE SEIDE UNIT ALSO ITA NO.1379/BANG/2010 PAGE 11 OF 32 WHICH I HOLD THAT CANNOT BE EQUATED WITH THE CONCLU SION THAT THE CLAIM OF FILATI DIVISION U/S 10B CAN BE DE NIED BECAUSE IT IS BORN OUT OF RECONSTRUCTION OF SEIDE UNIT VIDE SATISH V PAI V. CIT (1979) 119 ITR 877 (KAR) & CIT V. ORIENT PAPER MILLS LIMITED (1974) 94 ITR 73 (CAL) IN BOTH THESE CITED CASES, THE ASSESSEE HAD BEEN PRODUCING THE SAME ARTICLE EVEN PRIOR TO THE NEW INDUSTRIAL UNDERTAKING AS ITS MAIN BUSINESS. WHILE IN THE FORMER CASE (PAIS CASE) SPLITTING UP WAS ALLEG ED, IN THE LATTER, RECONSTRUCTION WAS SOUGHT TO BE PRESUME D. 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 RS.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 APPRECI ATING THE FACTS AND CIRCUMSTANCES UNDER WHICH THE SAME WA S DISALLOWED BY THE ASSESSING OFFICER. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N HOLDING THAT RELIEF U/S.10B(2)(II) OF THE IT ACT, 1 961 CAN ONLY BE DENIED ONLY IN THE YEAR OF FORMATION BY SPL ITTING UP OR RECONSTRUCTION AND NOT IN THE SUBSEQUENT YEAR S OR ANY OF THE SUBSEQUENT YEARS AND IN HOLDING THAT THE ABOVE DEDUCTION TO BE ALLOWED IF IT IS ALLOWED IN T HE EARLIER YEARS. ITA NO.1379/BANG/2010 PAGE 12 OF 32 4. THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS NOT JUSTIFIED IN HOLDING THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CASE THAT THE CONDITIONS LAID DOWN IN SE CTION 10B(2)(II) OF THE IT ACT, 1961, WERE NOT VIOLATED, THEREBY, ALLOWING THE DEDUCTION CLAIMED U/S.10B OF THE IT ACT, 1961.' 5.1. THE LD. D R ARGUED THAT THE AO HAD , IN FACT, ANALYZED THE ANNUAL REPORTS FOR VARIOUS YEARS RIGHT FROM 1999-00 TO 200 5-06 WHICH THREW LIGHT AS TO HOW HEALTHY WAS THE BUSINESS POTENTIAL OF THE AP PELLANT UNDER FABRIC DIVISION AND OVER THE YEARS IT HAD CONTRIBUTED TO T HE EXTENT OF 80 TO 85% OF THE TOTAL REVENUE. HOWEVER, IT WAS CLAIMED BY THE L D. D R THAT THE APPELLANT OVER THE YEARS PROGRESSIVELY SHIFTED REVENUES OF FA BRIC DIVISION TO FILATI DIVISION SO AS TO REDUCE THE TAXABLE PROFITS UNDER SEIDE DIVISION. IT WAS, FURTHER, ADVOCATED THAT THE DEVISE ADOPTED BY THE A PPELLANT, AS EXPOSED BY THE AO IN HIS IMPUGNED ORDER UNDER DISPUTE, WAS WIT H A SOLE INTENTION TO SHIFT THE INCOME FROM SEIDE DIVISION TO YARN DIVISI ON SO AS TO BRING THE TAXABLE INCOME INTO THE AMBIT OF DEDUCTIBLE INCOME WHICH WAS CONTRARY TO THE PROVISIONS OF S. 10B OF THE ACT. IT WAS, THER EFORE, SUBMITTED THAT WITHOUT APPRECIATING THE EXPOSURE OF THE MODUS OPERANDI OF THE APPELLANT BY THE AO, THE LD. CIT (A) GROSSLY ERRED IN DELETING THE DENIA L OF DEDUCTION U/S 10B OF THE ACT. HENCE, IT WAS FERVENTLY PLEADED BY THE LD. D R THAT THE IMPUGNED ORDER OF THE LD. CIT (A) DESERVES TO BE ASSAILED. ITA NO.1379/BANG/2010 PAGE 13 OF 32 6. THE AR ON THE OTHER HAND REITERATED THE SUBMISS IONS MADE BEFORE THE LOWER AUTHORITIES AND RELIED ON THE FIND INGS OF THE FIRST APPELLATE AUTHORITY. THE LEARNED AR HAS ALSO FILED A WRITTEN SUBMISSION TO FURTHER STRENGTHEN HIS ARGUMENT, THE ESSENCE OF WHICH IN A CONDENSED FORM READS AS FOLLOWS : - THE APPELLANT COMPANY ESTABLISHED ITS FIRST UNIT (EOU) AND COMMENCED COMMERCIAL PRODUCTION IN THE YEAR 1987 AND FOR ALL THESE YEARS CLAIMING EXEMPTION U/S 10B (AS ALLOWED TO EOU) AND U/S 80HHC OF THE ACT. - CONSIDERING THE MARKET POTENTIAL AND THE BACKWARD INTEGRATION, ANOTHER UNIT STYLED HIMATSINGKA FILAT I COMMENCED COMMERCIAL PRODUCTION IN FY 1998-99, AFTER OBTAINING NECESSARY APPROVALS FROM ALL THE CONCERNED AUTHORITIES. INITIALLY, APPROVAL WAS GI VEN IN THE NAME OF COMPANY - HIMATSINGKA SEIDE LIMITED - WHICH WAS SUBSEQUENTLY AMENDED AS HIMATSINGKA - FACED WITH THE GLOBAL SLOWDOWN AND FALLING MARGINS FOR SPUN SILK YARN AND IN ORDER TO CAPTURE THE MARK ET POTENTIAL OF NEW KINDS OF FABRICS, THE APPELLANT DE CIDED 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 RS. 12.2 8 CRORES WHICH EVENTUALLY IN SUBSEQUENT YEARS INCREAS ED TO RS.90.63 CRORES. THE ADDITIONS MADE IN FILATI U NIT (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 FABRI C UNDER FILATI UNIT COMMENCED IN OCTOBER 2000. IN OTHER WOR DS FROM THE YEAR 2000-2001, FILATI UNIT STARTED MANUFACTURING FABRICS ALSO, IN ADDITION TO YARN, TH AT ITA NO.1379/BANG/2010 PAGE 14 OF 32 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, DEDUC TION U/S 10B IN RESPECT OF ITS FILATI UNIT. . - THAT THE AO HAD PREDETERMINED HIS MIND BY DECLARIN G THE ENTIRE SALES OF FABRIC AS SEIDE DIVISION AND SALES OF YARN AS FILATI DIVISION BY GROSSLY IGNORING ALL THE RELEVAN T RECORDS MAINTAINED BY THE COMPANY OVER THE YEARS, UNIT WISE , SHOWING THE PRODUCTION OF BOTH THE PRODUCT I.E FABR IC & YARN. AT NO POINT OF TIME, THAT THE AO HAD TRIED T O FIND THE FACTS FROM ITS OWN RECORDS THAT THE SEIDE AND FILAT I WERE PRODUCING FABRIC AND YARN, BOTH. - THAT THE AO HAD FAILED TO APPRECIATE THAT THE FIL ATI UNIT WAS A NEW UNIT IN COMPARISON TO THE SEIDE UNIT WHIC H WAS ESTABLISHED MORE THAN 20 YEARS AGO AND WAS HAVING O LD MACHINERIES WHICH WAS ON THE VERGE OF PHASING OUT E ITHER DUE TO THE LIFE SPAN OR DUE TO ADVANCEMENT AND TECHNOLOGICAL CHANGES. THE NEW UNIT (FILATI) WAS EQ UIPPED WITH THE LATEST MACHINERY HAVING HIGH CAPACITY AND MODERN TECHNIQUE. THE FILATI UNIT WAS ALSO CAPABLE TO PROD UCE THE LATEST KIND OF FABRIC WHICH INCLUDES VELVET / PILE FABRICS, VERY FINE THIN SHEER FABRICS, CHENILLE FABRICS, ETC . THAT THE AO HAD ALSO FAILED TO APPRECIATE THAT IT WAS IMPORT ANT FOR THE APPELLANT TO SET UP THE MOST MODERN AND NEW UNI T TO MEET THE MARKET REQUIREMENT AND DEMAND OF THE MODER N FABRIC AND MAINTAIN ITS VIABILITY; THAT THE TEXTILE INDUSTRY AS A WHOLE AND THE FABRIC MANUFACTURING IN PARTICULAR HAD UNDERGONE A SEA CHANGE IN ITS MANUFACTURING AND TECHNOLOGY FOR MODERNIZATION; THAT TO FURTHER SUPPO RT THAT FILATI UNIT WAS EQUIPPED TO MANUFACTURE FABRICS WIT H LATEST MACHINERIES, THAT ACCORDING TO A MACHINERY CHART PREPARED WHICH DEMONSTRATES THE PRODUCT DIFFERENTIA TIONS OF BOTH THE UNITS AND THE UTILIZATION OF THE MACHIN ERIES. ON A SIMPLE COMPARISON OF BOTH THE UNITS, MACHINE WISE PRODUCT WISE AND CAPACITY WISE, IT IS CLEAR THAT FI LATI UNIT IS ENGAGED IN A MODERN UPGRADED PRODUCT CATEGORY ACCEPTABLE TO THE CUSTOMERS WHICH WERE NOT BEING PR ODUCED BY SEIDE UNIT. - THAT 10B EXEMPTION IS AN INDEPENDENT EXEMPTION AVAILABLE TO A NEW MANUFACTURING UNDERTAKING SUBJEC T TO ITA NO.1379/BANG/2010 PAGE 15 OF 32 FULFILLMENT OF THE CONDITIONS AS LAID DOWN IN THE P ROVISIONS OF SECTION 10B OF THE ACT AND THAT THE UNIT WAS EST ABLISHED IN THE YEAR 1998-99 FULFILLING ALL THE CONDITIONS O F AN EOU AND HAS BEEN AVAILING THE 10B EXEMPTION SINCE THEN WHICH HAS ALL ALONG BEEN ALLOWED BY THE DEPARTMENT. - THAT THE OBSERVATIONS OF THE AO IN PARA 27 IS NOT CORRECT THAT THE TRANSFER OF THE ASSETS INCLUDING LAND, BUI LDING AND MACHINERIES HAS BEEN DONE GRADUALLY TO CLAIM DEDUCTION U/S 10B. 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 L ATEST TECHNOLOGY AND DEMAND OF THE CUSTOMERS. SOME TRANSF ER OF THE ASSETS, IF AT ALL HAS BEEN DONE FROM THE SEIDE UNIT TO THE FILATI UNIT, THE SAME HAS BEEN IN ACCORDANCE WITH T HE 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 THA N RS 90 CRORES OVER THE PERIOD IN THE FILATI DIVISION TO IN CREASE ITS PRODUCTION OF FABRIC TO MEET THE MARKET DEMANDS. IT IS NOT A CASE WHERE THE PRODUCTION OF FILATI UNIT HAS INCREA SED 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 BUSINES S TO NEW BUSINESS AND BY WAY OF RECONSTRUCTION OF THE EXISTI NG UNIT. (REFER PARA 33 A.) IT HAS BEEN SUBMITTED THAT THE FILATI UNIT WHICH WAS ESTABLISHED IN THE YEAR 1998-99 HAS BEEN SET UP AS AN INDEPENDENT EOU AND A NEW UNDERTAKING, HAD OBTAINED ALL PRIOR APPROVALS FROM THE CONCERNED AUT HORITIES INCLUDING CEPZ, ACQUIRED NEW MACHINERIES AND HAD FULFILLED ALL THE CONDITIONS PRESCRIBED UNDER THE P ROVISIONS OF S. 10B OF THE ACT. THE UNIT HAS BEEN CORRECTLY G RANTED EXEMPTION AFTER DUE VERIFICATION OF THESE PROVISION S AND THE CLAIM OF THE APPELLANT U/S 10B HAS RIGHTLY BEEN CLA IMED AND ALLOWED IN THE EARLIER YEARS. IT IS PERTINENT TO NO TE HERE THAT ONE ARM OF THE GOVERNMENT HAVING RECOGNISED THE UNI T AS 100% EOU, THE AO CANNOT SAY THAT THE BENEFIT OF EXEMPTION IS NOT AVAILABLE TO THE APPELLANT. ITA NO.1379/BANG/2010 PAGE 16 OF 32 HOWEVER, FOR REMOVAL OF DOUBT, THE SETTING UP OF TH E FILATI UNIT CANNOT BE STATED TO HAVE BEEN FORMED BY WAY OF RECONSTRUCTION AND /OR SPLITTING UP OF AN EXISTING BUSINESS, THE APPELLANT RELIES ON THE CASE LAWS AND SUBMISSIO NS AFFIRMING THAT ITS UNIT DOES NOT FALL BY ANY IMAGI NATION UNDER RECONSTRUCTION AND/OR SPLITTING OF EXISTING B USINESS. - THAT THE PROVISIONS U/S 10B OF THE ACT PROVIDES T AX HOLIDAY BENEFITS TO EXPORT ORIENTED UNITS. THE TAX HOLIDAY BENEFIT AVAILABLE TO THE UNDERTAKING IS 100% OF THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNIN G WITH THE AY RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICL ES OR THINGS. HOWEVER, THE BENEFIT U/S 10B OF THE ACT IS AVAILABL E TO AN UNDERTAKING ONLY IF IT FULFILLS CERTAIN SPECIFIED C ONDITIONS, NAMELY: (I) IT MANUFACTURES OR PRODUCES ANY ARTICLES OR THI NGS OR COMPUTER SOFTWARE; (II) IT IS NOT FORMED BY THE SPLITTING UP, OR THE R ECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE; AND (III) IT IS NOT FORMED BY THE TRANSFER TO A NEW BU SINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. THIS CLAUSE WOULD NOT APPLY IF THE VALUE OF USED MACHINE RY OR PLANT DOES NOT EXCEED 20% OF THE TOTAL MACHINERY OR PLANT OF THE UNDERTAKING. THE ABOVE PROVISIONS OF THE ACT ARE ANALYZED AS BE LOW: FORMATION S. 10B(2)(II) STATES THAT THE PROVISIONS OF SECTION 10B WOULD APPLY TO AN UNDERTAKING, WHICH IS NOT FORMED BY THE SPLITTING UP , OR THE RECONSTRUCTION , OF A BUSINESS ALREADY IN EXISTENCE. (A) A PERUSAL OF THE ABOVE CONDITION INDICATES THAT THE WORD FORMATION IS CRUCIAL TO DETERMINE THE ABOVE BUT I S NOT DEFINED IN THE ACT. HENCE, IT IMBIBES THE MEANING AS IS UNDERSTOOD IN COMMON PARLANCE. AS PER OXFORD ENGLIS H DICTIONARY, THE WORD FORM MEANS, COME INTO BEING , GO TO MAKE UP, COMPOSE ETC. ITA NO.1379/BANG/2010 PAGE 17 OF 32 (B) THE TERM FORMATION HAS ALSO BEEN DISCUSSED A T LENGTH IN VARIOUS DECISIONS OF THE HIGH COURT AND SUPREME COU RT IN INDIA. THOUGH, THE SAME WAS RENDERED IN THE CONTEX T OF EXEMPTION/DEDUCTION UNDER SECTION 15C OF THE ERSTWH ILE 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 PROVI SIONS 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 I NDIA, IN RESPECT OF THE SAID SECTIONS WHILE ANALYZING THE IS SUES INVOLVED. (C) THE SUPREME COURT EXAMINED THE TERM FORMED I N THE CASE OF CWT V RAMARAJU SURGICAL COTTON MILLS LIMITE D. THE APEX COURT DEALING WITH THE EXPRESSION SETTING UP OCCURRING IN SECTION 5(1) (XXI) OF THE WEALTH TAX A CT HAS OBSERVED THAT UNLESS A FACTORY IS ERECTED AND PLANT AND MACHINERY ARE INSTALLED THEREIN, IT CANNOT BE SAID TO HAVE BEEN SET UP. THE SETTING UP IS PERHAPS A STAGE ANTERIOR TO THE COMMENCEMENT OF THE FACTORY AND THEREFORE AN UNDERT AKING CAN BE FORMED ONLY ONCE IN ITS LIFETIME. IT MAY BE NOTED THAT THE RESTRICTIVE CONDITIONS ENUMERATED ABOVE IS APPL ICABLE AT THE TIME OF FORMATION OF THE UNDERTAKING AND NOT SU BSEQUENTLY (D) THE TERM FORMED IS A STAGE ANTERIOR TO THE COMMENCEMENT OF THE FACTORY AND AN UNDERTAKING CAN BE FORMED ONLY ONCE IN ITS LIFETIME. RELIES ON THE CASE LAW, VIZ., : (I) CIT V. NIPPON ELECTRONICS (INDIA) PVT LTD (1990) 1 81 ITR 518 (KAR) BAJAJ TEMPO LTD VS. CIT 196 ITR 188 (1992) (SC); SPLITTING UP OR RECONSTRUCTION (A) THE TERMS SPLITTING UP AND RECONSTRUCTION H AVE NOT BEEN DEFINED IN THE ACT. HENCE, THESE TERMS HAVE TO BE INTERPRETED IN THE LIGHT OF JUDICIAL PRECEDENTS EXISTING IN THI S CONNECTION. RELIES ON THE FOLLOWING JUDICIAL PRECEDENTS: ITA NO.1379/BANG/2010 PAGE 18 OF 32 (I) CIT VS. GANGA SUGARS LTD. 92 ITR 160 (DEL); TEXTILE MACHINERY CORPORATION LTD. VS. CIT, W.BL (1977) 107 ITR 195 (SC) THE RATIO OF THE ABOVE DECISIONS SQUARELY APPLIES T O THE FACTS IN THE INSTANT CASE. (B) THE DELHI HIGH COURT IN THE CASE OF CIT V. HIN DUSTAN GENERAL INDUSTRIES LIMITED (137 ITR 851) (1981) HAS INTERPRETED THAT THE TERM RECONSTRUCTION IS NO DO UBT VERY WIDE BUT IT DOES NOT HOLD IN A CASE OF A COMPANY SE TTING UP OR ESTABLISHING A TOTALLY INDEPENDENT AND VIABLE INDUS TRIAL UNIT FOR CARRYING ON THE SAME OR SIMILAR BUSINESS EVEN T HOUGH 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 UNDER TAKINGS AND THE ESSENCE OF THE EXEMPTION IS THAT IT IS A NE W INDUSTRIAL UNIT THAT IS ESTABLISHED AND THAT IT IS NOT MERELY A REHASH OF AN ALREADY EXISTING UNIT. HOWEVER, THE APEX COURT IN METROPOLITAN SPRINGS (P) LTD V. CIT (191 ITR 288 ) HAS HELD THAT EVEN IF SOME EMPLOYEES ARE COMMON TO THE OLD AND THE NEW UNIT, IT WILL NOT BE A BAR ON ELIGIBILITY OR DEDUCTION. - THAT A SIMILAR VIEW WAS TAKEN BY THE APEX COURT I N INDIAN ALUMINIUM COMPANY LTD VS CIT (108 ITR 367) WHERE IT WAS HELD THAT EVEN IF THE NEW UNIT MANUFACTURES THE SAM E COMMODITY AS THE OLD UNIT, IT WILL BE AN ELIGIBLE U NDERTAKING. WHILE DECIDING WHETHER THERE IS SPLITTING UP OR REC ONSTRUCTION OF AN UNDERTAKING, IT IS NOT NECESSARY TO SEE WHETH ER THE NEW UNDERTAKING HAS PRODUCED A DIFFERENT ARTICLE THAN THAT PRODUCED BY THE OLD UNDERTAKING AS HELD BY THE MAD RAS HIGH COURT IN THE CASE OF PREMIER COTTON MILLS LTD VS CI T (240 ITR 434) - THAT RECENTLY, THE CHENNAI TRIBUNAL IN THE CASE O F ITO VS. DSM SOFT P LTD HAS HELD THAT ONCE THE TEST OF FORMA TION IS SATISFIED BY THE COMPANY IN ITS INITIAL YEAR OF OPE RATION, THE NEW UNIT CANNOT BE HELD TO BE FORMED AS A RESULT OF SPLITTING UP OR RECONSTRUCTION OF ITS EXISTING BUSINESS MERELY O N THE GROUND THAT THE COMPANY HAS TRANSFERRED FEW OF ITS EMPLOYE ES TO THE NEW UNIT OR IT SERVES THE SAME CLIENT. ITA NO.1379/BANG/2010 PAGE 19 OF 32 - THAT THE MUMBAI TRIBUNAL IN THE CASE OF DCIT V. S HAMROCK (32 SOT 1) HAS OBSERVED THAT THE CONCEPT OF RECONST RUCTION OF BUSINESS WOULD NOT BE ATTRACTED WHEN A COMPANY WHIC H IS ALREADY RUNNING ONE INDUSTRIAL UNIT SETS UP ANOTHER INDUSTRIAL UNIT. THE NEW INDUSTRIAL UNIT WOULD NOT LOSE ITS SE PARATE 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, EMPLOYEES AND THE COMMON AGENTS OF THE OLD AND THE NEW UNITS DO NOT I NVALIDATE THE CLAIM OF THE ASSESSES THAT IT IS OPERATING A NE W UNIT AND THAT LAW DOES NOT BAR RIGHTFUL CLAIM OF THE ASSESSE S DUE TO THESE ASPECTS. THE HON'BLE CHENNAI BENCH IN THE CASE OF ITO V. SER VION GLOBAL SOLUTIONS LTD (117 TTJ 380) HAS CONSIDERED A CASE FOR EXEMPTION U/S 10A AND HAS HELD THAT THE FACT THAT T HE NEW UNIT ALSO DEALS WITH THE SAME PRODUCT AS THAT OF THE OLD UNIT OR THAT THERE ARE SAME OLD UNIT EMPLOYEES OR CUSTOMERS CANN OT BE TAKEN AS A GROUND FOR DENYING BENEFIT U/S 10A. - THE DELHI HIGH COURT IN THE CASE OF CIT VS MAHAN FOODS LTD (216 CTR 148) WHILE EXAMINING RECONSTRUCTION OF BUSINESS ALREADY IN EXISTENCE HAD MADE A FINDING TH AT THAT THE FORMATION OF THE NEW UNDERTAKING IS NOT AS A CONSEQ UENCE OF THE TRANSFER OF PLANT AND MACHINERY OF THE OLD BUSI NESS AND THAT THERE WERE SUBSTANTIAL INVESTMENTS IN NEW PLAN T AND MACHINERY. IT WAS ALSO A CASE WHERE A SEPARATE AND DISTINCT UNIT WAS PUT UP FOR MANUFACTURING THE SAME ITEM. TH US, IT WAS HELD THAT NATURE OF PRODUCT MANUFACTURED IS NOT THE CRITERIA FOR DECIDING WHETHER A NEW UNIT HAS BEEN SET UP OR NOT. THE LD. A R ALSO DREW THE REFERENCE OF THIS BENCH T O THE RECENT RULING OF THE JURISDICTIONAL HIGH COURT IN T HE CASE OF M/S.SAMI LABS LTD. V. ACIT REPORTED IN 334 ITR 157. 7 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSING OFFICER UNDER MISTAKEN NO TION HAD ANALYSED THE ITA NO.1379/BANG/2010 PAGE 20 OF 32 FINANCIAL AND QUANTITATIVE DETAILS OF THE WEAVING ( FABRIC) SEGMENT AND YARN SEGMENT SEPARATELY. HE WAS OF THE VIEW THAT THE SE IDE UNIT OF THE ASSESSEE WAS EXCLUSIVELY MANUFACTURING FABRICS WHEREAS FILAT I UNIT WAS EXCLUSIVELY MANUFACTURING YARN AND NOT FABRIC. THE ASSESSING O FFICER HELD THAT THE COMPANY STARTED SHIFTING THE BUSINESS OF THE WEAVIN G UNIT (SEIDE/ FABRIC UNITS) TO THE YARN DIVISION (FILATI UNIT) ON A GRAD UAL BASIS SO AS TO REDUCE THE IMPACT ON TAXES ON THE WEAVING UNIT. IT WAS FURTHE R HELD BY THE ASSESSING OFFICER THAT THE ASSESSEE COMPANY HAD TRANSFERRED A SSETS WHICH INCLUDE LAND, BUILDINGS AND PLANT AND MACHINERY OF THE WEAV ING DIVISION TO FILATI DIVISION GRADUALLY AND STARTED SHOWING THE TURNOVER OF THE VERY TRANSFERRED ASSETS UNDER THE FILATI DIVISION OF THE COMPANY AND STARTED CLAIMING DEDUCTION U/S.10B OF THE ACT AND CORRESPONDINGLY, T HE TURNOVER UNDER SEIDE UNIT HAD BEEN BROUGHT DOWN SUBSTANTIALLY. THIS MIS TAKEN CONCLUSION DRAWN BY THE ASSESSING OFFICER THAT THE SEIDE UNIT IS EXC LUSIVELY MANUFACTURING FABRICS AND FILATI UNIT IS EXCLUSIVELY MANUFACTURIN G YARN PROBABLY COULD HAVE OCCURRED DUE TO THE ASSESSEE FURNISHING SEGMEN T-WISE ACCOUNTS (PRODUCT-WISE). THE ASSESSEE BEING A COMPANY WAS A LSO REQUIRED TO REPORT SEGMENT-WISE ACCOUNTS (PRODUCT-WISE) AS PER THE ACC OUNTING STANDARDS-17. THE ASSESSEE WHILE SUBMITTING INFORMATION TO THE AS SESSING OFFICER INADVERTENTLY SUBMITTED THE SEGMENT WISE INSTEAD OF UNIT WISE PROFITABILITY AND BALANCE-SHEET. IT WAS SUBMITTED THAT THE COPIE S OF THE SEGMENT WISE ACCOUNTS ARE FURNISHED TO RESPECTIVE STOCK EXCHANGE IN WHICH THE ASSESSEE ITA NO.1379/BANG/2010 PAGE 21 OF 32 SHARES ARE LISTED AND IT IS A MATTER OF RECORD. A COPY OF THE SEGMENT WISE ACCOUNTS PUBLISHED IN THE BUSINESS STANDARD NEWSPAP ER FOR THE YEAR ENDING 31.03.2006 AND AUDITED BALANCE SHEET FOR THE CONCER NED YEAR DISCLOSING SEGMENT WISE FIGURES ARE ENCLOSED IN THE PAPER BOOK FILED BY THE ASSESSEE. WE ARE OF THE VIEW THE ASSESSING OFFICER MISCONSTRU ED THE FACTS AND CONCLUDED THAT SEGMENT WISE ACCOUNTS WERE THE UNIT WISE ACCOUNTS. THE ASSESSING OFFICER IGNORED ALL THE DOCUMENTS AND REC ORDS AND IN PARTICULAR THE UNIT WISE AUDIT REPORT OF FILATI UNIT U/S.10B O F THE ACT. 7.1. AT THIS JUNCTURE, IT IS WORTHWHILE TO RECORD T HE CHRONOLOGY OF THE EVENTS OF THE ASSESSEE COMPANY. THOUGH THE CHRONOL OGY OF EVENTS ARE RECORDED IN A TABULAR FORM IN THE IMPUGNED ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), FOR THE SAKE OF CONVENIENCE, THE SAME IS REPRODUCED BELOW : SL. NO. DATE/YEAR EVENT 1. 1985 HSL WAS INCORPORATED TO MANUFACTURE AND EXPORT NATURAL SILK FABRIC. 2. 1987 FIRST UNIT CALLED SEIDE UNIT WAS ESTABLISHED AS 100% EOU. STARTED COMMERCIAL PRODUCTION OF FABRIC, ETC. 3. 31.3.1995 A.Y.1995-96 UNDER GREEN CARD NO.269, THE HSL GOT APPROVAL OF CEPZ TO PRODUCE SPUN SILK AND BLENDED YARN IN THE FACTORY LOCATED AT VEERAPURA VILLAGE, DODDABALLAPUR, BANGALORE. 4. 9-4-1997 (F.Y.1997- 98) FILATI DIVISION GOT THE CERTIFICATE TO MANUFACTURE SPUN ITA NO.1379/BANG/2010 PAGE 22 OF 32 A.Y. 1998-99 SI LK AND BLENDED YARN VIDE REFERENCE NO.1/32/96 : EOU: CEPZ/1222 DATE 9-4-1997 (COPY ENCLOSED AS ANNEXURE- I). THIS CERTIFICATE SHOWS THE FILATI DIVISION WAS GIVEN A DISTINCT IDENTIFICATION BY CHANGE OF NAME FROM HSL TO HIMATSINGKA FILATI DIVISION OF HSL. P ROJECT COST OF RS.49.07 WAS SHOWN IN THE BALANCE SHEET. 5. (APRIL, 1998) F.Y. 1998-99 ASSESSMENT YEAR 1999-2000 COMMERCIAL PRODUCTION OF YARN STARTED IN FILATI UNIT. LOSS RESULTING FROM SUCH BUSINESS WAS REFLECTED IN THE RETURN. THE DEPARTMENT CONSIDERE D SUCH LOSS OF FILATI DIVISION TO REDUCE THE CLAIM OF DEDUCTION UNDER SECTION 80 HHC OF I T ACT. 6. 19-09-2000 F.Y. 2000-01 ASSESSMENT YEAR 2001-02 (I) FILATI UNIT ADDED MACHINERIES VALUED AT RS.12,27,54,090/- TO MANUFACTURE FABRIC AND ALSO OBTAINED THE APPROVAL FROM CEPZ ON 19-9- 2000 TO PRODUCE FABRICS ALONG WITH ITS ORIGINAL PRODUCT YARN. IN OCTOBER, 2000, IT STARTED COMMERCIAL PRODUCTION IN FABRIC ALSO. (II) THUS, FILATI UNIT BECAME MANUFACTURER AND EXPORTER OF YARN AS WELL AS FABRIC WHILE SEIDE UNIT REMAINED EXCLUSIVELY THE MANUFACTURE AND EXPORTER OF FABRIC ONLY. (III) FILATI UNIT CLAIMED DEDUCTION 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 YEAR S, 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 ITA NO.1379/BANG/2010 PAGE 23 OF 32 THE DEPARTMENT WITH MINOR CHANGES IN QUANTIFICATION. 8. A.Y. 2006-07 THE CLAIM OF DEDUCTION UNDER SECTI ON 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 U NIT AND FILATI UNIT WAS PRODUCING ONLY YARN. LATER ON FILATI UNIT WAS EXPA NDED BY ADDING MACHINERY TO MANUFACTURE FABRIC IN ADDITION TO YARN . NECESSARY APPROVALS WERE DULY OBTAINED FROM ALL CONCERNED AUTHORITIES I NCLUDING THE APPROVAL OF CEPZ. CEPZ GAVE THEIR APPROVAL VIDE LETTER NO.1/32 :96:EOU:CEPZ/6447 DATED 19 SEPTEMBER, 2000 CLEARLY GIVING THE APPROVA L FOR THE MANUFACTURE OF VELVET PILE FABRICS AND OTHER KINDS OF FABRICS ( ANNEXURE F OF PAPER BOOK). CEPZ ALSO ISSUED REVISED GREEN CARD NO.450 DATED 8.3.01 GIVING THE VARIOUS PRODUCTS TO BE MANUFACTURED BY THE UNIT I.E. YARNS OF SPUN SILK/WOOLEN/VISCOSE/BLENDS, VELVET (PILE) & CHENILL E FABRICS MADE OUT OF SPUN SILK/NATURAL SILK/WOOLEN/VISCOSE/COTTON & BLEN DS (INC. JACQUARD WOVEN) (COURTESY : ANNEXURE G OF PAPER BOOK). BASE D ON THE APPROVAL, THE ASSESSEE EXPANDED ITS FILATI EOU AND MADE A CAPITAL EXPENDITURE OF RS.12.28 CRORES WHICH EVENTUALLY IN SUBSEQUENT YEAR S INCREASED TO RS.90.63 CRORES. THE ADDITIONS TO FIXED ASSETS MADE IN THE FILATI UNIT (FABRIC ONLY) ARE DULY DISCLOSED IN THE AUDITED BALANCE SHEET FOR THE YEAR ENDING 31.3.2001 AND SUBSEQUENT YEARS. THE YEAR-WISE BREA K UP OF THE ADDITIONS TO ITA NO.1379/BANG/2010 PAGE 24 OF 32 THE FIXED ASSETS MADE IN THE FILATI UNIT IS DETAILE D AT ANNEXURE H OF THE PAPER BOOK. THE PLANT AND MACHINERY MAINLY INCLUDE D WEAVING LOOMS ETC. TO MANUFACTURE FABRICS IN ADDITION TO YARN BY THE F ILATI UNIT. THE COMMERCIAL PRODUCTION OF THE FABRIC UNDER FILATI UN IT WAS COMMENCED IN OCTOBER, 2000. IN OTHER WORDS, FROM THE YEAR 2000- 01, FILATI UNIT STARTED MANUFACTURING FABRICS ALSO, IN ADDITION TO YARN. T HE PRODUCTION & SALES MADE BY THE FILATI UNIT OF FABRICS AS WELL AS YARN HAVE DULY BEEN REFLECTED IN THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE AN D THE SAME FORMED PART OF THE BALANCE SHEET AND BASED ON THE INCOME TAX RE TURNS FILED BY THE ASSESSEE; THE SAME HAS BEEN DULY ASSESSED ACCORDING LY. THE ASSESSEE CLAIMED DEDUCTIONS UNDER SECTION 10B FOR ITS YARN A ND FABRIC MANUFACTURING OF THE FILATI UNIT AND THE SAME HAVE BEEN DUTY ALLO WED BY THE RESPECTIVE ASSESSING OFFICERS IN RESPECT OF ASSESSMENT YEARS 2 000-01, 2001-02, 2002- 03, 2003-04, 2004-05, 2005-06. THE SUMMARIZED CLAIM OF THE ASSESSEE YEAR WISE IS A S UNDER : FY AY PRODUCT LINE PROFIT/(LOSS) RS. 10B CLAIM ALLOWED BY ASSESSING OFFICER RS. 1998-99 1999-00 YARN (29,091,721) 1999-00 2000-01 YARN (17,353,470) 2000-01 2001-02 YARN & FABRICS (31,126,485) LOSS IGNORED, BEING 10B UNIT AND NOT SET OFF AGAINST OTHER PROFITS. 2001-02 2002-03 -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 ITA NO.1379/BANG/2010 PAGE 25 OF 32 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 B EEN 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 TH E A.YS.1999-00 TO 2001-02. LOSS WAS IGNORED AND WAS NOT SET OFF AGAI NST 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 IS VERY HEAVY ON THE REVEN UE TO EXAMINE THE FACTS IN THE INITIAL YEAR AND COME TO A CONCLUSION WHETHER BENEFIT U/S.10B(2)(II) IS TO BE ALLOWED OR DENIED. THIS LE GAL PROPOSITION HAS BEEN ELABORATELY DISCUSSED BY THE JURISDICTIONAL HIGH CO URT IN CIT V. NIPPON ELECTRONICS (INDIA) PVT. LTD., (1990) (181 ITR 518) AND SAMI LABS LTD., V. ACIT (2011) (334 ITR 157). 7.2. THE OBSERVATIONS OF THE ASSESSING OFFICER IN PARA 27 IS NOT CORRECT THAT THE TRANSFER OF THE ASSETS INCLUDING L AND, BUILDING AND MACHINERIES HAS BEEN DONE GRADUALLY TO CLAIM DEDUCT ION UNDER SECTION 10B. THE FILATI UNIT HAS BEEN ESTABLISHED IN COLLABORATI ON WITH M/S FILATI BURATTI SPA, ITALY AS AN INDEPENDENT UNIT TO PRODUCE THE PR ODUCTS BASED ON LATEST ITA NO.1379/BANG/2010 PAGE 26 OF 32 TECHNOLOGY AND DEMAND OF THE CUSTOMERS. SOME TRANS FER 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 UNDER SECTION 10B RIGHT FROM THE INCEPTION. THE ASSESSING OFFICER HAS FAILED TO APPRECIATE THAT THE ASSESSEE HAS INVE STED MORE THAN RS.90 CRORES OVER THE PERIOD IN THE FILATI DIVISION TO IN CREASE ITS PRODUCTION OF FABRIC TO MEET THE MARKET DEMANDS. THE DEPRECIATIO N HAS BEEN CLAIMED AND ALLOWED. 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 ASSESSING OFFICER IN THIS REGARD ARE UNFOUNDED WITHOUT ANY SUBSTANCE AND EVIDENCE. EVEN ASSUMING IF THERE IS SOME TRANSFER OF MACHINERY AND PLANT FROM THE SEIDE UNIT TO THE FILATI UNIT, THE ASSESSING OFFICER DOES NOT HAVE A CASE THAT SUCH TRANSFER EXCEED THE PRESCRIBED LIMIT, NAMELY, THE T RANSFERRED MACHINERY AND PLANT VALUE, EXCEEDED 20% [EXPLANATION TO SECTION 1 0B(2) R.W. EXPLANATION 2 TO SECTION 80I(2)] OF THE TOTAL VALUE OF THE MACH INERY AND PLANT USED IN THE BUSINESS OF FILATI UNIT. 7.3. ANOTHER IMPORTANT ASPECT TO BE NOTED IS THE FABRIC MANUFACTURING CAPACITY IN THE FILATI UNIT WAS 14,12 ,194 (QUANTITY IN METERS) WHEREAS THE PRODUCTION WAS ONLY TO THE EXTENT OF 76 % OF THE INSTALLED CAPACITY DURING THE CURRENT FINANCIAL YEAR. THEREF ORE, WHEN THE FILATI UNIT ITA NO.1379/BANG/2010 PAGE 27 OF 32 HAS NOT UTILIZED ITS FULL CAPACITY, UTILIZATION PRO DUCTION OF FABRIC, THE ASSESSING OFFICERS STATEMENT THAT THE ASSESSEE HAS SHIFTED FABRIC SALES TURNOVER FROM SEIDE UNIT TO FILATI UNIT, IS ONLY A PRESUMPTION WITHOUT ANY EVIDENCE TO SUBSTANTIATE THE SAME. 7.4. THEREFORE, WE ARE IN TOTAL AGREEMENT WITH TH E 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 STAR TED 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 PR ODUCTION TAKEN TOGETHER IN AY 2002-03 FOR THE FIRST TIME. THEREFORE, THE IS SUE OF FORMATION OUT OF RECONSTRUCTION OR SPLITTING UP COULD HAVE BEEN RAIS ED EITHER OF THESE THREE ASSESSMENT YEARS AND, THEREFORE, THE AO IS NOT JUST IFIED IN DISALLOWING THE CLAIM U/S 10B OF I.T. ACT IN AY 2006-07 WHICH IS NO T THE FORMATION YEAR OF THE FILATI DIVISION ON THE PLEA THAT THE FILATI DIV ISION WAS BORN OUT OF RECONSTRUCTION PROCESS OF EXISTING SEIDE UNIT. 7.4.1. AT THIS JUNCTURE, WE VENTURE TO QUOTE THE RULINGS O F VARIOUS JUDICIARIES ON A SIMILAR ISSUE: (A) IN THE CASE OF CIT V. NIPPON ELECTRONICS (INDI A) PVT. LTD REPORTED IN 181 ITR 518 (KAR), THE HONBLE ITA NO.1379/BANG/2010 PAGE 28 OF 32 JURISDICTIONAL COURT HAD HELD IN THE CONTEXT OF S.8 0J OF THE ACT THAT THE WORD FORMED SUGGESTS THAT THE TRANSFER CONTEMPLATED IS ONE AT THE TIME OF FORMATI ON OF THE NEW UNDERTAKING. ONCE THE CONDITION IS SATISFI ED IN THE YEAR OF FORMATION OF THE UNIT, THERE IS NO NEED TO LOOK AT THIS CONDITION IN LATER YEARS. THE RATIO LAID DOWN BY THE HONBLE COURT IS DIREC TLY APPLICABLE TO THE ISSUE ON HAND. IN THE PRESENT CASE, THE CLAIM OF D EDUCTION U/S 10B OF THE ACT FOR FILATI DIVISION FOR THE AY 2002-03 WAS ALLO WED. SUBSEQUENTLY, THE CLAIMS FOR DEDUCTIONS U/S 10B OF THE ACT FOR FILATI DIVISION WERE ALLOWED FOR THE AYS. 2003-04 TO 2005-06, OF COURSE, AT REDU CED PROPOSITIONS. THIS UNAMBIGUOUSLY PROVES THAT THE AO MUST HAVE COME TO A DEFINITE CONCLUSION THAT THERE WAS NEITHER RECONSTRUCTION NOR SPLITTING UP OF THE EXISTING UNITS, AND, THEREFORE, ALLOWED THE APPELLANTS CLAIM THOUG H AT REDUCED AMOUNTS, OTHERWISE, IT IS A SIMPLE LOGIC THAT HE COULD HAVE RAKED UP THE ISSUE AT THAT RELEVANT TIME ITSELF. (B) WITH REGARD TO THE AOS ALLEGATION THAT THE RE WAS RECONSTRUCTION OF THE EXISTING BUSINESS OF APPELLANTS SEIDE DIVI SION, IT MAY NOT BE INAPPROPRIATE TO QUOTE THE RULING OF THE HONBLE APEX COURT ON A SIMILAR ISSUE IN THE CASE OF TEXTILE MACHINERY CORP ORATION LTD. V. CIT (1977) 107 ITR 195 (SC) AS UNDER: 'A NEW ACTIVITY LAUNCHED BY THE ASSESSEE BY ESTABLI SHING NEW PLANTS AND MACHINERY BY INVESTING SUBSTANTIAL FUNDS MAY PRODUCE THE SAME COMMODITIES OF THE OLD BUSINESS OR IT MAY PRODUCE SOME OTHER DISTINCT MARKETABLE PRODUCTS, EV EN COMMODITIES WHICH MAY FEED THE OLD BUSINESS. THESE PRODUCTS ITA NO.1379/BANG/2010 PAGE 29 OF 32 MAY BE CONSUMED BY THE ASSESSEE IN HIS OLD BUSINESS OR MAY BE SOLD IN THE OPEN MARKET. ONE THING IS CERTAIN TH AT THE NEW UNDERTAKING MUST BE AN INTEGRATED UNIT BY ITSELF WH EREIN ARTICLES ARE PRODUCED AND AT LEAST A MINIMUM OF TEN PERSONS WITH THE AID OF POWER AND A MINIMUM OF TWENTY PERSO NS WITHOUT THE AID OF POWER HAVE BEEN EMPLOYED. SUCH A NEW INDUSTRIALLY RECOGNIZABLE UNIT OF AN ASSESSEE CANNO T BE SAID TO BE RECONSTRUCTION OF HIS OLD BUSINESS SINCE THERE I S NO TRANSFER OF ANY ASSETS OF THE OLD BUSINESS TO THE NEW UNDERT AKING WHICH TAKES PLACE WHEN THERE IS RECONSTRUCTION OF THE OLD BUSINESS. FOR THE PURPOSE OF SECTION 15C THE INDUSTRIAL UNITS SET UP MUST BE NEW IN THE SENSE THAT NEW PLANTS AND MACHIN ERY ARE ERECTED FOR PRODUCING EITHER THE SAME COMMODITIES O R SOME DISTINCT COMMODITIES. IN ORDER TO DENY THE BENEFIT OF SECTION 15C THE NEW UNDERTAKING MUST BE FORMED BY RECONSTRU CTION OF THE OLD BUSINESS. IF AN UNDERTAKING IS NOT FORMED BY THE RECONSTRUCTI ON OF THE OLD BUSINESS THAT UNDERTAKING WILL NOT BE DENIED TH E BENEFIT OF SECTION 15C MERELY BECAUSE IT GOES TO EXPAND THE GE NERAL 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 DECISI VE TESTS IN CONSTRUING SECTION 15C.' (C) INCIDENTALLY, THE HONBLE DELHI H IGH COURT IN THE CASE OF CIT V. HINDUSTAN GENERAL INDUSTRIES LIMITED REPORTED IN (1 981) 137 ITR 851 (DEL) HAD INTERPRETED THAT THE TERM RECONSTRUCTION IS NO DO UBT 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 O F EXPANDING THE ALREADY EXISTING BUSINESS. THE EMPHASIS IS NOT ON BUSINESS BUT ON UNDERTAKING. THE EXEMPTION IS GRANTED TO NEW UNDERTAKINGS AND TH E ESSENCE OF THE ITA NO.1379/BANG/2010 PAGE 30 OF 32 EXEMPTION IS THAT IT IS A NEW INDUSTRIAL UNIT THAT IS ESTABLISHED AND THAT IT IS NOT MERELY A REHASH OF AN ALREADY EXISTING UNIT. (D) THE HONBLE ITAT, E BENCH IN THE CASE OF TATA COMMUNICATIONS INTERNET SERVICES V. ITO REPORTED IN (2010) 130 TTJ (DEL) HAD ALLOWED THE CLAIM OF THE ASSESSEE BY HOLDING T HAT SUCH OBJECTION COULD ONLY BE MADE IN THE FIRST YEAR OF FORMATION OR AT B EST THE FIRST YEAR OF THE CLAIM MADE AND NOT IN SUBSEQUENT YEARS ESPECIALLY W HEN IN EARLIER YEARS, NO OBJECTION HAD BEEN RAISED ON SUCH GROUND EVEN IF ASSESSMENT WAS COMPLETED UNDER SCRUTINY AND SUCH CLAIMS HAD BEEN A CCEPTED BY THE DEPARTMENT AS SUCH. (E) TO TOP IT ALL, THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF SAMI LABS LTD. REPORTED IN 334 ITR 157 HAD OBSERVED THAT STARTING POINT OF THE HOLIDAY PERIOD WOULD BE THE YEAR IN WHICH THE MANUFACTURE OR PRODUCTION OF THE ARTIC LE BEGINS AND THERE IS NO DISPUTE ON THIS. ELIGIBILIT Y TEST HAS TO BE IN THE INITIAL ASSESSMENT YEAR AND IF FOR ANY REASON LIKE NOT EARNING PROFITS AND GAINS IN THE IN ITIAL YEARS ON ACCOUNT OF ITS INFANCY AND ON ACCOUNT OF N ON- STABILIZATION OF ITS UNIT, AS THE CASE MAY BE IT MA Y NOT BE ABLE TO DERIVE THE BENEFITS FLOWING FROM SEC.10-B IN THAT YEAR, BUT WOULD BE ELIGIBLE TO AVAIL THE SAME IN ANY OF THE SUCCEEDING YEARS, ONCE IT IS FOUND ELIGIBLE IN THE INITIAL YEAR OF MANUFACTURE. . IN AN OVERALL CONSIDERATION OF THE FACTS AND CIRC UMSTANCES OF THE ISSUE AS DELIBERATED UPON IN THE FORE-GOING PARAGRA PHS AND ALSO IN CONFORMITY WITH THE PRECEDENT LAID DOWN BY VARIOUS JUDICIARIES, CHIEFLY, THE JURISDICTIONAL HONBLE HIGH COURT IN THE CASE OF M/ S. SAMI LABS LIMITED V. ITA NO.1379/BANG/2010 PAGE 31 OF 32 ACIT CITED SUPRA, WE ARE OF THE UNANIMOUS VIEW THAT THE LD. CIT (A) WAS FULLY JUSTIFIED IN FINDING FAULT WITH THE AO THAT (I) THE AO OUGHT TO HAVE RAISED SUCH A BOGEY OF THE ALLEGED FORMATION OUT OF RECONSTRUCTION OR SPLITTING UP OF THE EXISTING BUSINESS OF SEIDE DIVI SION ETC., WHEN THE APPELLANT HAD INITIALLY CLAIMED SUCH A DEDUCTION I N THE AY 2002-03 ITSELF; AND (II) HE ( THE AO) WAS ALSO NOT JUSTIFIED IN DIS ALLOWING SUCH A CLAIM IN THE AY UNDER CHALLENGE WHICH INCIDENTALLY NOT THE FORMA TION YEAR OF THE ALLEGED FILATI DIVISION. FURTHERMORE, THE STAND OF THE AO H AD, IN FACT, BEEN CONTRARY TO THE VERY SPIRIT OF THE RULING OF THE JURISDICTIO NAL HIGH COURT CITED ABOVE. IN ESSENCE (I) THE APPELLANT WAS ELIGIBLE FOR CLAIM SINCE THOSE TW O UNITS WERE DISTINCT INDUSTRIALLY RECOGNIZABLE UNITS WHICH, IN OUR CONSIDERED VIEW, CANNOT BE CATEGORIZED AS HAVING BEEN FORMED B Y THE RECONSTRUCTION MERELY BECAUSE OF COMMON OWNERSHIP O R BECAUSE IT PRODUCED THE SAME COMMODITIES AND DEAL WITH THE SAME CUSTOMERS. IT HAS, THEREFORE, BEEN CLASSIFIED AS A CASE OF EXPANSION, BUT, NOT RECONSTRUCTION OR SPLITTING UP AS ALLEGED BY THE REVENUE; & (II) THOUGH HYPOTHETICAL, THE AOS ALLEGED CLAIM OF YARN DIVISION OF THE APPELLANT WAS NOTHING BUT THE RECONSTRUCTION O F THE EXISTING BUSINESS OF SEIDE DIVISION, EVEN THEN ALSO THE AO WAS FORBIDDEN IN DISALLOWING THE CLAIM OF THE APPELLANT U/S 10-B OF THE ACT FOR THE AY UNDER DISPUTE WHICH WAS, ADMITTEDLY, NOT TH E FORMATION OF FILATI DIVISION. 8. IN A NUT-SHELL , THE FINDINGS OF THE LD. CIT (A) REQUIRE NO INTERV ENTION OF THIS BENCH. IT IS ORDERED ACCORDINGLY. ITA NO.1379/BANG/2010 PAGE 32 OF 32 9. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ORDER PRONOUNCED IN OPEN COURT ON 27/01/2012. SD/- SD/- (GEORGE GEORGE K) (N. BARATHVAJA SANKAR) JUDICIAL MEMBER VICE PRESIDENT