Dy. Commissioner of Income Tax, Lucknow V. E-Soft Technologies Limited, Lucknow

ITA 895/LKW/2014

• Counselvise Citation: 89523714 RSA 2014
• Duration Of Justice: 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-06-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 12-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARE BEING DISPOSED OF
• Keywords: Depreciation
• Section: 10AA; 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NOS.251 & 895/LKW/2014 A.YRS.:2009 - 10 TO 2010 - 11 DY.C.I.T., RANGE - 2, LUCKNOW. VS M/S E - SOFT TECHNOLOGIES LTD., 7, RAM MOHAN RAI MARG, LUCKNOW. PAN:AAACE7504J (APPELLANT) (RESPONDENT) O R D E R PER A. K. GARODIA, A.M. BOTH THESE APPEALS ARE FILED BY THE REVENUE, WHICH ARE DIRECTED AGAINST TWO SEPARATE ORDERS OF LEARNED CIT(A) - II, LUCKNOW DATED 05/02/2013 FOR THE ASSESSMENT YEAR 200 9 - 10 AND DATED 04/09/2014 FOR THE ASSESSMENT YEAR 2010 - 11. SINCE COMMON ISSUE IS INVOLVED IN BOTH THE APPEALS, THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE GROUNDS RAISED BY THE REVEN UE IN ASSESSMENT YEAR 2009 - 10 ARE AS UNDER: 1. THE LEARNED CIT ( A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN ALLOWING THE DEDUCTION OF RS.59,44,003/ - CLAIMED U/S 10A WITHOUT GIVING ANY OPPORTUNITY TO THE ASSESSING OFFICER IN ACCEPTING FRESH EVIDENCE PR ODUCED BY THE ASSESSEE AND WITHOUT APPRECIATING THE FACT THAT THE NEW UNIT WAS CREATED BY TRANSFERRING MORE THAN 20% OF PLANT APPELLANT BY SMT. SWATI RATNA, D. R. RESPONDENT BY SHRI S. C. AGARWAL, ADVOCATE DATE OF HEARING 01/07/2015 DATE OF PRONOUNCEMENT 1 4 /08/2015 2 & MACHINERY OF ITS EXISTING UNIT IN VIOLATION OF PROVISIONS OF SECTION 10A. 3. THE GROUNDS RAISED BY THE REVENUE IN ASSESSMENT Y EAR 20 1 0 - 1 1 ARE AS UNDER: 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN ALLOWING THE DEDUCTION OF RS.95,14,127/ - CLAIMED U/S 10A WITHOUT PASSING THE SPEAKING ORDER AND ONLY RELYING SOLELY ON THE APPELLATE ORDER OF THE EARLIER YEAR (2 009 - 10). 2. THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT THE BASIC CONDITIONS FOR CLAIMING DEDUCTION U/S 10A WERE NOT COMPLIED WITH BY THE ASSESSEE AND THE CLAIM HAS BEEN MADE IN VIOLATION OF PROVISIONS OF SECTION 10A. 4. LEARNED D.R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER. HE ALSO SUBMITTED THAT O N PAGE NO. 42 OF THE PAPER BOOK SUBMITTED BY THE ASSESSEE, IS A CALCULATION CHART OF DEPRECIATION AS PER INCOME TAX RULES AND FROM THE SAME, IT CAN BE SEEN THAT EVEN OUT OF 10 COMPUTERS INSTALLED BY THE ASSESSEE IN THE PRESENT YEAR, 8 COMPUTERS WERE TO PUT TO USE BY 27 TH SEPTEMBER, 2008 AND THE ASSESSEE CLAIMED DEPRECIATION ON THESE 8 COMPUTERS ON THE BASIS THAT THESE COMPUTERS WERE USED FOR MORE THAN 180 DAYS IN THE PRESENT YEAR WHEREAS THE STP UNIT WAS GRANTED APPROVAL BY SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) VIDE LETTER DATED 16/10/2008 AND THEREFORE, IT IS ACCEPTED POSITION BY THE ASSESSEE ALSO THAT OUT OF TOTAL 10 NEW COMPUTERS PURCHASED AND PUT TO USE IN THE PRESENT YEAR, 8 WERE PUT TO USE BEF ORE COMING INTO EXISTENCE OF THE STP UNIT AND THEREFORE, THE CLAIM OF THE ASSESSEE THAT MORE THAN 20% OF TOTAL ASSETS ARE NOT OLD ASSETS, IS NOT CORRECT AND AS A CONSEQUENCE , THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. HE SUBMITTED THAT UNDER THESE FACTS, THE ORDER OF CIT(A) SHOULD BE REVERSED AND THAT OF THE ASSESSING OFFICER SHOULD BE RESTORED. 5. LEARNED A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). HE ALSO PLACED RELIANCE ON THE JUDGMENT OF HON'BLE KARNATAKA HIGH COUR T 3 RENDERED IN THE CASE OF CIT VS. EXPERT OUTSOURCE (P) LTD. [2013] 358 ITR 518 (KAR). HE SUBMITTED THAT IN THIS CASE, THE STP UNIT WAS REGISTERED ON 04/08/2004 AND THE ASSESSEE STARTED BUSINESS OPERATIONS FROM 29/12/2003 AND UNDER THESE FACTS, THE ASSESSI NG OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10A ON THE BASIS THAT THE ASSESSEE HAS USED THE MACHINERY PREVIOUSLY USED, WHICH IS MORE THAN 20% OF THE TOTAL PLANT & MACHINERY AND UNDER THESE FACTS, THE CLAIM OF THE ASSESSEE WAS ALLOWED BY CIT (A) IN THAT CASE AND THE ORDER OF CIT(A) WAS APPROVED BY THE TRIBUNAL AND WHEN THE REVENUE CARRIED THE MATTER IN APPEAL BEFORE HON'BLE KARNATAKA HIGH COURT, HON'BLE KARNATAKA HIGH COURT HAS UPHELD THE TRIBUNAL ORDER . HE ALSO SUBMITTED THAT IN THE P RESENT CASE, THE FACTS ARE SIMILAR AND THEREFORE, THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THIS JUDGMENT OF HON'BLE KARNATAKA HIGH COURT. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT A VERY DETAILED ORDER HAS BEEN PASSED BY LEARNED CIT(A) AFTER EXAMINING EACH AND EVERY ASPECT OF THE ISSUE IN DISPUTE. THE RELEVANT PARAS OF THE ORDER OF CIT(A) ARE PARA NO. 4(4)(I) TO 4(12), WHICH ARE REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: - 4(4 )(I) I HAVE EXAMINED THE FACTS AND CIRCUMSTANCES OF THE CASE. I HAVE CONSIDERED THE FINDING OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. THERE IS NO DISPUTE WITH REGARD TO THE BASIC FACT THAT THE ASSESSEE COMPANY IS IN E XISTENCE SINCE 1999 AND DURING THE YEAR UNDER CONSIDERATION, IT SET UP A UNIT FOR 100% EXPORT OF COMPUTER SOFTWARE. FOR THE SAID PURPOSE APPROVAL WAS OBTAINED BY IT FROM SOFTWARE TECHNOLOGIES PARK OF INDIA (HEREINAFTER REFERRED TO AS THE STPI) AND WAS ALLO WED SUCH APPROVAL WITH EFFECT FROM 16.10.2008. THE CLAIM OF THE APPELLANT TO DEDUCTION WAS EXAMINED BY THE AO IN LIGHT OF PROVISIONS OF SECTION 10A(2)(II) AND 10A(2)(III) READ WITH EXPLANATION 2 TO SECTION 801 OF THE ACT. THE PROVISIONS LAY DOWN AS UNDER 4 10A (2) THIS SECTION APPLIES TO ANY UNDERTAKING WHICH FULFILS ALL THE FOLLOWING CONDITIONS, NAMELY : (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 RESULT OF THE RE - ESTABLISHMENT, RECONSTRUCTION OR REVIVAL BY THE ASSESSEE OF THE BUSINESS OF ANY SUCH UNDERTAKINGS AS IS REFERRED TO IN SECTION 33B, IN THE CIRCUMSTANCES AND WITHIN THE PERIOD SPECIFIED IN THAT SECTION; ( III) IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. EXPLANATION. THE PROVISIONS OF EXPLANATION 1 AND EXPLANATION 2 TO SUB SECTION (2) OF SECTION 80 - 1 SHALL APPLY FOR THE PURPOSES OF CLAUSE (HI) OF THIS SUB - SECTION AS THEY APPLY FOR THE PURPOSES OF CLAUSE (II) OF THAT SUB - SECTION. SECTION 801 EXPLANATION 2 : WHERE IN THE CASE OF AN INDUSTRIAL UNDERTAKING, ANY MACHINERY OR PL ANT OR ANY PART THEREOF PREVIOUSLY USED FOR ANY PURPOSE IS TRANSFERRED TO A NEW BUSINESS AND THE TOTAL VALUE OF THE MACHINERY OR PLANT OR PART SO TRANSFERRED DOES NOT EXCEED TWENTY PER CENT OF THE TOTAL VALUE OF THE MACHINERY OR PLANT USED IN THE BUSINESS, THEN, FOR THE PURPOSES OF CLAUSE (II) OF THIS SUB - SECTION, THE CONDITION SPECIFIED THEREIN SHALL BE DEEMED TO HAVE BEEN COMPLIED WITH. 4(4)(II) THE AO EXAMINED THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT AND FOUND THAT - ON REFERENCE TO THE APPLICA TION SUBMITTED TO THE STPI IT WAS NOTICED THAT THE ASSESSEE WAS USING POINT TO POINT LEASED LINES AND INTERNET LEASED LINES OF THE EXISTING UNIT. SEPARATE BOOKS OF ACCOUNTS WERE NOT MAINTAINED IN RESPECT OF THE NEW UNIT. THE REPORT OF THE INCOME TAX INSPEC TORS WHO CARRIED ON SPOT INQUIRIES REPORTED THAT THERE WAS NO DEMARCATION TO SHOW THAT THE NEW UNIT WAS SEPARATE FROM THE EXISTING UNIT. 5 ON EXAMINATION OF FIXED ASSETS SCHEDULE, THE AO CONCLUDED THAT OLD ASSETS WERE MORE THAN 20% OF THE TOTAL ASSETS. 4(4)(III) BASED ON ABOVE OBSERVATIONS THE AO CONCLUDED THAT THE NEW UNIT WAS FORMED BY SPLITTING UP AND RECONSTRUCTION OF OLD UNIT AND THERE WAS TRANSFER FROM OLD UNIT TO NEW UNIT. AFTER EXAMINATION THE AO FOUND THE ASSESSEE IN VIOLATION OF ABOVE PROVISION S AND DISALLOWED DEDUCTION OF RS. 59,44,003 / - UNDER SECTION 10A OF THE ACT. I PROCEED TO EXAMINE THE ISSUE IN LIGHT OF THE ABOVE OBSERVATIONS OF THE AO AND THE SUBMISSIONS OF THE APPELLANT. 4(5)(I) THE FIRST ISSUE IS THE OBSERVATIONS OF THE AO THAT SEPARA TE BOOKS OF ACCOUNTS HAVE NOT BEEN MAINTAINED. A REFERENCE IN THIS REGARD MAY BE MADE TO THE PARAGRAPH (V) OF THE CBDT CIRCULAR NO. 01/2013 DATED 17.01.2013 ISSUED VIDE F. NO. 178/84/2012 - ITA.I, WHICH IS AS UNDER SUBJECT: ISSUES RELATING TO EXPORT OF CO MPUTER SOFTWARE - DIRECT TAX BENEFITS - CLARIFICATION REGARDING - (V) WHETHER IT IS NECESSARY TO MAINTAIN SEPARATE BOOKS OF ACCOUNT FOR AN ASSESSEE IN RESPECT OF ITS ELIGIBLE UNITS CLAIMING TAX BENEFITS UNDER SECTIONS 10A AND 10B. SINCE THERE IS NO REQUIR EMENT IN LAW TO MAINTAIN SEPARATE BOOKS OF ACCOUNT, THE SAME CANNOT BE INSISTED UPON. HOWEVER, SINCE THE DEDUCTIONS UNDER THESE SECTIONS ARE AVAILABLE ONLY TO THE ELIGIBLE UNITS, THE ASSESSING OFFICER MAY CALL FOR SUCH DETAILS OR INFORMATION PERTAINING TO DIFFERENT UNITS TO VERIFY THE CLAIM AND QUANTUM OF EXEMPTION, IF SO REQUIRED. 4(5)(II) THE RELEVANT CIRCULAR CLEARLY DRAWS OUT THE CONCLUSION THAT THERE IS NO REQUIREMENT IN SECTION 10A OF THE ACT TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS. THE ISSUE WAS ALSO EXAMINED BY THE BANGALORE BENCH OF HON'BLE ITAT IN I.T.A NO. 1 151BANG/2009 IN T HE CASE OF IBM INDIA P. LTD. V. DEPUTY COMMISSIONER OF INCOME TAX. THE OBSERVATIONS OF THE HON'BLE COURT ARE AS UNDER - CONSIDERING THE SECOND OBJECTION OF THE AO, NAMELY, THAT SEPARATE BOOKS OF ACCOUNT HAVE NOT BEEN MAINTAINED FOR THE STP UNITS, HIS OBSE RVATION WAS THAT THE OBJECTION OF THE AO AROSE ON THE PREMISE THAT PART OF 6 THE EXPENDITURE WHICH COULD BE RELATED TO THE EXEMPTED INCOME WHICH IS NOT ALLOWABLE TO THE ASSESSEE BY VIRTUE OF THE PROVISIONS CONTAINED IN SECTION 14A OF THE ACT WHICH COULD BE D ISGUISED AND ALLOWED TO BE SET OFF AGAINST TAXABLE INCOME AND, THUS, THE ASSESSEE WOULD BE BENEFITED BY PAYING REDUCED TAX WHICH COULD HAVE BEEN AVOIDED. ON THIS ISSUE, THE OBJECTION OF THE AO AS IS SEEN FROM THE REMAND REPORT AND AS NOTED BY THE CIT (A) W AS WITH REGARD TO ALLOCATION OF THE OVERHEAD EXPENSES IN THE RATIO OF TURNOVER. THE REASON GIVEN BY THE LEARNED CIT (A) FOR NOT ACCEPTING THE REASONING OF THE AO WAS AS THE ASSESSEE HAS THREE UNITS AT DIFFERENT PLACE, THE ONLY PLAUSIBLE MANNER AVAILABLE FO R ALLOCATION OF EXPENDITURE IS IN THE RATIO OF TURNOVER WHICH IS POSSIBLY THE ONLY INDICATOR AVAILABLE AND IS A REASONABLE METHOD OF ARRIVING AT THE EXPENSES. FURTHER, WE VENTURE TO QUOTE THE RULING OF THE HON'BLE SUPREME COURT IN THE CASE OF SMT. TARULAT A SHYAM AND OTHERS V. CIT REPORTED IN 108 ITR 345 (SC) WHEREIN IT HAS BEEN MADE IMPLICITLY CLEAR THAT 'TO US, THERE APPEARS NO JUSTIFICATION TO DEPART FROM THE NORMAL RULE OF CONSTRUCTION ACCORDING TO WHICH THE INTENTION OF THE LEGISLATURE IS PRIMARILY TO BE GATHERED FROM THE WORDS USED IN THE STATUTE. IT WILL BE WELL TO RECALL THE WORDS OF ROWLATT J. IN CAPE BRANDY SYNDICATE V. INLAND REVENUE COMMISSIONERS [1921] 1 KB 64 (KB) AT PAGE 71, THAT: '.......... IN A TAXING ACT ONE HAS TO LOOK MERELY AT WHAT IS CLEARLY SAID. THERE IS NO ROOM FOR ANY INTENDMENT. THERE, IS NO EQUITY ABOUT A TAX: THERE IS NO PRESUMPTION AS TO A TAX. NOTHING IS TO BE READ IN, NOTHING IS TO BE IMPLIED. ONE CAN ONLY LOOK FAIRLY AT THE LANGUAGE USED.' IN VIEW OF THE FACT THAT THE MAINTENANCE OF SEPARATE BOOKS OF ACCOUNT FOR STP UNITS IS NOT A CONDITION LAID DOWN IN THE PROVISIONS OF S. 10A OF THE ACT AND ALSO IN CONFORMITY WITH THE RULINGS OF THE HON'BLE SUPREME COURT REFERRED SUPRA AND THE FINDING OF T HE HON'BLE BENCH IN THE ASSESSEE'S OWN CASE FOR THE IMMEDIATELY PRECEDING AY CITED ABOVE, WE ARE OF THE CONSIDERED VIEW 7 THAT THE L D. C I T(A) WAS NOT JUSTIFIED IN DENYING THE LEGITIMATE CLAIM OF THE ASSESSEE U/S 10A OF THE ACT. IT IS ORDERED ACCORDINGLY. 4(5)(III) RESPECTFULLY FOLLOWING THE OBSERVATION OF THE HON'BLE COURT SUPRA AND THE CIRCULAR OF CBDT ON THE SUBJECT IT CAN BE SAID THAT THERE IS NO REQUIREMENT FOR MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS UNDER SECTION 10A OF THE ACT. NON - MAINTENANCE OF S EPARATE BOOKS OF ACCOUNTS COULD NOT THEREFORE BE A CONDITION FOR DISALLOWING THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT. 4(6 ) THE AO REFERRED TO THE APPLICATION MADE BY THE APPELLANT TO STPI TO CONCLUDE FROM THE SUBMISSIONS MADE IN THE COLUMN REL ATING TO COMMUNICATION REQUIREMENTS THAT THE NEW UNIT WAS USING THE POINT TO POINT LEASED LINES AND INTERNET LEASED LINES OF THE EXISTING UNIT. I FIND THAT THE CONCLUSION HAS BEEN DRAWN BY THE AO WITHOUT PROVIDING OPPORTUNITY TO THE APPEL L ANT TO EXPLAIN TH E ISSUE. I FIND THAT THE APPLICATION FOR THE APPROVAL OF STPI WAS MADE ON 25.07.2008 AND APPLICATION FOR INSTALLATION OF LEASED LINES AND INTERNET LEASED CIRCUITS WAS MADE TO SIFY TECHNOLOGIES LIMITED ON 24.07.2008. THE BILLS OF SIFY TECHNOLOGIES LIMITED S HOW THE CUSTOMERS REFERENCE DATE AS 24.07.2008. MOREOVER PAYMENT OF INTERNET CHARGES OF RS.3,12,876/ - HAS BEEN SHOWN TO HAVE BEEN MADE BY THE APPELLANT VIDE BANK PAYMENT VOUCHER NUMBERS 199 AND 205. THE FACTS SHOW THAT THE NEW UNIT IS USING SEPARATE COMMUN ICATION LINES FOR INTERNET USAGE. 4(7)(I) I FIND THAT THE RELIANCE OF THE AO ON THE REPORT OF THE INCOME TAX INSPECTORS (HEREINAFTER REFERRED TO AS THE ITI) IS NOT J USTIFIABLE AS THE REPORT WAS NOT CONFRONTED TO THE APPELLANT. MOREOVER, THE ILL'S CONDUCTED THEIR SPOT INQUIRIES ON 26.12.2011 WHEREAS THE UNIT CLAIMING DEDUCTION UNDER SECTION 10A OF THE ACT WAS FUNCTIONAL ONLY TILL 31.03.2011. IN OTHER WORDS ON THE DATE ON WHICH THE INQUIRIES WERE CONDUCTED, THE UNIT IN RESPECT OF WHICH THE INQUIRIES WERE CONDUCTED WAS NOT IN OPERATION. NEVERTHELESS, THE REPORT OF THE ITI OUTLINES THAT THE NEW UNIT WAS OPERATING AT THE SAME PLACE AND THERE WAS NO DEMARCATION BETWEEN THE O LD UNIT AND NEW UNIT. IN THIS CONNECTION THE ISSUE WHICH NEEDS EXAMINATION IS WHETHER THERE IS ANY REQUIREMENT THAT THE NEW UNIT BE SET UP AT A NEW PLACE OR WHETHER THERE IS ANY REQUIREMENT OF PHYSICAL SEPARATION 8 BETWEEN UNITS FOR CLAIMING DEDUCTION UNDER SECTION 10A OF THE ACT. 4(7)(II) A REFERENCE IN THIS REGARD MAY BE MADE TO THE PARAGRAPH (VII) OF THE CBDT CIRCULAR NO. 01/2013 DATED 17.01,2013 ISSUED VIDE F. NO. 178/84/2012 - ITA.I, WHICH IS AS UNDER - (VII) WHETHER NEW UNITS/UNDERTAKINGS SET UP IN THE S AME LOCATION WHERE THERE IS AN EXISTING ELIGIBLE UNIT/UNDERTAKING WOULD AMOUNT TO EXPANSION OTTHE EXISTING UN IT/UNDERT AKING. WHETHER SETTING UP OF NEW UNIT/UNDERTAKING IN A LOCATION (COVERED BY SECTIONS 10A, 10AA OR 10B), WHERE AN ELIGIBLE UNIT IS ALREADY EXISTING, WOULD AMOUNT TO EXPANSION OF SUCH ALREADY EXISTING UNIT IS A MATTER OF FACT REQUIRING EXAMINATION AND VERIFICATION. HOWEVER, IT IS CLARIFIED THAT SETTING UP OF SUCH A FRESH UNIT IN ITSELF WOULD NOT MAKE THE UNIT INELIGIBLE FOR TAX BENEFITS, AS L ONG AS THE UNIT IS SETUP AFTER OBTAINING NECESSARY APPROVALS FROM THE COMPETENT AUTHORITIES; HAS NOT BEEN FORMED BY SPLITTING OR RECONSTRUCTION OF AN EXISTING BUSINESS; AND FULFILS ALL OTHER CONDITIONS PRESCRIBED IN THE RELEVANT PROVISIONS OF LAW. 4(7)(III) A SIMILAR ISSUE WAS EXAMINED BY HON'BLE ITAT, PUNE IN THE CASE OF ACIT VS SYMANTEC SOFTWARE INDIA P. LTD [ITA NO 787 /PN/09 (AY 2004 - 05), DATED 30 TH NOVEMBER 2011]. IN THAT CASE THE FIRST UNIT HAD CEASED TO BE ELIGIBLE FOR EXEMPTION AND A NEW UNIT WAS SET UP AS AN EXTENSION OF THE FIRST UNIT AFTER SEEKING NECESSARY APPROVALS. THE HON'BLE COURT HELD THAT DEDUCTION IS AVAILABLE TO AN INDEPENDENT UNIT WHICH IS AN EXPANSION OF THE EXISTING UNIT. 4(7)(III) IN VIEW OF THE ABOVE I AM OF THE CONSIDERED VI EW THAT PHYSICAL DEMARCATION IS NOT A CRITERION TO DECIDE THE ELIGIBILITY OF DEDUCTION UNDER SECTION 10A OF THE ACT SO LONG AS THE NEW UNIT IS INDEPENDENT OF THE OLD EXISTING UNIT. PHYSICAL INDEPENDENCE OF THE TWO UNITS IS NOT ENVISAGED IN SECTION 10A(2)(I I) AND 10A(2)(III) READ WITH EXPLANATION 2 TO SECTION 801 OF THE ACT. 9 4( 8)(I) THE FIXED ASSETS SCHEDULE EXAMINED BY THE AO IN THE ASSESSMENT ORDER AT PAGE 4 IS AS UNDE R: S.NO. PARTICULARS FIXED ASSETS AS ON 1/4/08 FIXED ASSETS PURCHASED FOR OLD UNIT FIXED ASSETS PURCHASED FOR NEW UNIT FIXED ASSETS AS ON 31/3/2009 BEFORE CLAIMING DEPRECIATION PERCENTAGE OF OLD ASSETS 1. FURNITURE FIXTURE 7,81,336/ - 36,800/ - 2,38,585/ - 10,56,721/ - 73.93% 2. OFFICE EQUIPMENTS 11,17,272/ - 1,51,115/ - 5,55,480/ - 18,23,867/ - 61.25% 3. COMPUTERS 44,16,979/ - 6,42,263/ - 12,25,258/ - 62,84,500/ - 70.28% TOTAL ASSETS PURCHASED FOR NEW UNIT 20,19,323/ - 4(8)(II) ON THE BASIS OF ABOVE SCHEDULE THE AO CONCLUDED THAT THE PERCENTAGE OF OLD PLANT AND MACHINERY WAS MORE THAN 20% OF THE TOTAL PLANT AND MACHINERY. I FIND THAT THE AO HAS NOT CORRECTLY APPRECIATED THE FACTS. THE PROVISIONS OF EXPLANATION 2 TO SECTI ON 80I OF THE ACT PROHIBIT TRANSFER OF MORE THAN 20% OF THE OLD PLANT AND MACHINERY TO THE NEW UNIT. IN THE INSTANT CASE THERE IS NO TRANSFER AS SUCH OF ANY PLANT AND MACHINERY FROM OLD UNIT TO THE NEW UNIT. THE TOTAL ASSETS PURCHASED FOR NEW UNIT IS SEPARATELY SHOWN AT RS.20,19,323/ - . THIS IS THE INVESTMENT MADE BY THE APPELLANT OF ASSETS IN NEW UNIT. THESE ASSETS DO NOT REFER TO ASSETS TRANSFERRED TO NEW UNIT FROM THE OLD UNIT. THE CONCLUSION OF TRANSFER OF ASSETS FROM OLD UNIT TO THE NEW UNIT HAS NOT BEEN CORR ECTLY DRAWN BY THE AO. 4(9) THE PROVISIONS OF SECTION 10A(2)(II) AND 10 A(2)(III) READ WITH EXPLANATION 2 TO SECTION 80I OF THE ACT PROHIBIT SPLITTING UP OR RECONSTRUCTION OF AN EXISTING BUSINESS OR TRANSFER OF OLD PLANT AND MACHINERY OF MORE THAN 20% TO T HE NEW UNIT FOR CLAIMING DEDUCTION UNDER SECTION 10A OF THE ACT. IN THE INSTANT CASE THE APPELLANT HAS MADE SUBSTANTIAL INVESTMENT OF RS. 20,19,323/ - IN ASSETS FOR THE NEW BUSINESS FOR WHICH APPROVAL WAS GRANTED BY THE STPI. IN ORDER TO HOLD THAT A BUSINES S WAS FORMED BY SPLITTING UP OF A BUSINESS ALREADY IN EXISTENCE, THERE MUST BE SOME MATERIAL TO HOLD THAT EITHER SOME ASSETS OF THE EXISTING BUSINESS ARE DIVERTED AND ANOTHER, NEW BUSINESS IS SET UP FROM SUCH SPLITTING UP OF ASSETS OR THAT THE TWO BUSINESS ES WERE SAME AND THE ONE FORMED WAS AN INTEGRAL PART OF THE EARLIER ONE. HOWEVER, IF THE ALTERATIONS OR CHANGES ARE SUBSTANTIAL, THERE WOULD BE LITTLE SCOPE OF DESCRIBING WHAT EMERGES AS A RECONSTRUCTION OF BUSINESS. HENCE, IN THESE 10 MATTERS, ONE HAS TO LOO K AT THE SUBSTANCE OF A TRANSACTION AND NOT THE FORM.' 4(10) IN THE INSTANT CASE, THERE IS SUBSTANTIAL INVESTMENT MADE IN ASSETS OF NEW UNIT AFTER SEEKING APPROVAL OF THE STPI. THE BUSINESS OF THE TWO UNITS IS DISTINCT AND SEPARATE AS CAN BE EASILY DECIPH ERED FROM THE TURNOVER OF THE TWO PERIODS AS UNDER AS MENTIONED BY THE AO AT PAGE 2 OF THE ASSESSMENT ORDER - TURNOVER UP TO 15.10.2008 DOMESTIC 25,66,596/ - EXPORT 1,49,52,581/ - 1,75,19,177/ - TURNOVER AFTER 16.10.2008 DO M ESTIC TURNOVER OF EXISTING BUSINESS 17,21,408/ - EXPORT TURNOVER OF NEW UNIT 4,27,05,973/ - 4,44,27,381/ - 6,19,46,558/ - 4(11) NOW AS REGARDS THE PRINCIPLES LAID DOWN BY COURTS IN RELATION TO THE CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT, IT HA S BEEN L AID DOWN THAT A NEW UNIT SHOULD BE SET UP FROM NEW INVESTMENTS. THE NEW UNIT MUST BE SET UP FOR PRODUCING EITHER THE SAME COMMODITIES OR SOME DISTINCT COMMODITIES (SUPREME COURT IN THE CASE OF TEXTILE MACHINERY CORPORAT ION VS CIT (107 ITR 195). FURTHER, EVEN IF SOME EMPLOYEES ARE COMMON TO THE OLD AND THE NEW UNIT, IT WILL NOT BE A BAR ON ELIGIBILITY OR DEDUCTION (MADRAS HIGH COURT IN THE CASE OF METROPOLITAN SPRINGS ( P ) LTD VS CIT (191 ITR 288). AGAIN, EVEN IF THE NEW U NIT MANUFACTURES THE SAME COMMODITY AS THE OLD UNIT, IT WILL BE AN ELIGIBLE UNDERTAKING (SUPREME COURT IN THE CASE OF INDIAN ALUMINUM COMPANY LTD VS CIT (108 ITR 367). FINALLY, WHILE DECIDING WHETHER THERE IS SPLITTING UP OR RECONSTRUCTION OF AN UNDERTAKIN G, IT IS NOT NECESSARY TO SEE WHETHER THE NEW UNDERTAKING HAS PRODUCED A DIFFERENT ARTICLE THAN THAT PRODUCED BY THE OLD UNDERTAKING (MADRAS HIGH COURT IN THE CASE OF PREMIER COTTON MILLS LTD VS CIT (240 ITR 434) 4(12) ON THE BASIS OF MY EXAMINATION I FIN D THAT THERE IS NOTHING TO PROVE THAT THE NEW UNIT WAS FORMED BY SPLITTING UP OR RECONSTRUCTION OF AN EXISTING BUSINESS OR TRANSFER OF OLD PLANT AND MACHINERY O F MORE THAN 20% TO THE NEW UNIT. THERE 11 IS NO VIOLATION AS SUCH OF THE PROVISIONS CONTAINED IN SE CTION 10A(2)(II) AND 10A(2)(III) READ WITH EXPLANATION 2 TO SECTION 80 I OF THE ACT. THE AO IS THEREFORE NOT JUSTIFIED IN DISALLOWING THE DEDUCTION CLAIMED BY THE APPELLANT UNDER SECTION 10A OF THE ACT. THE AO IS THEREFORE DIRECTED TO ALLOW DEDUCTION OF RS. 59,44,003/ - CLAIMED UNDER SECTION 10A OF THE ACT. THE APPELLANT GETS CONSEQUENTIAL RELIEF. THE GROUNDS OF APPEAL NUMBERS 2 TO 10 ARE ALLOWED. 6.1 FROM THE ABOVE PARAS FROM THE ORDER OF LEARNED CIT(A), WE FIND THAT REGARDING THIS OBJECTION OF THE ASSESSING OFFICER THAT THE ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNT, CIT(A) HAS REFERRED TO A TRIBUNAL ORDER OF BANGALORE BENCH OF I.T.A.T. IN THE CASE OF IBM INDIA P. LTD. V. DEPUTY COMMISSIONER OF INCOME TAX (SUPRA) ALONG WITH CBDT CIRCULAR NO. 01 OF 2013 DATED 17/01/2013 AND HELD THAT THERE IS NO REQUIREMENT OF MAINTAINING SEPARATE BOOKS OF ACCOUNT U/S 10A AND NON MAINTENANCE OF SEPARATE BOOKS OF ACCOUNT CANNOT BE BASIS FOR DISALLOWING THE CLAIM OF DEDUCTION U/S 10A OF THE ACT. ON THIS ASPECT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LEARNED CIT(A) BECAUSE HIS DECISION IS IN LINE WITH THE TRIBUNAL DECISION BEING TRIBUNAL ORDER IN THE CASE OF IBM INDIA P. LTD. V. DEPUTY COMMISSIONER OF INCOME TAX (SUPRA). 6.2 REGARDING THE SECOND OBJECTION OF THE ASSESSING OFFICER THAT THE NEW UNIT WAS USING THE POINT TO POINT LEASED LINES AND THE INTERNET LEASED LINES OF THE EXISTING UNIT, IT IS HELD BY LE ARNED CIT(A) THAT THE CONFUSION HAS BEEN DRAWN BY THE ASSESSING OFFICER WITHOUT PROVIDING OPPORTUNITY TO THE ASSESSEE TO EXPLAIN THE ISSUE. HE HAS ALSO GIVEN A FINDING THAT THE APPLICATION FOR APPROVAL OF STPI WAS MADE ON 27/05/2008 AND APPLICATION FOR IN STALLATION OF LEASED LINE AND INTERNET LINE WAS MADE ON 24/07/2008 AND AS PER THE BILL OF SIFY TECHNOLOGIES LTD., THE DATE MENTIONED IS 24/07/2008. HE HAS ALSO GIVEN A FINDING THAT THE PAYMENT OF INTERNET CHARGES OF RS.3,12,876/ - HAS BEEN SHOWN TO HAVE BE EN MADE BY THE ASSESSEE AND 12 THEREFORE, IT IS SEEN THAT THE NEW UNIT IS USING SEPARATE COMMUNICATION LINE FOR INTERNET USAGE. HE HAS ALSO NOTED THAT THE ASSESSING OFFICER HAS RELIED UPON THE REPORT OF INCOME TAX INSPECTOR BUT IT IS NOT JUSTIFIABLE BECAUSE THE REPORT WAS NOT CONFRONTED TO THE ASSESSEE. HE HAS ALSO NOTED THAT THE INCOME TAX INSPECTOR HAS CONDUCTED ENQUIRY ON 26/06/2011 WHEREAS THE UNIT IS CLAIMING DEDUCTION U/S 10A ONLY TILL 31/03/2011 AND THEREFORE, ON THE DATE ON WHICH THE ENQUIRY WAS COND UCTED, THE UNIT IN RESPECT OF WHICH THE ENQUIRY WAS CONDUCTED, WAS NOT IN OPERATION. HE HAS ALSO OBSERVED THAT THE REPORT OF THE INCOME TAX INSPECTOR OUTLINES THAT THE NEW UNIT WAS OPERATED ON THE SAME PLACE AND THERE WAS NO DEMARCATION BETWEEN NEW UNIT A ND OLD UNIT BUT AS PER THE CBDT CIRCULAR NO. 01 OF 2013 AND AS PER THE TRIBUNAL DECISION OF THE PUNE BENCH IN THE CASE OF ACIT VS SYMANTEC SOFTWARE INDIA P. LTD IN ITA NO . 787/PN/09 FOR ASSESSMENT YEAR 2004 - 05), DATED 30 TH NOVEMBER 2011 , IT WAS HELD THAT P HYSICAL DEMARCATION IS NOT A CRITERI A TO DECIDE THE ELIGIBILITY OF DEDUCTION UNDER SECTION 10A OF THE ACT SO LONG AS THE NEW UNIT IS INDEPENDENT OF THE OLD EXISTING UNIT. HENCE, IN OUR CONSIDERED OPINION, ON THIS ASPECT ALSO, THERE IS NO INFIRMITY IN THE ORDER OF CIT (A). 6.3 REGARDING THIS OBJECTION OF THE ASSESSING OFFICER THAT THE PERCENTAGE OF OLD PLANT & MACHINERY USED BY NEW UNIT WAS MORE THAN 2 0% , A CLEAR FINDING I S GIVEN BY THE LEARNED CIT(A) THAT THE ASSESSING OFFICER HAS NOT CORRECTLY APPRECIATED THE FACTS. HE HAS ALSO GIVEN A FINDING THAT THE PROVISION OF EXPLANATION 2 TO SECTION 80I OF THE ACT PROHIBITS TRANSFER OF MORE THAN 20% OF OLD TOTAL PLANT & MACHINERY TO NEW UNIT BUT IN THE PRESENT CASE, THERE IS NO TRANSFER OF PLANT & MACHINERY FROM OLD UNIT TO NEW UNIT. HE HAS ALSO GIVEN A FINDING THAT THE TOTAL ASSETS PURCHASED IS SEPARATELY SHOWN AT RS.29,20,233/ - AND THEREFORE, THIS CONFUSION OF THE 13 ASSESSING OFFI CER REGARDING TRANSFER OF MORE THAN 20% OF THE TOTAL PLANT & MACHINERY OF OLD UNIT TO NEW UNIT IS NOT CORRECT. 6.4 REGARDING THIS OBJECTION OF LEARNED D.R. OF THE REVENUE THAT EVEN OUT OF NEW COMPUTERS INSTALLED IN THE PRESENT YEAR, 8 COMPUTERS OUT OF 10 C OMPUTERS WERE PUT TO USE ON OR BEFORE 27/09/2008 WHEREAS THE STPI APPROVAL HAS BEEN GRANTED ON 16/10/2008, WE ARE OF THE CONSIDERED OPINION THAT ON THIS ASPECT, THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. EXPERT OUTSOURCE (P) LTD. ( SUPRA), SUPPORTS THE CASE OF THE ASSESSEE. IN THAT CASE, THE ASSESSEE WAS CARRYING ON THE BUSINESS OF CONSULTANCY SOFTWARE FROM 29/12/2003 AND THE STPI APPROVAL WAS OBTAINED BY THE ASSESSEE WITH EFFECT FROM 04/08/2004. IT IS ALSO NOTED BY HON'BLE HIGH CO URT THAT THE ASSESSEE DID NOT CHOOSE THE AVAILABLE OPTION OF CONVERSION OF THE DTA UNIT INTO STP UNIT AND THIS WAS THE BASIS OF THE OBJECTION OF THE ASSESSING OFFICER THAT WHEN THE ASSESSEE HAS USED THE MACHINERY FOR DTA UNIT AND ALSO FOR STP UNIT, SUCH USER OF OLD PLANT & MACHINERY IS MORE THAN 20% AND THEREFORE, THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTIO N. UNDER THESE FACTS, THE ISSUE WAS DECIDED BY HON'BLE HIGH COURT IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER: 4. IN THE INSTANT CASE, THE ASSESSEE BEGAN OPERATIONS ON DECEMBER 17, 2003, WHEREAS THE STPI WAS REGISTERED ON AUGUST 4, 2004. THE STP AUT HORITIES COULD ALSO PERMIT THE CONVERSION OF AN EXISTING UNIT INTO A STPI UNIT. THE PURPOSE OF THE STP SCHEME IS TO ENCOURAGE EXPORTS AND GAIN VALUABLE FOREIGN EXCHANGE FOR THE COUNTRY. THE STP SCHEME PROVIDES THE BENEFIT OF CONVERTING A DTA UNIT INTO A ST PI UNIT AND THE SAME SHOULD ALSO HOLD GOOD FOR TAX PURPOSES. CBDT CIRCULAR NO. 1 OF 2005, DATED JANUARY 6, 2005, GRANTS CERTAIN BENEFITS UNDER SECTION 10B. THOUGH THE CIRCULAR IS IN THE CONTEXT OF SECTION 10B, THE RATIO OF THE CIRCULAR EQUALLY APPLIES TO S ECTION 10A ALSO. IN FACT, THE COMMISSIONER OF INCOME - TAX (APPEALS) HAS REFERRED TO VARIOUS JUDGMENTS ON THE POINT AND HAD COME TO THE CONCLUSION THAT THE BENEFIT OF SECTION 10A WOULD ALSO BE AVAILABLE EVEN WHEN AN EXISTING UNIT GETS CONVERTED INTO A 14 STPI U NIT. IN FACT, THE MATERIAL ON RECORD DISCLOSES THAT NO EXPORT OF COMPUTER SOFTWARE WAS MADE BEFORE AUGUST 4, 2004. THE EXPORT COMMENCED ONLY AFTER AUGUST 4, 2004. THE INVOICES PRODUCED IN THE CASE CLEARLY ESTABLISH THE SAID FACT. IN THESE CIRCUMSTANCES, TH E APPELLATE AUTHORITY AS WELL AS THE TRIBUNAL WERE JUSTIFIED IN EXTENDING THE BENEFIT OF SECTION 10A TO THE UNIT IN QUESTION. 6 . 4.1 AS PER THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT, THE RELEVANT PARA OF WHICH IS REPRODUCED ABOVE, IT IS SEEN THAT A DTA UNIT CAN BE CONVERTED INTO STP UNIT BUT EVEN IF THE ASSESSEE DID NOT CHOOSE TO GET ITS DTA UNIT CONVERTED INTO STP UNIT, THE DEDUCTION IS ALLOWABLE TO THE ASSESSEE. IN THE PRESENT CASE ALSO , THE ASSESSEE HAS NOT CHOSEN TO CONVERT ITS STP UNIT TO DT A UNIT AND SOME OF THE MACHINERY WERE PUT TO USE BEFORE THE REGISTRATION GRANTED BY STPI, BUT THIS FACTOR ALONE CANNOT BE A BASIS TO DENY THE ASSESSEE DEDUCTION U/S 10A OF THE ACT. 7. WE ALSO FIND THAT IT IS ALSO NOTED BY CIT(A) IN PARA 4(10) AND 4(11) OF HIS ORDER THAT THE ASSESSEE WAS HAVING EXPORT TURNOVER OF RS.149.52 LAC FOR THE PERIOD UPTO 15/10/2008 AND THE EXPORT TURNOVER AFTER 16/10/2008 WAS RS.427.05 LAC AND AS PER THE CERTIFICATE OF THE CHARTERED ACCOUNTANT IN FORM NO. 56 AS R EQUIRED U/S 10A, THE CALCULATION FOR DEDUCTION ALLOWABLE TO THE ASSESSEE U/S 10A HAS BEEN COMPUTED BY ADOPTING EXPORT TURNOVER FOR THE PERIOD 16/10/2008 TO 31/10/2009 OF RS.427.0 5 LAC ON PROPORTIONATE BASIS BY CONSIDERING THE TOTAL TURNOVER OF THE WHOLE YE AR INCLUDING DOMESTIC AND EXPORT TURNOVER AT RS.469.46 LAC. THE CIT(A) HAS REFERRED TO VARIOUS JUDGMENTS, SUCH AS IN THE CASE OF TEXTILE MACHINERY CORPORATION LTD. VS. CIT [1977] 107 ITR 195 (SC), CIT VS. METROPOLITAN SPRINGS (P.) LTD. [1991] 191 ITR 288 (BOM) AND CIT VS. INDIAN ALUMINIUM CO. LTD. [1977] 108 ITR 367 (SC) WHEREIN IT WAS HELD THAT EVEN IF SOME EMPLOYEES ARE COMMON IN OLD AND NEW UNIT, THERE IS NO BAR O N ALLOWABILITY OF DEDUCTION U/S 10A OF THE ACT. FINALLY, IN PARA 4(12) OF HIS ORDER, A CAT EGORICAL FINDING HAS BEEN GIVEN 15 BY LEARNED CIT(A) THAT THERE IS NO MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFICER T O PROVE THAT THE NEW UNIT WAS FORMED BY SPLITTING UP OR RECONSTRUCTION OF AN EXISTING BUSINESS OR TRANSFER OF OLD PLANT AND MACHINERY OF MORE THAN 20% TO THE NEW UNIT AND T HERE FORE, THERE IS NO VIOLATION OF THE PROVISIONS CONTAINED IN SECTION 10A(2)(II) AND 10A(2)(III) READ WITH EXPLANATION 2 TO SECTION 80I OF THE ACT AND THEREFORE, THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT . THESE CATEGORICAL FINDINGS OF LEARNED CIT ( A) COULD NOT BE CONTROVERTED BY LEARNED D.R. OF THE REVENUE AND HENCE, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF LEARNED CIT(A) IN BOTH THE YEARS BECAUSE IN ASSESSMENT YEAR 2010 11, THE ORDER OF ASSESSING OFFICER AND CIT(A) ARE IN LINE WITH THE RESPECTIVE ORDERS IN EARLIER YEAR. HENCE, WE DECLINE TO INTERFERE IN THE ORDERS OF CIT(A) IN BOTH THE YEARS. 8. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE STAND DISMISSED. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 4 /08/2015 *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A) 5. D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR