Commissioner Of Income Tax-I, Chandigarh v. M/S Mega Packages

ITA No. 145 of 2011 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 145 of 2011 Date of Decision: 24.8.2011 Commissioner of Income Tax-I, Chandigarh ....Appellant. Versus M/s Mega Packages ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel,for the appellant. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 31.5.2010 passed by the Income Tax AppellateTribunal, Chandigarh, Bench “A” (hereinafter referred to as “theTribunal”) in ITA No. 1136/CHD/2009, relating to the assessment year2006-07, claiming the following substantial question of law:- “Whether on the facts and circumstances of the case,the Ld. ITAT was right in law in confirming the orderof the CIT(A) who had deleted the addition made bythe Assessing Officer on account of disallowance ofthe deduction claimed by the assessee firm u/s80-IC, as the assessee firm has taken over the ongoing proprietary concern and as per Section 80-IA (12), the deduction is available only when an Indian Company is taken over by another Indian Companyin a scheme of amalgamation or demerger?” 2.Briefly stated, the facts necessary for adjudication asnarrated in the appeal are that the assessee is a partnership firm havingtwo partners, namely, Karanjit Singh Bajwa as confirming partner andInder Raj Singh Grewal as the incoming partner with 50% share each.It was also agreed upon between the parties that the name and style ofthe partnership would continue to be Mega Packages. The auditors inthe audit report in Form No.3CD had reported that the proprietorshipconcern of Karanjit Singh Bajwa was converted into a partnership firmw.e.f. 1.4.2005. The assessee firm during the year under considerationclaimed deduction under Section 80-IC of the Act. The computation ofthe deduction under Section 80-IC was annexed in Annexure A to theTax Audit Report in Form Nos. 3CB and 3CD attached with the return.The Assessing Officer held that in the assessment years 2004-05 and2005-06, the return of income of Mega Packages was filed as aproprietary concern of Karanjit Singh Bajwa. The date ofcommencement of the activity was 22.11.2003 and the initialassessment year from which deduction under Section 80-IC of the Actwas claimed was assessment year 2004-05. The Assessing Officerissued a show cause notice to the assessee to explain as to why thededuction under Section 80-IC should be allowed when the partnershipfirm had been formed during the year whereas earlier deduction wasclaimed as a proprietary concern by invoking the provisions of Section80-IA(12), and without prejudice to the provisions of Section 80-IA(12) also under Section 80-IC(4)(i) of the Act. The assessee submitted itsreply pleading that it was a proprietorship and during the relevantprevious year, the same was converted from proprietorship topartnership firm. The Assessing Officer vide order dated 29.12.2008held that a new person came into existence this year and invoking theprovisions of Sections 80-IC(7) and 80-IA(12) of the Act disallowed thededuction of Rs.23,68,113/- on the ground that such benefit wasadmissible for the remaining period in case of companies only. Thebenefit of Section 80-IC of the Act was also denied on the basis ofprovisions of Section 80-IC(4)(i) of the Act. Feeling aggrieved, theassessee filed an appeal before the Commissioner of Income Tax(Appeals) [in short “the CIT(A)”]. The CIT(A) vide order dated25.9.2009 allowed the claim of the assessee under Section 80-IC of theAct on both the grounds. Against the order of the CIT(A), thedepartment filed an appeal before the Tribunal. The Tribunal vide orderdated 31.5.2010 upheld the order of the CIT(A) and dismissed theappeal. Hence, the present appeal by the revenue. 3.We have heard learned counsel for the revenue. 4.Learned counsel for the revenue raised two fold submissionin support of the appeal. According to the learned counsel, theprovisions of Section 80-IA(12) of the Act were applicable in view ofSection 80-IC(7) of the Act. Under Section 80-IA(12) of the Act, theassessee is entitled to benefit of deduction under Section 80-IC of theAct for the remaining unexpired period where there is amalgamation ordemerger of an Indian Company. Therefore, this benefit could not beextended in cases where proprietorship concern was converted into partnership concern. Elaborating further, learned counsel urged thatunder Section 80-IC(4)(i) of the Act, any undertaking which is notformed by splitting up or by reconstruction of a business already inexistence alone can derive benefit thereunder. 5.The point for consideration in this appeal is whether theassessee was entitled to benefit of deduction under Section 80-IC of theAct for the remaining period after the proprietorship concern wasconverted into a partnership concern. 6.The Assessing Officer had denied the benefit of Section80-IC of the Act on two counts, namely, (i)The assessee had converted proprietorship concern intopartnership and, therefore, was not entitled to take benefitof Section 80-IC for the remaining period in view ofSections 80-IC(7) and 80-IA(12) of the Act. (ii)Section 80-IC(4)(i) of the Act disentitled the assessee toclaim deduction under Section 80-IC of the Act on changeof status of the assessee from proprietorship to partnership.7.In our opinion, the revenue was not right in denying benefitof Section 80-IC of the Act to the assessee in both the situations. 8.Taking up first aspect of the plea of the revenue, it may benoticed that benefit being admissible to an undertaking, the same couldnot be denied to the assessee for the remaining period only on theground that sub-section (12) of Section 80-IA embraces only cases ofamalgamation or demerger of Indian Company and, therefore, suchbenefit would not be available in case of change from proprietorship topartnership firm. Similar contention raised before the Tribunal was repelled with the following observations:- 8.Taking up first aspect of the plea of the revenue, it may benoticed that benefit being admissible to an undertaking, the same couldnot be denied to the assessee for the remaining period only on theground that sub-section (12) of Section 80-IA embraces only cases ofamalgamation or demerger of Indian Company and, therefore, suchbenefit would not be available in case of change from proprietorship topartnership firm. Similar contention raised before the Tribunal was repelled with the following observations:- “17.In the facts of the present case, the unit wasbeing run as a sole proprietorship in AssessmentYears 2004-05 and 2005-06 and the benefit ofdeduction u/s 80-IC of the Act was allowed. In theyear under appeal the said proprietorship concernhas been taken over, as a going concern, by apartnership firm constituted of the sole proprietor andanother incoming partner. The successor to thebusiness i.e. the assessee before us, the partnershipconcern is entitled to the benefit of deduction u/s80-IC of the Act for the unexpired period and in theabsence of any conditions not being fulfilled by theassessee, we find no merit in the order of AssessingOfficer in disallowing the claim of deduction u/s 80-ICof the Act. 18.Now coming to the second plea of theAssessing Officer regarding the application of theprovisions of Section 80-IC(7) r.w.s. 80-IA(12) of theAct. The provisions of Section 80-IA(12) of the Acttalks about an undertaking, which is entitled to thebenefit of deduction, under that section, is transferredbefore the expiry of the specified period to anothercompany, in a scheme of amalgamation or demerger,the conditions of allowing the deduction to theamalgamating/demerged company and amalgamated resulting company are provided. The said section issilent about the conditions in respect of the transferof business from the sole proprietor concern to apartnership concern. Even otherwise, the provisionsof section 80-IA(12) of the Act talks about thecontinuity of the deduction to be allowed for theunexpired period. However, in view of the BoardCircular dated 13.12.1963 in cases of non corporateassesses, the benefit of deduction u/s 80-IA/80-ICcan be claimed proportionately by the predecessorand the successor in business. Accordingly, weuphold the order of CIT(A) in allowing the deductionu/s 80-IC of the Act. We are also in conformity withthe order of CIT(A) that the present case is neither acase of amalgamation nor transfer of capital assetattracting the provisions of section 45(3) of theIncome Tax Act for charge of capital gain tax.Accordingly, the grounds of appeal raised by theRevenue are dismissed.” 9.Adverting to the alternate reason adopted by the AssessingOfficer to deny the benefit of Section 80-IC the Act for the remainingperiod, suffice it to notice that the formation of the partnership fromproprietorship business could not held to be as a result of splitting orreconstruction of a business already in existence which could justifydenying benefit by virtue of Section 80-IC(4)(i) of the Act. The Tribunalrejected the said contention as under:- -7- “9.Section 80IC of the Act envisaged specialprovisions in respect of certain undertaking orenterprises in certain special categories and allowsdeduction out of profits of the previous year, in caseof the fulfillment of the conditions enlisted hereunder.The deduction is allowable to an undertaking orenterprises which manufactures or produces anyarticle or thing, not being any article or thing specifiedin 13 Schedule, as per section 80IC(2)(a) of the Act.The quantification of deduction is provided in section80IC(3) of the Act. The conditions to be fulfilled areenlisted in section 80IC(4) of the Act, which reads asunder:- (4)This section applies to any undertakingor enterprise which fulfils all the followingconditions, namely:-or enterprise which fulfils all the followingconditions, namely:- (4)This section applies to any undertakingor enterprise which fulfils all the followingconditions, namely:-or enterprise which fulfils all the followingconditions, namely:- (i)it is not formed by splitting up, or thereconstruction of a business already inexistence:reconstruction of a business already inexistence: Provided that this condition shall notapply in respect of an undertaking whichis formed as a result of the re-establishment, reconstruction or revivalby the assessee of the business of anysuch undertaking as is referred to insection 33B, in the circumstances and within the period specified in that section; (ii)it is not formed by the transfer to a newbusiness of machinery or plantpreviously used for any purpose. Explanation:- The provisions of Explanations 1and 2 to sub-section (3) of Section 80-IA shallapply for the purposes of clause (ii) of this sub-section as they apply for the purposes ofclause (ii) of that sub-section. 10.The sub-section (4) to section 80IC postulatesthat undertaking eligible for deduction under thesection is not formed by splitting up or reconstructionof a business already in existence. Under theprovisions of section 80IC of the Act, the intention isto allow the benefit of tax deduction to an undertakingwhich has fulfiled the conditions laid down in the Act.Section 80IC of the Act bestows the deduction underthe Act upon the undertaking and not the owner.Once the same is to be allowed to undertaking thechange in ownership of the undertaking would notdisentitle the successor, the benefits of deduction forunexpired period. 11.Reference is invited to the circular No. F.No.15/5/63-IT(A-1) dated 13.12.1963 which reads asunder:- “The Board agree that the benefit of section 84 of the I.T. Act, 1961, attaches to theundertaking and not to the owner thereof. Thesuccessor will be entitled to be benefit for theunexpired period of five years provided theundertaking is taken over as a runningconcern.” 12.The said circular was issued with reference toSection 84 which was replaced by section 80J w.e.f.1.4.1968. The said section 80J has been omitted byFinance Act No.2 of 1996 w.e.f. 1.4.1989. However,the provisions of section 84/80J and 80IC are similarin the context of benefit of deduction to be allowed toan undertaking. Reading the provisions of section84, 80J and 80IC of the Income Tax Act, we find thatthe provisions of the aforesaid sections are similarand applying the circular issued in respect of section84 to the provisions of section 80IC, we hold that thebenefit of deduction u/s 80IC, which has notwithdrawn till date, as a going concern, is to beallowed to an undertaking. The said undertakingbeing succeeded by a partnership firm, would notdisentitle the succeeding person, the benefit ofdeduction under the aforesaid section. We findsupport from the ratio laid down in the undermentioned judgment replied upon by the assessee.”The interpretation placed by the Tribunal on the provisions ITA No. 145 of 2011 of Section 80-IC(4)(i) of the Act being in consonance with law, no faultarises in the view taken by the Tribunal. No ground to interfere with theorder of the Tribunal has been made out. Therefore, no substantialquestion of law arises in this appeal. Accordingly, the present appeal isdismissed. (AJAY KUMAR MITTAL) JUDGE August 24, 2011gbs (ADARSH KUMAR GOEL)ACTING CHIEF JUSTICE