Commissioner Of Income Tax, Jaipur-Ii ,Jaipur v. M/S Veto Electropowers, C

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 314 / 2011 COMMISSIONER OF INCOME TAX, JAIPUR-II ,JAIPUR ----Appellant Versus M/s VETO ELECTROPOWERS, C-55, SAKET COLONY, ADARSH NAGAR, JAIPUR ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. MathurFor Respondent(s) : Mr. Mahendra Gargieya _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASJudgment 11/09/2017 1.By way of this appeal, the Department has challenged thejudgment and order of the Tribunal whereby the Tribunal hasdismissed the appeal preferred by the Department. 2.While admitting the matter on 10.04.2013, the court hasframed the following question of law:- “Whether in the facts and circumstances of the casethat ITAT was justified in law in allowing the benefit ofdeduction u/s. 10B even to the acquired unit of M/S.Anjali Exports despite of the facts the same was nothaving certificate of Export Oriented Unit which wasmandatory requirement” 3. The facts of the case are that the assessee is a partnershipconcern and was established in the year 2000. The assessee wasclaiming deduction u/s 10B of 100% of EOU. The firm earlier wasknown as M/s. V.K. Exports. On 30.12.2006, reconstitution ofbusiness was made and new partner has introduced & Old partner retired. After reconstitution of business, the name is changed toM/s Veto Electro Power. On 15.01.2007, the assessee firm haspurhcased another undertaking named M/s Anjali Exports throughMOU. M/s Anjali Exports was established in the year 2001 and wasclaiming deduction u/s 10B. On 24.03.2007, M/s Veto ElectroPower was converted into company named M/s Veto Electro PowerPvt. Ltd. And M/s Veto Electro Power Pvt. Ltd. has signed anotherMOU for purchase of M/s Anjali Exports on 15.01.2007 and theassessee firm has shown purchase of M/s Anjali Exportsretrospectively from 01.04.2006. Similarly, MOU signed by M/sVeto Electro Power Pvt. Ltd. On 24.03.2007 and purchase of M/sAnjali Exports was shown retrospectively from 01.04.2006. Thebooks of accounts of M/s Anjali Exports are not maintainedseparately. The books of accounts of M/s Anjali Exports and M/sVeto Electro Power are merged. No separate audit of theseaccounts was made. In case of assessee following points haveemerged- 1. M/s Veto Electro Power is formed after reconstitution of M/s V.K.Exports on 30.12.2006. 2. M/s Veto Electro Power has purchased M/s Anjali Exportsthrough slump sales amounting to Rs.3 crores.through slump sales amounting to Rs.3 crores. 3. The partners and name of assessee firm has changed duringthe reconstitution of business. 4. After purchase of M/s Anjali Exports, both the undertaking havemerged and reconstitution of the business came into existencebecause all the old plant & machinery, assets, liabilities, etc. Havepurchased by M/s Veto Electro Power. 5. The books of accounts of M/s Anjali Exports and M/s VetoElectro Power have merged.Electro Power have merged. 6. No separate audit have made of M/s Anjali Exports and M/sVeto Electro Power. 7. The ownership of undertaking M/s Anjali Exports have changed. The assessee firm has claimed deduction u/s 10B of Income TaxAct, 1961 for both the undertakings, M/s Anjali Exports & M/s VetoElectro Power in its return. 4. The counsel for the appellant has taken us to the order of AO and CIT (A) and contended that CIT(A) has seriously committedan error taking into consideration that income of Anjali Exports isof the previous year therefore, he cannot be allowed benefit forthe whole year. He particularly invited our attention to theobservations by the CIT (A) which reads as under:- 6. No separate audit have made of M/s Anjali Exports and M/sVeto Electro Power. 7. The ownership of undertaking M/s Anjali Exports have changed. The assessee firm has claimed deduction u/s 10B of Income TaxAct, 1961 for both the undertakings, M/s Anjali Exports & M/s VetoElectro Power in its return. 4. The counsel for the appellant has taken us to the order of AO and CIT (A) and contended that CIT(A) has seriously committedan error taking into consideration that income of Anjali Exports isof the previous year therefore, he cannot be allowed benefit forthe whole year. He particularly invited our attention to theobservations by the CIT (A) which reads as under:- I have considered facts of the case and arguments takenby Sh. Shah quite carefully. Basic facts of the caseregarding reconstitution of the firm, introduction of thenew partners, retirement of the partner, change of name ofthe firm as M/s Veto Electro Powers (formally known asM/s V.K. Exports), acquisition of undertaking namely M/sAnjali Exports and 100% EOU unit w.e.f 1.4.2006 by theMOU dt.15.1.2007 and conversion of M/s Veto ElectroPowers into a Pvt.Ltd.Co. w.e.f. 20.3.2007 as M/s Veto Electro Powers (india) Pvt.Ltd. are already reproduced inearlier part of this appellate order and therefore, it is notconsidered necessary to reproduce them again. On factualappreciation of development of the events it isundisputedly clear that M/s V.K. Exports afterreconstitution of the firm had changed its name to VetoElectro Powers w.e.f 6.12.2006 and thereafter, by a MOUdt.15.1.2007 M/s Veto Electro Powers acquired the exportoriented undertaking from a partnership firm namely M/sAnjali Exports. Such industrial undertaking was a 100%EOU unit set up by M/s Anjali Exports on 2.1.2002 at F-6,Malviya nagar Ind. Area, Jaipurwhich has commencedmanufacturing operation on 18.7.2004 which was claimingexemption /deduction in respect of the income of the saidunit u/s 10B of I.T.Act which was also granted by theassessing officer of M/s Anjali Exports. I have also gonethrough the copy of MOU dt.15.1.2007 and copy ofagreement of assignment of business with Anjali Exportsaccording to which M/s Anjali Exports was having amanufacturing unit at F-6, Malviya industrial Area, Jaipurand w.e.f 1.4.2006 all the assets and liabilities of said unitsaid business as on 1.4.2006 becomes the assets and liability of the appellant firm. It is clear that the appellantfirm had acquired on slump sale basis the aforesaid 100%EOU unit set up by M/s Anjali Exports at F-6, MalviyaNagar Ind. Area, Jaipur. Thereafter, the appellant firm videtheir letter dated 11.1.2007 to the DevelopmentCommissioner, Noida Special Economic zone has intimatedregarding change in the name of partnership firm from M/sV.K.Exports to M/s veto Electro Powers and regardingchanges of partners in the partnership firm and inresponse to that Assistant Development Commissionerfrom the office of Development Commissioner NoidaSpecial Economic Zone vide his two letters dt.18.1.2007has informed the noting regarding changes in the partnersand regarding change in the name from M/s V.K Exports toM/s Veto Electro Powers. Further, from the perusal of copyof certificate of Importer Exporter Code (IEC) Numberdated 22.8.2001 with endorsement having mention ofdifferent 3 units which includes one unit at F-6, MalviyaInd. Area, Jaipur earlier owned by M/s Anjali Exports whichmakes it clear that in the certificate issued by Jt.Development Commissioner, Noida Special Economic Zonethe 100% EOU of M/s Anjali Exports is covered through theendorsement and since, by the time of issuing thisendorsement the appellant firm had converted into aPvt.Ltd.CO. w.e.f 20.3.2007 therefore, the name of theunit in the certificate was stated as M/s Veto ElectroPowers India Pvt.Ltd. This is a case of appellant firm forthe accounting year upto 19.3.2007 because thereafter, ithas converted into a Pvt.Ltd.Co. With this factualdiscussion supported with documentary evidence it is clearthat the appellant firm had acquired all the assets andliabilities for the 100% EOU of M/s Anjali Exports situatedat F-6, Malviya Ind. Area, Jaipur and this fact is evidencedby the endorsement made by Jt. DevelopmentCommissioner, Noida Special Economic zone to the originalcertificate issued to M/s V.K. Exports whose name hasbeen changed as M/s Veto Electro Powers which is the caseof present appellant firm. It is clear that this is not a caseof new concern coming into existence but themanufacturing and export activity being run in 100% EOUby M/s V.K. Exports and M/s Anjali Exports was continuingas such. Further from the perusal of copy of P&L A/c andBalance Sheet of M/s Veto Electro Powers (formally V.K.Exports) as on 19.3.2007 and for the period from 1.4.2006to 19.3.2007 it is clear that separate figures of variousaccounts namely Income & Expenditure for Anjali Exportsand veto Electro Powers were given alongwith consolidated figure of the audited accounts and therefore, the officer isassessing factually incorrect in his finding that there wereno separate books of accounts and separate audit of M/sAnjali Exports and M/s Veto Electro Powers. In fact, withsuch separate audited figures only the assessing officercould come to know about the exemption claimed u/s 10Bpertaining to 100% EOU of M/s Anjali Export which wasdisallowed at Rs 8,25,38,959/-. The assessing officer isalso not correct in his observation that M/s Anjali Exporthas completely merged with M/s Veto Electro Powerbecause as per MOU M/s Anjali Export had transferred soldassets liabilities of its 100% EOU at F-6, Malviya NagarInd.Area, Jaipur. Such acquiring of business of M/s AnjaliExports cannot be said as reconstruction of business asreferred by assessing officer and on this issue there isdirect judgment of ITAT Delhi bench in the case of TechBooks Electronics Services Pvt. Ltd. v/s Addl.CIT Range-16 (100 ITD 125) in which Hon'ble ITAT has referred theterm reconstruction as per the dictionary meaning as givenin judicial dictionary by K.J.Iyer where the wordreconstruction is expressed by synonymous "re- build".Thus, if there is change of ownership from one person toanother person but the business continuous to be thesame it cannot be said that the undertaking is formed as aresult of reconstruction. Further, by referring theconversion of the firm into company Hon'ble ITAT hasobserved that it could not be said that there was anytransfer. On incorporation of a company consequences asper the provisions of the Companies Act,1956 and otherstatutory provisions follow ensue. Thus, there is merelystatutory vesting and it could be said that EOU owned byassessee company was formed as a result ofreconstruction of EOU owned by the firm. Further, the PANof prior and post acquisition of appellant firm i e. M/s VetoElectro Power is the same and all other registration of M/sV.K. Exports such as IEC number, registration with Ministryof Commerce and Industry, Excise and Custom Authoritiesetc. continued to remain in same manner in new namenamely M/s Veto Electro Powers. This is a clear case ofacquisition of an entity of 100% EOU unit by the another100% EOU unit through slump sale. It shall not be out ofplace to analyze that the re-organization of M/s VetoElectro Powers and M/s Anjali Exports is complete taxneutral exercise not aimed to gain any undue taxadvantage. As per provisions of S.10B(1) the deduction inrespect of an undertaking and it is not to the assessee andtherefore, deduction u/s 10B is qua undertaking and qau assessee and therefore, the change in the ownership of anundertaking will have no effect on the eligibility of theundertaking to claim deduction u/s 10B of I.T. Act. As perpara No 6.34(6) of the foreign trade policy the name canbe changed and the two firms can also be merged as perprovisions of clause 6.34(10) of the said policy. Further,the observation of assessing officer regarding provisions ofS.10B (7A) for denying the deduction exemption on theground that as per this provision the benefit is available toonly Indian Companies and not to other entity is far fromcorrect. The said sub section only prohibits the companiesother than Indian companies but the AO has convenientlyignored the provisions of sub Section 9 and 9A of 10Bwhich were omitted w.e.f. 1.4.2004 by Finance Act,2003and with such omission it makes prominently clear thatthere is no such ban now on the availability of suchdeductions in case of the firms. Rather in the explanatorymemorandum it is clear that sub section 9 and 9A becomeredundant so that the tax benefit is not lost on the changeof ownership of the eligible undertaking. With thisdiscussion and analysis of facts and evidence in myconsidered view the assessing officer was not justified indisallowing the deduction / exemption claimed u/s 10B ofI.T. Act in respect of 100% EOU of M/s Anjali Exports at Rs8,25,38,959/- and AO is thereby directed to allow thesame. 5. He also pointed out the finding of the Tribunal which reads as under:- 37. The other objection of the AO is that an agreement ofassignment of business was also entered by Ms. AnjaliExports and M/s. Veto Electric Power Pvt. Ltd.. thereforethere was a contradiction in MOUs entered into byassessee and the successor company. This is a technicalobjection of the AO. There will be no impact on therevenue either M/s. Anjali Exports is taken over byassessee firm or by its successor company. The successorcompany is not a new entity as the same was convertedfrom partnership firm to private limited company. All itspartners were taken as Director or shareholder of thesuccessor company. Upto 19.3.2007 there were two firmsin existence. M/s. Anjali Exports were taken over byassessee firm and, therefore, the profits of M/s Anjaliexports have been shown in the hands of the assesseefirm. From 20.3.2007 the asses firm has converted into aprivate limited company and from that date the successor company is doing the business in the name of privatelimited company. In the name of private limited companyagain there is no dispute in respect to allowability ofdeduction under section 10B. Only condition is thatsection 10B deduction is allowable for 10 years. It is not acase that the private limited company will take deductionfor another 10 years. For the years the firm M/s. VetoElectric Power formerly known as M/s, V.K Exports haveallowed deduction in those yeas will be excluded from theperiod of 10 years and for remaining period only thesuccessor company in our considered view can claimdeduction under section 10B. Therefore, there is no caseof department that by an act of entering into MOU thecompany is extending the period of deduction Rather thefacts are reversed as M/s. Anjali Exports who started itsoperation from assessment year 05-06 was entitled fordeduction for 10 years. However, the business of M/s.Anjali exports was taken over by assessee firm, therefore,Ms. Anjali Export lost its deduction for remaining years i.eabout 7 years, as the deduction can be allowed only for 10years i.e. in case of M/s. Veto Electric Powers or in case ofM/s. Veto Electric Power Pvt. Ltd. Therefore, for thisreason also we see no infirmity in the finding of ld CIT (A)in holding that deduction under 10B is allowable. 6,In our considered opinion, MOU was entered on 24.03.2007in that view of the matter any benefit will be taken from the dateof MOU and the effect will be given in the relevant year. 6,In our considered opinion, MOU was entered on 24.03.2007in that view of the matter any benefit will be taken from the dateof MOU and the effect will be given in the relevant year. 7.In that view of the matter, the view taken by the Tribunal isrequired to be confirmed. The issue is answered in favour ofassessee against the Department.required to be confirmed. The issue is answered in favour ofassessee against the Department. 8. The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Gandhi/Gourav-38