Sherla v. Itxa.510.2017+_35(1).Doc

IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. INCOME TAX APPEAL NO.510 OF 2017 Pr. Commissioner of Income Tax – 10 … Appellant VsMedley Pharmaceuticals Ltd.… Respondent With INCOME TAX APPEAL NO.511 OF 2017 Pr. Commissioner of Income Tax – 10 … Appellant VsMedley Pharmaceuticals Ltd.… Respondent With INCOME TAX APPEAL NO.732 OF 2017 Pr. Commissioner of Income Tax – 10 … Appellant VsMedley Pharmaceuticals Ltd.… Respondent With INCOME TAX APPEAL NO.1226 OF 2017 Pr. Commissioner of Income Tax – 10 … Appellant VsMedley Pharmaceuticals Ltd.… Respondent WithINCOME TAX APPEAL NO.1305 OF 2017 Pr. Commissioner of Income Tax – 10 … Appellant Vs Medley Pharmaceuticals Ltd.… Respondent ANDINCOME TAX APPEAL NO.1378 OF 2017 Pr. Commissioner of Income Tax – 10 Vs Medley Pharmaceuticals Ltd. … Appellant … Respondent Mr.Akhileshwar Sharma for the Appellant Ms.Shobha Jagtiani with Mr.Ravi R. i/b D.M. Harish Rao for theRespondent in all the matters CORAM: AKIL KURESHI & S.J. KATHAWALLA, JJ. DATED: JULY 22, 2019 P.C.: 1.These appeals arise in common background involving the same appellant and the assessee and raise common questionsand hence, the appeals are being disposed of by a common order. For convenience, we may refer to Income Tax Appeal No.510 of2017. This Appeal is filed by the Revenue to challenge thejudgment of the Income Tax Appellate Tribunal (for short, ‘theTribunal’). Following questions are presented for ourconsideration: i)Whether on the facts and in circumstances of the caseand in Law, the Tribunal was justified in deleting thedisallowance of claim of deduction under section 80-IA inrespect of Unit-1 at Daman without appreciating the fact thatUnit-1 at Daman was formed with the transfer of machineryfrom Aurangabad Unit in excess of 20% of the total value ofthe plant & machinery at Unit-1, Daman, in violation of theprovisions of section 80-IA(2)(ii) of the Income Tax Act,1961? ii)Whether on the facts and in circumstances of the caseand in Law, the Tribunal was justified in holding that the Unit-2 at Daman was a separate and independent unit withoutappreciating the fact that the Unit-2 was merely an extensionof Unit-1 in view of the fact that both the units have acommon excise registration, common electricity and water connection indicating that Units-1 and 2 are same and an artificial distinction was created for claiming deduction undersection 80-IA/80IB of the Income Tax Act, 1961 for a longerperiod? 2. The respondent-assessee is a private limited company and is engaged in manufacturing pharmaceutical products. Therespondent had a manufacturing unit at Aurangabad. Later on, theassessee established another unit at Daman. Yet another unitreferred to as Unit-2 at Daman was set up at the same site. Theassessee claimed exemption of an income arising out of itsmanufacturing activities carried out at the Daman units in terms ofsection 80-IA of the Income Tax Act (for short, ‘the Act’). TheRevenue rejected the claim on two grounds. Firstly, on the groundthat the assessee had utilised old machinery, valuation of whichwas in excess of 20% of the total installed machinery. Secondly,that the Unit-2 was a mere extension of the existing Unit-1and was not an independent manufacturing unit. 3.As is well known, section 80-IA / 80-IB of the Act grantcertain exemption of income subject to fulfillment of conditionscontained therein. The assessee’s units at Daman situated in a backward area was subject to fulfillment of conditions, eligible for such exemption. Sub-section (3) of section 80-IA laid down these conditions in the following manner: “(3)This section applies to an undertaking referred to inclause (ii) or clause (iv) of sub-section (4) which fulfills all thefollowing conditions, namely:- (i)it is not formed by splitting up, or the reconstruction, of a business already in existence: 3.As is well known, section 80-IA / 80-IB of the Act grantcertain exemption of income subject to fulfillment of conditionscontained therein. The assessee’s units at Daman situated in a backward area was subject to fulfillment of conditions, eligible for such exemption. Sub-section (3) of section 80-IA laid down these conditions in the following manner: “(3)This section applies to an undertaking referred to inclause (ii) or clause (iv) of sub-section (4) which fulfills all thefollowing conditions, namely:- (i)it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of anundertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee ofthe business of any such undertaking as is referred to insection 33B, in the circumstances and within the periodspecified in that section; (ii)it is not formed by the transfer to a new business ofmachinery or plant previously used for any purpose; Provided that nothing contained in this sub-section shallapply in the case of transfer, either in whole or in part, ofmachinery or plant previously used by a State ElectricityBoard referred to in clause (7) of section 2 of the ElectricityAct, 2003 (36 of 2003), whether or not such transfer is inpursuance of the splitting up or reconstruction orreorganisation of the Board under Part XIII of that Act.” 4. Explanation 2 below section 80-IA(3) which is also relevant for our purpose reads as under: “Explanation 2 – Where in the case of an undertaking, anymachinery or plant or any part thereof previously used forany purpose is transferred to a new business and the totalvalue of the machinery or plant or part so transferred doesnot exceed twenty per cent of the total value of the machinery or plant used in the business, then, for thepurposes of clause (ii) of this sub-section, the conditionspecified therein shall be deemed to have been compliedwith.” 5.The Revenue’s first objection emanates out of the secondcondition that the industry is not formed by transfer of machinery ofplant previously used for any purpose as explained in Explanation2, which provides that the value of such machinery used in thebusiness previously should not exceed 20% of the total value ofthe machinery of the plant used in the business. In this context,Revenue had contended before the Tribunal that the petitioner hadtransferred its machinery previously used at Aurangabad to itsunits at Daman and thereby breached this condition. The Revenue’s first objection emanates out of the second 6.The Tribunal, however, in a detailed discussion contained inthe impugned judgment, had rejected the contention. The Tribunalhad taken into account the valuation of the existing machineryused at Daman and the valuation of the written down value of themachinery transferred from Aurangabad to come to the conclusionthat the same did not exceed 20% of the total value of themachinery. The entire issue is thus based on factual considerationand on appreciation of evidence on record. No question of lawarises. 7.The Revenue’s second objection flows from the firstcondition contained in sub-section (3) of section 80-IA of the Act.This objection is confined to the Unit 2 at Daman. The Revenueargues that the said Unit is nothing but an extension of the existingunit and the assessee desired to extend the benefits of section80-IA beyond the prescribed statutory period of 10 years. 7.The Revenue’s second objection flows from the firstcondition contained in sub-section (3) of section 80-IA of the Act.This objection is confined to the Unit 2 at Daman. The Revenueargues that the said Unit is nothing but an extension of the existingunit and the assessee desired to extend the benefits of section80-IA beyond the prescribed statutory period of 10 years. 8.The Tribunal, however, noted that the operations of Unit-1 atDaman started in A.Y. 1995-1996 and the operations of the Unit-2at Daman started during the period relevant to the AssessmentYear 1999-2000. It was further noted that the productsmanufactured at both the Units were different, though some of thepharmaceutical formulations may be common. The Tribunal notedthat in Unit-1, the assessee was manufacturing oral liquids only,whereas at the Unit-2, the assessee had started manufacturingtablets, capsules as well as certain orally administered liquids. Theassessee had also commenced for the first time manufacturingactivity of certain antibiotics. The Tribunal, therefore, came to theconclusion that the formation of Unit-2 at Daman cannot be seenas a mere extension of the assessee’s existing unit-1. TheTribunal has discarded the Revenue’s contention that both the ITXA.510.2017+_35(1).doc Units shared common amenities and common central exciseregistration and, therefore, cannot be seen as a separate industry,was rejected by the Tribunal. The assessee had presented fulldetails of purchase of new plot, efforts made for obtaining separateexcise registration for the new industry as well as for obtaining of aseparate electric connection. Again, the Tribunal has examinedthe relevant factors and come to the conclusion which does notgiven rise to any substantial question of law. 9.All the appeals involve similar issues. Under thecircumstances, the appeals are dismissed. (S.J. KATHAWALLA, J.) (AKIL KURESHI, J.)