The Commissioner Of Income Tax - I Coimbatore v. M/S. Heartland Kg Information Limited 365 Thudiyalur Road, Saravnampatti Coimbatore

In the High Court of Judicature at Madras Dated: 19.08.2013 Coram The Honourable Mrs.JUSTICE CHITRA VENKATARAMANandThe Honourable Ms.JUSTICE K.B.K.VASUKI TC(A).No.625 of 2009 The Commissioner of Income Tax - ICoimbatore .... AppellantVs.M/s. Heartland KG Information Limited 365 Thudiyalur Road, SaravnampattiCoimbatore .... Respondent Tax Case Appeal against the order of the Income Tax AppellateTribunal, Chennai 'D' Bench, dated 21.11.2008 passed in I.T.A.No.1884/Mds/ 2006 for the assessment year 2004-05 and against the orderof the Commissioner of Income Tax (Appeals) Coimbatore made inITA.No.402/05-06, dated 30.5.2006 and against the Assessment OrderPAN/GIR.No.AAACH8795C of Income Tax Officer, Company Ward I,Coimbatore for the Assessment year 2004-2005, dated 30.1.2006. For Appellant:Mr.N.V.BalajiFor Respondent :Mr.C.V.Rajan forMr.P.J. Rishikesh JUDGMENT (Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.) The above Tax Case Appeal is filed at the instance of theRevenue as against the order of Income Tax Appellate Tribunal forthe assessment year 2004-05. The Tax Case Appeal was admitted on thefollowing substantial questions of law:- "1.Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in law in sustaining the order of theCommissioner of Income Tax (Appeals) and granteddeduction under Section 10A of the Income Tax Act, https://hcservices.ecourts.gov.in/hcservices/ 1961, even though the assessee claim deductionunder Section 10B of the Income Tax Act, 1961? 2.Whether on the facts and in the circumstances ofthe case the Income Tax Appellate Tribunal wasright in law in sustaining the order of theCommissioner of Income Tax (Appeals) even thoughthe assessee does not satisfy the provisions ofSection 10A(2)(iii) of the Income Tax Act, 1961? 3.Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal wasright in law in granting deduction under Section10A of the Income Tax Act, even though theassessee is entitled deduction under Section 80HHEof the Income Tax Act, 1961 and the same wasgranted by the Assessing Officer?" https://hcservices.ecourts.gov.in/hcservices/ 1961, even though the assessee claim deductionunder Section 10B of the Income Tax Act, 1961? 2.Whether on the facts and in the circumstances ofthe case the Income Tax Appellate Tribunal wasright in law in sustaining the order of theCommissioner of Income Tax (Appeals) even thoughthe assessee does not satisfy the provisions ofSection 10A(2)(iii) of the Income Tax Act, 1961? 3.Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal wasright in law in granting deduction under Section10A of the Income Tax Act, even though theassessee is entitled deduction under Section 80HHEof the Income Tax Act, 1961 and the same wasgranted by the Assessing Officer?" 2. The assessee herein is an industrial undertaking engaged inMedical Transcription Business. It is seen from the facts narratedthat one M/s.KGISL got approval as a 100% EOU in the year 1998 fromSoftware Technology Park of India and started its new business ofMedical Transcription during financial year 1999-2000. It is statedthat it also had another undertaking engaged in the business ofdevelopment of software exported outside India. To that end it isstated to have imported machinery, during the assessment year 2000-01 and 2001-02. In respect of business income earned from export,the said undertaking claimed for exemption under Section 10A of theIncome Tax Act. In July 2001, the said company transferred theentire undertaking engaged in the export business of MedicalTranscription along with all transcriptions contracts, books,records, all rights, all permits, all warranties, including computersoftware to the assessee company by letter dated 28.5.2001 and28.6.2001. The transfer was recognised and allowed by SoftwareTechnology Park of India. It is a matter of record and not indispute that vendor company transferred its export obligation to theassessee company. By reason of transfer of the entire business, theemployees of the vendor company engaged in Medical Transcriptionwere also transferred and employed by the assessee company. In thebackground of the income on export, originally, the assessee claimeddeduction under Section 10B of the Act. The Officer however rejectedthe said claim on the ground that when the assessee had filedapproval obtained from the Software Technology Park of India for thepurpose of Section 10B, the same would not be sufficient to grantthe relief. The Assessing Officer further viewed that the assesseehad not satisfied the conditions on account of the transfer ofbusiness. The Officer further pointed out that transfer relatedonly to machinery. Consequently, the claim could not be sustained.Thus the claim was rejected. However, on the claim under Section 80HHE as an alternative claim, the Officer granted 30% deduction onthe profit as allowable under Section 80HHE. 80HHE as an alternative claim, the Officer granted 30% deduction onthe profit as allowable under Section 80HHE. 3. Aggrieved by this, the assessee went on appeal before theCommissioner of Income Tax (Appeals). The assessee took a specificstand therein that it had taken an alternative plea for grantingrelief under Section 10A of the Act, which was rejected by theAssessing Officer on the ground that the claim was hit by Section80-I(2) Explanation (2) of the Act. The assessee pointed out thatcontrary to the view of the Officer, the vendor company hadtransferred the entire business. Consequently, the claim ofexemption/ deduction under Section 10A of the Act which was alreadygranted to the vendor company would be available to the assesseetoo. Considering the contentions raised by the assessee as regardsthe transfer of entire assets to its favour, the Commissioner ofIncome Tax (Appeals) sought for detailed report. Accordingly, theAssessing Officer submitted his report, wherein, in paragraph 8, itwas pointed out that though the assessee's balance sheet showedtransfer of business and for that, there was corresponding deductionin the balance sheet of the vendor company, the approval by STPI wasnot sufficient for claiming benefit under Section 10B of the Act andthat the assessee having failed to show that it was 100% EOU, theclaim was rejected. The assessee contested the report, thatconsidering the vendor company being 100% approved EOU undertaking,the benefit that the vendor had would be available to the assesseetoo. The Commissioner of Income Tax (Appeals) pointed out that asper the deed of transfer, the entire undertaking engaged in thebusiness of medical transcription which was functioning in third andfourth floor of vendor company was transferred with all assets andliabilities to the assessee company. Referring to the Board'scircular in F.No.15/5/63-IT(A.1) dated 13.12.1963, the Commissionerof Income Tax (Appeals) held that the benefit that the vendorcompany had in respect of the individual undertaking engaged in themanufacture of articles could be claimed by successor company forthe remaining tax holiday period since the entire undertaking in thebusiness of medical transcription was transferred to the assessee.Thus the assessee would be entitled to have the benefit underSection 10A of the Act for the remaining period. The Commissionerfurther pointed out that for the assessment year 2001-02, M/s. KGISLwas granted deduction in respect of medical transcription businesscommenced during that year. Thus, when the company had the benefitof deduction under Section 10A, on the transfer of entire businessto the assessee company, the benefit under Section 10A could not bedenied to the assessee. The Commissioner of Income Tax (Appeals)further pointed out that even though the assessee had made the claimoriginally under Section 10B, yet, the relief being one to beconsidered under Section 10A, and the said claim being alreadyallowed at the hands of the vendor company, the same would beavailable to the assessee company too as the alternative claim madebefore the Officer. Thus, the assessee's appeal was allowed. In the light of the reasoning, the Commissioner of Income Tax (Appeals)held that the relief under Section 80HHE would not be available tothe assessee. light of the reasoning, the Commissioner of Income Tax (Appeals)held that the relief under Section 80HHE would not be available tothe assessee. 4. The Revenue went on appeal before the Income Tax AppellateTribunal challenging the order of the Commissioner of Income Tax(Appeals) on the aspect of relief granted under Section 10A of theAct. The Tribunal pointed out that the circular issued by the Boardclearly supported the case of the assessee. In so holding, itreferred to the decision of the Gujarat High Court in the case ofCHOKSHI METAL REFINERY v. CIT – (107 ITR 63) and held that when theassessee had made alternative claim under Section 10A before theAssessing Officer, it could not be held that the claim was not madebefore the Assessing Officer. Referring to the provisions underSection 10A of the Act, the Tribunal further held that admittedlythe unit is located in Software Technology Park of India and thecopy of the approval letter dated 25.4.2001 clearly showed thestatus of the assessee company. The Tribunal referred to thedecision of this Court reported in 233 ITR 207 - AGS TIBER CHEMICALSINDUSTRIES P. LIMITED v. CIT, and held that the assessee wasentitled to the relief under Section 10A. 5. As regards the objection of the Department that there wasonly transfer of machinery, the Tribunal pointed out that the letterdated 28.5.2001 from Software Technology Park of India showed thatthere was transfer of whole business of the undertaking on themedical transcription. Thus, it cannot be said that it was a case offormation of an undertaking by using assets previously used, ascontended by the Revenue. In the background of the said factualposition, the Tribunal held that the order of the Commissioner ofIncome Tax (Appeals) merited to be confirmed. Thus, the Tribunalrejected the Revenue's appeal. Aggrieved by this, present appealbefore this Court by the Revenue. 6. As far as the first question raised as regards the claim ofthe assessee originally made under Section 10B of the Income Tax Actis concerned, we do not think, the said question can be answered infavour of the Revenue. A reading of the order of the AssessingOfficer as well as the Commissioner of Income Tax (Appeals) showsthat even though the assessee originally claimed relief underSection 10B, it was cautious enough to make an alternative pleaunder Section 10A in view of the fact that the assessee's vendor hadthe benefit under Section 10A. It is not denied by the Revenue thatthe assessee had the whole business transferred to its favour andthat the factum of transfer was also intimated to the SoftwareTechnology Park of India. Thus, as a Software Technology Park, theassessee is entitled to place his claim under Section 10A. In anyevent, even assuming for a moment, the assessee had not referred tothe Section correctly, the fact remains that if the claim could befavourably be considered under any of those special deduction provisions and on the conditions specified therein being satisfied,we do not think that there exists any justifiable ground for theRevenue to contend that the assessee shall not be entitled to havethe benefit of Section 10A. 7. Given the fact that the findings of the Tribunal is that theentire business of M/s.KGISL stood transferred to the assessee andthat the assessee is also recognised to have had its industrialunit, in the Software Technology Park, we have no hesitation inconfirming the order of the Tribunal in granting the relief to theassessee under Section 10B. Consequently, the first question of lawis answered against the Revenue. provisions and on the conditions specified therein being satisfied,we do not think that there exists any justifiable ground for theRevenue to contend that the assessee shall not be entitled to havethe benefit of Section 10A. 7. Given the fact that the findings of the Tribunal is that theentire business of M/s.KGISL stood transferred to the assessee andthat the assessee is also recognised to have had its industrialunit, in the Software Technology Park, we have no hesitation inconfirming the order of the Tribunal in granting the relief to theassessee under Section 10B. Consequently, the first question of lawis answered against the Revenue. 8. As far as the second question of law as to whether theTribunal was right in sustaining the order of the Commissioner ofIncome Tax (Appeals), that the assessee had not satisfied theprovisions under Section 10A(2)(iii) of the Act to claim thededuction under Section 10A, is concerned, the factual position hasalready been pointed out that the assessee had the entire medicaltranscription transferred to its favour, a fact which would not becontroverted by the Revenue at any stage. Contrary to the assertionof the Revenue that what was transferred was only machinery, we findthat the Officer himself had accepted that the balance sheet of theassessee reflected the transfer of the entire business and to thatextent, it was removed in the vendor's balance sheet. 9. As to the eligibility of the assessee to claim deduction,Section 10(A)(2) of the Act assumes significance, which reads asfollows:- This section applies to any undertaking which fulfills allthe following conditions, namely :-(i) it has begun or begins to manufacture or producearticles or things or computer software during theprevious year relevant to the assessment year-(a) commencing on or after the 1[st] day of April,1981, in any free trade zone; or(b) commencing on or after the 1[st] day of April,1994, in any electronic hardware technologypark, or, as the case may be, softwaretechnology park;(c) commencing on or after the 1[st] day of April,2001 in any special economic zone;(ii) it is not formed by the splitting up, or thereconstruction, of a business already in existence:Provided that this condition shall not apply inrespect of any undertaking which is formed as aresult of the re-establishment, reconstructionor revival by the assessee of the business ofany such undertakings as is referred to in https://hcservices.ecourts.gov.in/hcservices/ Section 33B, in the circumstances and within theperiod specified in that section;(iii) it is not formed by the transfer to a newbusiness of machinery or plant previously used forany purpose. Explanation – The provisions of Explanation 1 andExplanation 2 to sub Section (2) of Section 80-I shallapply for the purposes of clause (iii) of this sub sectionas they apply for the purposes of clause (ii) of that sub-section. https://hcservices.ecourts.gov.in/hcservices/ Section 33B, in the circumstances and within theperiod specified in that section;(iii) it is not formed by the transfer to a newbusiness of machinery or plant previously used forany purpose. Explanation – The provisions of Explanation 1 andExplanation 2 to sub Section (2) of Section 80-I shallapply for the purposes of clause (iii) of this sub sectionas they apply for the purposes of clause (ii) of that sub-section. 10. A cursory reading of the above Section shows that where anundertaking is formed by splitting up or reconstruction of businessalready in existence then the said undertaking would not be entitledto claim deduction under Section 10A. The other conditions is thatthe industrial undertaking should not be formed by transfer of plantand machinery already used for any purpose. Thus, what is prohibitedin Section 10(A)(2)(iii) is that the transfer of used machinery andplant to a new business undertaking and forming of an industrialundertaking by splitting or reconstruction of the existingindustrial undertaking. The intention thus under Section 10A beingclear and that there is no specific prohibition or even by inferenceto an industrial unit formed by transfer of entire business, we haveno hesitation in rejecting the Revenue's plea that by transfer ofmachinery, the assessee would be disentitled to the relief underSection 10A. As already pointed out, the fact herein is that thetransfer was not that of plant and machinery alone but of sale ofwhole business unit to the transferor company which was primarilyonly of export of articles or things. In the circumstances, going byclear provisions of Act, we reject the Revenue's plea. 11. In this regard, learned counsel for the assessee placedreliance on the decision of the Bombay High Court reported in [2012]343 ITR 397 – CIT v. SONATA SOFTWARE LIMITED, wherein, the BombayHigh Court held that the sale of business was not reconstruction.The issue therein arose in the context of Section 10A of the IncomeTax Act. Referring to the decision of the Supreme Court reported in[1997] 107 ITR 195 – TEXTILE MACHINERY CORPORATION LIMITED v. CIT,the Bombay High Court held that where a running business istransferred lock, stock and barrel by one assessee to anotherassessee, the principle of reconstruction, splitting up and transferof plant and machinery could not be applied. 12. Going by the decision of the Bombay High Court and thedecision of the Supreme Court, we hold that the contention of theRevenue based on Section 10A(2)(ii) of the Act cannot be sustained.In the circumstances, we reject the Revenue's plea, in particular,Question No. 2, on the factual finding that the sale is of thebusiness as a whole and not just the machinery alone. 13. Learned counsel for the assessee also placed reliance onthe decision of the Allhabad High Court reported in [2012] 349 ITR267 – CIT v. BULLET INTERNATIONAL, wherein the Allahabad High Courtconsidered the case of proprietorship business transferred topartnership, claiming the benefit of exemption under Section 10A.The Allahabad High Court pointed out that there was no dispute thatfor the earlier assessment year exemption was granted to theproprietary business. The denial of exemption on the ground thatconversion of the proprietorship into the partnership to result inthe disentitlement of the benefit under Section 10A is not borne outeither by the plain language of Section 10A or in view of theCircular No. 7/03 dated 5.9.2003. Thus, the successor in businesswould be entitled to have the benefit under Section 10A. Thus,referring to sub sections (9) and (9A) of Section 10A, which were nolonger in existence with effect from April 1, 2004, the AllahabadHigh Court held against the Revenue that the benefit would beavailable to the partnership concern too, which was formed out ofconversion of the proprietorship concern. 14. This takes us to the third question of law viz., as towhether the Tribunal was right in granting deduction under section10A, although the assessee was entitled to deduction under Section80HHE of the Income Tax Act. We do not find that said the questionsurvives for any consideration, for the simple reason, that thisCourt accepts the plea of the assessee that the assessee would beentitled to the claim under Section 10A. Having thus granted reliefto the assessee under Section 10A, the Tribunal rightly held thatthe assessee was not entitled to the relief under Section 80HHE.Having regard to the above fact, we do not find that question No.3,in this case survives for consideration and the same is rejected. 15. In the circumstances, the above Tax Case (Appeal) standsdismissed. No costs. Sd/Assistant Registrar /True Copy/ Sub Assistant Registrar bg To 1. Commissioner of Income Tax- I , Coimbatore 2.Income Tax Appellate Tribunal, Chennai 'D' BenchChennai. https://hcservices.ecourts.gov.in/hcservices/ 3.The Commissioner of Income Tax, (Appeal) I, Coimbatore. 4.The Secretary, Central Revenue Board,New Delhi. One cc to Mr.P.J.Rishikesh, advocate SR.No.43583 one cc to Mr.N.V.Balaji, advocate SR.No.43617 TCA.No. 625 of 2009SCD(CO)SKY/18/10