Calcutta High Court
Smt. Sangita Agarwal vs Commissioner Of Income Tax-Xi on 24 December, 2010
Author: K. J. Sengupta
Bench: Kalyan Jyoti Sengupta
1 ITA 208 of 2009 In The High Court At Calcutta Special Jurisdiction (Income Tax) Original Side Present:
The Hon'ble Justice Kalyan Jyoti Sengupta And The Hon'ble Justice Kalidas Mukherjee Smt. Sangita Agarwal Vs. Commissioner of Income Tax-XI, Kolkata Judgment on: 24.12.2010.
K.J. Sengupta, J.:-
The above appeal was admitted by an order dated 16th September 2009 on the following questions of law.
"1. Whether the Tribunal misdirected itself in law inasmuch as it adopted a wholly erroneous approach in interpreting the provisions of sub-
sections (2) and (5) of section 10A of the Income Tax Act, 1961, and in denying the assessee's claim for exemption from tax under section 10A of the said Act in respect of the profits and gains of Rs.19,99,084/-, derived by her new industrial undertaking, set up at Falta Free Trade Zone, during the financial year relevant to the assessment year 2005-06, and, in that 2 view of the matter, in arbitrarily reversing the order passed by the Commissioner of Income Tax (Appeals) - XIX, Kolkata, whereby such exemption was allowed?
2. Whether on a correct interpretation of Section 10A of the Income Tax Act, 1961, the Tribunal substantially erred in law in holding that the assessee shifted/transferred her existing business from 'Non-SEZ Area' to 'Falta Free Trade Zone', and that the same amounted to "splitting up or reconstruction of a business already in existence" within the meaning of section 10A (2) (ii) of the said Act, and, therefore, the findings of the Tribunal to this effect were illegal, invalid, unreasonable, based on irrelevant considerations, and, therefore, otherwise perverse?"
By the said order it was made clear that appeal is not required to be heard with formality which was dispensed with. The above appeal is directed against the judgment and order of the learned Tribunal dated 12th June 2009 passed by the Income Tax Appellate Tribunal. By the impugned judgment and order the learned Tribunal allowed the appeal filed by the Revenue, in relation to assessment year 2005-06, thereby reversed the judgment and order of CIT (Appeal) disallowing exemption under Section 10A of the Income Tax Act, 1961 (hereinafter referred to as the said Act). The fact of the case as it appears from the record is shortly put hereunder. The appellant, an individual at the relevant point of time has been carrying on business of manufacturing/assembling and dealing with various electronic items and components, etc in her proprietorship 3 concern in the name and style of Kan-San Corporation. She filed her returns of income for the relevant assessment year along with the tax audit report and audited accounts under Section 44AB on 30th October, 2005 declaring total income of Rs. 20,15,170/- arising out of business income, income from house property, capital gains income and income from other sources. In computing total income the appellant claimed exemption under Section 10A of the said Act in respect of the income of Rs. 19,99,084/- said to have been derived from the new manufacturing unit set up at Falta Special Economic Zone (hereinafter in short SEZ) in the later part of the previous year relevant to the assessment year under appeal. The Assessing Officer has determined the appellant's total income at Rs.
41,79,537.50 after deleting the appellant's claim of exemption under Section 10A of the said Act in respect of the income amounting to Rs. 19,99,084 towards new unit set up in the aforesaid SEZ. The Assessing Officer noticed the appellant had claimed deduction under Section 10A amounting to Rs. 19,99,084/- representing profit for the period of 1st January 2005 to 31st March 2005. While scrutinizing the returns and having noted the remark of the Auditors the Assessing Officer asked the appellant to show cause as to why exemption under Section 10A of the said Act in respect of Rs. 19,90,084 as claimed by her for the above period should not be denied on following amongst grounds:-
"As per Section 10A(2)(ii) the appellant did not submit the report of accountant in the prescribed form along with the returns of income, certifying that the deduction had been correctly claimed in accordance with the provisions of Section 10A (2) (ii). The conditions 4 laid down in Section 10A(2)(ii) have not been fulfilled because the appellant had not started new business but shifted and reconstructed her business which was already in existence in an area outside SEZ as was evident from the Auditor's remark stating that the said organization had resumed its operation at the aforesaid SEZ from 1st January 2005 at the address of the same business as that of the earlier business meant that no new business had been started at the aforesaid SEZ. However, the fact that the closing stock of the value of Rs.6,65,421/- as on 31st December 2004 of the earlier business had been carried over to the new business as opening stock as on 2005. The business was merely shifted to new location. The appellant does not fulfil the conditions laid down in Section 10A (2)
(i) because she did not bring nor used any new machinery to the new business hence she had not manufactured nor produced anything during the period of 1st January 2003 to 31st March 2005 in FSEZ."
"On receipt of the said notice the assessee furnished detailed explanation by letter dated 27th December 2007 answering all the queries made by the Assessing Officer as above. However, this explanation do not find favour of the said officials and the same was rejected on various grounds. Accordingly claim of exemption under Section 10A of the said Act in respect of income amounting to Rs. 19,99,084 was held to be inadmissible under provisions of Section 10A (5) , 10A(2) (i), 10A(2) (ii) of the said Act.5
The appellant therefore carried the matter to the Commissioner of Income Tax (Appeal) against the aforesaid rejection of claim of exemption of the said amount. The CIT (Appeal) after going into great details of the fact of the case and also appreciating the evidence adduced before him came to conclusion that the claim of the appellant for exemption under Section 10A in respect of the profit derived from the new business unit established in the aforesaid SEZ has to be allowed.
It appears that CIT (Appeal) considering large number of decisions of Supreme Court as well as Various High Courts and with detailed reasons found that the assessee has fulfilled all the conditions for getting the said exemption. The Revenue being aggrieved by the said order of the CIT (Appeals) took the matter to the learned Tribunal on appeal on the following ground:-
"On the facts and circumstances of the case the CIT (Appeal) was not justified in allowing the exemption under Section 10A of the said Act of Rs. 19,99,084 treating as profit earned from free trade zone."
The learned Tribunal allowed the appeal and set aside the order of the CIT (Appeal) and restored the order of the Assessing Officer. The learned Tribunal having taken note of the audit report and relying on the findings of the Assessing Officer came to conclusion that the assessee is not entitled to exemption as she continues to carry on old business and did not launch new activity setting up new plant outside the SEZ. The 6 appellant/assessee herein simply transferred the business already in existence from the non-SEZ area to SEZ area and thereby she did not fulfil the conditions in getting exemption and as such the Assessing Officer was justified in disallowing such claim.
The learned Counsel appearing for the appellant submits that the learned Tribunal adopted wholly erroneous approach in holding that the appellant assessee shifted /transferred existing business from non-SEZ area to SEZ area.
He submits that on the undisputed facts and circumstances it will reveal that there has been no violation of Section 10A (2) (ii) and/or Section 10(5) of the Act. He contends that the appellant/assessee did not split and/or reconstruct the business already in existence within the meaning of Section 10A (2) of the Act.
He further submits that the filing of the audit report with the returns under Section 10A(5) is procedural, directory and not mandatory and requirement therein is fulfilled even if the same is filed in course of assessment proceeding and before the assessment is completed, and sometimes the same may be filed even in the course of appellate proceedings. His further contention is that the activity involving assembling of different parts or components whether manually or mechanically to bring into existence of different marketable products like electronic and engineering equipments is new venture. The appellant started manufacturing articles or things within the meaning of section 10A(2) (ii) of the said Act. Mere use of the stock inputs and raw materials of old business in the 7 newly set up business for manufacturing the finished products cannot be treated to be splitting up of the business.
The learned Counsel for the Revenue submits while relying on the decision of the Assessing Officer as well as the learned Tribunal that the appellant has not been able to fulfil the conditions for getting exemption under Section 10A of the said Act. It has been factually found and even going by the Auditor's report of the Assessee that the said business was an existing business and the same was simply split up and/or reconstructed at the SEZ from non-SEZ area.
His further contention is that the case of the appellant is to be found within the mischief of clause (ii) sub-section (2) of Section 10A of the said Act. On fact the appellant does not come within the purview of the exceptional clause as mentioned in the proviso of sub-section (2). Therefore, both the Assessing Officer as well as the learned Tribunal is perfectly justified in disallowing the claim.
After considering the contention and rival contention of both the learned counsels and having gone through the records namely the judgments and orders of all the authorities below it appears to us in order to decide the appeal if one question is answered entire appeal can be disposed of, that is whether on the fact findings all the authorities below came to correct conclusion that the business of the appellant-assessee set up at Falta Special Economic Zone is a split up from the original one or is a reconstructed one within the meaning of sub-section 2 Clause (c) sub-clause (ii) of Section 10A of the Act.
From the records it appears that the following are the admitted position:- 8
(i) The assessee-appellant had been carrying on her old business for manufacturing the same products at non SEZ area. The appellant applied for necessary permission and clearance from respective authorities for setting up her place of business at SEZ at Falta. During the relevant period, she exported her finished goods and earned profit of the amount deduction of which was disallowed by the A.O. (Assessing Officer) and also by the learned Tribunal.
(ii) The dispute then arose what is the nature of the unit set up for production at SEZ.
(iii) The A.O. (Assessing Officer) held that it was a split up business with the same plant and machinery hence it was reconstructed one. The Assessing Officer came to the findings that the assessee shifted the same business to Falta SEZ with the same stock, manpower and plant and machinery from Non-SEZ.
(iv) The Commissioner of Income Tax (Appeal) on analysis of facts and evidence came to the conclusion that the business activity at SEZ of the appellant was neither a split up nor a reconstructed one.
It appears to us that the decision of the C.I.T. (Appeals) is based on compact fact findings with appreciation of evidence. The impugned judgment of the learned Tribunal held that the assessee-appellant in this case transferred the business already in existence at non SEZ area to SEZ area. It is also held by the learned Tribunal that the business of the appellant at SEZ was formed by reconstruction 9 of a business already in existence. Thus, the appellant is not entitled to deduction as her case falls within the mischief of clause (ii).
We notice also that the Assessing Officer came to conclusion on fact that the business was shifted from non SEZ to SEZ at Falta. Then, again he has said the assessee has merely reconstructed her own old business after shifting it to Falta SEZ. This finding in our view really helps the assessee for legally there is no prohibition of the shifting of business with lock, stock and barrel in order to get the benefit of deduction under the aforesaid section. The said Clause (ii) merely mention the splitting up or the reconstruction. The Assessing Officer seems to be of the opinion that shifting of business is tantamount to reconstruction. We think that this interpretation appears to be patently wrong even going by etymological meaning of the word "reconstruction". As we have already observed that the provision of the statute does not prohibit shifting of business but does split up of business.
The words "split up" is plainly understandable that division of the original establishment into two or more units but the fraction of the original must remain at the same place and another fraction may be relocated and this arrangement is to be termed as splitting up. In this case, there is no question of splitting up. Now the question is whether shifting of entire business is tantamount to reconstruction or not even going by the findings of the Assessing Officer and the same finding has also been reached by the learned Tribunal.
The language used in the said clause is as follows:
10
"Clause (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;"
It is not formed by the split up or the reconstruction of a business already in existence. The meaning of the word "reconstruction" is to be read with the words "already in existence". According to us, taking into consideration of the aforesaid words employed in the said clause reconstruction of the business means it must be an exercise of reorganization or reshaping at the same place not at a different place otherwise the words "already in existence" would not have been mentioned by the legislature.
We think that the requirement is that the business may be the same, but it must not be reconstructed one. To put it differently at an area where any business activity is being carried on, and because of the Government policy subsequently, this area is declared to be SEZ for manufacturing of specified goods if the business is reconstructed only to get benefit at the same place of prohibition clause (ii) would hit. We have support of the pronouncement of the 11 high authorities in the mater of the definition of the reconstruction of business already in existence.
The Supreme Court in case of Textile Machinery Corporation Limited v. Commissioner of Income Tax reported in (1977) 107 ITR 195, while interpreting the same language namely reconstruction of business already in existence as mentioned in the earlier Income Tax Act 1922 in its section 15C2(i). At page 205 of the said report while relying on the observation of Buckley, J. what the Supreme Court has accepted is as follows:-
"What does 'reconstruction' mean? To my mind it means this, an undertaking of some definite kind is being carried on, and the conclusion is arrived at that it is not desirable to kill that undertaking, but that it is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on--that would be a mere sale - but in some altered form to continue the undertaking in such a manner as that the persons now carrying it on will substantially continue to carry it on. It involves, I think, that substantially the same business shall be carried on and substantially the same persons shall carry it on. But it does not involve all the assets shall pass, to the new company or resuscitated company, or that all the shareholders of the old company shall be shareholders in the new company or resuscitated company. Substantially the business and the persons interested must be the same". 12
The Supreme Court has been pleased to observe at page 204 of the report as follows:-
" that one thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business."
Delhi High Court in the case of Commissioner of Income Tax v. Gedore Tools India Private Limited reported in (1980) 126 ITR 673 while discussing the same in the context of the language mentioned in Section 80J the present Income Tax Act came to conclusion at page 677 of the report that mere fact that the second unit manufactures some of the items which were manufactured by the first unit, does not make it an integral part of the first unit. It would survive independently of the first unit.
The Delhi High Court in case of Commissioner of Income Tax v. Ganga Sugar Corporation Limited reported in (1973) 092 ITR 173 the Division Bench of the Court also accepted the observation of the Justice Buckley in case of South 13 African Supply and Cold Storage Companies case and came to their lordships' own conclusion at page 179 as follows:-
"The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit, sets up another industrial unit. The new industrial unit would not loose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before setting up a new unit".
In the case of Commissioner of Income Tax v. Gaekwar Foam and Rubber Company limited the Division Bench of the Bombay High Court renders a decision reported in 1959 (35) ITR 662, while interpreting the same language as mentioned in Section 15C. At page 669 of the report the Division Bench observed that expression "reconstruction" represents a legal conception. The reconstruction of a business or an industrial undertaking must necessarily involve the concept that the original business or undertaking is not to cease functioning, and its identity is not to be lost or abandoned. The concept essentially rests on changes but the changes must be constructive and not destructive. There must be something positive about the whole matter as opposed to negative. The underlying idea of a reconstruction evidently must be - and this is brought out by the section itself - of a "business already in existence". There must be continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business 14 though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. Thus, for instance the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively, that would not be reconstruction or if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganization of the business on sounder lines or alterations in the mode or method or scope of type activities of the business or in its personnel or infusion of new blood in the management or control of the business which may even be by some changes in the constitution of persons interested in the undertaking would certainly be no more than reconstruction of the business of it is substantially the same business carried on by substantially the same persons."
In view of the aforesaid discussion and based on the fact finding recorded in considerable detail by the CIT (Appeal) that the unit of the business of the assessee at SEZ at Falta is the new one and merely some old stocks of the raw materials were used in old business does not amount to reconstruction. It is to be found on evidence that materials were brought and with the running of the old business simultaneously at non SEZ. Under this circumstances, neither the learned Tribunal nor the Assessing Officer on the given fact correctly interpreted the reconstruction.
15
Hence, we are of the view as rightly pointed out by Mr. Poddar that the judgment and order of the learned Tribunal is not sustainable and the same is set aside. Thus the judgment and order of the CIT (Appeals) is restored in its file and we direct the Assessing Officer to do the needful in terms of the judgment of the CIT (Appeals).
Thus the appeal is allowed without any order as to costs.
(K. J. Sengupta, J.) I agree.
(Kalidas Mukherjee, J.)