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2017 DIGILAW 1286 (RAJ)

Commissioner Of Income Tax v. Green Fire Exports

2017-05-18

INDERJEET SINGH, K.S.JHAVERI

body2017
JUDGMENT K.S. Jhaveri, J. - By way of all these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal of the department and confirmed the order of the CIT(A) modifying the order of the Assessing Officer. 2. This Court while admitting the appeal No. 285/2011 on 31.03.2014 has framed the following substantial question of law: "Whether the Tribunal as well as CIT(A) were justified in holding the assessee entitled for benefit under section 10AA of the Act and thereby granting deduction of Rs. 7,38,85,415/- despite violation of mandatory conditions prescribed in section 10AA(4)(ii) of the Act." 2.1. This Court while admitting the appeal No.382/2011 on 31.03.2014 has framed the following substantial question of law: "Whether the Tribunal as well as CIT(A) were justified in holding the assessee entitled for benefit under section 10AA of the Act and thereby granting deduction of Rs. 2,32,67,650/- despite violation of mandatory conditions prescribed in section 10AA(4)(ii) of the Act." 2.2. This Court while admitting the appeal No.224/2012 on 31.03.2014 has framed the following substantial question of law: "Whether the Tribunal as well as CIT(A) were justified in holding the assessee entitled for benefit under section 10AA of the Act and thereby granting deduction of Rs. 12,15,247/- despite violation of mandatory conditions prescribed in section 10AA(4)(ii) of the Act." 2.3. This Court while admitting the appeal No.95/2014 on 23.04.2016 has framed the following substantial question of law: "Whether the Tribunal as well as CIT(A) were justified in holding the assessee entitled for benefit under section 10AA of the Act and thereby granting deduction of Rs. 2,21,13,167/- despite violation of mandatory conditions prescribed in section 10AA(4)(ii) of the Act." 2.4. This Court while admitting the appeal No.96/2014 on 23.04.2016 has framed the following substantial question of law: "Whether the Tribunal as well as CIT(A) were justified in holding the assessee entitled for benefit under section 10AA of the Act and thereby granting deduction of Rs. 3,30,87,091/- despite violation of mandatory conditions prescribed in section 10AA(4)(ii) of the Act." 2.5. This Court while admitting the appeal No.10/2016 on 03.01.2017 has framed the following substantial question of law: "Whether on the facts and circumstances of the case and in law the Hon''ble ITAT is justified in deleting the disallowance of Rs. 3,30,87,091/- despite violation of mandatory conditions prescribed in section 10AA(4)(ii) of the Act." 2.5. This Court while admitting the appeal No.10/2016 on 03.01.2017 has framed the following substantial question of law: "Whether on the facts and circumstances of the case and in law the Hon''ble ITAT is justified in deleting the disallowance of Rs. 20,82,95,557/- made by the Assessing Officer under Section 10-AA even though the assessee does not fulfill the conditions of Section 10AA(4)(ii) of the Income Tax Act, 1961 namely that the undertaking should not be formed by the reconstruction of business already in existence." 2.6. This Court while admitting the appeal No.132/2016 on 14.9.2016 has framed the following substantial question of law: "Whether the Tribunal as well as CIT(A) were justified in holding the assessee entitled for benefit under section 10AA of the Act and thereby granting deduction of Rs. 2,95,41,452/- despite violation of mandatory conditions prescribed under section 10AA(4)(ii) of the Act , which provides that the assessee should not be formed by construction of a business already in existence and the assessee was formed by reconstruction of another unit which was his proprietary concerned in the same trade of business?" 2.7. This Court while admitting the appeal No.257/2016 on 23.01.2017 has framed the following substantial question of law: "Whether the Tribunal as well as CIT(A) were justified in holding the assessee entitled for benefit under section 10AA of the Act and thereby granting deduction of Rs. 2,17,55,743/- despite violation of mandatory conditions prescribed under section 10AA(4)(ii) of the Act , which provides that the assessee should not be formed by construction of a business already in existence and the assessee was formed by reconstruction of another unit which was his proprietary concerned in the same trade of business?" 3. Counsel for the appellant has taken us to the order of the Assessing Officer and contended that the Assessing Officer while concluding the issue has observed as under: "The Assessee had contended that just because the proprietor of M/s Green Fire is one of the partner should not be taken as ''reconstruction of old business'' as the assessee firm is a separate entity formed and carrying on business much before the AY 2007-08. The repeated concern of the assessee with respect to the assessee coming into existence is irrelevant and has already been addressed in above paragraphs. The repeated concern of the assessee with respect to the assessee coming into existence is irrelevant and has already been addressed in above paragraphs. As discussed in detail in the show caused dated 16.12.2009, and at the cost of repetition, the main points are summarized once again as under:- i. The unit set up in SEZ is actually not an all the same a new and identifiable unit. A business activity normally comprises assets, employees and contracts. When any one or more of these move, from one location to another, the issue for consideration is whether such shifting tantamount to reconstruction. In the case of the assessee, it is clear form perusal of details placed on file that there has been a transfer of assets i.e. in terms of capital induction, human resources, transacting parties-purchase as well as sales, inventories, customer base, nature of business itself, trademark and even the Brandname of both the concerns. There cannot be reconstruction without transfer of assets. A new industrially recognizable unit of the assessee can not be said to be reconstruction of his old business if there is no transfer of assets of the old business to the new undertaking. But in the given case, the assets have been substantially transferred out of the existing business on to the new unit. ii. The major sales party of M/s Green Fire (Proprietorship concern, AY 2006-07) was M/s Emsaru USA Corporation to which sales of Rs. 9,24,54,775/- out of total sales of Rs. 10,24,87,665/- was made. And out of the total sales of Rs. 20,79,56,985/-, sales of Rs. 193636330/- was made to the same concern by the assessee. Therefore, it is obvious that there has been a near total shift of customer''s base from the old business to the new one. iii. Reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business. In order to be entitled to the benefit, the new unit has to be former by substantially new investment, which unfortunately was not the case here. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will be not be available. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will be not be available. From this it is clear that substantial investment of new capital is imperative and this substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital. As mentioned in the show cause also, in the AY2007-08, capital of Rs. 27 lacs out of total receipt of Rs. 38 lacs in the year was received from M/s Green Fire. Even in the earlier year also, there has been a direct intake of capital from it by M/s Green Fire Exports. Thus, it is clear that the new unit in the name of M/s Green Fire Exports has not been formed out of new funds, but it merely reflects shift of money from the original business i.e. M/s Green Fire to the new one. The new undertaking must not be substantially the same old existing business. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the assets of the old business, the benefit will not be available. Same is the case as far as funds from unsecured loans is concerned, i.e. source of funds remains the same. iv. Further, the concept of ''reconstruction of business already in existence'' 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 brought out by the section itself - of a business already in existence''. The changes that have taken place in non-SEZ unit has been anything but positive. Continuity and preservation of old unit has been completely lost. There couldn''t be a clearer case of destruction of the old unit. v. Transfer of assets and the consequent reconstruction of existing business also finds reflection in the fact that most of the purchase parties of both unit are same. This fact also strengthens the stand of deconstruction of old unit and reconstruction of the same in the form of the assessee firm. All these points tell only one thing i.e. only represents shifting of contracts from M/s Green Fire to M/s Green Fire Exports. This fact also strengthens the stand of deconstruction of old unit and reconstruction of the same in the form of the assessee firm. All these points tell only one thing i.e. only represents shifting of contracts from M/s Green Fire to M/s Green Fire Exports. Same reasoning hold true with respect to shifting of employees en masse." 4. He has strongly relied upon the definition of Section 10AA sub clause (4) which reads as under: "4. This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:- (i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any special Economic Zone; (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 under taking, being the Unit, which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section. (iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose. Explanation-The provisions of explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section." 5. He has submitted that all the conditions are mandatory and are required to be fulfilled. The condition No.2 has been specifically committed breach of. Both the authorities have reached the finding and have wrongly concluded against the department. 6. Counsel for the respondent Mr. Pathak has taken us to the order of the CIT(A) which reads as under: "After considering submission of th AR as well as AO and considering various aspects the allowability of deduction under section 10 AA in the case of appellant is decided taking an over all view. Admittedly the new industrial undertaking is a seprate and independent production unit set up in SEZ area. The plant has not been set up by shifting of machinery of old unit but new machinery worth more than Rs. 43 lacs have been purchased. Admittedly the new industrial undertaking is a seprate and independent production unit set up in SEZ area. The plant has not been set up by shifting of machinery of old unit but new machinery worth more than Rs. 43 lacs have been purchased. The AO has considered transfer of capital of Smt. Kamlesh Dangayach and employees of the old concern to the new concern s shifting of assets. Smt. Kamlesh Dangayach has diverted her capital from M/s Green fire to the new unit but the amount so shifted was only Rs6737224/-whereas her investment in plant and machinery and land and building of new unit comes to Rs. 14626947/-. This clearly shows that substantial new capital was introduced in the new unit. Large number of employees of M/s Green Fire Exports did not shift enmass to the new unit but they left the job and joined the new unit for their better prospects from time to time. In any case the employees, though, important part of business undertakings, cannot be considered as an assets in its commercial sense. So long as the assets appearing in the balance sheet of old concern are not shofted to new unit but lying as it is, it cannot be a case of reconstruction of business. The purchasing or selling may be common but it cannot amount to reconstruction of old business. The Hon''ble S.C. in the case of Textile Machinery Corp. Ltd. vs. Commissioner of Income Tax(relied upon by the AO) has held that reconstruction of business involves substantially the same person carrying on substantially the same business but at the same time has also held that where the new industrial undertaking is separate and independent production unit and the undertakings can be carried out separately without complete absorption of identity of the old business they are not to be treated as business formed by reconstruction of the old business. The Hon''ble Court has observed that by establishing new undertakings if the assessee expands his existing business then also the assessee cannot be deprived of the benefit. That every new creation in business is some kind of expansion and advancement but as long as a new and identifiable undertaking separate and distinct from the existing business is set up, it cannot be tantamount to reconstruction. That every new creation in business is some kind of expansion and advancement but as long as a new and identifiable undertaking separate and distinct from the existing business is set up, it cannot be tantamount to reconstruction. As plant and machinery of the old business is lying as it is, it cannot be said that the old business is ceased. The very purpose of bringing the provisions of section 10AA and a-like provision is to encourage new units with new plant and machinery to be set up for manufacturing or production of articles to be exported. The beneficial provisions brought in statute book to encourage the export and to encourage setting up new business units should be interpreted liberally. From the facts of the case it appears that it is not the case of reconstruction of existing business but a totally new undertaking has started functioning. As all other requirements of the Section have been fulfilled, claim of deduction under section 10AA is justified. The AO is, therefore, directed to allow deduction claimed under section 10AA on profits and gains derived from Exports. Thus first ground of appeal is decided in favour of the appellant." 7. Mr. Pathak has also taken us to the order of the Tribunal in para 4.7 & 4.8 which reads as under: "4.7. The Hon''ble Apex Court in the case of Textile Machinery Corporation Ltd. (supra) has also approved the observations of the Hon''ble Bombay High Court in the case of Commissioner of Income Tax vs. Gaekwar Foam. And rubber company Ltd. [1959] 35 ITR 662 The Hon''ble Bombay High court has held that reconstruction of business or industrial undertaking must necessarily involve the concept that the original business or undertaking do not cease functioning and its identity is not to be lost or abandoned. The underlying idea of a reconstruction is of a "business already in existence" - there must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to do same business though in some altered or varied form. In the instant case the earlier industrial undertaking was owned by Smt. Kamlesh Dangayach while the present undertaking is owned by the firm. The firm is separate entity under the income tax Act and the earlier industrial undertaking of the assessee must cease to the function. The deduction under section 10 AA is undertaking specific. In the instant case the earlier industrial undertaking was owned by Smt. Kamlesh Dangayach while the present undertaking is owned by the firm. The firm is separate entity under the income tax Act and the earlier industrial undertaking of the assessee must cease to the function. The deduction under section 10 AA is undertaking specific. The Hon''ble Allahabad High Court in the case of Commissioner of Income Tax vs. Modi Spinning and Manufacturing [1980] 125 ITR 361 had occasion to consider to the allowibility of deduction under section 15C of I.T. Act 1922. The revenue argued that the assessee has expended the business and therefore the undertaking should be considered to have been formed as the result of reconstruction. The tribunal in this case observed that the unit was bigger then the unit which the assess has already there and there were new features in the new unit. The Hon''ble Allahabad High Court observed that every new creation in business is some kind of expansion and advancement. If the undertaking is new and identitiable undertaking, separate and distinct, foom the existing business then it will not be reconstruction of business already in existence. The Hon''ble Delhi Court in the case of Commissioner of Income Tax vs. Gedore Tools India (Pvt) Ltd. [1980] 126 ITR 673 has held that the fact that the new Unit manufactured some of the items which were manufactured by the old unit will not make it an integral part of old unit, Even if new undertaking manufactures a product which is feeded to the old business even then it will not amount reconstruction of the old business. Establishment of the new unit with new separate plant and machinery by investing substantial funds is essential. If the new unit has not derived any thing foom the old unit by way of equipment or by way of factory building and no assets of the old unit have been transferred to the new unit, the new unit had not been formed by reconstruction. We feel that the ld. AR in his written submission has rightly placed reliance on the followings decisions that the new undertaking is not a formed on reconstruction of the business already in the existence. 1. Commissioner of Income Tax vs. Ambur Cooperative Sugar Mills Ltd. [1981] 127 ITR 495 (Madras) 2. Addl. We feel that the ld. AR in his written submission has rightly placed reliance on the followings decisions that the new undertaking is not a formed on reconstruction of the business already in the existence. 1. Commissioner of Income Tax vs. Ambur Cooperative Sugar Mills Ltd. [1981] 127 ITR 495 (Madras) 2. Addl. Commissioner of Income Tax vs. Hutti Gold mines Company Ltd. [1981] 128 ITR 476 (Karnataka) In this case existing plant and conveyer belts and old mill dismanted and the new mill and refinery covering fortunes area of factory was setup. New unit is independent unit and is entitled to deduction and it will not be reconstruction of business. (3) Commissioner of Income Tax vs. Mahaan foods Ltd. [2008] 216 CTR 148 (Delhi) In this case assessee setup industrial undertaking with latest technology and increased capacity with frest investment of Rs. 104.88 laks as against investment 20.8 laks in old plant and it cannot be said that the unit was a result a reconstruction of old business. (4) Commissioner of Income Tax vs. Premier Cotton Mills Ltd. [1999] 240 ITR 434 (Madras) (5) Commissioner of Income Tax vs. Quality Steel Tube Ltd. [2006] 280 ITR 254 (Allahabad.) 4.8 Even if for the argument sake, it is considered that substantial persons have started the unit even then it can not be considered as reconstruction of the existing business. There is substantial investment in new plant and machinery. Details of machineries installed are available at page 15 of the paper book. Out or total investment of plant and machinery of Rs. 43,99,591/-the machinery purchased from domestic market is only of Rs. 31,750/- other machineries installed have been acquired through imports from foreign countries. Purchase vouchers are available in the paperbook. We were informed that the proprietorship concern was not using the imported machinery. There is definitely advancement in the technique of making studded jewellery. Hence the unit even if relate to person having substantial interest in old unit, even then the new unit can not be considered a reconstruction of old business as new unit if independent is not to be considered as reconstruction of business." 8. We have heard counsel for both the sides. 9. Hence the unit even if relate to person having substantial interest in old unit, even then the new unit can not be considered a reconstruction of old business as new unit if independent is not to be considered as reconstruction of business." 8. We have heard counsel for both the sides. 9. Taking into consideration the conclusion reached by the Tribunal and CIT(A), we are of the opinion that the conclusion reached by the Tribunal after relying upon the decisions of Delhi High Court in the case of Commissioner of Income Tax vs. Mahaan foods Ltd. [2008] 216 CTR 148, the Madras High Court in the case of Commissioner of Income Tax vs. Premier Cotton Mills Ltd. [1999] 240 ITR 434 and the Allahabad High Court in the case of Commissioner of Income Tax vs. Quality Steel Tube Ltd. [2006] 280 ITR 254, is just and proper and no interference in the order of the Tribunal is called for. 10. In that view of the matter, the issue is answered in favour of the assessee and against the department. 11. The appeals stand dismissed. 12. A copy of this judgment be placed in each file.