[2013] 30 taxmann.com 271 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'B'
Armstrong Knitting Mills (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Co. Circle*
DR. O.K. NARAYANAN, VICE-PRESIDENT
S.S. GODARA, JUDICIAL MEMBER
IT APPEAL NO. 113 (MAD.) OF 2012
[ASSESSMENT YEAR 2007-08]
JANUARY 4, 2013
Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and
gains from infrastructure undertakings, etc. - Splitting up or
reconstruction - Assessment year 2007-08 - Whether where assessee
purchased windmill, sold windmill to its sister concern and got same
leased back, same amounted to splitting up of business and hence section
80-IA(3)(i) is not applicable - Held, yes - Whether as plant previously
used for generating power stood transferred to a new business of
assessee's sister concern, case was also hit by section 80-IA(3)(ii) -
Held, yes - Whether, therefore, claim of deduction under section 80-IA
was not liable to be accepted being violative of section 80-IA(3) -
Held, yes [Para 8] [In favour of revenue]
FACTS
Facts
• The assessee-company was engaged in the business of power generation from windmills.
• The windmills were put to use by the assessee for producing wind
power and thereafter it had sold the same to its sister concern who
executed a lease agreement with the assessee for leasing out the
windmills in lieu of lease rent.
• The assessee claimed that it was entitled for deduction under section 80-IA.
• The Assessing Officer held that the assessee was not eligible for
deduction under section 80-IA as its claim was hit by section 80-IA(3)
since the undertaking in question had been formed by transfer to a new
business of machinery, plant previously used 'for any purpose'.
• The Commissioner (Appeals) affirmed the findings of the Assessing Officer.
HELD
• A perusal of the provision of section
80-IA(3) makes it clear that while enacting section 80-IA for providing
deduction to the undertakings engaged in infrastructure development, the
legislature has incorporated the above deduction provision. At the same
time, in sub-section (3), the legislature has also stipulated some
conditions which are to be satisfied i.e.,
the undertaking in question should not be formed by splitting or
reconstruction of a business already in existence and it should not be
formed by the transfer to a new business of machinery or plant
previously used 'for any purpose'. The assessee, in this case, had
earlier purchased the windmill, sold it and later on got it leased back.
Meaning thereby that its business stood split up since the assessee's
status as proprietor of the plant changed to that of a lease holder. The
same amounts to splitting up for the purpose of the above said
legislative provision. Hence, section 80-IA(3)(i) is not applicable in the instant case.
• Similarly, assessee's case is also hit by section 80-IA(3)(ii)
as the assessee had earlier sold the business the windmill plant stood
transferred to its sister concern. The sister concern leased back the
windmill to the assessee. It has come on record that the assessee had
also produced wind power in the year 2003. Therefore, as per sub-clause (ii)
of section 80-IA(3), once the machinery or plant previously used for
'any purpose' is transferred to a new business, the concerned
undertaking is not entitled for deduction. In the instant case and in
view of the circumstances involved, it is to be held that since the
plant previously used for generating power stood transferred to a new
business of its sister concern, the condition above said would come to
play in these circumstances. The legislature in its wisdom has
deliberately laid emphasis in using the word 'any purpose', which is of
widest possible amplitude being inclusive in nature covering the facts
of the instant case.
• Hence, while affirming the findings of the
Commissioner (Appeals), assessee's claim of deduction under section
80-IA is not liable to be accepted being violative of section 80-IA(3).
Therefore, the order of the Commissioner (Appeals) is confirmed. [Para
8]
CASE REVIEW
CIT v. Tata Communication Internet Services Ltd. [2012] 17 taxmann.com 241/204 Taxman 606 (Delhi) (para 8) distinguished.
CASES REFERRED TO
CIT v. Tata Communication Internet-Services Ltd. [2012] 17 taxmann.com 241/204 Taxman 606 (Delhi) (para 3).
K. Ravi for the Appellant. Dr. S. Moharana for the Respondent.
ORDER
S.S. Godara, Judicial Member - This
assessee's appeal arises from the order of the Commissioner of Income
Tax (Appeals) II, Coimbatore dated 25.10.2011 in IT Appeal No. 562/09-10
for the assessment year 2007-08, in proceedings under section 143(3) of
the Income Tax Act, 1961 [in short the "Act"].
2. The assessee has raised following substantive grounds in the instant appeal:
| "1&2.** | ** | ** |
3. The learned Assessing Officer has erred in not considering the fact
that the sub section 3(ii) of section 80IA of the Income Tax Act, 1961
states that the new industrial undertaking should not be formed by the
transfer to a new business of machinery or plant previously used for any
purpose. In the order passed by him, Assessing Officer himself has
mentioned the assets were originally purchased by the industrial
undertaking and hence the subsection 3(ii) of Section 80IA will not
apply to the assessee.
| 4, 5 & 6** | ** | ** |
7. The learned Commissioner of Income Tax (Appeals) has erred in not
considering the fact that, only the rate at which amount is credited by
the Tamilnadu Electricity Board in the assessee's electricity bill
towards the windmill generation of the assessee has been adopted by the
assessee as the income of windmill and the assessing officer cannot
adopt a notional rate in arriving the total receipts of the assessee in
this case. Further, the learned CIT(Appeals) has not considered the
decision of ITAT, Chennai in the case of M/s. Velayuthasamy Spinning
Mills (P) Ltd. (ITA No. 850 (Mds)/2011) allowing the assessee to
consider the buying rate from TNEB as the income of the undertaking."
3. In support of the grounds raised, the AR
has vehemently argued that the CIT(A) has erred in upholding the
findings of the Assessing Officer that assessee's claim of deduction is
barred by section 80IA(3) of the "Act". Therefore, by referring to case
law of Hon'ble Delhi High Court titled as CIT v.Tata Communication Internet Services Ltd. [2012] 17 taxmann.com 241/204 Taxman 606 (Delhi) he has prayed for acceptance of the appeal.
4. The DR representing the Revenue, on the
other hand, has chosen to strongly support the findings of the CIT(A)
and prayed for confirming the same.
5. We have heard both parties and perused
the orders of the Assessing Officer as well as CIT(A). The case law
cited by the assessee has also been gone through. Undisputed facts of
the instant case are that the assessee is a company engaged in the
business of power generation from windmills. For the impugned assessment
year i.e. 2007-08, it had filed its 'return' on 19.11.2007 disclosing
income of "NIL" under the normal provisions and Rs. 29,72,939/- under
section 115JB. In 'scrutiny' proceedings, the Assessing Officer noticed
that the assessee had earlier purchased the windmills in question and
produced 18488 units of power upto 10.02.2003 and upto 31.03.2003, the
production was 48600 units. The Assessing Officer was of the opinion
that since the windmills were put to use by the assessee for producing
wind power and thereafter it had sold the same to its sister concern
namely M/s. Armstrong Knitting Mills (Firm) who executed a lease
agreement with the assessee for leasing out the windmills in lieu of
lease rent along with additional charge of Rs. 0.50 per unit of the
energy, the assessee was not eligible for claiming deduction under
section 80IA of the "Act".
6. The assessee's explanation before the
Assessing Officer was that it was entitled for deduction under section
80IA of the Act and the relevant provisions in the said section i.e.
80IA(3)(i) & (ii) do not apply. The Assessing Officer was not
convinced. Hence, vide the assessment order dated 24.12.2009, he held
that assessee's claim was hit by section 80IA(3) of the "Act" since the
undertaking in question had been formed by transfer to a new business of
machinery, plant previously used "for any purpose". On merits also, the
Assessing Officer opined that since there was no profit after setting
up of unabsorbed business loss and depreciation under section 80B(5)
read with sections 72(2) and 32(2) of the "Act", the assessee's case was
also not eligible for deduction. He also opined that per section
80IA(8) of the "Act", profit had to be computed at the sale price per
unit charged by the assessee instead of that charged by the TNEB from
its consumers. Accordingly, the Assessing Officer computed assessee's
income as Rs. 29,72,938/-.
7. Aggrieved, the assessee carried the
matter in appeal. The CIT(A) has also affirmed the findings of the
Assessing Officer on maintainability of the claim of deduction in
assessee's case by relying on section 80IA(3) clauses (i) & (ii) of
the "Act".
It is in this backdrop that the assessee is in appeal before us.
8. After perusing the findings of the
Assessing Officer and the CIT(A), it is evident to us that the assessee
had earlier purchased the windmill in question, generated wind energy,
sold the windmill to its sister concern and got the same leased back and
raised claim of deduction in hand. The moot question before us is as to
whether the said course of action adopted by the assessee is hit by
section 80IA(3) or not. At this stage, we deem it appropriate to
reproduce the said provision, which reads as under:
(3) This section applies to an undertaking referred to in clause (ii) or
clause (iv) or clause (vi) of sub-section (4) which fulfils all the
following 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 an undertaking which is formed as a result of the
re-establishment, 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;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose:
A perusal of the above said provision makes it clear that while enacting
section 80IA of the "Act" for providing deduction to the undertakings
engaged in infrastructure development, the legislature has incorporated
the above deduction provision. At the same time, in sub-section (3), the
legislature has also stipulated some conditions which are to be
satisfied i.e. the undertaking in question should not be formed by
splitting or reconstruction of a business already in existence and it
should not be formed by the transfer to a new business of machinery or
plant previously used "for any purpose". The assessee, in this case, had
earlier purchased the windmill, sold it and later on got it leased
back. Meaning thereby that its business stood split up since the
assessee's status as proprietor of the plant changed to that of a lease
holder. In our view, the same amounts to splitting up for the purpose of
the above said legislative provision. Hence, section 80IA(3)(i) is
applicable in the instant case.
Similarly, we are also of the view that assessee's case is also hit by
section 80IA(3)(ii) as the assessee had earlier sold the business the
windmill plant stood transferred to its sister concern. The sister
concern leased back the windmill to the assessee. It has come on record
that the assessee had also produced wind power in the year 2003 (supra).
Therefore, as per sub-clause (ii) of section 80IA(3), once the
machinery or plant previously used for 'any purpose' is transferred to a
new business, the concerned undertaking is not entitled for deduction.
In the instant case and in view of the circumstances involved herein, we
hold that since the plant previously used for generating power stood
transferred to a new business of its sister concern, the condition above
said would come to play in these circumstances. The legislature in its
wisdom has deliberately laid emphasis in using the word "any purpose",
which is of widest possible amplitude being inclusive in nature covering
the facts of the instant case. So far as case law (supra)
cited by the assessee is concerned, we are of the view that the same is
not applicable qua the peculiar facts and circumstances of the case. In
the said case, the assessee's claim of deduction had satisfied the
condition enshrined in section 80IA(3) of the "Act". In view of the said
factual position, their Lordships have upheld the concerned assessee's
claim. We also deem it appropriate to reproduce the relevant portion
herein below:
"10. There is no dispute with regard to the fact that Clause (ii) of the
Section 80IA (4) was inserted in Section 80IA(3) by the Finance Act II
of 2004 with effect from 1.4.2005 and that this was not with
retrospective effect. It became applicable only after its insertion with
effect from 1.4.2005. The Circular issued by DBDT explaining the
provisions of Finance Act II of 2004 testifies the fact that this
insertion took effect from 1.4.2005 and is to apply in relation to the
assessment year 2005-06 and subsequent years. The first claim of the
assessee for deduction under Section 80IA indisputably was for
assessment year 2004-05. The Tribunal has rightly recorded that the
business of fax and email has been started by the assessee in 1997 and
the business of providing internet services during the year 2000 being
from 17.10.2000, the relevant assessment year 2001-02. The question for
consideration would be as to whether there was any violation of
provisions in the claim of deduction under Section 80IA(4)(ii) of the
Act for assessment year 2001-02 or at the maximum for the first year of
deduction under Section 80IA being the assessment year 2004-05.
Admittedly, the assessee was granted deduction under Section 80IA for
the assessment year 2004-05. The Tribunal was right in holding that the
revenue could not pick up the assessment year granting claim holding
that there was violation of provisions of Section 80IA(3) on the ground
that the business was formed by splitting up and reconstruction of
business already in existence or that it was formed by transfer of
plants and machinery to the new business. The bar as provided under
Section 80IA(3) is to be considered only for the first year of claim for
deduction under Section 80IA. Once the assessee is able to show that it
has used new plants and machinery which has not been previously used
for any purpose and the new undertaking is not formed by splitting up or
reconstruction of business already in existence, it is entitled to the
deduction under Section 80IA for subsequent years. Since the assessee
had been granted claim of deduction right from the assessment year
2004-05 under Section 80IA, consequently it cannot be denied deduction
for the subsequent years inasmuch as restrain of Section 80IA(3) cannot
be considered for every year of claim of deduction, but can be
considered only in the year of formation of the business.
11. Be that as it may, Clause (ii) of Section 4 of Section 80IA was
inserted in sub clause 3 of Section 80IA with effect from 1.4.2005 and
the business of the assessee had been formed and started much prior to
that. The restriction placed by Section 80IA(3) to the provisions of
80IA(4)(ii) would not bar the assessee for continuing its claim of
deduction under Section 80IA. Since the provisions of 80IA(3) are not
applicable to the present assessee, it having commenced its business
much prior to 1.4.2005, Section 80IA(3) would not disentitle it from
claiming deduction under Section 80IA on its income from internet
services and internet telephony services.
12. In our view, the Tribunal was right in holding that the assessee
could not be said to have been formed by splitting up or reconstruction
of the business already in existence as its business had commenced after
1.4.1995 and before 31.3.2005 and the assessee had started its business
of fax and email services right from the financial year 2003 and 2005
and it continued to carry on the business of internet telephony.
13. Insofar as the objection of the revenue that there had been change
in the name of pattern of shareholding it does not make any difference
as it is a well settled rule of law that benefit under Section 80IA of
the Act is available to an undertaking and not to the assessee since the
undertaking continues to carrying on its business without any
reconstruction of business already in existence.
14. Even otherwise, on merits the conditions under Section 80IA(3) of
the Act are seen to be fully met by the assessee and on this ground also
the assessee is entitled for deduction under Section 80IA of the Act.
The first contention is that section 80IA(3) of the Act provides that
the eligible business is not formed by splitting up or reconstruction of
the business already in existence. It may be noticed that the assessee
started its new business in the existing company and the said business
could not be said to have been formed either by splitting up or
reconstruction of the existing business. It is to be noted herein that
the business of providing internet services was awarded by the
government to the assessee in the year 1999. The second contention of
applicability of section 80IA(3) regarding use of old plants and
machinery is also not relevant in the case of the present assessee as
the business of assessee had not come into existence or formed by
transfer of any old plants and machinery. The license was granted to the
assessee on 5.1.1999 and it purchased new plants and machinery worth
Rs. 5.65 crore during the financial year 2000-01 for this
telecommunication business."
A perusal of the above said extract of the judgment clarifies that since
the assessee had been able to get its claim of deduction by satisfying
conditions enumerated by sub-section (3) of section 80IA, the Hon'ble
High Court had rejected the contention of the Revenue. Whereas, in the
instant case, the facts are otherwise, wherein the present assessee has
failed to satisfy the above said condition. Hence, while affirming the
findings of the CIT(A), we also hold that assessee's claim of deduction
under section 80IA is not liable to be accepted being violative section
80IA(3) of the "Act". Therefore, the order of the CIT(A) is confirmed.
9. Coming to ground 7 of the assessee's
appeal. Since we have disagreed with assessee's claim regarding
maintainability of the claim, we also hold that this ground is also
liable to fail as the same is only of academic significance.
10. In the result, the appeal of the assessee is dismissed.
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