Vildirect: IncomeTax-caselaws-2014-VIL-674-KAR-DT

2014-VIL-674-KAR-DT

KARNATAKA HIGH COURT

IT Appeal Nos. 391 & 392 of 200

Date: 10.06.2014

COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE, BANGALORE

WIPRO GE MEDICAL SYSTEM LTD.

K.V. Aravind, Advocate for the Appellant
S.R. Anuradha, Advocate for the Respondent

BENCH

N. KUMAR AND B. MANOHAR, JJ.

JUDGMENT

N. Kumar, J. –

The common question of law that arises for our consideration in these two appeals is:-

'Whether the assessee is entitled to the benefit under Section 10A of the Income Tax Act, 1961, in respect of two undertakings which they have commenced in second and sixth floors of Golden Enclave situate in Software Technology Park?'

2. The assessee is carrying on the business of manufacturing and trading of diagnostic medical systems. The assessee filed returns for the assessment years 1997-98 and 1998-99 on 28.11.1997 and 30.11.1998 respectively. The assessments were completed under Section 143 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment years 1997-98 and 1998-99 on 30.03.2000 and 30.03.2001 respectively. As there were certain additions made, assessee had filed appeals before the Commissioner of Income Tax (Appeals) ("CIT)(A)" for short). The learned CIT(A) deleted the additions made for both the assessment years by order dated 22.02.2001 and 30.04.2001. In the meantime, learned CIT, Central, Bangalore issued a notice under Section 263 of the Act for the assessment year 1997 - 98 dated 11.03.2002. This was suitably replied by the assessee on 26.03.2002. On the basis of the reply filed, the CIT-Central, dropped proceedings, but no orders were passed and the same was informed to the assessee by letter dated 31.05.2005. In the meantime, a notice under Section 148 of the Act was issued for both the assessment years under consideration. The reasons for such reopening are, in fact, the same reasons for which the learned CIT (A) initiated revision proceedings under Section 263 of the Act for the assessment year 1997-98 dated 11.03.2002. Therefore., it was contended before the assessing authority that the proceedings initiated under Section 147 of the Act is not maintainable. There was no new material which justifies the initiation of the proceedings. At the most it may amount to change of opinion which has no justification for the initiation of the proceedings and therefore, the assessee sought for dropping all the proceedings. However, by overruling the objections, the assessing authority passed the order withdrawing the benefit conferred under Section 10A of the Act to the assessee in respect of the two undertakings which were established in second and sixth floors of the said technology park. Aggrieved by the same, the assessee preferred an appeal before learned CIT(A). The appellate authority was of the view that the issue was already the subject matter of an appeal and a revision. In the reasons recorded by the assessing officer, nowhere it was stated that there was failure on the part of the assessee to disclose any material required for assessment. The reopening was basically to reallocate the expenditure recorded by the assessee to various businesses. The issue stood for consideration for the assessment year 1995-96 before the Tribunal and the Tribunal by its order dated 08.07.2002 in ITA Nos. 322-328 (B)/2001 approved the method followed by the assessee. The issue relating to the reallocation came up before the learned CIT (A) for the assessment year 1999-2000, who decided the issue in favour of the assessee and upheld by the ITAT by dismissing the revenue's appeal. The reasons recorded by the assessing officer do not indicate any new material or information which came to its possession subsequent to the original assessment. The assessee has provided a detailed break up at the time of original proceedings. The CIT Central had issued a notice under Section 263 of the Act, subsequently the proceedings were dropped and therefore, the order passed by the appellate authority was legal and do not call for any interference. Accordingly, the appeal came to be dismissed. Aggrieved by the same, the revenue preferred an appeal before the first Appellate Authority. The first Appellate Authority has dismissed the appeal upholding that there is no justification to interfere with the well considered order passed by the Tribunal. It is against this order the revenue has preferred these appeals.

3. Learned Counsel for the revenue assailing the impugned order, contended that the grounds on which proceedings should have been initiated under Section. 263 of the Act are totally different from the grounds on which the proceedings under Section 147 of the Act are initiated. Merely because the proceedings initiated under Section 263 of the Act are dropped, even if on the same grounds the proceedings are initiated under Section 147 of the Act, which is permissible in law, the appellate authority was not justified in holding that the proceedings are not maintainable. Secondly, he contended that admittedly, the assessee is having a undertaking in the third floor of the technology park -Golden Enclave. The said undertaking was commenced prior to 1993 and therefore, the assessee is not entitled to the benefit of Section 10A of the Act. The assessee sought for expansion of its units in third floor undertaking to construct second and sixth floors which was granted. They are not new undertakings. It is not in dispute that the account maintained by the assessee is only one account in respect of all the three undertakings and no separate accounts are maintained. Therefore, ignoring these above facts benefit had been granted under Section 10A of the Act. After noticing its mistake, rightly the assessing authority initiated the proceedings for reassessment under Section 147 of the Act and rightly, it disallowed the said benefit which was wrongly restored by the appellate authorities and therefore, he submits that the orders requires to be set aside.

4. Per contra, learned Counsel for the assessee contended that when once the higher authority was satisfied that, no case is made for initiating proceedings under Section 263 of the Act, the assessing authority was not justified in reopening the assessment on the very same grounds and therefore, the orders passed by the appellate authorities upholding that the said proceedings are not maintainable is in accordance with law. Insofar as the benefit under Section 10A of the Act is concerned, the assessee is not permitted for expansion of its existing undertaking which it had set up. There were independent undertakings, one in the second floor on 16.11.1995 and another on the sixth floor on 30.07.1996, which was established for manufacturing articles which are meant for export and as the said two units satisfies all the requirements contemplated under Sub-section 2 of Section 10A, the assessing authority earlier were justified in granting the benefit. Without any justification, without any fresh material being made available, the Assessing Authority had no jurisdiction to initiate the proceedings under Section 147 of the Act.

5. The substantial questions of law that arise in the light of the aforesaid facts and rival contentions are:-

"a. Whether the appellate authorities were correct in holding that the reopening of assessment is bad in law as the Commissioner exercising jurisdiction under Section 263 of the Act for the assessment year 1997 - 98 on the same grounds has dropped proceedings?

b. Whether the assessee is entitled to the benefit under Section 10A in respect of the two units which were commenced as expansion?"

6. Re. Point No 1: Section 263 of the Act deals with the powers of the Commissioner to revise the orders which are prejudicial to the interests of the revenue, which reads as under:-

"263. Revision of orders Prejudicial to revenue.-(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing afresh assessment."

Therefore, the Commissioner can exercise the revisional powers if on the order passed by the assessing officer is erroneous insofar as it is prejudicial to the interest of the revenue. Once the said condition is satisfied, the Commissioner is vested with the power to revise the orders passed by the assessing officer.

Section 147 of the Act deals with the income escaping assessment, which reads as under:

"147. Income escaping assessment - If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned."

Therefore the grounds on which the Commissioner could initiate proceedings in revising the orders passed by the assessing officer is totally different from the grounds on which an assessing officer could initiate proceedings for assessment or reassessment under Section 147 of the Act. Therefore, merely because the Commissioner dropped the proceedings under Section 263 of the Act would not act as a bar for the assessing officer to initiate proceedings under Section 147 of the Act, if he has reason to believe that any income chargeable to tax is escaped assessment. Therefore, the findings recorded by both the appellate authorities is unsustainable in law. Therefore, the question is answered in favour of the revenue and against the assessee.

7. Re. Point No.2: Chapter 3 of the Act deals with incomes, which do not form part of total income. Section 10 sets out the incomes which are not included in the total income. It states that in computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included. Therefore, all incomes which are mentioned in the clauses are not included in the total income of any person. Section 10A of the Act is a special provision in respect of newly established undertaking in free trade zone etc. It provides a deduction of such profits and gains as derived by an undertaking for export of articles, things or computer software which is for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. It is a provision which was introduced with the object of encouraging export outside the country. The benefit is extended to a ten consecutive assessment years. This is to boost earning of foreign exchange. Before an assessee can claim benefit under this provision, he has to fulfill the conditions stipulated in sub-section (2) of Section 10A. The first condition to be satisfied is, such an assessee should begin or begins to manufacture or produce articles or things or computer software during the previous year relevant to the, assessment year in respect of the undertakings situate in a software technology park; the assessee should have commenced manufacturing on or after first day of April, 1994. The second condition is such an undertaking should not be formed, by splitting up or reconstruction of a business already in existence. In other words, it should be a new undertaking. Third condition to be satisfied is that it should not have been formed by a transfer to a new business of any machinery or plant previously used for any purpose. In other words, that new undertaking should use new machinery or plant. Once all the conditions are fulfilled, the assessee is entitled to the benefit of tax exemption in respect of the income accrued from such undertaking.

8. The arguments of the revenue is that if the assessee has to avail the said benefit, he should set up a new independent undertaking after obtaining requisite permission for each of the floors and then only such benefit is granted. In the instant case, it is not disputed that the assessee is having manufacturing unit in the third floor of the Golden Enclave which was commenced prior to 1993 for which the assessee is not entitled to claim the benefit under Section 10A of the Act. The assessee sought permission to expand its business. After getting such permission it has set up a undertaking in the second floor on 16.11.1995 and in sixth floor on 30.07.1996. No separate bank accounts or accounts are maintained in these two new units. Only one account is maintained and benefit under Section 10A is claimed in respect of all the three units. Therefore, it is contended that the assessee is not entitled to the benefit under Section 10A.

9. In the entire Section 10A of the Act, it is no where mentioned that the assessee has to set up a new independent undertaking to be eligible for such benefit. Though the heading in Section 10A of the Act refers to newly established undertaking which has to be understood in the context of assessee establishing new undertakings. The said establishment of new business is necessarily has to be by way of an expansion because as it is clear from sub-section (2), if he starts an undertaking by transfer of the machineries and the plant which is already using, he is not entitled to the benefit under Section 10A of the Act. Similarly if he wants to form an undertaking by splitting up or by reconstruction of a business already in existence, then also the assessee is not entitled to the benefit under Section 10A. An assessee who is carrying on business by setting up an undertaking if he sets up an independent undertaking to manufacture or produce articles, it is already producing or manufacturing in the existing undertaking in the software technology park, the profits and gains derived from that undertaking from export of articles, things or computer software, the assessee is entitled to the benefit under Section 10A of the Act. In fact, in one of the similar situation, the Apex Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 held as under:

"10. The assessee continues to be the same for the purpose of assessment. It has its existing business already liable to tax. It produced in the two concerned undertakings commodities different from those which it has been manufacturing or producing in its existing business. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under section 15C. Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under section 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly so in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two undertakings which are separate and distinct."

Following the aforesaid judgment, the Apex Court in the case of International Instruments (P.) Ltd. v. CIT [1980] 123 ITR 11/[1979] 1 Taxman 91 has held as under:

'"5. Sec. 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profits thereon are ascertainable. There is no difficulty to hold that s. 15C is applicable to an absolutely new undertaking for the first time started by an assessee. The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plants and machinery by investing substantial funds. The new 'activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. 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 recognizable 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. For the purpose of s.15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of s.15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned."

It is seen from the decision of the Supreme Court that the grounds on which the Tribunal denied relief to the assessee are irrelevant. Merely because pursuant to a single collaboration agreement the units in question came into existence it cannot be said that they are not new industrial undertakings or separate units. The fact that the assessee was getting articles produced from the new undertakings from abroad for manufacturing dashboard instruments earlier, shows that they were marketable commodities and they answered one of the tests adopted by the Supreme Court in determining whether an undertaking is a new industrial undertaking or not. The fact that there was common management or the fact that separate accounts had not been maintained, would not also lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained the investment on each of the units can be reasonably determined with the material which the assessee may make available to the Department. We are, therefore, of the view that the finding of the Tribunal that the assessee was not entitled to relief under s. 84 and deduction under s. 80J of the Act during the assessment years in question, is erroneous.'

10. From the aforesaid judgments, it is clear that trade and industry do not run in ear-marked channels in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. The new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. What the law requires for an assessee to be entitled to the benefit under Section 10A of the Act, is the assessee has begun or begins to manufacture or produce articles or things or computer software by setting up a new undertaking, an undertaking, which is independent of the old, undertaking. Such a new undertaking should not be commenced with the machinery or plant previously used by the assessee in the existing business. Similarly, such a new undertaking should not be found by building up or reconstruction of an undertaking already in existence. If a new undertaking is established as a separate entity, new machineries are purchased and installed and if the same business is carried on by the assessee namely manufacture or production of articles or things or computer software meant for exporting and other requirements provided under law, then the assessee would be entitled for the benefit under Section 10A. Newly established undertaking does not mean a new company or a partnership. The newly established undertaking is an undertaking of an assessee independent of all undertakings that he is already possessing. The fact that there was common management or the fact that separate accounts had not been maintained, would not lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained, the investment on each of the units can be reasonably determined with the material which the assessee may make available to the Department. It has to be understood that by establishing of a new industrial undertaking the assessee expands its existing business. The assessee should not be deprived of the benefit under Section 10A. In order that the new undertaking is said to be not form part of the already existing business there must be a new emergence of a physically and separate industrial unit which may exist on its own as a viable unit. An undertaking newly formed should be in physical identity and the old unit be preserved. The fact that if there was common management or separate accounts had not been maintained would not lead to the conclusion that there were not separate undertakings. Even if separate accounts are not maintained, the investment on each of the units can be reasonably determined with the material, which the assessee may make available with the department.

11. In the background of the law, if we look at the facts of the case, the assessee set up an undertaking in the third floor of the Golden Enclave which is a software technology park. It was commenced prior to 1993. It is enjoying the benefit under Section 80HHE of the Act. It is not eligible for the benefit under Section 10A of the Act as it was commenced prior to 01.04.1994. Assessee wanted to expand the business. Therefore, a request was made to the authorities for permission to expand the business. Permission was granted. As an expansion, the assessee has set up one unit in Kadugodi and two units in the second floor of the same building on 16.11.1995 and sixth floor on 30.07.1996. The material on record discloses that for setting up these two undertakings nothing from the existing undertaking is made use of. Fresh machinery and plant were purchased, fresh employees were recruited and it was running as an independent unit. Because it is an undertaking belonging to the assessee, only single account is maintained by the assessee. In the light of the aforesaid undisputed facts, it cannot be said that the assessee is not entitled for the benefit under Section 10A of the Act in respect of these two newly established undertakings which it satisfies all the conditions stipulated in Subsection 2 of Section 10A of the Act. The second substantial question of law is answered in favour of the assessee and against the revenue.

Accordingly, the appeals are partly allowed.

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