Whether Sec 10A benefits are available in case a partnership firm gets converted into a company with partners becoming shareholders and dissolution of firm involves no transfer of assets - YES: HC

issue before the Bench is - Whether Sec 10A benefits are available in case a partnership firm gets converted into a company with partners becoming shareholders and dissolution of firm involves no transfer of assets. And the verdict favours the assessee.

Facts of the case

The assessee is engaged in the business of exporting software having its Unit at Software Technology Park. The assessee-Company had filed return of income claiming 100% exemption

under Section 10A of the Act. The Assessing Officer verified the records and found that the assessee was originally a partnership firm formed on 29-11-1993. Subsequently, it was reconstituted in the year 1995 as well as in the year 1997. The name of the firm was changed from M/s.Foresee Software Consultant to M/s.Foresee Information Systems on 22-08-1995. From the year 1995-96, the firm was exporting software to the US based company M/s.Effone Software Inc., and it had claimed deduction under Section 80HHE from the assessment year 2000-01 and continued up to 2002-03. On 24-07-2001, the Partnership Firm was converted into a Company and the same business was continued after conversion of the Firm into company. The assessee made an application before the Software Technology Park of India for approval of setting up Software Technology Park Unit. The STPI accorded approval for the same. Thereafter, a legal agreement was executed on 8-1-2002 between the STPI and the assessee. On the basis of the said agreement, an application was made before the Customs Authorities for issue of license. Accordingly, the Customs Authorities issued license on 22-1-2002 and a bond was executed on 4-2-2002. The assessee commenced its commercial production on 4-2-2002. The Assessing Officer found that exemption under Section 10A can be extended only to the new undertakings whereas the assessee-Company was an existing Unit and it had continued its business which, it was doing from 1993. Accordingly the Revenue refused to extend the benefit of 100% exemption under Section 10A of the Act.

On appeal the assessee contended that the Assessing Officer had misunderstood and misread Section 10-A, Board Circular No.1/2005 and Import and Export Policy of the Government of India and contended that the assessee was entitled for the benefit under the Act. The Appellate Authority held that the assessee was entitled for the benefit of 100% exemption under Section 10A of the Act. The Appellate Authority held that understanding of the Assessing Officer with regard to benefit under Section 10A was erroneous in law. The assessee had not violated any of the conditions under Section 10A(2)(ii) and 10A(2)(iii) of the Act. It was also held that there was no transfer of ownership or the beneficial interest in the undertaking consequent upon the conversion of the firm into a company and it was only a transformation of the erstwhile firm into company.

On Revenue's appeal, the Tribunal held that the assessee-Company was entitled for exemption for a period of 10 years from the date of approval from the STPI and dismissed the appeals.

On appeal the counsel for Revenue contended that deduction under Section 10A of the Act was a special provision, which was applicable in respect of newly established industrial undertakings in a Free Trade Zone. In the instant case, the assessee- Company was admittedly established in the year 1993 and it was converted from the Firm into a Company in the year 1996. An application was filed before the STPI authorities and obtained approval for setting up of a new Unit. But the assessee had not set up a new unit. Hence, they were not entitled for any exemption under Section 10A of the Act. The assessee was already enjoying the exemption under Section 80HHE of the Act. However the assessee had not fulfilled the provisions of Section 10A(2)(i)(b) of the Act and they had violated Section 10A(2)(ii) and of the Act.

Held that,

++ the records clearly disclose that the assessee is a partnership Firm engaged in the business of exporting software. It was subsequently converted into a Company and got changed its name as M/s. Foresee Information Systems. All the partners in the Firm became the shareholders of the company and all the assets and liabilities of the Firm were transferred to the company. The assessee-Company made an application before the STPI authorities for approval to set up a STP unit. The STPI authorities accorded approval for setting up a STP unit. The license was granted by the Customs Authorities in January 2002. Prior to the setting up of STP Unit, the assessee was claiming deduction under Section 80HHE. The assessee is dealing with the US based company M/s. Effone Software Inc., and all exports have been made to the said company only. He filed returns of income claiming deduction under Section 10A of the Act. The Assessing Authority, after scrutinizing the returns filed by the assessee held that the assessee is not entitled for deduction under Section 10A and rejected the same for the reasons referred to in the earlier part of the order. On an appeal filed by the assessee, the First Appellate Authority considered the matter afresh and held that the assessee is entitled for the benefit under Section 10A. The said order was confirmed by the Tribunal;

++ the assessee is a 100% export oriented unit, enjoying deduction under Section 80HHE of the Act. In the CBDT Circular No.1/2005 dated 6-1-2005, it has been stated that existing Domestic Tariff Area Units which were approved as 100% EOU units by the Board shall be eligible for deduction under Section 10B of the Act;

++ reading of the clauses makes it very clear that benefit under Section 10A can be extended even to the existing units, if they have fulfilled the condition under Sections 10A(2)(a)(ii) and 10A(2)(a)(iii) of the Act and as contended by the assessee, the requirement of setting up of a new STP unit does not arise. The Bombay High Court in TEXSPIN ENGINEERING AND MANUFACTURING WORKS has clearly held that the conversion of a Firm into a Company is not a case of distribution of assets or dissolution of the Firm. In the present case also there is no transfer of business as contemplated under Section 45(1) of the Act and only the partnership firm was converted into a company and all the partners of the firm have become the shareholders of the company. Further all the assets and liabilities were transferred to the Company. None of the outsiders were inducted as shareholders. In view of the STPI scheme framed by the Government of India, the existing DTA units can also be converted into STP units and enjoy the deduction under Section 10A of the Act. The records further disclose that the assessee has not violated any of the conditions prescribed under Section 10A of the Act. Further, Division Bench of this Court also had an occasion to examine the Circular No.1/2005 issued by the CBDT in CIT v/s EXPERT OUTSOURCES PRIVATE LIMITED, wherein the Division Bench of this Court has held that though the circular is in the context of Section 10B, the ratio of the circular equally applies to Section 10A also. The benefit under Section 10A would also be available even when an existing unit gets converted into STP unit. Hence, it is not open to the Assessing Officer to contend that no new undertaking came into being after approval of STPI;

++ a similar view has been taken in CIT v/s EXPERT OUTSOURCES. Hence, the law declared by the Division Bench of this Court referred to above is binding on the Assessing Officer. The First Appellate Authority as well as the Tribunal after considering the matter in detail and taking into consideration the Board Circular No.1/2005 issued by the CBDT and the Import and Export Policy clearly held that the assessee is entitled for deduction under Section 10 of the Act. The assessee Company fulfills all the conditions enumerated under Section 10A of the Act and it is not formed by splitting up, or reconstruction of the business already in existence. It is also not formed by transformation of new business of plant or machinery previously used for any purpose. Both the Assessing Authority as well as the Tribunal have concurrently held that the assessee is entitled for deduction under Section 10A of the Act. We find there is no infirmity or irregularity in the said finding. Hence, the substantial question of law framed in these appeals is answered against the revenue and in favour of the assessee.