THE issues before the Bench are - Whether when assessee decides to allot sweat equity shares to its employees free of cost, it is entitled to claim the fair market value of ESOP as expenditure - Whether mere non-allotment of the shares pending completion of certain formalities makes such expenditure contingent liability; Whether when the assessee takes over running business of partnership firms, availing benefits of Ss 80IB/80IC, such benefits available to the undertakings cannot be availed by the amalgamating company for the unexpired period; Whether the change in ownership of the undertaking would disentitle the
successor the benefit of deduction under Ss 80IB/ 80IC of the Act for the unexpired period; Whether AMC charges received by the assessee which are directly relatable to the business of manufacturing, commissioning and erection of cooling system, is eligible for deduction u/s 80IB/80IC of the Act and Whether deduction u/s 80IB/80IC of the Act is allowable on assembling the bought out items in order to make available the whole unit in a running condition at the site of the company/plant. Answers to these questions partly go in favour of the assessee.
successor the benefit of deduction under Ss 80IB/ 80IC of the Act for the unexpired period; Whether AMC charges received by the assessee which are directly relatable to the business of manufacturing, commissioning and erection of cooling system, is eligible for deduction u/s 80IB/80IC of the Act and Whether deduction u/s 80IB/80IC of the Act is allowable on assembling the bought out items in order to make available the whole unit in a running condition at the site of the company/plant. Answers to these questions partly go in favour of the assessee.
Facts of the case
A) Assessee is engaged in the business of manufacture and supply of machinery/ items relating to sugar industry. The AO disallowed the expenditure claimed by the assessee on account of ESOP scheme. During the year under consideration the assessee had debited a sum of Rs.4,19,39,972/- to the Profit & Loss Account as employee benefit expenses. The assessee during the course of assessment proceedings submitted that the share outstanding account of Rs.4,19,39,9721- in the balance sheet as at 31st March, 2006 represented issue of 3,94,692 Sweat Equity shares to be issued to the employees, free of cost for rewarding them for past services or providing knowhow for making available rights in the IPR as per the provisions of section 79A of the companies Act, 1956,. However, in the books, it has been booked at Rs.106.26 per share (Face value of Rs.10/- per share) at arms length price based on subscription agreement, representing a sum of Rs. 4,19,39,9721-. Accordingly, an amount of Rs.4,19,39,9721- was charged to P&L account as employees benefit expenses. Pending allotment of 3,94,972 equity share to employees as on 31s t March, 2006, the sum of Rs.4,19,39,9721- had been shown as share outstanding account in the balance sheet. The reason for creating this share outstanding account of Rs. 4,19,39,972/- in the balance sheet was that at the time of finalizing the balance sheet i.e. 31st March, 2006, the company had offered for sale 3,94,692 sweat equity shares by passing a board resolution and disclosure have been made in the balance sheet under the head "issued share capital.
The AO held that the said expenditure booked to Profit and Loss account was not an ascertained liability of Rs. 4,19,39,972/- but a contingent liability. It was not a benefit conferred on the employees without any restrictions. The employee was not free to encash these shares. Further resolution was passed on 31-03-2006 and amount taken to share outstanding account. No option was given or exercised by the employees for these shares upto the end of the financial year. The liability of the company would get determined when the employee gives its option and is able to encash it without any restriction. However, this was not so in the year under consideration. So, the amount of Rs.4,19,39,972/- not being an ascertained liability as on 31-03-06 was not allowed as expenditure in Profit and Loss account. The CIT (Appeals) allowed the claim of the assessee, following the ratio laid down by the Chennai Bench of the Tribunal in S.S.I. Ltd. Vs. DCIT (2005-TIOL-30-ITAT-MAD).
B) The assessee had started its commercial production w.e.f 1.12.2004 after taking over as going concerns, two running manufacturing partnership firms namely M/s Spray Engineering Devices, a partnership firm and C&C Systems. All the assets and liabilities of the partnership firm were taken over by the newly constituted company at their book values and there was simple change in constitution of the legal entity. The erstwhile partners were issued equity shares in lieu of their balances in capital accounts. The existing firms were enjoying the deductions u/s 80IB and 80IC of the Act on the date of their take over by the company. So the newly constituted company i.e. assessee started claiming deduction u/s 80IB and 80IC for the remaining period, out of the total period of 10 years, as prescribed, less the period for which the deduction had already been claimed in the hands of the firm/s. The AO while passing the order u/s 143(3) of the Act relating to preceding year i.e. Assessment Year 2005-06 allowed the claim of the assessee for deduction u/s 80IB/80IC of the Act following the Board Circular dated 31.12.1963. The AO was of the view that the provisions of section 80IB (12)/80IA(12) of the Act clearly grant privilege only to the case of undertaking of Indian company being transferred during amalgamation or demerger to another Indian company. The AO was of the view that if an undertaking not owned by an Indian Company is transferred no such benefit would be available. The AO thus denied the benefit of deduction u/s 80IB / 80IC of the Act for the unexpired period by holding it to be reconstruction of business already in existence as in Sec 80IB(2)(i) or 80IC(4) (i) of the Act. The AO also noted that w.e.f. Assessment Year 2007-08 the said privilege to provide deduction to undertaking u/s 80IA(12) had also been withdrawn by the legislature by introducing Section 80IA(12A) of the Act. The AO held that the principle of res-judicata did not apply to the assessment proceedings and where AO failed to notice the provisions of section 80IA(12) for Assessment Year 2005-06, the same could not be the basis for allowing the deduction in assessment year 2006-07. However, the CIT (Appeals) allowed the claim of the assessee.
C) The assessee provided customized cooling and condensing systems to the sugar systems based on their own assessment of the clients’ specific needs. Client needs were based on the sizes of the sugar mill and the type of the existing equipment of the sugar mill. The assessee also provided automation of the above said equipments based on the client needs. Further the smooth running of the automation units the AMC of these units was provided for. AMC contract normally covered the keep up of the equipments and all damages occurred in the routine operation. The assessee furnished communication with certain customers to whom it had supplied the cooling and condensing systems and Annual Maintenance Contract (AMC) of the said systems were to be carried out by the assessee at negotiated terms and conditions. The claim of the assessee was that it was providing AMC to only such cooling and condensing systems, which were manufactured by it and supplied to the customers as the systems provided by the assessee were client based, depending on the size of the sugar mill and type of the existing sugar mill. The total AMC charges received by the assessee during the year were Rs.37,75,423. On this AMC charges, the assessee claimed deduction u/s 80IB which were denied by the AO but on appeal, were allowed by the CIT(A).
D) The assessee was engaged in manufacturing machinery for sugar industry as well as cooling and condensing system. The assessee claimed that it was carrying on the activities which were of manufacturing in nature. The AO from the details furnished by the assessee noted that the assessee was not manufacturing all the items, it was supplying to the customers. Some particular items were being purchased from the market and many times were directly delivered to the customers by the supplier and some times of the said machinery/items were sent alongwith the machinery manufactured by it. The AO referred to the voltage stabilizers, motors, pumps, switch gear, control valve, cable, etc. The assessee was requisitioned to furnish copies of its contract with the customers or the purchase orders placed by the customers and to explain how the profits on the said items not manufactured by it, were eligible for deduction u/s 80IB/80IC of the Act. The AO was of the view that the assessee is just a supplier of some major parts of the cooling and condensing system or sugar industry machinery which go into making of a complete cooling and condensing system or sugar industry machinery. Civil work is an important ingredient of the system as without proper foundation no such installation of heavy machinery is possible but the assessee is not into doing the said work. The contract is normally for supply of such manufactured components as well as the other bought out things and the assessee enters into a civil contract for the same. So claim of the assessee that it is claiming deduction for manufacture of sugar industry machinery or cooling systems is not correct. The AO thus held that the assessee was not entitled to the benefit of deduction u/s 80IB/80IC on such items, which have been traded by it and were not the integral part of the goods manufactured by it. The AO, however, was of the view that the benefit of certain items were to be allowed to the assessee, i.e. nuts or bolts or sheets purchased by it. From the perusal of the Profit & Loss Account the purchase price of the traded goods was Rs.6.12 crores and in views of the net profit rate of the assessee being approximately 14.9%, gross profit rate being approximately 48.13%, the profits earned on the traded goods was estimated at 15%. Thus sum of Rs.1,08,12,103/- was considered as profit from trading activity on which deduction u/s 80IB/80IC of the Act was not granted. The CIT (Appeals) upheld the order of the AO.
On cross appeals by the assessee as well as the Revenue, the ITAT held that,
A) ++ the assessee vide special resolution passed at the extraordinary general meeting held on 31.3.2006 had allotted 394692 number of equity shares @ Rs.106.26 amounting to Rs.4.19 crores to its employees as sweat equity. List of the allottees was before the Board during the course of extraordinary general meeting and the finding of the CIT (Appeals) is that the said shares were allotted immediately thereafter. The Revenue has not controverted the above said finding of the CIT (Appeals). In view thereof, the liability had got crystallized as on 31.3.2006. Admittedly, no allotment was done on 31.3.2006 but the facts of the case reflects that the assessee had specified the number of shares to be allotted to its employees as on 31.3.2006 and immediately thereafter the said shares were so allotted. Consequently, mere non-allotment of the shares pending completion of certain formalities, does not merit the disallowance of said expenditure being contingent liability;
++ the allotment of the sweat equity of the employees by the assessee was an ascertained liability on the date of passing of the resolution by the Board of the assessee company. Merely because under the scheme of allotment of said equity, there was a lock in period of five years under which in case the employee left the employment before the expiry of five years, the shares so allotted to him would vest with the assessee company, does not make the liability as contingent. The assessee had explained that as per the scheme where the said shares are forfeited by the management, the same would be offered to tax in the relevant AY;
++ in the facts of the present case before us, what has been booked as expenditure, is the value of shares allotted to the employees under the sweat equity scheme. In the totality of the facts and circumstances of the case, the ITAT was in agreement with the CIT (Appeals) in allowing claim of deduction;
B) ++ the business was being carried out by two partnership concerns i.e. M/s Spray Engineering Devices Ltd. and C & C Systems and as per the agreement the assessee company had taken over the two running manufacturing partnership firms as going concerns. The Memorandum of Association of the assessee company vide its main object provide the same. Further object of the assessee was to carry on the business of manufacture, purchase, sale, i.e, in the field of sugar, energy, power, etc. Memorandum and Articles of Association of assessee company is enclosed at pages 640 to 677. The two manufacturing partnership concerns were claiming deduction u/s 80IB/80IC of the Act. The assessee company on amalgamation claimed the above said deduction u/s 80IB/80IC of the Act for the unexpired period as postulated under the Act. The issue arising in the present grounds of appeal is whether after the said amalgamation or take over by the assessee company, deduction u/s 80IB/80IC of the Act for the remaining period was available to the assessee company;
++ the Tribunal in assessee’s own case while deciding appeal in AY 2005-06 have held that deduction u/s 80IB/80IC of the Act was available to the undertaking and not the assessee as envisaged in CBDT Circular No.F15/5/63/ IT (A-1) dated 13.12.1963. The Tribunal further held that the provisions of section 80IA(12) of the Act were not applicable to the facts of the present case as business of the two firms had been transferred under the scheme of the Income Tax Act;
++ the Punjab & Haryana High Court in CIT Vs. Mega Packages had also laid down the proposition that the benefit admissible to an undertaking u/s 80IC of the Act for the remaining period could not be denied to the assessee on the ground that section 80IA(12) of the Act embraces only the cases of amalgamation or demerger of Indian company. It was further held that where the proprietaryship business was taken over by the partnership concern, it could not be held to be the result of splitting or reconstructing of business already in existence, which could justify denying the benefit u/s 80IC(4) (ii) of the Act. The High Court held that under the provisions of section 80IC of the Act the benefit was available to an undertaking which had fulfilled the conditions laid down u/s 80IC of the Act. It was further held “Section 80IC of the Act bestows the deduction under the Act upon the undertaking and not the owner. Once the same is to be allowed to undertaking the change in ownership of the undertaking would not disentitle the successor, the benefit of deduction for an expired period;
++ in view of the above said ratio laid down by the Punjab & Haryana High Court, the assessee is entitled to the benefit of deduction u/s 80IB/80IC of the Act for the un-expired period as deduction is allowable to an undertaking and the taking over of the business of two partnership concerns by the assessee company does not amount to reconstruction of business as business of the undertaking had continued;
C) ++ Deduction u/s 80IB/80IC of the Act on AMC charges – the Himachal Pradesh High Court in assessee’s own case in ITA No.39 of 2006 vide decision dated 7.11.2009 had held that the words ‘derived from’ in section 80IB of the Act were much narrower in connotation as compared to the words ‘attributable to’. It was further laid down that The Industrial Undertaking would be entitled to claim deductions u/s 80-IB only if it shows that the profit is derived from the business of such Industrial Undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. The High Court after laying down the above said principles held that the assessee was entitled to claim deduction u/s 80IB of the Act on MODVAT credit and also erection and commissioning charges, being directly relatable to the business and the source of the income being business itself. The High Court further held that when the assessee is engaged in the business of manufacture, the work ‘manufacture’ cannot be read so narrowly so as to limit the amount only to the price of the goods sold. If the manufacturer is required by the customer to erect and commission the machinery the amount received by it on this count is income derived from the business itself and therefore eligible for deduction u/s 80-IB;
++ following the above said parity of reasoning and in view of the factual aspect brought on record by the assessee, it was held that AMC charges received by the assessee are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently the assessee is eligible to the claim of deduction u/s 80IB/80IC of the Act;
D) ++ Deduction u/s 80IB/80IC of the Act on the profits on sale of components of system - The CIT (Appeals) while deciding the present issue had relied upon the ratio laid down by the Punjab & Haryana High Court in M/s Arisudana Spinning Mills Ltd. (supra) where the assessee in addition to manufacturing yarn was engaged in the trading of raw wool and knitted cloths. In respect of the trading activities carried on by the assessee the High Court held that the assessee was not entitled to the deduction u/s 80IA of the Act. However, in the facts of the present case, the assessee is not engaged in the trading of any items, but is purchasing certain items from the market like electric motors, Watt. conductor, cables, etc. In order to complete its project of supply the customers cooling and condensing system for the sugar industry on the specific need of its clients, the bought out components are part of the assembly unit assembled by the assessee and made operational at the premises of its clients. There is no merit in the observation of the AO that the assessee has dispatched the manufactured items alongwith bought out components for the clients of the assessee to assemble. The claim of the assessee in this regard was to the contrary. Even after assembling the unit the assessee was also providing the services by the Annual Maintenance Contractor of the said unit in entirety and there is no merit in the observation of the AO to the contrary. Relying upon the ratio laid down in Mihir Engineers Ltd. (supra) the AO was directed to allow the claim of the assessee on the net profits declared without deducting the profits relating to bought out components, as being, eligible for deduction u/s 80IB/80IC of the Act.
A) Assessee is engaged in the business of manufacture and supply of machinery/ items relating to sugar industry. The AO disallowed the expenditure claimed by the assessee on account of ESOP scheme. During the year under consideration the assessee had debited a sum of Rs.4,19,39,972/- to the Profit & Loss Account as employee benefit expenses. The assessee during the course of assessment proceedings submitted that the share outstanding account of Rs.4,19,39,9721- in the balance sheet as at 31st March, 2006 represented issue of 3,94,692 Sweat Equity shares to be issued to the employees, free of cost for rewarding them for past services or providing knowhow for making available rights in the IPR as per the provisions of section 79A of the companies Act, 1956,. However, in the books, it has been booked at Rs.106.26 per share (Face value of Rs.10/- per share) at arms length price based on subscription agreement, representing a sum of Rs. 4,19,39,9721-. Accordingly, an amount of Rs.4,19,39,9721- was charged to P&L account as employees benefit expenses. Pending allotment of 3,94,972 equity share to employees as on 31s t March, 2006, the sum of Rs.4,19,39,9721- had been shown as share outstanding account in the balance sheet. The reason for creating this share outstanding account of Rs. 4,19,39,972/- in the balance sheet was that at the time of finalizing the balance sheet i.e. 31st March, 2006, the company had offered for sale 3,94,692 sweat equity shares by passing a board resolution and disclosure have been made in the balance sheet under the head "issued share capital.
The AO held that the said expenditure booked to Profit and Loss account was not an ascertained liability of Rs. 4,19,39,972/- but a contingent liability. It was not a benefit conferred on the employees without any restrictions. The employee was not free to encash these shares. Further resolution was passed on 31-03-2006 and amount taken to share outstanding account. No option was given or exercised by the employees for these shares upto the end of the financial year. The liability of the company would get determined when the employee gives its option and is able to encash it without any restriction. However, this was not so in the year under consideration. So, the amount of Rs.4,19,39,972/- not being an ascertained liability as on 31-03-06 was not allowed as expenditure in Profit and Loss account. The CIT (Appeals) allowed the claim of the assessee, following the ratio laid down by the Chennai Bench of the Tribunal in S.S.I. Ltd. Vs. DCIT (2005-TIOL-30-ITAT-MAD).
B) The assessee had started its commercial production w.e.f 1.12.2004 after taking over as going concerns, two running manufacturing partnership firms namely M/s Spray Engineering Devices, a partnership firm and C&C Systems. All the assets and liabilities of the partnership firm were taken over by the newly constituted company at their book values and there was simple change in constitution of the legal entity. The erstwhile partners were issued equity shares in lieu of their balances in capital accounts. The existing firms were enjoying the deductions u/s 80IB and 80IC of the Act on the date of their take over by the company. So the newly constituted company i.e. assessee started claiming deduction u/s 80IB and 80IC for the remaining period, out of the total period of 10 years, as prescribed, less the period for which the deduction had already been claimed in the hands of the firm/s. The AO while passing the order u/s 143(3) of the Act relating to preceding year i.e. Assessment Year 2005-06 allowed the claim of the assessee for deduction u/s 80IB/80IC of the Act following the Board Circular dated 31.12.1963. The AO was of the view that the provisions of section 80IB (12)/80IA(12) of the Act clearly grant privilege only to the case of undertaking of Indian company being transferred during amalgamation or demerger to another Indian company. The AO was of the view that if an undertaking not owned by an Indian Company is transferred no such benefit would be available. The AO thus denied the benefit of deduction u/s 80IB / 80IC of the Act for the unexpired period by holding it to be reconstruction of business already in existence as in Sec 80IB(2)(i) or 80IC(4) (i) of the Act. The AO also noted that w.e.f. Assessment Year 2007-08 the said privilege to provide deduction to undertaking u/s 80IA(12) had also been withdrawn by the legislature by introducing Section 80IA(12A) of the Act. The AO held that the principle of res-judicata did not apply to the assessment proceedings and where AO failed to notice the provisions of section 80IA(12) for Assessment Year 2005-06, the same could not be the basis for allowing the deduction in assessment year 2006-07. However, the CIT (Appeals) allowed the claim of the assessee.
C) The assessee provided customized cooling and condensing systems to the sugar systems based on their own assessment of the clients’ specific needs. Client needs were based on the sizes of the sugar mill and the type of the existing equipment of the sugar mill. The assessee also provided automation of the above said equipments based on the client needs. Further the smooth running of the automation units the AMC of these units was provided for. AMC contract normally covered the keep up of the equipments and all damages occurred in the routine operation. The assessee furnished communication with certain customers to whom it had supplied the cooling and condensing systems and Annual Maintenance Contract (AMC) of the said systems were to be carried out by the assessee at negotiated terms and conditions. The claim of the assessee was that it was providing AMC to only such cooling and condensing systems, which were manufactured by it and supplied to the customers as the systems provided by the assessee were client based, depending on the size of the sugar mill and type of the existing sugar mill. The total AMC charges received by the assessee during the year were Rs.37,75,423. On this AMC charges, the assessee claimed deduction u/s 80IB which were denied by the AO but on appeal, were allowed by the CIT(A).
D) The assessee was engaged in manufacturing machinery for sugar industry as well as cooling and condensing system. The assessee claimed that it was carrying on the activities which were of manufacturing in nature. The AO from the details furnished by the assessee noted that the assessee was not manufacturing all the items, it was supplying to the customers. Some particular items were being purchased from the market and many times were directly delivered to the customers by the supplier and some times of the said machinery/items were sent alongwith the machinery manufactured by it. The AO referred to the voltage stabilizers, motors, pumps, switch gear, control valve, cable, etc. The assessee was requisitioned to furnish copies of its contract with the customers or the purchase orders placed by the customers and to explain how the profits on the said items not manufactured by it, were eligible for deduction u/s 80IB/80IC of the Act. The AO was of the view that the assessee is just a supplier of some major parts of the cooling and condensing system or sugar industry machinery which go into making of a complete cooling and condensing system or sugar industry machinery. Civil work is an important ingredient of the system as without proper foundation no such installation of heavy machinery is possible but the assessee is not into doing the said work. The contract is normally for supply of such manufactured components as well as the other bought out things and the assessee enters into a civil contract for the same. So claim of the assessee that it is claiming deduction for manufacture of sugar industry machinery or cooling systems is not correct. The AO thus held that the assessee was not entitled to the benefit of deduction u/s 80IB/80IC on such items, which have been traded by it and were not the integral part of the goods manufactured by it. The AO, however, was of the view that the benefit of certain items were to be allowed to the assessee, i.e. nuts or bolts or sheets purchased by it. From the perusal of the Profit & Loss Account the purchase price of the traded goods was Rs.6.12 crores and in views of the net profit rate of the assessee being approximately 14.9%, gross profit rate being approximately 48.13%, the profits earned on the traded goods was estimated at 15%. Thus sum of Rs.1,08,12,103/- was considered as profit from trading activity on which deduction u/s 80IB/80IC of the Act was not granted. The CIT (Appeals) upheld the order of the AO.
On cross appeals by the assessee as well as the Revenue, the ITAT held that,
A) ++ the assessee vide special resolution passed at the extraordinary general meeting held on 31.3.2006 had allotted 394692 number of equity shares @ Rs.106.26 amounting to Rs.4.19 crores to its employees as sweat equity. List of the allottees was before the Board during the course of extraordinary general meeting and the finding of the CIT (Appeals) is that the said shares were allotted immediately thereafter. The Revenue has not controverted the above said finding of the CIT (Appeals). In view thereof, the liability had got crystallized as on 31.3.2006. Admittedly, no allotment was done on 31.3.2006 but the facts of the case reflects that the assessee had specified the number of shares to be allotted to its employees as on 31.3.2006 and immediately thereafter the said shares were so allotted. Consequently, mere non-allotment of the shares pending completion of certain formalities, does not merit the disallowance of said expenditure being contingent liability;
++ the allotment of the sweat equity of the employees by the assessee was an ascertained liability on the date of passing of the resolution by the Board of the assessee company. Merely because under the scheme of allotment of said equity, there was a lock in period of five years under which in case the employee left the employment before the expiry of five years, the shares so allotted to him would vest with the assessee company, does not make the liability as contingent. The assessee had explained that as per the scheme where the said shares are forfeited by the management, the same would be offered to tax in the relevant AY;
++ in the facts of the present case before us, what has been booked as expenditure, is the value of shares allotted to the employees under the sweat equity scheme. In the totality of the facts and circumstances of the case, the ITAT was in agreement with the CIT (Appeals) in allowing claim of deduction;
B) ++ the business was being carried out by two partnership concerns i.e. M/s Spray Engineering Devices Ltd. and C & C Systems and as per the agreement the assessee company had taken over the two running manufacturing partnership firms as going concerns. The Memorandum of Association of the assessee company vide its main object provide the same. Further object of the assessee was to carry on the business of manufacture, purchase, sale, i.e, in the field of sugar, energy, power, etc. Memorandum and Articles of Association of assessee company is enclosed at pages 640 to 677. The two manufacturing partnership concerns were claiming deduction u/s 80IB/80IC of the Act. The assessee company on amalgamation claimed the above said deduction u/s 80IB/80IC of the Act for the unexpired period as postulated under the Act. The issue arising in the present grounds of appeal is whether after the said amalgamation or take over by the assessee company, deduction u/s 80IB/80IC of the Act for the remaining period was available to the assessee company;
++ the Tribunal in assessee’s own case while deciding appeal in AY 2005-06 have held that deduction u/s 80IB/80IC of the Act was available to the undertaking and not the assessee as envisaged in CBDT Circular No.F15/5/63/ IT (A-1) dated 13.12.1963. The Tribunal further held that the provisions of section 80IA(12) of the Act were not applicable to the facts of the present case as business of the two firms had been transferred under the scheme of the Income Tax Act;
++ the Punjab & Haryana High Court in CIT Vs. Mega Packages had also laid down the proposition that the benefit admissible to an undertaking u/s 80IC of the Act for the remaining period could not be denied to the assessee on the ground that section 80IA(12) of the Act embraces only the cases of amalgamation or demerger of Indian company. It was further held that where the proprietaryship business was taken over by the partnership concern, it could not be held to be the result of splitting or reconstructing of business already in existence, which could justify denying the benefit u/s 80IC(4) (ii) of the Act. The High Court held that under the provisions of section 80IC of the Act the benefit was available to an undertaking which had fulfilled the conditions laid down u/s 80IC of the Act. It was further held “Section 80IC of the Act bestows the deduction under the Act upon the undertaking and not the owner. Once the same is to be allowed to undertaking the change in ownership of the undertaking would not disentitle the successor, the benefit of deduction for an expired period;
++ in view of the above said ratio laid down by the Punjab & Haryana High Court, the assessee is entitled to the benefit of deduction u/s 80IB/80IC of the Act for the un-expired period as deduction is allowable to an undertaking and the taking over of the business of two partnership concerns by the assessee company does not amount to reconstruction of business as business of the undertaking had continued;
C) ++ Deduction u/s 80IB/80IC of the Act on AMC charges – the Himachal Pradesh High Court in assessee’s own case in ITA No.39 of 2006 vide decision dated 7.11.2009 had held that the words ‘derived from’ in section 80IB of the Act were much narrower in connotation as compared to the words ‘attributable to’. It was further laid down that The Industrial Undertaking would be entitled to claim deductions u/s 80-IB only if it shows that the profit is derived from the business of such Industrial Undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. The High Court after laying down the above said principles held that the assessee was entitled to claim deduction u/s 80IB of the Act on MODVAT credit and also erection and commissioning charges, being directly relatable to the business and the source of the income being business itself. The High Court further held that when the assessee is engaged in the business of manufacture, the work ‘manufacture’ cannot be read so narrowly so as to limit the amount only to the price of the goods sold. If the manufacturer is required by the customer to erect and commission the machinery the amount received by it on this count is income derived from the business itself and therefore eligible for deduction u/s 80-IB;
++ following the above said parity of reasoning and in view of the factual aspect brought on record by the assessee, it was held that AMC charges received by the assessee are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently the assessee is eligible to the claim of deduction u/s 80IB/80IC of the Act;
D) ++ Deduction u/s 80IB/80IC of the Act on the profits on sale of components of system - The CIT (Appeals) while deciding the present issue had relied upon the ratio laid down by the Punjab & Haryana High Court in M/s Arisudana Spinning Mills Ltd. (supra) where the assessee in addition to manufacturing yarn was engaged in the trading of raw wool and knitted cloths. In respect of the trading activities carried on by the assessee the High Court held that the assessee was not entitled to the deduction u/s 80IA of the Act. However, in the facts of the present case, the assessee is not engaged in the trading of any items, but is purchasing certain items from the market like electric motors, Watt. conductor, cables, etc. In order to complete its project of supply the customers cooling and condensing system for the sugar industry on the specific need of its clients, the bought out components are part of the assembly unit assembled by the assessee and made operational at the premises of its clients. There is no merit in the observation of the AO that the assessee has dispatched the manufactured items alongwith bought out components for the clients of the assessee to assemble. The claim of the assessee in this regard was to the contrary. Even after assembling the unit the assessee was also providing the services by the Annual Maintenance Contractor of the said unit in entirety and there is no merit in the observation of the AO to the contrary. Relying upon the ratio laid down in Mihir Engineers Ltd. (supra) the AO was directed to allow the claim of the assessee on the net profits declared without deducting the profits relating to bought out components, as being, eligible for deduction u/s 80IB/80IC of the Act.
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