Whether Sec 80IB benefits are not to be denied merely because ownership of the Undertaking changes from proprietorship to partnership firm - YES: HC

THE issues before the Bench are - Whether Sec 80IB benefits are not to be denied merely because the ownership of the Undertaking changes from proprietorship to partnership firm; Whether on conversion of a proprietorship firm into a partnership firm, there is any transfer of plant and machinery to the new firm and Whether in that case there is only a transfer of industrial undertaking as a whole along with assets and liabilities. And the verdict goes in favour of the assessee.

Facts of the case

The assessee concern's factory is situated in SIDCO Industrial Estate in Jammu & Kashmir and derives income from manufacture and sale of consumer electronic durable goods. For AY 2005-06, assessee had filed a return showing a loss. The case was taken up for scrutiny and notice u/s 143(2) and 142(1) was issued. During the year, assessee claimed deduction u/s 80-IB amounting to Rs.18,51,055/-. The AO issued a notice u/s 142(1) requiring the assessee to justify his claim of deduction u/s 80-IB. In response to which, assessee had submitted that his factory was situated in Jammu & Kashmir. On going through the claim of the assessee, AO found that the assessee was running business from the same premises as a proprietorship concern and that on 1st April, 2004 a partnership firm was constituted in which two other persons were inducted as partners. According to AO, a new legal entity was formed on 1st April, 2004. The AO accordingly held that the industrial undertaking under proprietorship was converted into a partnership firm on 1st April, 2004 and that the transfer of machinery or plant previously used by the proprietorship concern was being used by the partnership firm and, accordingly, the assessee was not entitled for exemption u/s 80-I. The AO, accordingly, disallowed the deduction claimed by the assessee.

On appeal, CIT allowed the appeal holding that the assessee was entitled for deduction u/s 80-IB and found that the business of the undertaking was not formed by splitting up or by reconstruction and that the undertaking was already in existence and, consequently, the assessee was not hit by the provision of Section 80IB(2)(i). On further appeal, Tribunal dismissed the said appeal and found that only the constitution of the assessee's firm was changed from proprietorship concern into a partnership firm and that there was no transfer of plant and machinery to the new firm, inasmuch as it was only a transfer of the industrial undertaking as a whole along with the assets and liabilities. The Tribunal held that there was no splitting up or reconstruction of the business, which was already in existence and that it was only a case of change of the constitution of the same industrial concern, which continued to manufacture the same item, even after the admission of a partner. The Tribunal found that the conditions that disqualifies the deductions u/s 80-IB was not existing.

Before HC, the Revenue's counsel submitted that by conversion of the assessee's proprietary business into a partnership firm, led to a transfer of the assets of proprietary business to the partnership firm, as a result of which, the plant and machinery, which was being used by the proprietorship concern was transferred and used by a partnership firm w.e.f. 1st April, 2004. Consequently, in view of the provisions of Section 80- IB(2)(i) the assessee was not entitled for deduction.

Held that,

++ from a perusal of the aforesaid provision, the emphasis is on the formation of the undertaking, which is not formed by splitting up or reconstruction of an existing business. The formation of the undertaking should not be confused with the ownership of the business. If the undertaking is formed by splitting up or by reconstruction, in that case, the undertaking will not be qualified for claiming exemption. In the instant case, the undertaking was already in existence and was not formed by splitting up or by reconstruction of the business. The undertaking was admittedly formed in the year 2002 and not in the year 2004. In 2004, the ownership of the business changed from a proprietorship firm to a partnership firm, wherein two persons were inducted as partners. On the conversion of the proprietorship firm into a partnership firm there was no transfer of plant and machinery to the new firm. In the instant case, there was only transfer of the industrial undertaking as a whole along with assets and liabilities;

++ consequently, in our view the two conditions, which are provided u/s 80-IB(2)(i), which disqualifies the deduction are not present in the instant case. From a perusal of the aforesaid provision, it is clear that Section 84 is more or less the same as provided in Section 80-IB of the Act. The Central Board of Direct Taxes issued a circular F. No.15/5/63-IT(A-1) dated 13th December, 1963 indicating that the benefit of Section 84 is attached to the undertaking and not to the owner thereof and, consequently, the successor would be entitled to the benefit for the unexpired period of 5 years provided the undertaking is taken over as a running concern. The same principle is applicable in the instant case. Admittedly, the undertaking was in existence since 2002. The proprietorship concern changed into a partnership firm. The benefit under Section 80-IB is available to the partnership firm and the conditions imposed under Section 80-IB(2)(i) does not come in the way;

++ in CIT Vs. Bullet International, (2012) 349 ITR (All) a Division Bench of this Court held that the exemption granted to a proprietorship concern, which converted from a proprietorship into a partnership concern was still entitled for exemption under Section 10A of the Act. In the light of the aforesaid, we hold that the Tribunal was justified in dismissing the appeals of the revenue holding that the assessee was entitled for deduction under Section 80-IB of the Act and was not hit by the provisions of Section 80-IB(2)(i) of the Act. The Tribunal was also justified in holding that upon conversion of the proprietorship concern to a partnership concern there was no transfer of plant and machinery to the partnership firm, inasmuch as there was a transfer of the industrial undertaking as a whole along with its assets and liabilities. Consequently, for the reasons stated aforesaid, all the appeals fail and are dismissed. The questions of law as indicated aforesaid are answered accordingly.