ITA No. 145 of 2011 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 145 of 2011 Date of Decision: 24.8.2011 Commissioner of Income Tax-I, Chandigarh ....Appellant. Versus M/s Mega Packages ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL, ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel, for the appellant. AJAY KUMAR MITTAL, J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 31.5.2010 passed by the Income Tax Appellate Tribunal, Chandigarh, Bench “A” (hereinafter referred to as “the Tribunal”) in ITA No. 1136/CHD/2009, relating to the assessment year 2006-07, claiming the following substantial question of law:- “Whether on the facts and circumstances of the case, the Ld. ITAT was right in law in confirming the order of the CIT(A) who had deleted the addition made by the Assessing Officer on account of disallowance of the deduction claimed by the assessee firm u/s 80-IC, as the assessee firm has taken over the on going proprietary concern and as per Section 80-IA ITA No. 145 of 2011 -2- (12), the deduction is available only when an Indian Company is taken over by another Indian Company in a scheme of amalgamation or demerger?” 2. Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee is a partnership firm having two partners, namely, Karanjit Singh Bajwa as confirming partner and Inder Raj Singh Grewal as the incoming partner with 50% share each. It was also agreed upon between the parties that the name and style of the partnership would continue to be Mega Packages. The auditors in the audit report in Form No.3CD had reported that the proprietorship concern of Karanjit Singh Bajwa was converted into a partnership firm w.e.f. 1.4.2005. The assessee firm during the year under consideration claimed deduction under Section 80-IC of the Act. The computation of the deduction under Section 80-IC was annexed in Annexure A to the Tax Audit Report in Form Nos. 3CB and 3CD attached with the return. The Assessing Officer held that in the assessment years 2004-05 and 2005-06, the return of income of Mega Packages was filed as a proprietary concern of Karanjit Singh Bajwa. The date of commencement of the activity was 22.11.2003 and the initial assessment year from which deduction under Section 80-IC of the Act was claimed was assessment year 2004-05. The Assessing Officer issued a show cause notice to the assessee to explain as to why the deduction under Section 80-IC should be allowed when the partnership firm had been formed during the year whereas earlier deduction was claimed as a proprietary concern by invoking the provisions of Section 80-IA(12), and without prejudice to the provisions of Section 80-IA(12) ITA No. 145 of 2011 -3- also under Section 80-IC(4)(i) of the Act. The assessee submitted its reply pleading that it was a proprietorship and during the relevant previous year, the same was converted from proprietorship to partnership firm. The Assessing Officer vide order dated 29.12.2008 held that a new person came into existence this year and invoking the provisions of Sections 80-IC(7) and 80-IA(12) of the Act disallowed the deduction of Rs.23,68,113/- on the ground that such benefit was admissible for the remaining period in case of companies only. The benefit of Section 80-IC of the Act was also denied on the basis of provisions of Section 80-IC(4)(i) of the Act. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT(A) vide order dated 25.9.2009 allowed the claim of the assessee under Section 80-IC of the Act on both the grounds. Against the order of the CIT(A), the department filed an appeal before the Tribunal. The Tribunal vide order dated 31.5.2010 upheld the order of the CIT(A) and dismissed the appeal. Hence, the present appeal by the revenue. 3. We have heard learned counsel for the revenue. 4. Learned counsel for the revenue raised two fold submission in support of the appeal. According to the learned counsel, the provisions of Section 80-IA(12) of the Act were applicable in view of Section 80-IC(7) of the Act. Under Section 80-IA(12) of the Act, the assessee is entitled to benefit of deduction under Section 80-IC of the Act for the remaining unexpired period where there is amalgamation or demerger of an Indian Company. Therefore, this benefit could not be extended in cases where proprietorship concern was converted into ITA No. 145 of 2011 -4- partnership concern. Elaborating further, learned counsel urged that under Section 80-IC(4)(i) of the Act, any undertaking which is not formed by splitting up or by reconstruction of a business already in existence alone can derive benefit thereunder. 5. The point for consideration in this appeal is whether the assessee was entitled to benefit of deduction under Section 80-IC of the Act for the remaining period after the proprietorship concern was converted into a partnership concern. 6. The Assessing Officer had denied the benefit of Section 80-IC of the Act on two counts, namely, (i) The assessee had converted proprietorship concern into partnership and, therefore, was not entitled to take benefit of Section 80-IC for the remaining period in view of Sections 80-IC(7) and 80-IA(12) of the Act. (ii) Section 80-IC(4)(i) of the Act disentitled the assessee to claim deduction under Section 80-IC of the Act on change of status of the assessee from proprietorship to partnership. 7. In our opinion, the revenue was not right in denying benefit of Section 80-IC of the Act to the assessee in both the situations. 8. Taking up first aspect of the plea of the revenue, it may be noticed that benefit being admissible to an undertaking, the same could not be denied to the assessee for the remaining period only on the ground that sub-section (12) of Section 80-IA embraces only cases of amalgamation or demerger of Indian Company and, therefore, such benefit would not be available in case of change from proprietorship to partnership firm. Similar contention raised before the Tribunal was ITA No. 145 of 2011 -5- repelled with the following observations:- “17. In the facts of the present case, the unit was being run as a sole proprietorship in Assessment Years 2004-05 and 2005-06 and the benefit of deduction u/s 80-IC of the Act was allowed. In the year under appeal the said proprietorship concern has been taken over, as a going concern, by a partnership firm constituted of the sole proprietor and another incoming partner. The successor to the business i.e. the assessee before us, the partnership concern is entitled to the benefit of deduction u/s 80-IC of the Act for the unexpired period and in the absence of any conditions not being fulfilled by the assessee, we find no merit in the order of Assessing Officer in disallowing the claim of deduction u/s 80-IC of the Act. 18. Now coming to the second plea of the Assessing Officer regarding the application of the provisions of Section 80-IC(7) r.w.s. 80-IA(12) of the Act. The provisions of Section 80-IA(12) of the Act talks about an undertaking, which is entitled to the benefit of deduction, under that section, is transferred before the expiry of the specified period to another company, in a scheme of amalgamation or demerger, the conditions of allowing the deduction to the amalgamating/demerged company and amalgamated ITA No. 145 of 2011 -6- resulting company are provided. The said section is silent about the conditions in respect of the transfer of business from the sole proprietor concern to a partnership concern. Even otherwise, the provisions of section 80-IA(12) of the Act talks about the continuity of the deduction to be allowed for the unexpired period. However, in view of the Board Circular dated 13.12.1963 in cases of non corporate assesses, the benefit of deduction u/s 80-IA/80-IC can be claimed proportionately by the predecessor and the successor in business. Accordingly, we uphold the order of CIT(A) in allowing the deduction u/s 80-IC of the Act. We are also in conformity with the order of CIT(A) that the present case is neither a case of amalgamation nor transfer of capital asset attracting the provisions of section 45(3) of the Income Tax Act for charge of capital gain tax. Accordingly, the grounds of appeal raised by the Revenue are dismissed.” 9. Adverting to the alternate reason adopted by the Assessing Officer to deny the benefit of Section 80-IC the Act for the remaining period, suffice it to notice that the formation of the partnership from proprietorship business could not held to be as a result of splitting or reconstruction of a business already in existence which could justify denying benefit by virtue of Section 80-IC(4)(i) of the Act. The Tribunal rejected the said contention as under:- ITA No. 145 of 2011 -7- “9. Section 80IC of the Act envisaged special provisions in respect of certain undertaking or enterprises in certain special categories and allows deduction out of profits of the previous year, in case of the fulfillment of the conditions enlisted hereunder. The deduction is allowable to an undertaking or enterprises which manufactures or produces any article or thing, not being any article or thing specified in 13 Schedule, as per section 80IC(2)(a) of the Act. The quantification of deduction is provided in section 80IC(3) of the Act. The conditions to be fulfilled are enlisted in section 80IC(4) of the Act, which reads as under:- (4) This section applies to any undertaking or enterprise 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 ITA No. 145 of 2011 -8- 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. Explanation:- The provisions of Explanations 1 and 2 to sub-section (3) of Section 80-IA shall apply for the purposes of clause (ii) of this sub- section as they apply for the purposes of clause (ii) of that sub-section. 10. The sub-section (4) to section 80IC postulates that undertaking eligible for deduction under the section is not formed by splitting up or reconstruction of a business already in existence. Under the provisions of section 80IC of the Act, the intention is to allow the benefit of tax deduction to an undertaking which has fulfiled the conditions laid down in the Act. 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 benefits of deduction for unexpired period. 11. Reference is invited to the circular No. F.No. 15/5/63-IT(A-1) dated 13.12.1963 which reads as under:- “The Board agree that the benefit of section 84 ITA No. 145 of 2011 -9- of the I.T. Act, 1961, attaches to the undertaking and not to the owner thereof. The successor will be entitled to be benefit for the unexpired period of five years provided the undertaking is taken over as a running concern.” 12. The said circular was issued with reference to Section 84 which was replaced by section 80J w.e.f. 1.4.1968. The said section 80J has been omitted by Finance Act No.2 of 1996 w.e.f. 1.4.1989. However, the provisions of section 84/80J and 80IC are similar in the context of benefit of deduction to be allowed to an undertaking. Reading the provisions of section 84, 80J and 80IC of the Income Tax Act, we find that the provisions of the aforesaid sections are similar and applying the circular issued in respect of section 84 to the provisions of section 80IC, we hold that the benefit of deduction u/s 80IC, which has not withdrawn till date, as a going concern, is to be allowed to an undertaking. The said undertaking being succeeded by a partnership firm, would not disentitle the succeeding person, the benefit of deduction under the aforesaid section. We find support from the ratio laid down in the under mentioned judgment replied upon by the assessee.” 10. The interpretation placed by the Tribunal on the provisions ITA No. 145 of 2011 -10- of Section 80-IC(4)(i) of the Act being in consonance with law, no fault arises in the view taken by the Tribunal. No ground to interfere with the order of the Tribunal has been made out. Therefore, no substantial question of law arises in this appeal. Accordingly, the present appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE August 24, 2011 (ADARSH KUMAR GOEL) gbs ACTING CHIEF JUSTICE