R. Bhoopathi, DR for the Revenue. J.D. Mistri, Sr. Advocate & Dharmesh Shah, AR for the Assessee.

The captioned appeals filed by the Revenue are directed against the order of the Commissioner of Income Tax (Appeals)-IX, Mumbai [in short ‘CIT(A)’] and arise out of the assessment completed u/s 143(3) (of Income Tax Act, 1961) (the ‘Act’). As common issues are involved, we are proceeding to dispose them off by this consolidated order for the sake of convenience. We begin with the assessment year (AY) 2005-06.

ITA No. 4176/MUM/2008 Assessment Year: 2005-06

2. The grounds of appeal filed by the Revenue read as under:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in allowing deduction u/s.80IB (of Income Tax Act, 1961) amounting to Rs.4,36,38,391/- merely based on the appellate order in the case of the assessee for A.Y 2003-04 without considering the diverse circumstances prevailed in the assessee's own case for A.Y.2005-06 where the facts were different from the facts for A.Y. 2003-04.

2. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in holding that the assessee's case is the case of transfer of undertaking and not of restructuring of existing business without considering the details such as date of license, the subsequent transfer of license, the unabsorbed depreciation as on 31.03.2003 and the opening WDV of Plant & Machinery during A.Y.2003-04 etc.

3. Briefly stated, the facts of the case are that during the AY 2005-06, the assessee-company filed a return of income of Rs. Nil after claiming deduction of Rs.4,36,38,691/- u/s 80IB (of Income Tax Act, 1961). The Assessing Officer (AO) disputed the said claim on the ground that (i) that the actual production started during AY 2002-03 is not established by the assessee as it was not in possession of licenses to start a factory, (ii) the business of assessee was formed by reconstruction of business already in existence and hence the assessee is not entitled to deduction, (iii) the business was initially carried out by the proprietary concern M/s Konkan Plastics ; this was based on the application made before the Licensing Authority for license to work a factory where the said proprietary concern had shown the nature of business which was similar to the business carried out by the assessee, (iv) since the said proprietary concern was subsequently taken over by the assessee, it was a case of reconstruction of business already in existence.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that vide order dated 28.03.2008, the Ld. CIT(A) observed that (i) the issue of deduction u/s 80IB (of Income Tax Act, 1961) was also subject matter of appeal for AY 2003-04, wherein it was held that the assessee had carried out the manufacturing activity and was eligible for deduction ; however, the issue of reconstruction of business already in existence was not raised during the said year, (ii) M/s Konkan Plastics had obtained license for running the factory, however, no business activities were carried on in the hands of M/s Konkan Plastics ; there were no manufacturing activities in the hands of the said proprietary concern ; there was no business as such in existence, (iii) later, the entire undertaking of the said M/s Konkan Plastics was transferred on going concern basis to the assessee-company; the business undertaking continued and only the ownership of the undertaking changed hands. With the above observations, the Ld. CIT(A) held that :

“2.7 In my view the transfer of undertaking cannot result in the reconstruction of business. The ‘reconstruction’ of an existing business must necessarily involve that the undertaking must continue to carry on the same business but in some altered or varied form. If the alterations and changes are substantial, it may be called as the reconstruction of business. In the present case, it is noticed that the appellant company had taken over the business undertaking of M/s. Konkan Plastics. The appellant has filed the copy of the order of Goa Industrial Dev. Corp. evidencing the change in constitution. This aspect is not disputed by the AO. In fact, the AO himself observed that M/s. Konkan Plastic was also set up to carry on the identical business as carried out by the appellant.

2.8 The proprietary concern, M/s. Konkan Plastic did not carry on any manufacturing activity and it had merely obtained the license to run the factory. The AR has filed the Balance sheet of the appellant company soon after takeover of the running business, i.e. for FY 2000-01. On perusal of the said Balance Sheet, it is noticed that there are no fixed assets. Also no manufacturing activity was carried on in the said business undertaking. The appellant acquired machineries and also started manufacturing activity during A.Y. 2002-03. It is thus, noticed that there is no change in the form of business. It is merely a case of change of ownership of business. In the present case, the evidences on record prove that there was no activity carried on in the hands of the proprietary concern. The activity started only in the hands of the appellant company.

2.9 In my view, there cannot be reconstruction of business when there was no business carried on in the hands of M/s. Konkan Plastics, proprietary concern. The AO has proceeded to disallow the deduction on the incorrect factual matrix and without noticing that there was no business carried on the hands of M/s. Konkan Plastics so as to call it a re-construction. In my view therefore the disallowance deserves to be deleted on the above ground.

2.10 The AO has also observed that no evidence is produced that the new machinery was acquired by the appellant. The AO has also observed that even though the same type of plant and machinery and man power was required for manufacturing of articles, the assessee company purchased the new plant and machinery and also employed new work force for carrying out the same activity which it was carrying out as a proprietary concern in the name of M/s. Konkan Plastic. It is noticed that the said observations are without considering the evidences on record. The appellant has filed the letter dated 23.11.2007 bearing no.70/11/M/KVM/DM/MD/08 filed before the AO, a copy of which is also filed before me, giving the details of plant and machinery and the bills evidencing the purchase of the same. It is also noticed that prior to the said purchase, the appellant or the proprietary concern did not own any plant and machinery. In light of the same, the observations are made by the AO without any evidence on record and hence devoid of merits. Hence, even the said observations do not justify the disallowance of deduction u/s. 80 (of Income Tax Act, 1961)-IB made by the AO.

2.11 In my view and for the reasons given above, the appellant is entitled to deduction u/s. 80 (of Income Tax Act, 1961)-IB of the Act since there was no reconstruction of business. The AO is accordingly directed to allow the deduction u/s. 80 (of Income Tax Act, 1961)-IB of the Act amounting to Rs.4,36,38,691/-.”

5. Before us, the Ld. Departmental Representative (DR) relies on the order of the AO dated 05.12.2007 and explains that (i) the assessee-company in its return of income for the AY 2003-04 submitted the details regarding the certificate issued by the Chief Inspector of Factory and Boilers, Government of Goa, wherein the Chief Inspector has issued certificate of license to the factory on 21.01.2003 ; therefore, the assessee’s claim that the actual production started in AY 2002-03 cannot be established as it was not in possession of necessary licenses to carry out the productions/manufacturing activity at its factory premises, (ii) that the assessee-company has changed its name from M/s Konkan Plastics to M/s Konkan Polymers & Additives Pvt. Ltd., as it was not eligible to claim deduction u/s 80-IB(4) (of Income Tax Act, 1961), when it was carrying out the business activity in the name of M/s Konkan Plastics, (iii) the list of items authorized by the Government of Goa to M/s Konkan Plastics included the manufacturing of blow and injection moulded articles ; the same activity has also been carried out by the assessee-company and there is absolutely no difference between the manufacturing activity carried out by M/s Konkan Plastics and the assessee-company, (iv) it is improbable that even though same type of plant & machinery and manpower was required for manufacturing of blow and injection moulded articles, the assessee-company purchased new plant & machinery and employed new work force for carrying out the same activity, which it was carrying out as a proprietary concern in the name of M/s Konkan Plastics.

Thus the Ld. DR submits that the order passed by the AO be restored.

6. On the other hand, the Ld. counsel for the assessee submits that it was already explained before the AO as well as CIT(A) that prior to the electric connection from Reliance Energy, the assessee was availing the electricity connection from the Government of Goa; although the certificate for license to work has been issued to the assessee on 21.03.2003, the date of issue of such license has no bearing on whether manufacturing had commenced and several evidences are on record which proves that the manufacturing activity had started during March 2002 itself. In this respect, the Ld. counsel refers to the evidences of manufacturing activity being carried out by the assessee which were filed in the form of excise returns before the excise authorities for the period from March 2002 to March 2003 as well as the Sales Tax returns for the quarters pertaining to FY 2002-03, which prove that manufacturing activity and the corresponding sales was carried out by the assessee since AY 2002-03. Thus it is stated that it cannot be said that the manufacturing activity of the assessee had not started till the receipt of the factory license. It is stated that the assessee had started the manufacturing activity during AY 2002-03 ;in the notes to the computation of income for AY 2002-03, it was clarified that the assessee was eligible for deduction u/s 80IB (of Income Tax Act, 1961) from AY 2002-03 ; the ledger account of the plant & machinery in the books of the assessee for the year ending 31.03.2002 along with the copies of the bills/invoices also shows purchase of new machinery during the said period ; therefore, the block of asset had started during the AY 2002-03 and the fixed asset statement of the assessee for the AY 2003-04 would show opening WDV.

The Ld. counsel submits that the copy of the application to the Directorate of Industries and Mines, Goa would indicate that the said application is the instruction manual explaining as to how to fill up the form ; while giving the illustration and filling up the name of the unit, they have used a dummy/illustrative fictitious name of “Kamal Enterprises/G.K. Enterprises”;

although the application was originally made by M/s Konkan Plastics, the application was once again made by the assessee on 30.03.2002 which is evident from page 2 of the said application. It is further explained by the Ld. counsel that although the original certificate was granted to M/s Konkan Plastics, no business was ever carried out by the said entity so much so that neither any plant & machinery was acquired by the said entity nor any business activity was commenced by them.

Finally, the Ld. counsel explains that the SSI Registration was initially obtained by M/s Konkan Plastics ; the name of the said concern was later changed to M/s Mystic Plastic Moulds ; no business was carried out by the said entity ever ; the said entity was later taken over by the assessee along with its pre-existing lease hold rights of the plot of land assigned by MIDC Goa ; thereafter, fresh application for SSI Registration was made by the assessee ; pursuant to the said takeover, the assessee had also requested for change of name in the electricity meter from M/s Mystic Plast Moulds to the assessee; this only establishes that the earlier entity was taken over by the assessee with its pre-existing land rights ; however, the said fact cannot result into disallowance of deduction u/s 80IB (of Income Tax Act, 1961), as there is no re-structuring of any business in existence.

Thus the Ld. counsel submits that the deduction claimed by the assessee was rightly allowed by the Ld. CIT(A) and that no interference is required in respect of the same.

7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.

We have examined the documents filed before the AO as well as CIT(A) namely (i) copies of the electricity bills of Electricity Department, Government of Goa, (ii) letter dated 30.03.2000 from Asst. Electrical Engineer certifying the change in name of the company, (iii) application for license to use building as factory, (iv) copies of excise returns in Form RT12 for the period from April 2002 to March 2003, (v) copy of the sales tax returns filed with the Sales Tax Department, Goa for the four quarter during AY 2003-04, (vi) profit and loss account and balance sheet with relevant schedules for the year ending 31.03.2001 and 31.03.2005.

An examination of the above documents clearly indicates that prior to the electric connection from Reliance Energy, the assessee was availing electricity connection from the Government of Goa ; the application for license to work was made by the assessee on 22.03.2002; the provisions of section 6 (of Income Tax Act, 1961) & 7 of the Factories Act, 1948 clearly indicate that there is no bar in occupying the factory premises, using it for manufacture and commencing the production there from before obtaining the final license from the prescribed authority; in the said application dated 22.03.2002 it was also declared that the manufacturing process is already commenced by the assessee on 19.03.2002, the computation of income for AY 2002-03 filed along with the return also stated that it was the first year of claim and that deduction was not claimed solely due to loss.

A perusal of the excise returns filed before the Excise Authorities for the period from March 2002 to March 2003 as well as sales tax returns before the Sales Tax Authorities for the quarters pertaining to the financial year 2002-03,clearly indicates that manufacturing activity and corresponding sales was carried out by the assessee. Thus it cannot be said that the manufacturing activity of the assessee had not started till the receipt of the factory license.

The ledger account of the plant & machinery in the books of the assessee for the year ending 31.03.2002 along with copies of the bills/invoices also indicates purchase of new machinery during the said period. It is further evident that the block of asset had started during AY 2002-03 and fixed asset statement of the assessee for the AY 2003-04 would show opening WDV. We find merit in the contentions of the Ld. counsel that “the copy of the application to the Directorate of Industries and Mines, Goa is filed at page 32-42 of the P/B for AY 2005-06. Page 1 of the said application is the instruction manual explaining as to how to fill up the form. While giving the illustration and filling up the name of the unit, they have used a dummy/illustrative fictitious name of ‘Kamal Enterprises/G.K. Enterprises’. Similarly, for other details on the page, dummy details have been typed. The details pertaining to the appellant had been filed at page 2 of the said application.”

We also find merit in the contentions of the Ld. counsel that although the original certificate was granted to M/s Konkan Plastics, no business was ever carried out by the said entity ; except the SSI license and the lease hold rights in the plot, no activity was ever carried out by the said entity.

The excise returns and sales tax returns filed by the assessee clarify the issues in the instant case. The plant & machineries, as evidenced by the invoices, have been purchased by the assessee ; the manufacturing activity was carried out by the assessee at its own premises.

In the case of CIT v. Western Outdoor Interactive P. Ltd. (2012) 349 ITR 309 (Bom), the Hon’ble Bombay High Court has held that “where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, 1961, then unless relief granted for the first year in which the claim was made and accepted is withdrawn or set aside, the Income Tax Officer cannot withdraw the relief for subsequent years. More particularly so, when the Revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years”.

In view of the above facts and position of law, we affirm the order of the Ld. CIT(A). Facts being identical, our decision for the AY 2005-06 applies mutatis mutandis to AYs 2004-05 and 2006-07.

8. In the result, the appeals filed by the Revenue are dismissed.

Order pronounced in the open Court on 02/11/2020.

Sd/- Sd/-

(MAHAVIR SINGH) (N.K. PRADHAN)

VICE PRESIDENT ACCOUNTANT MEMBER

Mumbai;

Dated: 02/11/2020